SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
OF 1934
Commission File Number: 0-16120
SECURITY FEDERAL CORPORATION
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(Exact name of registrant as specified in its charter)
South Carolina 57-08580504
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1705 Whiskey Road South, Aiken, South Carolina 29803
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 641-3000
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Securities registered pursuant to Section 12(b) None
of the Act: ----------------------
Securities registered pursuant to Section 12(g) Common Stock, par
of the Act: value $0.01 per share
----------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this
Form 10-KSB or any amendments to this Form 10-KSB. [ X ]
The registrant's revenues for the fiscal year ended March 31, 2000 were
$22,101,360.
As of June 19, 2000, there were issued and outstanding 836,225 shares of
the registrant's Common Stock. The aggregate market value of the voting stock
held by non-affiliates of the registrant, computed by reference to the average
of the bid and asked price of such stock as of June 19, 2000, was $33.6
million. (The exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the registrant that
such person is an affiliate of the registrant).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the
Fiscal Year Ended March 31, 2000. (Parts I and II)
2. Portions of the Registrant's Proxy Statement for the 2000 Annual
Meeting of Stockholders. (Part III)
Transitional Small Business Disclosure Format (check one) Yes No X
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<PAGE>
PART I
Item 1. Business
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Security Federal Corporation
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Security Federal Corporation (the "Company") was incorporated under the
laws of the State of Delaware in July 1987 by authorization of the Board of
Directors of Security Federal Savings Bank of South Carolina ("Security
Federal" or the "Bank") for the purpose of becoming a savings and loan holding
company that acquired all of the outstanding stock of Security Federal issued
upon the conversion of Security Federal from the mutual to the stock form (the
"Conversion"). Effective August 17, 1998, the Company changed its state of
incorporation from Delaware to South Carolina.
As a South Carolina corporation, the Company is authorized to engage in
any activity permitted by South Carolina General Corporation Law. The Company
is a unitary savings and loan holding company. Through the unitary holding
company structure, it is possible to expand the size and scope of the
financial services offered beyond those currently offered by the Bank. The
holding company structure also provides the Company with greater flexibility
than the Bank would have to diversify its business activities, through
existing or newly formed subsidiaries, or through acquisitions or mergers of
stock thrift institutions as well as other companies. There are no current
arrangements, understandings or agreements regarding any such acquisition.
Future activities of the Company, other than the continuing operations of
Security Federal, will be funded through dividends from Security Federal and
through borrowings from third parties. See "Regulation -- Savings and Loan
Holding Company Regulation" and "Taxation." Activities of the Company may also
be funded through sales of additional securities or income generated by other
activities of the Company. At this time, there are no plans regarding such
sales of additional securities or such activities.
At March 31, 2000, the Company had assets of approximately $304.8
million, deposits of approximately $228.8 million and shareholders' equity of
approximately $19.8 million.
The executive office of the Company is located at 1705 Whiskey Road
South, Aiken, South Carolina 29803, telephone (803) 641-3000.
Security Federal Bank
---------------------
General. Security Federal, a federally chartered stock savings bank, is
headquartered in Aiken, South Carolina. Security Federal, which has ten branch
offices in Aiken and Bamberg Counties, was originally chartered under the name
Aiken Building and Loan Association on March 27, 1922. The association
received its federal charter and changed its name to Security Federal Savings
and Loan Association of Aiken on March 7, 1962, and later changed its name to
Security Federal Savings Bank of South Carolina, on November 11, 1986.
Effective April 8, 1996, the Bank changed its name to Security Federal Bank.
The Bank converted from the mutual to the stock form of organization on
October 30, 1987. Security Federal increased its branch network to nine in
October 1993 with the completion of its acquisition of four former NationsBank
of South Carolina, N.A. branches located in Aiken County. In February 1996,
Security Federal opened a new branch office in the Aiken Walmart Superstore,
which became the Bank's tenth location. The Bank intends on opening a branch
in West Columbia in 2001, which will provide the Bank with the opportunity to
expand its market area.
The principal business of Security Federal is the acceptance of savings
deposits from the general public and the origination of mortgage loans to
enable borrowers to purchase or refinance one- to four-family residential real
estate. The Bank also makes loans secured by multi-family residential and
commercial real estate and consumer and commercial loans. In addition, the
Bank originates construction loans on single family residences, multi-family
dwellings and projects, commercial real estate, and loans for the acquisition,
development and construction of residential subdivisions and commercial
projects.
1
<PAGE>
Security Federal's income is derived primarily from interest and fees
earned in connection with its lending activities, and its principal expenses
are interest paid on savings deposits and borrowings and operating expenses.
Through a real estate partnership and Willow Woods Associates, the
Company is involved in real estate development.
Branch Acquisitions. On October 21, 1993, the Bank acquired certain
assets and certain deposits and other liabilities of four branch offices of
NationsBank of South Carolina, N.A. The branches are located in Langley,
Graniteville, Clearwater, and Wagener, all in Aiken County, South Carolina.
As consideration for the purchase price of the offices, the Company paid
a premium of approximately $4.4 million or 7.17% of the deposit liabilities,
and paid net book value including accrued interest for the loans, face value
of the coin and currency, and a set amount for the buildings and equipment for
the respective locations. The deposit premium, after adjusting for the costs
associated with the transaction was allocated to core deposit intangible (CDI)
($1.9 million) and goodwill ($2.0 million).
This transaction was an important strategic move for the Bank, providing
access to a strong and loyal customer base, expanding the Bank's branch
network in Aiken County which management believes will better enable the Bank
to serve its customer base, and providing opportunity for future growth. Most
of the cash provided by this transaction was used to purchase U.S. Treasury,
U.S. Government agencies and other securities with varying maturities.
Selected Consolidated Financial Information
-------------------------------------------
This information is incorporated by reference to page 3 of the 2000
Annual Report to Stockholders ("Annual Report").
Yields Earned and Rates Paid
----------------------------
This information is incorporated by reference to page 10 of the Annual
Report.
Rate/Volume Analysis
--------------------
This information is incorporated by reference to page 9 of the Annual
Report.
Lending Activities
------------------
General. The primary source of revenue for the Bank is interest and fee
income from lending activities. The principal lending activity of the Bank is
making conventional first mortgage real estate loans to enable borrowers to
purchase or refinance one- to four-family residential real property. The Bank
also makes loans secured by multi-family residential and commercial real
estate and consumer and commercial loans. The Bank continues to emphasize the
origination of adjustable rate residential mortgage loans, subject to market
conditions, for retention in its portfolio. In addition, the Bank originates
construction loans on single family residences, multi-family dwellings and
projects, commercial real estate, and loans for the acquisition, development
and construction of residential subdivisions and commercial projects.
Adjustable rate mortgage loans ("ARMs") constituted approximately 42.3%
of the Bank's total outstanding loan portfolio at March 31, 2000.
The loan-to-value ratio, maturity and other provisions of loans made by
the Bank reflect its policy of making the maximum loan permissible consistent
with applicable regulations, established lending policies and market
conditions. The Bank requires title insurance (or acceptable legal opinions on
smaller loans secured by real estate) and fire insurance, and flood insurance
where applicable, on loans secured by improved real estate.
2
<PAGE>
<TABLE>
Loan Portfolio Composition. The following table sets forth information concerning the composition of
the Bank's loan portfolio in dollar amounts in percentages, by type of loan and by type of security, and
presents a reconciliation of total loans receivable before net items.
At March 31,
-----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
TYPE OF LOAN:
------------
Fixed Rate Loans
----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real
estate (1).......... $ 13,408 6.6% $ 7,586 4.7% $ 9,981 7.0% $ 14,835 9.9% $ 11,846 7.6%
Commercial business
and commercial real
estate.............. 39,756 19.6 27,812 17.3 21,863 15.3 22,886 15.2 18,084 11.8
Consumer............. 28,984 14.2 28,492 17.7 29,257 20.5 24,180 16.1 22,635 14.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total fixed rate
loans........... 82,148 40.4 63,890 39.7 61,101 42.8 61,901 41.2 52,565 34.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Adjustable rate loans
---------------------
Residential real
estate (1).......... 86,040 42.3 59,507 36.9 37,701 26.4 35,910 23.9 48,718 31.5
Commercial business
and commercial real
estate.............. 22,306 11.0 24,514 15.3 26,593 18.7 29,690 19.8 31,310 20.2
Consumer............. 12,735 6.3 13,140 8.1 17,242 12.1 22,714 15.1 22,175 14.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total adjustable
rate loans ..... 121,081 59.6 97,161 60.3 81,536 57.2 88,314 58.8 102,203 66.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans....... 203,229 100.0% 161,051 100.0% 142,637 100.0% 150,215 100.0% 154,768 100.0%
===== ===== ===== ===== =====
Less
----
Loans in process..... 7,832 7,151 3,176 1,375 474
Deferred fees and
discounts........... 275 199 225 303 395
Allowance for loan
losses.............. 2,121 1,715 1,512 1,768 1,759
-------- -------- -------- -------- --------
Total loans
receivable........ $193,001 $151,986 $137,724 $146,769 $152,140
======== ======== ======== ======== ========
(1) Includes $2.2 million, $1.6 million, $1.8 million, $1.6 million and $2.5 million in multi-family
dwellings for fiscal years ended March 31, 2000, 1999, 1998, 1997 and 1996, respectively. Includes
residential construction loans.
</TABLE>
3
<PAGE>
<TABLE>
At March 31,
-----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
TYPE OF SECURITY:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Residential real
estate (1)........ $ 82,754 40.7% $ 52,860 32.8% $ 44,232 31.0% $ 46,782 31.1% $ 59,613 38.5%
Construction ....... 16,694 8.2 14,233 8.8 3,450 2.4 3,963 2.6 1,604 1.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate
loans ........... 99,448 48.9 67,093 41.6 47,682 33.4 50,745 33.8 61,217 39.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Commercial business
and commercial
real estate......... 62,062 30.6 52,326 32.5 48,456 34.0 52,576 35.0 48,741 31.5
Consumer loans:
Deposit account..... 1,304 0.6 1,213 0.8 1,275 0.9 1,299 0.9 1,299 0.8
Home equity......... 13,849 6.8 15,818 9.8 20,202 14.1 21,446 14.3 14,767 9.6
Home improvement.... 14,730 7.3 14,903 9.3 16,088 11.3 13,299 8.8 18,154 11.7
Other............... 11,836 5.8 9,698 6.0 8,934 6.3 10,850 7.2 10,590 6.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer
loans............ 41,719 20.5 41,632 25.9 46,499 32.6 46,894 31.2 44,810 28.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans..... 203,229 100.0% 161,051 100.0% 142,637 100.0% 150,215 100.0% 154,768 100.0%
===== ===== ===== ===== =====
Less:
Loans in process ..... 7,832 7,151 3,176 1,375 474
Deferred fees and
discounts............ 275 199 225 303 395
Allowance for loan
losses............... 2,121 1,715 1,512 1,768 1,759
-------- -------- -------- -------- --------
Total loans
receivable........ $193,001 $151,986 $137,724 $146,769 $152,140
======== ======== ======== ======== ========
(1) Includes $2.2 million, $1.6 million, $1.8 million, $1.6 million and $2.5 million in multi-family
dwellings at March 31, 2000, 1999, 1998, 1997 and 1996, respectively.
</TABLE>
4
<PAGE>
The following schedule illustrates the interest rate sensitivity of
Security Federal's loan portfolio at March 31, 2000. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
when the contract is due. This schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
At March 31, 2000
---------------------------------------------
Commercial
Business and
Residential Commercial
Real Estate Consumer(2) Real Estate Total
----------- ----------- ------------ -----
(In Thousands)
Six months or less(3)........ $ 6,239 $ 4,562 $ 4,485 $ 15,286
Over six months to one year.. 3,407 3,021 3,969 10,397
Over one year to three years. 1,862 6,375 18,990 27,227
Three to five years.......... 2,100 8,270 17,370 27,740
Over five to ten years....... 6,520 10,507 11,701 28,728
Over ten to twenty years..... 35,601 8,984 5,547 50,132
More than twenty years....... 35,886 -- -- 35,886
------- ------- ------- --------
Total(4).................. $91,615 $41,719 $62,062 $195,396
======= ======= ======= ========
-----------
(1) Includes multi-family dwellings.
(2) Includes home improvement loans and equity line of credit loans.
(3) Includes demand loans, loans having no stated maturity and overdraft
loans.
(4) Loan amounts are net of undisbursed funds for loans in process of $7.8
million.
The total amount of loans due after March 31, 2001, which have
predetermined or fixed interest rates is $51.4 million, while the total amount
of loans due after such date which have floating or adjustable interest rates
is $118.4 million.
Loan Originations, Purchases and Sales. The following table shows the
loan origination, purchase, sale and repayment activities of the Bank for the
periods indicated.
Year Ended March 31,
------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
Originated(1):
Adjustable rate - residential
real estate................ $ 44,382 $ 36,906 $ 12,080 $ 8,046 $ 3,684
Fixed rate - residential
real estate ............... 6,193 6,020 3,444 5,636 5,332
Consumer...................... 17,080 19,564 20,103 18,574 16,994
Commercial business and
commercial real estate...... 34,847 25,249 13,698 20,590 27,465
-------- -------- -------- --------- --------
Total consumer/commercial
business real estate..... 51,927 44,813 33,801 39,164 44,459
-------- -------- -------- --------- --------
Total loans
originated.......... $102,502 $ 87,739 $ 49,325 $ 52,846 $ 53,475
======== ======== ======== ========= ========
(table continued on following page)
5
<PAGE>
Year Ended March 31,
------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
Purchased..................... -- -- -- -- --
Sold(1):
Fixed rate - residential
real estate.................. $ 631 $ 5,644 $ 3,396 $ 5,810 $ 5,496
Adjustable rate - residential
real estate.................. -- -- -- -- --
Principal repayments(2)....... 59,693 63,680 53,507 51,589 47,028
(Increase) decrease in
other items, net............. (1,163) (4,153) (1,467) (818) 2,212
Net increase (decrease)....... $41,015 $14,262 $ (9,045) $ (5,371) $ 3,163
----------
(1) Does not include loans in the amount of $16.0 million, $28.1 million,
$7.9 million, $6.4 million and $6.9 million that were originated with
prior commitments to be purchased by institutional investors and sold
during the fiscal years ended March 31, 2000, 1999, 1998, 1997 and 1996,
respectively.
(2) Includes securizations of fixed rate residential loans in the amount of
$2.8 million for the fiscal year ended 1997.
In addition to interest earned on loans, the Bank receives loan
origination fees or "points" for originating loans. Loan points are a
percentage of the principal amount of the mortgage loan which are charged to
the borrower for the creation of the loan.
The Bank's loan origination fees generally range from 1% to 2% on
conventional residential mortgages, commercial real estate loans and
commercial business loans. The total fee income (including amounts amortized
to income as yield adjustments) for the fiscal year ended March 31, 2000 was
$195,255.
Loan origination and commitment fees are volatile sources of income.
Such fees vary with the volume and type of loans and commitments made and
purchased and with competitive conditions in mortgage markets, which in turn
are governed by the demand for and availability of money.
The following table shows deferred loan origination fees recognized as
income by the Bank expressed as a percentage of the dollar amount of total
mortgage loans originated (and retained in the Bank's portfolio) and purchased
during the periods indicated and the dollar amount of deferred loan
origination fees at the end of each respective period.
At or for the Year Ended March 31,
----------------------------------
2000 1999 1998
---- ---- ----
(Dollars In Thousands)
Net deferred loan origination fees
earned during the period(1).......... $65 $198 $112
Mortgage loan origination fees earned
as a percentage of total loans
originated during the period......... 0.1% 0.5% 0.7%
Net deferred loan origination fees
in loan portfolio at end of period... $275 $200 $225
------------
(1) Includes amounts amortized to interest income as yield adjustments. Does
not include fees earned on loans sold.
6
<PAGE>
The Bank also receives other fees and charges related to existing loans,
conversion fees, assumption fees, late charges, and other fees collected in
connection with a change in borrower or other loan modifications.
Security Federal currently sells substantially all conforming fixed-rate
loans with terms of 15 years or greater in the secondary mortgage market.
These loans are sold in order to provide a source of funds and as one of the
strategies available to close the gap between the maturities of its
interest-earning assets and interest-bearing liabilities. Currently, most
fixed-rate, long-term mortgage loans are being originated based on Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") underwriting standards.
Secondary market sales have been made primarily to the FHLMC or FNMA and
other savings and loan associations, banks, and other investors. The FHLMC
and FNMA are quasi-governmental agencies that purchase residential mortgage
loans from federally insured financial institutions and certain other lenders.
All loans sold were sold without recourse to Security Federal. Security
Federal ordinarily retains the servicing of the loans (i.e., collection of
principal and interest payments) sold to the FHLMC or FNMA, for which it
generally recognizes a fee of 1/4 to 1/2 of one percent per annum of the
unpaid principal balance of each loan. At March 31, 2000, Security Federal
serviced approximately $152.3 million in mortgage loans, including
approximately $54.1 million which the Bank serviced for FHLMC or FNMA. Loans
sold to other investors are generally sold with servicing released.
Most of the Bank's fixed-rate mortgage loans are underwritten according
to standards that would allow them to be sold into the secondary market. The
Bank currently sells in the secondary market substantially all of its
fixed-rate loans with terms to maturity of 15 years or greater. For the
fiscal year ended March 31, 2000, $16.0 million in loans were originated with
prior commitments to purchase such loans by other institutional investors at a
fixed price. These loans were carried in the Bank's "loans held for sale"
portfolio. In addition, during fiscal 2000, $631,000 in loans were originated
and sold to FHLMC and FNMA. At March 31, 2000, fixed-rate, residential
mortgage loans totaled $13.4 million, or 6.6% of the Bank's loan portfolio.
The Bank's fixed-rate single-family residential loans normally have remained
outstanding for significantly shorter periods because the borrowers have
prepaid the loans in full upon sale of the security property, due to the
due-on-sale clauses generally contained in the Bank's first mortgages, or upon
the refinancing of the original loan.
At March 31, 2000, the Bank held $1.3 million of loans for sale. All of
such loans were originated for other financial institutions based upon prior
commitments to purchase the loans at a set price. As a result, these loans
present no market risk to Security Federal. These loans are normally
delivered and paid for within 30 days after the date of closing.
Loan Solicitation and Processing. The Bank actively solicits mortgage
loan applications from existing customers, real estate agents, builders, real
estate developers and others. The Bank also receives mortgage loan
applications as a result of customer referrals and from walk-in customers.
Detailed loan applications are obtained to determine the borrower's
creditworthiness and ability to repay, and the more significant items on these
applications are verified through the use of credit reports, financial
statements and confirmations. After analysis of the loan application and
property or collateral involved, including an appraisal of the property
(residential appraisals are obtained through independent fee appraisers), the
lending decision is made in accordance with the underwriting guidelines of the
Bank. These guidelines are generally consistent with FHLMC and FNMA
guidelines for residential real estate loans. With respect to commercial real
estate loans, the Bank also reviews the capital adequacy of the business, the
income potential of the property, the ability of the borrower to repay the
loan and honor its other obligations, and general economic and industry
conditions.
Upon receipt of a loan application and all required related information
from a prospective borrower, the loan application is submitted for approval or
rejection. The residential mortgage loan underwriter approves loans which meet
FHLMC and FNMA underwriting requirements, not to exceed $252,700 per loan, and
the government loan direct endorser approves Federal Housing Administration
("FHA") loans not to exceed $121,296 and Veterans'
7
<PAGE>
Administration ("VA") loans not to exceed $203,000. However, the Bank does
submit some FHA and VA loans to the Department of Housing and Urban
Development for approval. The Chairman, Chief Executive Officer, Senior
Mortgage Officer or Senior Consumer/Commercial Loan Officer approve loans of
$200,000 or less, except as set forth above. Loans in excess of $200,000
require approval of any two of the above and any loan in an amount in excess
of $350,000 must be approved by the Bank's Executive Committee, which operates
as the Bank's Loan Committee. The loan approval limits shown are the aggregate
of all loans to any one borrower or entity.
The general policy of Security Federal is to issue loan commitments to
qualified borrowers for a specified time period. These commitments are
generally for a period of 45 days or less. With management approval,
commitments may be extended for a longer period. The total outstanding amount
of mortgage loan commitments issued by Security Federal as of March 31, 2000,
was approximately $1.4 million (excluding undisbursed portions of construction
loans in process). Security Federal also had outstanding commitments
available on retail lines of credit (including home equity and other consumer
loans) totaling $19.4 million as of March 31, 2000. See Note 13 of Notes to
Consolidated Financial Statements contained in the Annual Report.
Permanent Residential Mortgage Lending. Residential real estate mortgage
loans constituted approximately 48.9% of the Bank's total outstanding loan
portfolio at March 31, 2000.
Security Federal offers a variety of ARMs which offer adjustable rates of
interest, payments, loan balances or terms to maturity which vary according to
specified indices. The Bank's ARMs generally have a loan term of 15 to 30
years with rate adjustments every one to three years during the term of the
loan. Most of the Bank's ARMs contain a 100 or 200 basis point limit as to
the maximum amount of change in the interest rate at any adjustment period and
a 500 or 600 basis point limit over the life of the loan. The Bank generally
originates ARMs to hold in its portfolio. Such loans are generally made
consistent with FHLMC and FNMA guidelines. At March 31, 2000, residential
ARMs totaled $86.0 million, or 42.3% of the Bank's loan portfolio. For the
year ended March 31, 2000, the Bank originated $50.6 million in residential
real estate loans, 87.8% of which had adjustable rates of interest.
There are unquantifiable risks resulting from possible increased costs to
the borrower as a result of periodic repricing. Despite the benefits of ARMs
to the Bank's asset/liability management program, such loans also pose
potential additional risks, primarily because as interest rates rise, the
underlying payment by the borrower rises, increasing the potential for
default. At the same time, marketability of the underlying property may be
adversely affected by higher interest rates.
When making a one- to four-family residential mortgage loan, the Bank
evaluates both the borrower's creditworthiness and his or her general ability
to make principal and interest payments and the value of the property that
will secure the loan. The Bank generally makes loans on one- to four-family
residential properties in amounts of 95% or less of the appraised value
thereof. Where loans are made in amounts which exceed 80% of the appraised
value of the underlying real estate, the Bank's general policy is to require
private mortgage insurance on a portion of the loan. In general, the Bank
restricts its residential lending to South Carolina and the nearby Augusta,
Georgia market.
The Bank also provides construction financing for single family dwellings
both to owner-occupants and to builders for resale. Construction loans are
generally made for periods of six months to one year. Typically, interest
rates on interim construction loans are made on a fixed-rate basis. At March
31, 2000, residential construction loans on one- to four-family dwellings
totaled $16.7 million, or 8.2% of the Bank's loan portfolio. In addition to
the factors mentioned above concerning the creditworthiness of the borrower,
on loans of this type the Bank seeks to evaluate the financial condition and
prior performance of the builder.
Commercial Business and Commercial Real Estate Loans. The commercial
business and commercial real estate loans originated by the Bank are primarily
secured by business properties, churches, income property developments,
undeveloped land, business equipment, furniture and fixtures, inventory, and
receivables. At March 31, 2000, the Bank had approximately $62.1 million or
30.6% of the Bank's total loan portfolio, in commercial business and
commercial real estate loans. Approximately $51.7 million or 83.3% of
commercial business and
8
<PAGE>
commercial real estate loans were secured primarily by real estate at March
31, 2000. Loans secured by commercial real estate are typically written for
terms of 10 to 20 years. Commercial loans not secured by real estate are
typically based on terms of three to 60 months. Fixed rate loans typically
balloon at the end of three to seven years. Adjustable rate loans are usually
tied to the prime interest rate as quoted in the Wall Street Journal and
adjust monthly or annually.
Commercial business and commercial real estate lending entails
significant additional credit risk when compared to residential lending.
Commercial loans typically involve large loan balances to single borrowers or
groups of related borrowers. The payment experience of such loans is
typically dependent upon the successful operation of the business or real
estate project. These risks can be significantly affected by supply and
demand conditions in the market for office and retail space and for
condominiums and apartments and to adverse conditions in the local economy.
Although commercial loans generally involve more risk than residential loans,
they also typically earn more yield and are more sensitive to changes in
interest rates.
The underwriting standards employed by the Bank for commercial business
and commercial real estate lending include a determination of the borrower's
current financial condition, ability to pay, past earnings and payment
history. In addition, the current financial condition and payment history of
all principals are reviewed. Normally, the Bank requires the principal or
owners of a business to guarantee all loans made to their business by the
Bank. Although the creditworthiness of the business and its principals is of
primary consideration, the underwriting process also includes a comparison of
the value of the security, if any, in relation to the proposed loan amount.
Properties securing commercial loans originated by the Bank are appraised
at the time of the loan by appraisers designated by the Bank. Although the
Bank is permitted to invest in loans up to 100% of the appraised value of a
property on a commercial loan, the Bank currently seeks to invest in loans
with a loan to value ratio of 75% to 80%.
At March 31, 2000, the Bank did not have any commercial business or
commercial real estate loans to one borrower in excess of $2.8 million.
Federal law restricts the Bank's permissible lending limits to one borrower to
the greater of $500,000 or 15% of unimpaired capital and surplus. The Bank
has only infrequently made loans to one borrower equal to the amount federal
law allows or approximately $3.4 million as calculated at March 31, 2000.
Consumer Loans. The Bank originates consumer loans for any personal,
family or household purpose, including but not limited to the financing of
home improvements, automobiles, boats, mobile homes, recreational vehicles and
education. In addition, the Bank has expanded its home equity lending
program. Home equity loans are secured by mortgage lines on the borrower's
principal or second residence. At March 31, 2000, the Bank had $10.0 million
of home equity lines of credit outstanding and $18.0 million of additional
commitments of such lines of credit. The Bank also makes secured and
unsecured lines of credit available. Although consumer loans involve a higher
level of risk than one- to four-family residential mortgage loans, they
generally carry higher yields and have shorter terms to maturity than one- to
four-family residential mortgage loans. The Bank has increased its
origination of consumer loans during the past several years and at March 31,
2000, the Bank had total consumer loans of $41.7 million, or 20.5% of the
Bank's loan portfolio.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and
an assessment of ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income is determined
by verification of gross monthly income from primary employment, and
additionally from any verifiable secondary income. Although credit-
worthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.
9
<PAGE>
The Bank also has a credit card program. As of March 31, 2000, 928 Visa
credit cards had been issued by the Bank with total approved credit lines of
$2.0 million, of which $503,000 was outstanding.
Loan Delinquencies and Defaults
-------------------------------
General. The Bank's collection procedures provide that when a real
estate loan is approximately 20 days past due, the borrower is contacted by
mail and payment is requested. If the delinquency continues, subsequent
efforts are made to contact the delinquent borrower and establish a program to
bring the loan current. In certain instances, the Bank may modify the loan or
grant a limited moratorium on loan payments to enable the borrower to
reorganize his financial affairs. If the loan continues in a delinquent
status for 60 days or more, the Bank generally initiates foreclosures
proceedings after the customer has been notified by certified mail. At March
31, 2000, the Bank had property acquired as the result of foreclosures,
in-substance foreclosure or by deed in lieu of foreclosure and classified as
"real estate owned" valued at $332,000.
Delinquent Loans. The following table sets forth information concerning
delinquent mortgage and other loans at March 31, 2000. The amounts presented
represent the total remaining principal balances of the related loans (before
specific reserves for losses), rather than the actual payment amounts which
are overdue.
<TABLE>
Real Estate Non-Real Estate
---------------------------------- ----------------------------------
Commercial
Residential Commercial Consumer Business
--------------- --------------- --------------- ---------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days.............. 3 $ 187 $ -- $ -- 61 $ 688 11 $ 545
60 - 89 days.............. 1 163 -- -- 9 95 2 43
90 days and over.......... 3 335 -- -- 7 386 3 169
---- ------ ------ ------ ---- ------ ---- ------
Total delinquent loans.... 7 $ 685 $ -- $ -- 77 $1,169 16 $ 757
==== ====== ====== ====== ==== ====== ==== ======
</TABLE>
Classified Assets. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered to be of
lesser quality as "substandard," "doubtful" or "loss" assets. The regulation
requires savings associations to classify their own assets and to establish
prudent general allowances for loan losses for assets classified "substandard"
or "doubtful." For the portion of assets classified as "loss", an institution
is required to either establish specific allowances of 100% of the amount
classified or charge off such amount. In addition, the OTS may require the
establishment of a general allowance for losses based on assets classified as
"substandard" and "doubtful" or based on the general quality of the asset
portfolio of an association. Assets which do not currently expose the savings
association to sufficient risk to warrant classification in one of the
aforementioned categories but possess potential weaknesses are designated
"special mention" by management.
At March 31, 2000, approximately $1.6 million of the Bank's assets were
classified "substandard". The Bank had no loans classified as "special
mention," "doubtful" or "loss" at March 31, 2000. As of March 31, 2000,
there were loans totaling $784,000 which were troubled debt restructuring
within the meaning of FASB No. 15 of which $155,000 was classified
substandard. The Bank's classification of assets is consistent with OTS
regulatory classifications.
For additional information regarding the treatment of impaired loans, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Accounting and Reporting Changes" contained in the Annual
Report.
Non-performing Assets. Loans are placed on non-accrual status when the
collection of principal and/or interest becomes doubtful. In addition, all
loans are placed on non-accrual status when the loan becomes 90 days or more
contractually delinquent. All consumer loans more than 90 days delinquent are
charged against the consumer loan allowance for loan losses unless there is
adequate collateral which is in the process of being repossessed or
10
<PAGE>
foreclosed on. The Bank has had no troubled debt restructuring which involve
forgiving a portion of interest or principal on any loans or making loans at a
rate materially less than that of market rates. Other loans of concern are
those loans (not delinquent more than 60 days) that management has determined
need to be closely monitored as the potential exists for increased risk on
these loans in the future. Nonperforming loans are reviewed monthly on a loan
by loan basis. Specific reserves associated with these loans will vary based
on estimates of recovery for each loan.
The following table sets forth the amounts and categories of risk
elements in the Bank's loan portfolio.
March 31,
----------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
Loans Delinquent 60 to 89 Days:
Residential....................$ 163 $ 226 $ 79 $ 56 $ 452
Commercial real estate......... -- -- -- -- --
Consumer....................... 95 64 113 289 226
Commercial business ........... 43 18 195 142 490
------ ------ ------ ------ ------
Total........................$ 301 $ 308 $ 387 $ 487 $1,168
====== ====== ====== ====== ======
Total as a percentage of
total assets............... 0.10% 0.12% 0.18% 0.24% 0.54%
Non-Accruing Loans Delinquent
90 Days or More:
Residential....................$ 335 $ 362 $ 570 $ 105 $ 453
Commercial real estate......... -- -- -- -- 542
Consumer....................... 386 307 432 446 154
Commercial business ........... 169 513 1,032 330 255
------ ------ ------ ------ ------
Total........................$ 890 $1,182 $2,034 $ 881 $1,404
====== ====== ====== ====== ======
Total as a percentage
of total assets............ 0.29% 0.46% 0.94% 0.44% 0.65%
Troubled debt restructurings....$ 784 $ 706 $ 763(3) $ 829(2) $ 487(1)
Real estate owned...............$ 332 $ 154 $ 165 $ 52 $ 719
Allowance for loan losses.......$2,121 $1,715 $1,512 $1,768 $1,759
________________
(1) Included in non-accruing loan totals.
(2) $89,000 of troubled debt restructurings are included in non-accruing
loans.
(3) $86,000 of troubled debt restructurings are included in non-accruing
loans.
(4) $155,000 of troubled debt restructurings are included in non-accruing
loans.
For the fiscal year ended March 31, 2000, the interest income which would
have been recognized with respect to non-accruing loans, had such loans been
current in accordance with their original terms and with respect to troubled
debt restructurings, had such loans been current in accordance with their
original terms, totaled $52,000, compared to $11,000 for the year ended March
31, 1999.
At March 31, 2000, non-accrual loans totaled $890,000 compared to $1.2
million and $2.0 million at March 31, 1999 and 1998, respectively. Until
March 31, 1998, the Bank had classified all loans as non-accrual when they
were 60 days or more delinquent. Beginning March 31, 1998, the Bank has
classified all loans as non-accrual when they are 90 days or more delinquent
as is more common industry practice. Included in non-accruing loans at March
31, 2000 were three one- to four-family real estate mortgage loans totaling
$335,000 and three commercial loans totaling $169,000 and seven consumer loans
totaling $386,000. Of the seven in consumer loans on non-accrual status at
fiscal year end, no loan exceeded $160,000 at fiscal year end. Of the three
in non-accruing commercial business loans at March 31, 2000, no loan exceeded
$200,000.
11
<PAGE>
The Bank had three loans totaling $784,000 at fiscal year end which were
troubled debt restructurings compared to five loans of $706,000 at March 31,
1999, of which one loan of $86,000 was also on non-accrual status. Of the
three troubled debt restructurings at March 31, 2000, one consumer loan
partially secured by a single family residence at $155,000 was also on a
non-accrual status. The other loans consisted of two commercial business
loans totaling $451,000 secured by commercial real estate, two rental
properties and business assets. All three loans are considered well secured
and no loss is anticipated at this time. All troubled debt restructurings are
also considered impaired. At March 31, 2000, the Bank held $897,000 in
impaired loans compared to $880,000 at March 31, 1999.
At March 31, 2000, real estate acquired through foreclosure had an
outstanding book value of $332,000 and consisted of three properties.
Provision for Losses on Loans and Real Estate Owned. Security Federal
recognizes that credit losses will be experienced during the course of making
loans and that the risk of loss will vary with, among other things, the type
of loan being made, the creditworthiness of the borrower over the term of the
loan and, in the case of a secured loan, the quality of the underlying
security for the loan.
The Bank seeks to establish and maintain sufficient reserves for
estimated losses on specifically identified loans and real estate where such
losses can be estimated. Additionally, general reserves for estimated
possible losses are established on specified portions of the Bank's portfolio
such as consumer loans and higher risk residential construction mortgage loans
based on management's estimate of the potential loss for loans which normally
can be classified as higher risk. Specific and general reserves are based on,
among other criteria (1) the risk characteristics on the loan portfolio, (2)
current economic conditions on a local as well as a statewide basis, (3)
actual losses experienced historically, and (4) the level of reserves for
possible losses in the future. Additionally, a reserve is maintained for
uncollected interest on loans 90 days or more past due.
At March 31, 2000, total reserves relating to loans were $2.1 million.
In determining the adequacy of the reserve for loan losses, management reviews
past experience of loan charge-offs, the level of past due and non-accrual
loans, the size and mix of the portfolio, general economic conditions in the
market area, and individual loans to identify potential credit problems.
Commercial business, commercial real estate and consumer loans have increased
to $103.8 million, or 51.1% of the Bank's total loan portfolio at March 31,
2000, and it is anticipated there will be a continued emphasis on this type of
credit. Although commercial business and consumer loans carry a higher level
of credit risk than conventional residential mortgage loans, the level of
reserves reflects management's continuing evaluation of this risk based on
upon the Bank's past loss experience. At fiscal year end, the Bank's ratio of
loans delinquent more than 60 days to total assets was .39%. These delinquent
loans are considered to be well secured and are in the process of collection.
Management believes that reserves for loan losses are at a level adequate to
provide for inherent loan losses. Although management believes that it has
considered all relevant factors in its estimation of future losses, future
adjustments to reserves may be necessary if conditions change substantially
from the assumptions used in making the original estimations. Regulators will
from time to time evaluate the allowance for loan losses which are subject to
adjustments based upon the information available to the regulators at the time
of their examinations.
Management believes the Bank has no undue concentration of loans in any
one particular industry. At March 31, 2000, the Bank had no allowance for
losses on real estate owned.
12
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
At March 31,
------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of year........ $1,715 $1,512 $1,768 $1,759 $1,955
Provision charged to operations..... 750 600 780 300 230
Charge-offs:
Residential real estate............ -- 2 -- 64 5
Commercial business and commercial
real estate..................... 114 193 660 59 330
Consumer........................... 269 235 633 198 137
------ ------ ------ ------ ------
Total charge-offs................ 383 430 1,293 321 472
------ ------ ------ ------ ------
Recoveries:
Residential real estate............ -- -- -- -- --
Commercial business................ 1 2 56 -- --
Consumer 38 31 201 30 46
------ ------ ------ ------ ------
Total recoveries................. 39 33 257 30 46
------ ------ ------ ------ ------
Balance at end of year.............. $2,121 $1,715 $1,512 $1,768 $1,759
====== ====== ====== ====== ======
Ratio of net charge-offs during the
year to average loans outstanding
during the year.................... 0.20% 0.28% 0.72% 0.19% 0.28%
==== ==== ==== ==== ====
13
<PAGE>
<TABLE>
The distribution of the Bank's allowance for loan losses at the dates indicated is summarized in the
following table. The entire allowance is available to absorb losses from all loan categories.
At March 31,
-----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------- ---------------- ------------- ------------- ---------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential............. $ 258 48.9% $ 198 41.6% $ 140 33.4% $ 81 33.7% $ 460 39.1%
Consumer ............... 870 20.5 647 25.9 551 32.6 734 31.2 568 28.9
Commercial business
and commercial
real estate............ 993 30.6 870 32.5 821 34.0 953 35.1 731 32.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total................ $2,121 100.0% $1,715 100.0% $1,512 100.0% $1,768 100.0% $1,759 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
14
<PAGE>
Service Corporation
-------------------
As a federally chartered savings bank, Security Federal is permitted by
OTS regulations to invest up to 2% of its assets in the stock of, or loans to,
service corporation subsidiaries, and may invest an additional 1% of its
assets in service corporations where such additional funds are used for
inner-city or community development purposes. At March 31, 2000, Security
Federal's net investment in its service corporations (including loans to
service corporations) totaled $450,000. In addition to investments in service
corporations, federal institutions are permitted to invest an unlimited amount
in operating subsidiaries engaged solely in activities which a federal savings
bank may engage in directly.
Security Financial Services Corporation ("SFSC"). SFSC was incorporated
in 1975 as a wholly owned subsidiary of the Bank. Its primary activity is
investment brokerage services.
Real Estate Partnership. The Company also develops real estate through
two real estate partnerships which it purchased from SFSC at market value in
December 1995. Each project was designed primarily to develop and sell
residential lots in and around the Bank's primary lending area. One project
was completed during fiscal 1998. Total investment of the Company in the
remaining project at March 31, 2000, was approximately $159,000. The Company
has no plans for additional real estate ventures.
During fiscal 1988, SFSC completed construction on the first phase of
Currytowne, a joint venture development of single-family residential lots
located in Edgefield County, South Carolina, near North Augusta. This phase
contains 84 lots. By fiscal 1997 year end, all lots had been sold. The
partnership was completely liquidated in January 1998.
During fiscal 1990, SFSC entered into a joint venture agreement, known as
Willow Woods, to develop 97.2 acres of land in Aiken County into approximately
150 single family residential lots. SFSC is a 50% partner in the joint
venture. The first phase of this development containing 51 lots was completed
in May of 1991, and as of March 31, 2000, all of the lots had been sold.
Construction on the second phase of Willow Woods was completed in May 1994 and
contains 40 single family residential lots, and as of March 31, 2000, all of
the lots had been sold. Phase three was completed in October 1999 and
consists of 11 single family residential lots of which two had been sold as of
March 31, 2000.
Investment Activities
---------------------
Investment securities. The Bank has authority to invest in various types
of liquid assets, including U.S. Treasury obligations and securities of
various federal agencies, certificates of deposit at insured institutions,
bankers' acceptances and federal funds.
The Bank may also invest a portion of its assets in certain commercial
paper and corporate debt securities. The Bank is also authorized to invest in
mutual funds whose assets conform to the investments that a federal thrift
institution is authorized to make directly. There are various restrictions on
the foregoing investments. For example, the commercial paper must be
appropriately rated by at least two nationally recognized investment rating
services and the corporate debt securities must be appropriately rated by at
least one such service. In addition, the average maturity of an institution's
portfolio of corporate debt securities may not, at any one time, exceed six
years, and the commercial paper must mature within nine months of issuance.
Moreover, an institution's total investment in the commercial paper and
corporate debt securities of any one issuer may not exceed 1% of the
institution's assets except that an institution may invest 5% of its assets in
the shares of any appropriate mutual fund. See "Regulation -- Federal
Regulation of Savings Associations."
As a member of the Federal Home Loan Bank ("FHLB") System, Security
Federal must maintain minimum levels of investments that are liquid assets as
defined in Federal regulations. See "Regulation -- Federal Regulation
15
<PAGE>
of Savings Associations -- Federal Home Loan Bank System." Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans.
Historically, the Bank has maintained its liquid assets above the minimum
requirements imposed by the OTS regulations and at a level believed adequate
to meet requirements of normal daily activities, repayment of maturing debt
and potential deposit outflows. Cash flow projections are regularly reviewed
and updated to assure that adequate liquidity is provided. As of March 31,
2000, the Bank's liquidity ratio (liquid assets as a percentage of net
withdrawable savings and current borrowings) was approximately 31%.
The following table sets forth the composition of the Company's portfolio
of securities and other investments, not including mortgage-backed securities.
At March 31,
-------------------------
2000 1999 1998
---- ---- ----
(In Thousands)
Interest-bearing deposits with banks.......... $ -- $ -- $ --
Other interest earning assets................. 1,069 2,406 --
------- ------- -------
Total..................................... $ 1,069 $ 2,406 $ --
======= ======= =======
Investment Securities:
Available for sale:
U.S. Treasury obligations................ 1,001 5,054 50,083
FHLB securities.......................... 41,484 43,358 --
Federal Farm Credit Bank securities...... 9,716 7,985 --
FHLMC bonds.............................. 1,965 963 4,514
------- ------- -------
Total securities available for sale... 54,166 57,360 54,597
------- ------- -------
Held to Maturity:
FHLB securities.......................... -- -- 2,364
FNMA securities.......................... 266 337 500
FHLMC bonds.............................. -- -- 1,000
------- ------- -------
Total securities held to maturity..... 266 337 3,864
------- ------- -------
Total securities(1)........................... 54,432 57,697 58,461
FHLB stock.................................... 2,606 1,245 1,349
------- ------- -------
Total securities and FHLB stock (1)........... $57,038 $58,942 $59,810
======= ======= =======
------------
(1) Does not include mortgage-backed securities.
At March 31, 2000, the Company did not have any investment securities
(exclusive of obligations of the U.S. Government and federal agencies) issued
by any one entity with a total book value in excess of 10% of stockholders'
equity.
16
<PAGE>
The following table sets forth the maturities or repricing of investment
securities and FHLB stock at March 31, 2000, and the weighted average yields
of such securities and FHLB stock (calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security).
Callable securities are shown at their likely call dates based on current
interest rates.
<TABLE>
Maturing or Repricing
---------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
--------------- ----------------- ---------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
other agency
obligations........... $8,299 6.35% $45,253 5.90% $2,497 5.75% $ -- --%
FHLB stock............. -- -- 2,606 7.75 -- -- -- --
------ ---- ------- ---- ------ ---- ------- ----
Total................ $8,299 6.35% $47,859 6.35% $2,497 5.75% $ -- --%
====== ==== ======= ==== ====== ==== ======= ====
</TABLE>
For information regarding the market value of the Bank's securities
portfolios, see Notes 2 and 3 of Notes to Consolidated Financial Statements
contained in the Annual Report.
The Bank has sold securities under an agreement to repurchase when it is
a cost effective method to acquire funds. The Bank did not engage in such
transactions during fiscal 2000. See "-- Borrowings."
Mortgage-backed securities. Security Federal has a portfolio of
mortgage-backed securities which it holds in both an available for sale and a
held to maturity portfolio. Such mortgage-backed securities can serve as
collateral for borrowings and, through repayments, as a source of liquidity.
Under the Bank's risk-based capital requirement, mortgage-backed securities
have a risk weight of 20% (or 0% in the case of Government National Mortgage
Association ("GNMA") securities) in contrast to the 50% risk weight carried by
residential loans. See "Regulation."
The Bank had $10.7 million, $9.4 million and $4.4 million of
mortgage-backed securities issued by the FHLMC at March 31, 2000, 1999 and
1998, respectively. The Bank had $14.1 million in mortgage-backed securities
issued by FNMA and $12.2 million issued by GNMA at March 31, 2000, compared to
$8.7 million in mortgage-backed securities issued by FNMA and $9.8 million
issued by GNMA at March 31, 1999 and none at March 31, 1998.
2000 1999 1998
---- ---- ----
(In Thousands)
Available for Sale:
FHLMC...................... $ 8,304 $ 6,185 $ --
FNMA....................... 14,120 8,664 --
GNMA....................... 12,231 9,827 --
-------- -------- ------
Total...................... $ 34,655 $ 24,676 $ --
======== ======== ======
The following table sets forth the composition of the mortgage-backed
securities held to maturity portfolio at the dates indicated.
At March 31,
----------------------------------------
2000 1999 1998
---------- ---------- ----------
Book Value Book Value Book Value
---------- ---------- ----------
(In Thousands)
Held to Maturity:
FHLMC........................ $2,444 $3,196 $4,352
====== ====== ======
17
<PAGE>
At March 31, 2000, the Company did not have any mortgage-backed
securities (exclusive of obligations of agencies of the U.S. Government)
issued by any one entity with a total book value in excess of 10% of
stockholders equity.
For information regarding the market values of Security Federal's
mortgage-backed securities portfolio, see Notes 2 and 3 of the Notes to
Consolidated Financial Statements contained in the Annual Report.
The following table sets forth the maturities or repricings and the
weighted average yields of the mortgage-backed securities at March 31, 2000.
Not considered in the preparation of the table below is the effect of
prepayments.
<TABLE>
Maturing or Repricing
-------------------------------------------------------------------- March 31, 2000
Less Than 1 to 5 5 to 10 Over Balance
1 Year Years Years Ten Years Outstanding
-------------- -------------- -------------- -------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA................$ 4,338 6.45% $ 6,885 6.27% $ 3,236 5.98% $ 50 6.05% $14,509 6.26%
FHLMC............... 765 6.43 3,688 5.91 5,364 5.93 1,360 6.83 11,177 6.07
GNMA................ 10,449 5.96 415 6.83 706 6.83 851 7.31 12,421 6.13
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total...............$15,552 6.12% $10,988 6.17% $ 9,306 6.02% $ 2,261 6.99% $38,107 6.16%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
Sources of Funds
----------------
Deposit accounts have traditionally been a principal source of the Bank's
funds for use in lending and for other general business purposes. In addition
to deposits, the Bank derives funds from loan repayments, cash flows generated
from operations (including interest credited to deposit accounts), FHLB of
Atlanta advances, the sale of securities under agreements to repurchase, and
loan sales. Scheduled loan payments are a relatively stable source of funds
while deposit inflows and outflows and the related cost of such funds have
varied widely. FHLB of Atlanta advances and the sale of securities under
agreements to repurchase may be used on a short-term basis to compensate for
seasonal reductions in deposits or deposit inflows at less than projected
levels and may be used on a longer term basis in support of expanded lending
activities. The availability of funds from loan sales is influenced by general
interest rates. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in the Annual Report.
Occasionally, Security Federal sells its 15 and 30-year fixed rate loans
in the secondary market. In addition, the Bank originates loans for other
financial institutions with their prior commitment to purchase the loan at a
set price. The amount of these loans originated and sold depends primarily on
loan demand. During fiscal 2000, the Bank originated $16.0 million of such
loans for other financial institutions. See "-- Loan Originations, Purchases
and Sales."
Deposits. The Bank attracts both short-term and long-term deposits from
the general public by offering a wide assortment of accounts and rates. In
recent years, market conditions have required the Bank to rely increasingly on
short-term accounts and other deposit alternatives that are more responsive to
market interest rates than the passbook accounts and regulated fixed interest
rate, fixed-term certificates that were the Bank's primary source of deposits
before 1978. The Bank offers regular passbook accounts, checking accounts,
various money market accounts, fixed interest rate certificates with varying
maturities, negotiated rate $100,000 or above jumbo certificates of deposit
("Jumbo CDs") and individual retirement accounts.
At March 31, 2000, the Bank had no brokered deposits. In addition, the
Bank believes that, based on its experience over the past several years, its
passbook and transaction accounts are stable sources of deposits.
18
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs for the periods indicated.
At March 31,
-------------------------------------------------
2000 1999 1998
-------------- --------------- --------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Interest Rate Range:
Passbook accounts
0 % - 3.00%............. $ 13,203 5.8% $ 11,848 5.5% $12,328 6.8%
NOW and other transaction
accounts 0% - 1.09%...... 58,305 25.5 53,436 24.7 47,414 26.1
Money market funds
2.20% - 5.13%........... 51,636 22.5 49,370 22.8 27,902 15.3
-------- ----- -------- ----- -------- -----
Total non-certificates. $123,144 53.8 $114,654 52.9 87,644 48.2
-------- ----- -------- ----- -------- -----
Certificates:
0.00-4.99% ............... $ 15,575 6.8 31,101 14.4 3,087 1.7
5.00-6.99% ............... 90,104 39.4 70,640 32.6 90,920 50.0
7.00-8.99%................ -- -- 138 0.1 135 0.1
-------- ----- -------- ----- -------- -----
Total certificates..... $105,679 46.2 101,879 47.1 94,142 51.8
-------- ----- -------- ----- -------- -----
Total deposits....... $228,823 100.0% $216,533 100.0% $181,786 100.0%
======== ===== ======== ===== ======== =====
The Bank relies to a limited extent upon locally obtained Jumbo CDs to
maintain its deposit levels. At March 31, 2000, Jumbo CDs constituted 8.4% of
the Bank's total deposits. Security Federal has not relied heavily on Jumbo
CDs to manage interest rate sensitivity. Security Federal has, however,
exhibited an ability to attract and maintain such deposits to desired levels
during recent periods.
The following table sets forth the deposit flows at the Bank during the
periods indicated.
Years Ended March 31,
--------------------------------------
2000 1999 1998
----------- ---------- ----------
(Dollars in Thousands)
Opening balance....................... $ 216,533 $ 181,786 $ 168,061
Deposits.............................. 1,015,561 997,726 812,539
Withdrawals........................... (1,011,879) (970,599) (805,566)
Interest credited..................... 8,608 7,620 6,752
----------- ---------- ----------
Ending balance ....................... 228,823 216,533 181,786
----------- ---------- ----------
Net increase (decrease)............... $ 12,290 $ 34,747 $ 13,725
=========== ========== ==========
Percent increase (decrease)........... 5.7% 19.1% 8.2%
==== ==== ====
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<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of March 31, 2000.
4.00- 5.00- 6.00- 7.00-
4.99% 5.99% 6.99% 7.99% Total
----- ----- ----- ----- -----
(In Thousands)
Certificate accounts maturing
in quarter ending:
June 30, 2000............. $ 7,952 $15,570 $ 930 $ -- $ 24,452
September 30, 2000........ 5,133 19,839 572 -- 25,544
December 31, 2000......... 827 10,432 1,460 -- 12,719
March 31, 2001............ 143 8,998 6,024 -- 15,165
June 30, 2001............. 249 4,015 3,644 -- 7,908
September 30, 2001........ 403 1,314 4,949 -- 6,666
December 31, 2001......... 127 854 3,802 -- 4,783
March 31, 2002............ 336 485 211 -- 1,032
June 30, 2002............. 38 704 576 -- 1,318
September 30, 2002........ -- 562 1,572 -- 2,134
December 31, 2002......... 25 141 830 -- 996
Thereafter................ 343 986 1,633 -- 2,962
------- ------- ------- ------- --------
Total................... $15,576 $63,900 $26,203 $ -- $105,679
======= ======= ======= ======= ========
The following table indicates the amount of the Bank's deposits of
$100,000 or more by time remaining until maturity at March 31, 2000.
Passbook, NOW and
Certificates of Deposit Money Market Accounts
----------------------- ---------------------
(In Thousands)
Maturity Period
---------------
Three months or less............. $ 4,197 $36,708
Over three through six months.... 3,120 --
Over six through twelve month.... 4,675 --
Over twelve months .............. 7,135 --
-------- -------
Total......................... $ 19,127 $36,708
======== =======
Borrowings
----------
As a member of the FHLB of Atlanta, the Bank is required to own capital
stock in the FHLB of Atlanta and is authorized to apply for advances from the
FHLB of Atlanta. Each FHLB credit program has its own interest rate, which
may be fixed or variable, and range of maturities. The FHLB of Atlanta may
prescribe the acceptable uses to which these advances may be put, as well as
limitations on the size of the advances and repayment provisions. See Note 9
of Notes to Consolidated Financial Statements contained in the Annual Report
for disclosure regarding the maturities and rate structure of the Bank's FHLB
advances. Federal law contains certain collateral requirements for FHLB
advances. See "Regulation -- Federal Regulation of Savings Associations --
Federal Home Loan Bank System."
Occasionally, the Bank has used the sale of securities under agreements
to repurchase as a source of funds. The securities sold pursuant to these
agreements consist of mortgage loans which have been convened to FHLMC
participation certificates. The Bank has sold securities under agreements to
repurchase to both FHLMC and Wachovia Bank and Trust Company. These funds are
used whenever its costs are favorable compared to alternative sources of
20
<PAGE>
funds. At March 31, 2000, the Bank had no wholesale repurchase agreements
outstanding. At March 31, 2000, the Bank had $2.2 million in retail
repurchase agreements with an average rate of 5.57%.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances at the dates indicated.
Years Ended March 31,
----------------------------
2000 1999 1998
---- ---- ----
(In Thousands)
Maximum Balance:
FHLB advances................................. $50,611 $21,658 $28,268
Average Balance:
FHLB advances................................. $31,909 $16,958 $20,252
The following table sets forth information as to the Bank's borrowings
and the weighted average interest rates thereon at the dates indicated.
At March 31,
----------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Balance:
FHLB advances................................. $50,611 $14,600 $12,126
Weighted Average Interest Rate:
At Fiscal Year End:
FHLB advances ............................... 5.99% 5.82% 6.25%
During Fiscal Year:
FHLB advances ............................... 5.65% 5.91% 6.12%
Competition
-----------
The Bank serves the counties of Aiken and Bamberg, South Carolina through
its ten branch offices located in Aiken, Denmark, North Augusta, Graniteville,
Langley, Clearwater and Wagener, South Carolina. On October 21, 1993 the Bank
expanded its market area through the acquisition of four branch offices of
NationsBank of South Carolina, N.A. The branches are located in Langley,
Graniteville, Clearwater and Wagener, Aiken County, South Carolina.
Security Federal faces strong competition both in originating loans and
in attracting deposits. Competition in originating loans comes primarily from
other thrift institutions, commercial banks, mortgage bankers and credit
unions who also make loans in the Bank's market area. The Bank competes for
loans principally on the basis of the interest rates and loan fees it charges,
the types of loans it makes and the quality of services it provides to
borrowers.
The Bank faces substantial competition in attracting deposits from other
thrift institutions, commercial banks, money market and mutual funds, credit
unions and other investment vehicles. The ability of the Bank to attract and
retain deposits depends on its ability to provide an investment opportunity
that satisfies the requirements of investors as to rate of return, liquidity,
risk and other factors. The Bank attracts a significant amount of deposits
through its branch offices primarily from the communities in which those
branch offices are located. Therefore, competition for those deposits is
principally from other thrift institutions and commercial banks located in the
same communities. The
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<PAGE>
Bank competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours, and convenient branch locations
with interbranch deposit and withdrawal privileges at each.
The authority to offer money market deposits, and expanded lending and
other powers authorized for thrift institutions by federal law, have resulted
in increased competition for both deposits and loans between thrift
institutions and other financial institutions such as commercial banks and
credit unions.
REGULATION
General
-------
The Bank is subject to extensive regulation, examination and supervision
by the OTS as its chartering agency, and the FDIC, as the insurer of its
deposits. The activities of federal savings institutions are governed by the
Home Owners' Loan Act ("HOLA") and, in certain respects, the Federal Deposit
Insurance Act ("FDIA"), and the regulations issued by the OTS and the FDIC to
implement these statutes. These laws and regulations delineate the nature and
extent of the activities in which federal savings associations may engage.
Lending activities and other investments must comply with various statutory
and regulatory capital requirements. In addition, the Bank's relationship
with its depositors and borrowers is also regulated to a great extent,
especially in such matters as the ownership of deposit accounts and the form
and content of the Bank's mortgage documents. The Bank must file reports with
the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS to review the Bank's
compliance with various regulatory requirements. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have
a material adverse impact on the Company, the Bank and their operations. The
Company, as a savings and loan holding company, is also required to file
certain report with, and otherwise comply with the rules and regulations of,
the OTS.
Federal Regulation of Savings Associations
------------------------------------------
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS has extensive authority over the operations of savings
associations. Among other functions, the OTS issues and enforces regulations
affecting federally insured savings associations and regularly examines these
institutions.
All savings associations are required to pay assessments to the OTS to
fund the agency's operations. The general assessments, paid on a semi-annual
basis, are determined based on the savings association's total assets,
including consolidated subsidiaries. The Bank's OTS assessment for the fiscal
year ended March 31, 2000 was $59,000.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner.
The Bank, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (i.e., borrowings)
from the FHLB of Atlanta. The Bank is in compliance with this requirement
with an investment in FHLB of Atlanta stock of $2.6 million at March 31, 2000.
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<PAGE>
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB of Atlanta.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. The FDIC maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the SAIF. The Bank's deposit
accounts are insured by the FDIC under the SAIF to the maximum extent
permitted by law. As insurer of the Bank's deposits, the FDIC has
examination, supervisory and enforcement authority over all savings
associations.
Under applicable regulations, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as
of the reporting period ending seven months before the assessment period.
The capital categories are: (i) well-capitalized, (ii) adequately capitalized,
or (iii) undercapitalized. An institution is also placed in one of three
supervisory subcategories within each capital group. The supervisory subgroup
to which an institution is assigned is based on a supervisory evaluation
provided to the FDIC by the institution's primary federal regulator and
information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned with the most well-capitalized, healthy
institutions receiving the lowest rates.
Effective January 1, 1997, the premium schedule for BIF and SAIF insured
institutions ranged from 0 to 27 basis points. However, SAIF insured
institutions and BIF insured institutions are required to pay a Financing
Corporation assessment in order to fund the interest on bonds issued to
resolve thrift failures in the 1980s. This amount is currently equal to about
2.1 basis points for each $100 in domestic deposits for both BIF and SAIF
members. These assessments, which are revised quarterly based upon the level
of BIF and SAIF deposits, will continue until the bonds mature in the year
2015.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the
past and may raise insurance premiums in the future. If such action is taken
by the FDIC, it could have an adverse effect on the earnings of the Bank.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or
the OTS. Management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of specified liquid assets
equal to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement is currently 4%, but may be changed from time to time by the OTS
to any amount within the range of 4% to 10%. Monetary penalties may be
imposed for failure to meet liquidity requirements. The Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.
Prompt Corrective Action. The OTS is required to take certain supervisory
actions against undercapitalized savings associations, the severity of which
depends upon the institution's degree of undercapitalization. Generally, an
institution that has a ratio of total capital to risk-weighted assets of less
than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than
4%, or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
"undercapitalized." An institution that has a total risk-based capital ratio
less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that
is less than 3% is considered to be "significantly undercapitalized" and an
institution that has a tangible capital to assets ratio equal to or less than
2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a
23
<PAGE>
receiver or conservator for a savings institution that is "critically
undercapitalized." OTS regulations also require that a capital restoration
plan be filed with the OTS within 45 days of the date a savings institution
receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company in an amount of up to the
lesser of 5% of the institution's assets or the amount which would bring the
institution into compliance with all capital standards. In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS also could take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
At March 31, 2000, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that the
Bank fails to meet any standard prescribed by the Guidelines, the agency may
require the Bank to submit to the agency an acceptable plan to achieve
compliance with the standard. Management is aware of no conditions relating
to these safety and soundness standards which would require submission of a
plan of compliance.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio asset (as defined by
regulation) in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. As an alternative, the savings
association may maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code ("Code"). Under either test,
such assets primarily consist of residential housing related loans and
investments. At March 31, 2000, the Bank met the test and its QTL percentage
was 90%.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is subject to national bank limits for payment of dividends. If
such association has not requalified or converted to a national bank within
three years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies. See "-- Savings and Loan Holding Company
Regulations."
Capital Requirements. Federally insured savings associations, such as the
Bank, are required to maintain a minimum level of regulatory capital. The OTS
has established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). At March 31, 2000, the Bank
had tangible capital of $19.9 million, or 6.5% of adjusted total assets, which
is approximately $13.4 million above the minimum requirement of 2.0% of
adjusted total assets in effect on that date.
24
<PAGE>
The capital standards also require core capital equal to at least 4% of
adjusted total assets, depending on an institution's supervisory rating. Core
capital generally consists of tangible capital. At March 31, 2000, the Bank
had core capital equal to $20.5 million, or 6.7% of adjusted total assets,
which is $8.3 million above the minimum leverage ratio requirement of 4% as in
effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists
of core capital, as defined above, and supplementary capital. Supplementary
capital consists of certain permanent and maturing capital instruments that do
not qualify as core capital and general valuation loan and lease loss
allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary
capital may be used to satisfy the risk-based requirement only to the extent
of core capital.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, are multiplied by a risk weight, ranging from
0% to 100%, based on the risk inherent in the type of asset. For example, the
OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to- four family first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by FNMA or
FHLMC.
On March 31, 2000, the Bank had total risk-based capital of approximately
$22.5 million, including $20.5 million in core capital and $2.1 million in
qualifying supplementary capital, and risk-weighted assets of $180.7 million,
or total capital of 12.5% of risk-weighted assets. This amount was $8.1
million above the 8% requirement in effect on that date.
The OTS is authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis. The OTS and the
FDIC are authorized and, under certain circumstances required, to take certain
actions against savings associations that fail to meet their capital
requirements. The OTS is generally required to take action to restrict the
activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based
capital ratio or an 8% risk-based capital ratio). Any such association must
submit a capital restoration plan and until such plan is approved by the OTS
may not increase its assets, acquire another institution, establish a branch
or engage in any new activities, and generally may not make capital
distributions. The OTS is authorized to impose the additional restrictions
that are applicable to significantly undercapitalized associations.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an
unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Company or the Bank may have a substantial adverse effect on their operations
and profitability.
Limitations on Capital Distributions. The OTS imposes various
restrictions on savings associations with respect to their ability to make
distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account. The OTS also prohibits a savings association from declaring or paying
any dividends or from repurchasing any of its stock if, as a result of such
action, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with the association's mutual to stock conversion.
The Bank may make a capital distribution without OTS approval provided
that the Bank notify the OTS 30 days before it declares the capital
distribution and that the following requirements are met: (i) the Bank has a
regulatory rating in one of the two top examination categories, (ii) the Bank
is not of supervisory concern, and will remain adequately or well capitalized,
as defined in the OTS prompt corrective action regulations, following the
proposed distribution, and (iii) the distribution does not exceed the Bank's
net income for the calendar year-to-date plus retained net income for the
previous two calendar years (less any dividends previously paid). If the Bank
does
25
<PAGE>
not meet these stated requirements, it must obtain the prior approval of the
OTS before declaring any proposed distributions.
In the event the Bank's capital falls below its regulatory requirements
or the OTS notifies it that it is in need of more than normal supervision, the
Bank's ability to make capital distributions will be restricted. In addition,
no distribution will be made if the Bank is notified by the OTS that a
proposed capital distribution would constitute an unsafe and unsound practice,
which would otherwise be permitted by the regulation.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the national bank limit on loans to one borrower. A
savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At March
31, 2000, the Bank's limit on loans to one borrower was $3.4 million. At
March 31, 2000, the Bank's largest single loan to one borrower was $2.7
million, which was performing according to its original terms.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide
the information each agency may, by regulation, require. Savings associations
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank. Generally, transactions
between a savings association or its subsidiaries and its affiliates are
required to be on terms as favorable to the association as transactions with
non-affiliates. In addition, certain of these transactions, such as loans to
an affiliate, are restricted to a percentage of the association's capital.
Affiliates of the Bank include the Company and any company which is under
common control with the Bank. In addition, a savings association may not lend
to any affiliate engaged in activities not permissible for a bank holding
company or acquire the securities of most affiliates. The OTS has the
discretion to treat subsidiaries of savings associations as affiliates on a
case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions
on loans to such persons and their related interests. Among other things,
such loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
Community Reinvestment Act. Under the federal Community Reinvestment Act
("CRA"), all federally-insured financial institutions have a continuing and
affirmative obligation consistent with safe and sound operations to help meet
all the credit needs of its delineated community. The CRA does not establish
specific lending requirements or programs nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to meet all the credit needs of its delineated community. The CRA
requires the federal banking agencies, in connection with regulatory
examinations, to assess an institution's record of meeting the credit needs of
its delineated community and to take such record into account in evaluating
regulatory applications to establish a new branch office that will accept
deposits, relocate an existing office, or merge or consolidate with, or
acquire the assets or assume the liabilities of, a federally regulated
financial institution, among others. The CRA
26
<PAGE>
requires public disclosure of an institution's CRA rating. The Bank received
an "outstanding" rating as a result of its latest evaluation.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers or
directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $27,500 per
day, or $1.1 million per day in especially egregious cases. Under the FDIA,
the FDIC has the authority to recommend to the Director of the OTS that
enforcement action be taken with respect to a particular savings institution.
If action is not taken by the Director, the FDIC has authority to take such
action under certain circumstances. Federal law also establishes criminal
penalties for certain violations.
Savings and Loan Holding Company Regulations
--------------------------------------------
The Company is a unitary savings and loan holding company subject to
regulatory oversight of the OTS. Accordingly, the Company is required to file
reports with the OTS and is subject to regulation and examination by the OTS.
In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to present a serious risk to the
subsidiary savings association.
Acquisitions. Federal law and OTS regulations issued thereunder
generally prohibit a savings and loan holding company, without prior OTS
approval, from acquiring more than 5% of the voting stock of any other savings
association or savings and loan holding company or controlling the assets
thereof. They also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or controls more
than 25% of the voting shares of such holding company, from acquiring control
of any savings association not a subsidiary of such savings and loan holding
company, unless the acquisition is approved by the OTS.
Activities. As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions. If the Company acquires
control of another savings association as a separate subsidiary other than in
a supervisory acquisition, it would become a multiple savings and loan holding
company and the activities of the Bank and any other subsidiaries (other than
the Bank or any other SAIF insured savings association) would generally become
subject to additional restrictions. There generally are more restrictions on
the activities of a multiple savings and loan holding company than on those of
a unitary savings and loan holding company. Federal law provides that, among
other things, no multiple savings and loan holding company or subsidiary
thereof which is not an insured association shall commence or continue for
more than two years after becoming a multiple savings and loan association
holding company or subsidiary thereof, any business activity other than: (i)
furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a
subsidiary insured institution, (iv) holding or managing properties used or
occupied by a subsidiary insured institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies
or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS
prior to being engaged in by a multiple savings and loan holding company.
Qualified Thrift Lender Test. If the Bank fails the qualified thrift
lender test, within one year the Company must register as, and will become
subject to, the significant activity restrictions applicable to bank holding
companies. See "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test" for information regarding the Bank's qualified thrift
lender test.
27
<PAGE>
TAXATION
Federal Taxation
----------------
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income. The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on
the Bank's actual loss experience, or a percentage equal to 8% of the Bank's
taxable income, computed with certain modifications and reduced by the amount
of any permitted additions to the non-qualifying reserve. Due to the Bank's
loss experience, the Bank generally recognized a bad debt deduction equal to
8% of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new
rules eliminated the 8% of taxable income method for deducting additions to
the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also required that all institutions recapture
all or a portion of their bad debt reserves added since the base year (last
taxable year beginning before January 1, 1988). The Bank has no post-1987
reserves subject to recapture. For taxable years beginning after December 31,
1995, the Bank's bad debt deduction will be determined under the experience
method using a formula based on actual bad debt experience over a period of
years. The unrecaptured base year reserves will not be subject to recapture as
long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continue to be subject
to provisions of present law referred to below that require recapture in the
case of certain excess distributions to shareholders.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Bank's loan portfolio decreased since December
31, 1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserve. The amount of additional taxable income created from an
Excess Distribution is an amount that, when reduced by the tax attributable to
the income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a "nondividend distribution," then approximately
one and one-half times the Excess Distribution would be includable in gross
income for federal income tax purposes, assuming a 34% corporate income tax
rate (exclusive of state and local taxes). See "Regulation" for limits on the
payment of dividends by the Bank. The Bank does not intend to pay dividends
that would result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess
28
<PAGE>
of AMTI (with certain modification) over $2.0 million is imposed on
corporations, including the Bank, whether or not an Alternative Minimum Tax is
paid.
Dividends-Received Deduction. The Company may exclude from its income
100% of dividends received from the Bank as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
Audits. The Company, the Bank and its consolidated subsidiary have been
audited or their books closed without audit by the IRS with respect to
consolidated federal income tax returns through March 31, 1994. See Note 10
of Notes to Consolidated Financial Statements contained in the Annual Report
for additional information regarding income taxes of the Bank.
State Taxation
--------------
South Carolina has adopted the Code as it relates to savings banks,
effective for taxable years beginning after December 31, 1986. The Bank is
subject to South Carolina income tax at the rate of 6%. The Bank has not been
audited by the State of South Carolina during the past five years.
The Corporation's income tax returns have not been audited by federal or
state authorities within the last five years. For additional information
regarding income taxes, see Note 10 of the Notes to Consolidated Financial
Statements contained in the Annual Report.
Item 2. Properties
----------
At March 31, 2000, Security Federal owned the buildings and land for its
main office, five of its branch offices, including the operations center,
leased the land and owned the improvements thereon for one of its offices,
and leased the remaining four offices. The property related to the offices
owned by Security Federal had a depreciated cost (including land) of
approximately $2.4 million at March 31, 2000. At March 31, 2000, the
aggregate net book value of leasehold improvements (excluding furniture and
equipment) associated with leased premises was $600,000. See Note 5 of Notes
to Consolidated Financial Statements contained in the Annual Report.
The following table sets forth the net book value of the offices owned
(including land) and leasehold improvements on properties leased by Security
Federal at March 31, 2000.
Lease Date
Owned Expira- Facility Gross
or tion Opened/ Square Net Book
Location Leased Date Acquired Footage Value
----------------------------- ------ ---- -------- ------- --------
Main Office:
1705 Whiskey Road S. Owned N/A 1980 10,000 $495,821
Aiken, South Carolina
(table continued on following page)
29
<PAGE>
Lease Date
Owned Expira- Facility Gross
or tion Opened/ Square Net Book
Location Leased Date Acquired Footage Value
----------------------------- ------ ---- -------- ------- --------
Full Service
Branch Offices
149 E. Baruch Street Owned N/A 1984 2,258 194,445
Denmark, South Carolina
100 Laurens Street, N.W. Leased 2013 1959 4,500 17,113
Aiken, South Carolina
313 East Martintowne Road Owned(1) N/A 1973 4,356 126,936
North Augusta, South Carolina
1665 Richland Avenue, W. Owned N/A 1984 1,942 235,758
Aiken, South Carolina
Montgomery & Canal Streets Leased 2007 1993(2) 3,576 258,138
Masonic Shopping Center
Graniteville, South Carolina
2812 Augusta Road Owned N/A 1993(2) 2,509 187,763
Langley, South Carolina
Highway 125 and Highways
1 and 78 Leased 2003 1993(2) 2,287 165,031
Midland Valley Shopping
Center Clearwater,
South Carolina
118 Main Street North Owned N/A 1993(2) 3,600 275,222
Wagener, South Carolina
Walmart Superstore Leased 2001 1996 517 159,262
2035 Whiskey Road
Aiken, South Carolina
Operations Center:
871 East Pine Log Road Owned N/A 1988 10,000 889,176
Aiken, South Carolina
---------------
(1) Security Federal has a lease on the land for this office which expires in
2003, but has options through 2063.
(2) Represents acquisition date.
Item 3. Legal Proceedings
-----------------
The Company is involved as plaintiff or defendant in various legal actions
arising in the course of its business. It is the opinion of management, after
consultation with counsel, that the resolution of these legal actions will not
have a material adverse effect on the Company's financial condition and
results of operations.
30
<PAGE>
Item 4. Submission of Matter to Vote or Security Holders
------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended March 31, 2000.
PART II
Item 5. Market for the Issuer's Common Stock and Related Security Holder
Matters
---------------------------------------------------------------
The information contained in the section captioned "Stockholders
Information -- Price Range of Common Stock" and "-- Dividends" in the Annual
Report is incorporated herein by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report is incorporated herein by reference.
Item 7. Financial Statements
--------------------
Independent Auditors' Report*
Consolidated Balance Sheets, March 31, 2000 and 1999*
Consolidated Statements of Income For the Years Ended March 31, 2000,
1999 and 1998*
Consolidated Statements of Changes in Shareholders' Equity For the
Years Ended March 31, 2000, 1999 and 1998*
Consolidated Statements of Cash Flows For the Years Ended March 31,
2000, 1999 and 1998*
Notes to Consolidated Financial Statements*
* Contained in the Annual Report filed as an exhibit hereto and
incorporated herein by reference. All schedules have been omitted as
the required information is either inapplicable or contained in the
Consolidated Financial Statements or related Notes contained in the
Annual Report.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
---------------------------------------------------------------
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
---------------------------------------------------------------
The information contained under the section captioned "Election of
Directors" in the Proxy Statement is incorporated herein by reference. The
information contained under the section captioned "Compliance With Section
16(a) of the Exchange Act" in the Proxy Statement is incorporated herein by
reference.
Item 10. Executive Compensation
----------------------
The information contained in the section captioned "Election of Directors
-- Compensation of Executive Officers" in the Proxy Statement is incorporated
herein by reference.
31
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
The information contained in the section captioned "Voting Securities and
Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
The information contained in the section captioned "Certain Transactions"
in the Proxy Statement is incorporated herein by reference.
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a) Exhibits:
--------------
3.1 Articles of Incorporation and amendments thereto*
3.2 Bylaws*
4 Instruments defining the rights of security holders, including
indentures**
10 Executive Compensation Plans and Arrangements:
Salary Continuation Agreements***
Amendment One to Salary Continuation Agreements****
Stock Option Plan***
Incentive Compensation Plan***
13 Annual Report to Stockholders
21 Subsidiaries of Registrant
23 Consent of Elliott, Davis & Company, LLP
27 Financial Data Schedule
---------------
* Filed on August 3, 1998, as an exhibit to the Company's Form 8-K
Current Report.
** Filed on August 12, 1987, as an exhibit to the Company's Form 8-A
registration statement pursuant to Section 12(g) of the Securities
Exchange Act of 1934 or as a part of reports filed pursuant to
Section 13 of such Act.
*** Filed on June 28, 1993, as an exhibit to the Company's Annual Report
on Form 10-KSB pursuant to Section 12(g) of the Securities Exchange
Act of 1934. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
**** Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1993 pursuant to Section 12(g) of
the Securities Exchange Act of 1934. All of such previously filed
documents are hereby incorporated herein by reference in accordance
with Item 601 of Regulation S-B.
(b) Reports on Form 8-K.
--------------------
No current reports on Form 8-K were filed by the Company during the
three months ended March 31, 2000.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: June 29, 2000 By:/s/ Timothy W. Simmons
---------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By:/s/ Timothy W. Simmons June 29, 2000
------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
(Principal Executive Officer)
By:/s/ Roy G. Lindburg June 29, 2000
------------------------------------
Roy G. Lindburg, Treasurer and Chief
Financial Accounting Officer (Principal
Financial and Accounting Officer)
By:/s/ T. Clifton Weeks June 29, 2000
------------------------------------
T. Clifton Weeks
Chairman of the Board and Director
By: June __, 2000
------------------------------------
Gasper L. Toole, II
Director
By:/s/ Robert E. Johnson June 29, 2000
------------------------------------
Robert E. Johnson
Director Emeritus and Secretary
By:/s/Harry O. Weeks, Jr. June 29, 2000
------------------------------------
Harry O. Weeks, Jr.
Director
By:/s/ Robert E. Alexander June 29, 2000
------------------------------------
Robert E. Alexander
Director
By: June __, 2000
------------------------------------
Thomas L. Moore
Director
By: June __, 2000
-------------------------------------
William Clyburn
Director
<PAGE>
INDEX TO EXHIBITS
Exhibit Number
---------------
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Elliott, Davis & Company, LLP
27 Financial Data Schedule
<PAGE>
Exhibit 13
Annual Report to Stockholders
<PAGE>
SECURITY FEDERAL CORPORATION
ANNUAL REPORT
MARCH 31, 2000
<PAGE>
TABLE OF CONTENTS
Letter to Shareholders................................................ 1
Financial Highlights.................................................. 2
Selected Consolidated Financial and Other Data........................ 3
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 4
Report of Elliott, Davis & Company, Independent Auditors.............. 17
Consolidated Balance Sheets........................................... 18
Consolidated Statements of Income..................................... 19
Consolidated Statements of Shareholders' Equity....................... 20
Consolidated Statements of Cash Flows................................. 21
Notes to Consolidated Financial Statements............................ 23
Shareholders Information.............................................. 40
Security Federal Bank Board of Directors and Management Team.......... 42
<PAGE>
Fellow Shareholders:
We are very pleased to report our third consecutive year of record earnings
and our fourth consecutive year of record operating earnings. Net income for
our most recent fiscal year ending March 31, 2000 increased 11.9% to $2.0
million or $2.41 per share compared to $1.8 million or $2.14 per share for our
fiscal year ending March 31, 1999. In addition, as of March 31, 2000, total
assets reached a record high of over $304 million.
In view of our record earnings, your Board of Directors approved a dividend of
$.04 per share that was paid on June 15, 2000 to shareholders of record as of
May 31, 2000. This represented the 38th consecutive quarterly dividend paid
since the Bank's conversion to a stock form of ownership in 1987.
Much of our fiscal year was spent ensuring that we were prepared for the Year
2000 date change. Thanks to our dedicated and professional staff and the
confidence shown in us by our customers, we entered the new year without a
glitch.
Because of our growth and expected continual growth, we more than doubled the
size of our Operations building. This expanded facility, along with an
excellent Operations staff, enables our bank to provide the highest quality
service. We also installed a walk-up ATM at our Laurens Street branch for the
convenience of downtown Aiken shoppers. This addition increases the number of
ATMs in our growing network to nine.
We will soon offer internet banking to increase the customer convenience
already provided by our ATM, check, and credit cards; our ATM network; our
24-hour toll-free informational phone service; our 7-day banking at our Aiken
Wal-Mart branch; and our many branches that open Saturday mornings.
We recently announced our plans to add a branch in the West Columbia, South
Carolina area. Not only will this provide added convenience for many of our
Wagener, South Carolina customers, but will give us an opportunity to increase
and diversify our asset base and earnings potential. Mortgage loans and
investment services will also be offered at this location.
Unlike many of the larger regional banks which emphasize "sales" in an attempt
to establish a "sales culture" within their organizations, we emphasize
"service." In order to provide excellent "service," we must inform our
customers about our products and services and the benefits they provide. We
must also make suggestions and provide advice where appropriate. We are
convinced that only a "service culture" will build long lasting relationships
of mutual benefit.
Congratulations to Elsie Dicks, our Branch Manager in Graniteville, South
Carolina, who is celebrating her 35th year in banking.
Please accept our sincere appreciation for your loyalty to Security Federal
Bank. We thank you for recommending our Bank to your friends and relatives
and ask you to continue to do so. We also thank our loyal and dedicated staff
for the quality and amount of service they provide everyday to our customers
and to our community. This is what really sets Security Federal Bank apart.
Sincerely, Sincerely,
/s/T. Clifton Weeks /s/Timothy W. Simmons
T. Clifton Weeks Timothy W. Simmons
Chairman President & Chief Executive Officer
1
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
Years Ended March 31,
-----------------------
2000 1999
---------- ----------
Net Income $2,021,213 $1,805,749
Earnings Per Share - Basic 2.41 2.14
Book Value Per Share 23.56 23.23
Total Interest Income 19,805,361 17,311,510
Total Interest Expense 10,378,254 8,637,822
Net Interest Income Before Provision
For Loan Losses 9,427,107 8,673,688
Provision For Loan Losses 750,000 600,000
Net Income After Provision For Loan Losses 8,677,107 8,073,688
Net Interest Margin 3.54% 3.96%
Total Loans Originated 118,490,000 115,801,000
Adjustable Rate Loans As A Percentage
Of Total Gross Loans 59.6% 60.3%
NET INCOME (In Thousands) EARNINGS PER SHARE - BASIC
[Bar graph] [Bar graph]
1996 $1,060 1996 $1.29
1997 835 1997 1.01
1998 1,713 1998 2.04
1999 1,806 1999 2.14
2000 2,021 2000 2.41
RETURN ON EQUITY TOTAL ASSETS (In Millions)
[Bar graph] [Bar graph]
1996 7.13% 1996 $215
1997 5.28 1997 202
1998 9.96 1998 216
1999 9.56 1999 255
2000 10.41 2000 305
BOOK VALUE PER SHARE ALLOWANCE FOR LOAN LOSSES (1)
[Bar graph] [Bar graph]
1996 $18.68 1996 1.14%
1997 19.40 1997 1.19
1998 21.46 1998 1.09
1999 23.23 1999 1.12
2000 23.56 2000 1.09
(1) Allowance for losses as a percentage
of total loans.
2
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Selected Consolidated Financial and Other Data
At Or For The Year Ended March 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Balance Sheet Data (Dollars In Thousands, Except Per Share Data)
---------------------------
Total Assets $304,802 $254,718 $215,512 $201,646 $214,816
Cash And Cash Equivalents 7,417 6,951 4,659 7,904 9,824
Investment And Mortgage-
Backed Securities 91,531 85,569 62,813 36,970 41,013
Loans Receivable - Net (1) 193,001 151,986 137,724 146,769 152,140
Deposits 228,823 216,533 181,786 168,061 172,375
Advances From Federal Home
Loan Bank 50,611 14,600 12,126 14,114 22,864
Total Shareholders' Equity 19,759 19,560 18,076 16,182 15,434
Income Data
---------------------------
Total Interest Income 19,805 17,312 16,618 15,843 15,822
Total Interest Expense 10,378 8,638 8,001 7,908 8,622
-------- -------- -------- -------- --------
Net Interest Income 9,427 8,674 8,617 7,935 7,200
Provision For Loan Losses 750 600 780 300 230
-------- -------- -------- -------- --------
Net Interest Income After
Provision For Loan Losses 8,677 8,074 7,837 7,635 6,970
Other Income 2,296 2,641 2,004 1,659 1,468
General And Administrative
Expense 7,845 7,962 7,220 8,045 6,839
Income Taxes 1,107 947 908 414 539
-------- -------- -------- -------- --------
Net Income $ 2,021 $ 1,806 $ 1,713 $ 835 $ 1,060
======== ======== ======== ======== ========
Per Common Share Data
---------------------------
Net Income Per Common
Share (Basic) $ 2.41 $ 2.14 $ 2.04 $ 1.01 $ 1.29
======== ======== ======== ======== ========
Cash Dividends Declared $ .16 $ .14 $ .12 $ .10 $ .10
======== ======== ======== ======== ========
Other Data
---------------------------
Interest Rate Spread
Information:
Average During Period 3.19% 3.53% 4.00% 3.82% 3.22%
End Of Period 2.90% 3.15% 3.91% 4.01% 3.32%
Net Interest Margin (Net
Interest Income/Average
Earning Assets) 3.54% 3.96% 4.33% 4.09% 3.62%
Average Interest-Earning
Assets To Average Interest-
Bearing Liabilities 109.11% 110.85% 108.27% 106.40% 106.88%
Equity To Total Assets 6.48% 7.68% 8.39% 8.03% 7.21%
Non-Performing Assets To
Total Assets (2) .40% .52% 1.02% .70% 1.53%
Return On Assets (Ratio Of
Net Income To Average
Total Assets) .72% .77% .80% .40% .50%
Return On Equity (Ratio Of
Net Income To Average Equity) 10.41% 9.56% 9.96% 5.28% 7.13%
Equity To Assets Ratio (Ratio
Of Average Equity To Average
Total Assets) 6.93% 8.08% 8.05% 7.55% 6.95%
Dividend Pay-Out Ratio On
Common Shares 6.67% 6.53% 5.87% 9.94% 7.76%
Number Of Full-Service Offices 10 10 10 10 10
(1) INCLUDES LOANS HELD FOR SALE
(2) NON-PERFORMING ASSETS CONSIST OF NON-ACCRUAL LOANS AND REPOSSESSED REAL
ESTATE.
3
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
The following discussion is presented to provide the reader with an
understanding of the financial condition and results of operations of Security
Federal Corporation and its subsidiaries. The investment and other activities
of the parent company, Security Federal Corporation (the Company), have had no
significant impact on the results of operations for the periods presented in
the financial statements. The information presented in the following
discussion of financial results is indicative of the activities of Security
Federal Bank (the Bank), a wholly owned subsidiary of the Company. The Bank
is a federally chartered thrift that was founded in 1922.
The principal business of the Bank is accepting deposits from the general
public and originating consumer and commercial business loans as well as
mortgage loans that enable borrowers to purchase or refinance one-to-four
family residential real estate. The Bank also originates construction loans
on single-family residences; multi-family dwellings and projects; commercial
real estate; and loans for the acquisition, development and construction of
residential subdivisions and commercial projects.
The Bank's net income is dependent on its interest rate spread which is the
difference between the average yield earned on its loan and investment
portfolios and the average rate paid on its deposits and borrowings. The
Bank's interest spread is impacted by interest rates, deposit flows, and loan
demands. Levels of non-interest income and operating expense are also
significant factors in earnings.
Forward-Looking Statements
This document, including information included or incorporated by reference,
contents, and future filings by the Company on Form 10-KSB, Form 10QSB, and
Form 8-K, and future oral and written statements by the Company and its
management may contain forward-looking statements about Security Federal
Corporation and its subsidiaries which we believe are within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, without limitation, statements with respect to anticipated
future operating and financial performance; growth opportunities; interest
rates; acquisition and divestiture opportunites; and synergies, efficiencies,
cost-savings, and funding advantages expected to be realized from prior
acquisitions. Words such as "may," "could," "should," "would," "believe,"
"anticipate," "estimate," "expect," "intend," "plan," and similar expressions
are intended to identify these forward-looking statements. Forward-looking
statements by the Company and its management are based on beliefs, plans,
objectives, goals, expectations, anticipations, estimates, and intentions of
Management and are not guarantees of future performance. The Company
disclaims any obligation to update or revise any forward-looking statements
based on the occurrence of future events, the receipt of new information, or
otherwise. The important factors we discuss below and elsewhere in this
document, identified in our filings with the Securities and Exchange
Commission ("SEC"), and presented by our Management from time to time could
cause actual results to differ materially from those indicated by the
forward-looking statements made in this document.
Asset and Liability Management
The Bank's program of asset and liability management seeks to limit the Bank's
vulnerability to material and prolonged increases or decreases in interest
rates, or "interest rate risk." The principal determinant of the exposure of
the Bank's earnings to interest rate risk is the timing difference (gap)
between the repricing or maturity of the Bank's interest-earning assets and
the repricing or maturity of its interest-bearing liabilities. If the
maturities of the Bank's assets and liabilities were perfectly matched and the
interest rates borne by its assets and liabilities were equally flexible and
moved concurrently (neither of which is the case), the impact on net interest
income of any material and prolonged changes in interest rates would be
minimal.
The Bank's asset and liability policies are directed toward the objectives of
increasing the interest rate sensitivity of the Bank's assets by shortening
their maturities or periods to reprice while reducing the interest rate
sensitivity of the Bank's interest-bearing liabilities by extending their
maturities. The success of Management's strategy is evidenced by the
composition of the loan portfolio that includes $121.1 million of adjustable
rate consumer loans, commercial loans, and mortgage loans or approximately
59.6% of total gross loans at March 31, 2000. At March 31, 2000, the negative
mismatch of interest-earning assets repricing or maturing within one year with
interest-bearing liabilities repricing or maturing within one year was $96.8
million or 36.6% of total assets compared to $54.4 million or 21.3% at March
31, 1999. The increase in the negative gap is due to an increase in demand
deposit accounts that are catagorized as repricing in the less than 3-month
category and the popularity of the Bank's 5-year adjustable rate mortgage
loan.
4
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Asset and Liability Management, Continued
During the past year, the Bank originated approximately $44.4 million in
adjustable rate residential real estate loans, which are generally held for
investment and not sold. Also, as part of the Bank's asset liability program,
the Bank originated a total of $51.9 million in consumer and commercial loans,
which are usually short term in nature. During fiscal 2000, 94.5% of total
loan originations were comprised of consumer, commercial, and adjustable rate
mortgage loans compared to 93.1% of total originations in fiscal 1999. The
Bank's portfolio of consumer and commercial loans was $103.8 million at March
31, 2000, $94.0 million at March 31, 1999, and $95.0 million at March 31,
1998. Consumer and commercial loans combined were 51.1% of total loans at
March 31, 2000; 58.4% at March 31, 1999; and 66.6% at March 31, 1998.
The Bank originated $6.2 million, $6.0 million, $3.4 million, and $5.6 million
in fixed rate residential loans of which most were short-term construction
loans, in fiscal 2000, 1999, 1998, and 1997, respectively. The Bank sold
$631,000 in fixed rate residential loans to secondary market agencies in
fiscal 2000, $5.6 million in fiscal 1999, $3.4 million in fiscal 1998, and
$5.8 million in fiscal 1997. Other fixed rate residential loans passed
directly on to other investors, other than Freddie Mac or Fannie Mae, totaled
$16.0 million in fiscal 2000, $28.1 million in fiscal 1999, $7.9 million in
fiscal 1998, and $6.4 million in fiscal 1997. At March 31, 2000, fixed rate
residential loans amounted to $13.4 million or 6.6% of the total loan
portfolio compared to $7.6 million or 4.7% at the end of the previous fiscal
year.
Certificates of deposit of $100,000 or more (Jumbo Certificates) are normally
considered to be interest rate sensitive because of their relatively short
maturities. Many financial institutions have used Jumbo Certificates to
manage interest rate sensitivity and liquidity. The Bank has not relied on
Jumbo Certificates for liquidity or asset liability management. As of March
31, 2000, the Bank had $19.1 million outstanding in Jumbo Certificates
compared to $17.6 million at March 31, 1999.
The following table sets forth the maturity schedule of certificates of
deposit with balances of $100,000 or greater at March 31, 2000.
Within 3 Months $ 4,197,000
After 3, Within 6 Months 3,120,000
After 6, Within 12 Months 4,675,000
After 12 Months 7,135,000
------------
$ 19,127,000
============
A negative gap position is expected to have an adverse effect on net interest
income during periods of rising interest rates. A negative one-year gap
position occurs when the dollar amount of rate sensitive liabilities maturing
or repricing within one year exceeds the dollar amount of rate sensitive
assets maturing or repricing during that same period. As a result, during
periods of rising interest rates, the interest paid on interest-bearing
liabilities will increase faster than interest received from earning assets,
thus reducing net interest income. The reverse is true in periods of
declining interest rates resulting in an expected increase in net interest
income.
The table on the following page sets forth the Bank's interest-bearing
liabilities and interest-earning assets being repriced or maturing within one
year. The table on Page 7 presents the Bank's entire interest-bearing
liabilities and interest-earning assets into repricing or maturity time
periods. Both tables present adjustable rate loans in the periods they are
scheduled to reprice, not mature. Both tables also assume investments reprice
at the earlier of maturity; the likely call date, if any, based on current
interest rates; or the next scheduled interest rate change, if any. NOW
accounts, money market accounts, and regular savings accounts are assumed to
reprice in the less than three-month category.
5
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Asset and Liability Management, Continued
The following table sets forth the Bank's interest-bearing liabilities and
interest-earning assets repricing or maturing within one year.
At March 31
-------------------------
2000 1999
---------- ----------
(Dollars in Thousands)
Loans (1) $ 104,107 $ 88,585
Mortgage-Backed Securities:
Held To Maturity 343 1,155
Available For Sale 16,863 13,038
Investment Securities:
Held To Maturity 266 337
Available For Sale 9,467 23,524
Other Interest-Earning Assets 1,069 1,075
---------- ----------
Total Interest Rate Sensitive Assets
Repricing Within 1 Year $ 132,115 $ 127,714
---------- ----------
Deposits 191,254 180,678
FHLB Advances And Other Borrowed Money 37,642 1,397
---------- ----------
Total Interest Rate Sensitive Liabilities
Repricing Within 1 Year $ 228,896 $ 182,075
---------- ----------
Gap $ (96,781) $ (54,361)
========== ==========
Interest Rate Sensitive Assets/Interest
Rate Sensitive Liabilities 57.72% 70.14%
Gap As A Percent Of Total Assets (31.8)% (21.3)%
(1) LOANS ARE NET OF UNDISBURSED FUNDS AND LOANS IN PROCESS.
6
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Asset and Liability Management, Continued
The following table sets forth the interest sensitivity of the Bank's assets
and liabilities at March 31, 2000, on the basis of the factors and assumptions
set forth in the table on the previous page.
<TABLE>
Remaining Time Before Asset/Liability Matures Or Can Be Repriced
------------------------------------------------------------------------------
< Three 3-12 1 - 3 3 - 5 5 - 10 10 - 20 > 20
Months Months Years Years Years Years Years Total
------ ------ ----- ----- ----- ----- ----- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earnings Assets
Loans (1) $ 48,499 $ 55,608 $ 45,577 $ 30,269 $ 13,186 $ 2,082 $ 175 $195,396
Mortgage-Backed Securities:
Held To Maturity, At Cost 110 233 328 369 1,215 189 - 2,444
Available For Sale, At
Fair Value 3,881 12,982 11,088 4,692 1,769 243 - 34,655
Investment Securities: (2)
Held To Maturity, At Cost 266 - - - - - - 266
Available For Sale, At
Fair Value 5,983 3,484 24,288 18,191 2,220 - - 54,166
FHLB Stock, At Cost - - 2,606 - - - - 2,606
Other Interest-Earning
Assets 1,069 - - - - - - 1,069
--------- --------- -------- -------- --------- -------- ------- --------
Total Financial Assets $ 59,808 $ 72,307 $ 83,887 $ 53,521 $ 18,390 $ 2,514 $ 175 $290,602
========= ========= ======== ======== ========= ======== ======= ========
Interest-Bearing Liabilities
Deposits:
Certificate Accounts $ 31,261 $ 48,619 $ 24,640 $ 1,159 $ - $ - $ - $105,679
NOW Accounts 46,535 - - - - - - 46,535
Money Market Accounts 51,636 - - - - - - 51,636
Passbook Accounts 13,203 - - - - - - 13,203
Borrowings 28,786 8,856 10,000 5,180 - - - 52,822
--------- --------- -------- -------- --------- -------- ------- --------
Total Interest-Bearing
Liabilities $ 171,421 $ 57,475 $ 34,640 $ 6,339 $ - $ - $ - $269,875
========= ========= ======== ======== ========= ======== ======= ========
Current Period Gap $(111,613) $ 14,832 $ 49,247 $ 47,182 $ 18,390 $ 2,514 $ 175 $ 20,727
Cumulative Gap $(111,613) $ (96,781) $(47,534) $ (352) $ 18,038 $ 20,552 $20,727 $ 20,727
Cumulative Gap As A
Percent Of Total Assets (36.6)% (31.8)% (15.6)% (0.01)% 5.9% 6.7% 6.8% 6.8%
</TABLE>
(1) LOANS ARE NET OF UNDISBURSED FUNDS AND LOANS IN PROCESS.
(2) CALLABLE SECURITIES ARE SHOWN AT THEIR LIKELY CALL DATES BASED ON
MANAGEMENT'S ESTIMATES AT MARCH 31, 2000.
In evaluating the Bank's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing tables must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates. Additionally, the interest rates
of certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates. Loan repayment rates and withdrawals of deposits
will likely differ substantially from the assumed rates previously set forth
in the event of significant changes in interest rates due to the option of
borrowers to prepay their loans and the ability of depositors to withdraw
funds prior to maturity. Further, certain assets, such as adjustable rate
mortgages, have features that restrict changes in interest rates on a
short-term basis as well as over the life of the asset.
7
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Condition
Total assets at March 31, 2000 were $304.8 million; an increase of $50.1
million or 19.7% from March 31, 1999. This increase was the result of an
increase in net loans receivable and, to a lesser extent, an increase in
investment securities.
Total net loans receivable were $193.0 million at March 31, 2000; an increase
of $41.0 million or 26.7% from the prior year. Residential real estate loans
increased $32.7 million to $98.2 million at March 31, 2000 as mortgage rates
increased during the year which caused an increase in the amount of adjustable
rate loans that are held in portfolio versus fixed rate mortgages that are
sold to investors. Security Federal sells virtually all its fixed rate
mortgages, while retaining its adjustable rate mortgages originated. Consumer
loans increased nominally by $88,000. Commercial business and commercial real
estate loans increased to $62.1 million at fiscal year end from $52.3 million
at March 31, 1999; an increase of $9.7 million or 18.6%. Loans held for sale
decreased $309,000 at March 31, 2000 from one year earlier.
Real estate acquired in settlement of loans (REO) increased $178,000 to
$332,000 at March 31, 2000 from $154,000 at fiscal year end 1999. REO at
March 31, 2000 consisted primarily of single-family homes. Real estate
acquired for development decreased by $16,000 or 2.9% at March 31, 2000 from
the prior year.
Non-accrual loans totaled $890,000 at March 31, 2000 compared to $1.2 million
a year earlier. The Bank classifies all loans as non-accrual when they become
90 days or more delinquent. The Bank had three loans totaling $784,000 at
March 31, 2000 that were troubled debt restructurings compared to $706,000 at
March 31, 1999. Of the three troubled debt restructurings at March 31, 2000,
only one loan of $155,000, a consumer loan partially secured by a
single-family dwelling, was more than 90 days delinquent and on a non-accrual
status. The other two loans consisted of a $54,000 commercial loan secured by
two single-family rental properties and a $397,000 commercial business loan
secured by commercial real estate. Those two loans were less than 30 days
delinquent at March 31, 2000. All troubled debt restructurings are also
considered impaired. At March 31, 2000, the Bank held $897,000 in impaired
loans compared to $880,000 at March 31, 1999.
The Bank reviews its loan portfolio and loan loss allowance on a monthly
basis. Future additions to the Bank's allowance for loan losses are dependent
on, among other things, the performance of the Bank's loan portfolio, the
economy, changes in real estate values, and interest rates. There can be no
assurance that additions to the allowance will not be required in future
periods. Management constantly monitors its loan portfolio for the impact of
local economic changes.
Deposits at the Bank increased $12.3 million or 5.7% to $228.8 million at
March 31, 2000 from $216.5 million at March 31, 1999. Advances from the
Federal Home Loan Bank (FHLB) increased to $50.6 million at March 31, 2000; up
from $14.6 million a year earlier, an increase of $36.0 million, in order to
fund the Bank's growth in assets. Other borrowed money increased $1.3 million
to $2.2 million during the year compared to $869,000 at March 31, 1999.
Total shareholders' equity was $19.8 million at March 31, 2000; an increase of
$198,000 or 1.0% compared to $19.6 million a year earlier. The increase was
attributable to net income of $2.0 million that was partially offset by a $1.5
million increase in the unrealized net loss on securities available for sale,
an increase in the indirect guarantee of the ESOP debt of $187,000, and
$135,000 in dividends paid.
8
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The following table presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
higher or lower outstanding balances and the changes due to the volatility of
interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable
to: 1) changes in rate (changes in rate multiplied by old volume); 2) changes
in volume (changes in volume multiplied by old rate); and 3) net change (the
sum of the prior columns). For purposes of this table, changes attributable
to both rate and volume, which cannot be segregated, have been allocated
proportionately to the change due to volume and the change due to rate.
<TABLE>
Fiscal Year 2000 Compared To 1999 Fiscal Year 1999 Compared To 1998
---------------------------------- ---------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans: (1)
Real Estate Loans $ 1,497 $ (437) $ 1,060 $ 507 $ (298) $ 209
Other Loans 731 (294) 437 (683) 56 (627)
-------- ------ -------- -------- ------ ------
Total Loans 2,228 (731) 1,497 (176) (242) (418)
Mortgage-Backed
Securities (2) 1,187 (12) 1,175 600 (65) 535
Investments (2) (57) (60) (117) 611 (96) 515
Other Interest-Earning
Assets (53) (9) (62) 60 2 62
-------- ------ -------- -------- ------ ------
Total Interest-Earning
Assets $ 3,305 $ (812) $ 2,493 $ 1,095 $ (401) $ 694
======== ====== ======== ======== ====== ======
Interest-Bearing Liabilities:
Deposits:
Certificate Accounts $ 445 $ (297) $ 148 $ (32) $ 48 $ 16
NOW Accounts 34 (118) (84) 31 (102) (71)
Money Market Accounts 823 (36) 787 744 191 935
Passbook Accounts 27 2 29 (19) 8 (11)
-------- ------ -------- -------- ------ ------
Total Deposits 1,329 (449) 880 724 145 869
Borrowings 907 (47) 860 (170) (62) (232)
-------- ------ -------- -------- ------ ------
Total Interest-Bearing
Liabilities 2,236 (496) 1,740 554 83 637
-------- ------ -------- -------- ------ ------
Effect On Net Income $ 1,069 $ (316) $ 753 $ 541 $ (484) $ 57
======== ====== ======== ======== ====== ======
(1) INTEREST ON NON-ACCRUAL LOANS IS NOT INCLUDED IN INCOME, ALTHOUGH THEIR LOAN BALANCES ARE INCLUDED IN
AVERAGE LOANS OUTSTANDING.
(2) SECURITIES AVAILABLE FOR SALE ARE COMPUTED USING THEIR HISTORICAL COST.
</TABLE>
9
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations, Continued
The following table presents the total dollar amount of interest income from
average interest-earning assets for the periods indicated and the resultant
yields as well as the interest expense on average interest-bearing liabilities
expressed both in dollars and rates. No tax equivalent adjustments were made.
<TABLE>
Averages For Fiscal Years Ended March 31,
---------------------------------------------------------------------------------
Yield/ 2000 1999 1998
Rate At -------------------------- -------------------------- -------------------------
March 31, Average Yield/ Average Yield/ Average Yield/
2000 Balance Interest Rate Balance Interest Rate Balance Interest Rate
---- ------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning
Assets:
Mortgage Loans 7.03% $ 77,275 $ 5,443 7.04% $ 56,465 $ 4,383 7.76% $ 50,128 $ 4,174 8.33%
Other Loans 9.15% 94,241 8,761 9.30% 86,426 8,324 9.63% 93,552 8,951 9.57%
---- -------- -------- ---- -------- -------- ---- -------- -------- ----
Total Loans (1) 8.12% 171,516 14,204 8.28% 142,891 12,707 8.89% 143,680 13,125 9.13%
Mortgage-Backed
Securities (2) 6.16% 35,009 2,039 5.82% 14,633 864 5.90% 4,599 329 7.15%
Investments (2) 6.04% 58,296 3,493 5.99% 59,235 3,610 6.09% 49,252 3,095 6.28%
Other Interest-
Earning Assets 6.29% 1,376 69 5.01% 2,406 131 5.43% 1,299 69 5.31%
---- -------- -------- ---- -------- -------- ---- -------- -------- ----
Total Interest-
Earning Assets 7.44% $266,197 $ 19,805 7.44% $219,165 $ 17,312 7.90% $198,830 $ 16,618 8.36%
==== ======== ======== ==== ======== ======== ==== ======== ======== ====
Interest-Bearing
Liabilities:
Certificate
Accounts 5.41% $104,978 $ 5,355 5.10% $ 96,512 $ 5,207 5.40% $ 97,093 $ 5,191 5.35%
NOW Accounts 1.09% 40,081 418 1.04% 37,402 502 1.34% 35,440 573 1.62%
Money Market
Accts. 4.60% 52,589 2,409 4.58% 34,696 1,622 4.68% 18,128 687 3.79%
Passbook
Accounts 2.50% 12,890 318 2.47% 11,806 289 2.45% 12,562 300 2.39%
---- -------- -------- ---- -------- -------- ---- -------- -------- ----
Total Interest-
Bearing
Accounts 4.18% 210,538 8,500 4.04% 180,416 7,620 4.22% 163,223 6,751 4.14%
Other Bor-
rowings 5.57% 1,534 74 4.82% 369 15 4.07% 171 10 5.85%
FHLB Advances 5.99% 31,909 1,804 5.65% 16,958 1,003 5.91% 20,252 1,240 6.12%
---- -------- -------- ---- -------- -------- ---- -------- -------- ----
Total Interest-
Bearing
Liabilities 4.54% $243,981 $ 10,378 4.25% $197,743 $ 8,638 4.37% $183,646 $ 8,001 4.36%
==== ======== ======== ==== ======== ======== ==== ======== ======== ====
Net Interest Income $ 9,427 $ 8,674 $ 8,617
======== ======== ========
Interest Rate
Spread 2.90% 3.19% 3.53% 4.00%
==== ==== ==== ====
Net Yield On
Earning Assets 3.54% 3.96% 4.33%
==== ==== ====
(1) INTEREST ON NON-ACCRUAL LOANS IS NOT INCLUDED IN INCOME, ALTHOUGH THEIR LOAN BALANCES ARE INCLUDED IN
AVERAGE LOANS OUTSTANDING.
(2) SECURITIES AVAILABLE FOR SALE ARE COMPUTED USING THEIR HISTORICAL COST.
</TABLE>
10
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Comparison of the Years Ended March 31, 2000 and 1999
General
The Company earned record net income of $2.0 million for the year ended March
31, 2000, an increase of $215,000 or 11.9% over earnings of $1.8 million for
the year ended March 31, 1999. This marked the third consecutive year of
record earnings and the fourth consecutive year for record operating earnings.
The primary reason for the increased earnings was an increase in net interest
income and a decrease in general and administrative expenses, offset partially
by a decrease in other income.
Net Interest Income
Net interest income increased $753,000 to $9.4 million in fiscal 2000 compared
to $8.7 million in fiscal 1999 despite a 42 basis point decline in the net
yield on interest-earning assets. The increase was accomplished by increasing
the average of total loans by $28.6 million in fiscal 2000. The Bank has also
been successful in attracting demand, money market, and savings accounts.
Interest income on loans increased $1.5 million as residential real estate
loans and commercial loans both increased during the year. The yield of the
loan portfolio during fiscal 2000 decreased 61 basis points as residential
real estate loans, which are generally the lowest yielding loans in the
portfolio, grew faster than commercial and consumer loans. Interest income on
investment securities, mortgage-backed securities, and other securities
increased $1.0 million during fiscal 2000. The yield during the year
decreased 12 basis points, but the average balance of the investment portfolio
increased $18.4 million.
Interest expense on deposits increased $881,000 during the year ended March
31, 2000 compared to the year ended March 31, 1999. The average of interest
bearing deposits increased $30.1 million as the average cost of those deposits
decreased four basis points during the year. Interest expense on FHLB
advances and other borrowings increased $860,000 during fiscal 2000 due to the
average amount of borrowings increasing $16.1 million. The average cost of
borrowings decreased 26 basis points comparing fiscal 2000 to fiscal 1999.
Provision for Loan Losses
The Company's provision for loan losses increased $150,000 to $750,000 during
the year ended March 31, 2000. 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 $890,000 at March 31,
2000 compared to $1.2 million at March 31, 1999. Net charge-offs were
$344,000 in fiscal 2000 compared to $397,000 in fiscal 1999. The ratio of the
allowance for loan losses to total loans at March 31, 2000 was 1.09% compared
to 1.12% at March 31, 1999. Management believes the allowance for loan losses
is adequate based on Management's estimates of the losses inherent in the loan
portfolio, although there can be no guarantee as to these estimates. In
addition, bank regulatory agencies may require additions to the allowance for
loan losses based on their judgments and estimates as part of their
examination process.
Other Income
Other income decreased $345,000 or 13.1% from $2.6 million during fiscal 1999
to $2.3 million during fiscal 2000. Gain on sale of loans decreased $413,000
to $257,044 during fiscal 2000 compared to $669,757 during fiscal 1999 due to
the mix of single-family mortgages shifting to adjustable rate loans, which
are held in portfolio, from fixed rate mortgages, which are sold to investors.
The origination trend changed due to the increase in mortgage rates during the
year. Loan servicing fees declined $35,000 as the portfolio of loans serviced
for others decreased. Service fees on deposit accounts increased $232,000 due
to an increase in the number of demand deposit accounts. Income from real
estate operations decreased $38,000. Other miscellaneous income decreased
$96,000 or 14.4% during fiscal 2000 due primarily to a decrease in the net
gain on sale of REO.
General and Administrative Expenses
General and administrative expenses decreased $117,000 or 1.5% to $7.8 million
during the year ended March 31, 2000 compared to $7.9 million during the same
period one year earlier. Salaries and employee benefits increased $100,000 or
2.5% due to normal annual salary adjustments. Occupancy expense increased
$30,000 or 6.0%. Advertising expense decreased $169,000 during fiscal 2000.
Depreciation and maintenance of equipment expense increased $88,000 or 11.0%
as new ancillary software and personal computers were purchased in preparation
for the year 2000. Other miscellaneous expenses encompassing REO expense,
legal, professional, and consulting expenses, stationery and office supplies,
and other sundry expenses decreased $165,000 or 9.8% during fiscal 2000.
11
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Income Taxes
Income taxes increased $159,000 during the year ended March 31, 2000 compared
to the year ended March 31, 1999 due to an increase in taxable income. The
effective tax rate was 35% for fiscal 2000 and 34% for fiscal 1999.
12
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Comparison of the Years Ended March 31, 1999 and 1998
General
The Company earned record net income of $1.8 million for the year ended March
31, 1999; an increase of $93,000 or 5.4% over earnings of $1.7 million for the
year ended March 31, 1998. This was the second consecutive year for record
earnings and the third consecutive year of record operating earnings. The
primary reasons for the increase in net income for 1999 are a decrease in the
provision for loan losses and an increase in the gain on sale of loans offset
in part by an increase in general and administrative expenses. The Company's
interest rate spread decreased during the year due to the falling interest
rate environment and the Company's increased investments as a percentage of
interest-earning assets over loans.
Net Interest Income
Net interest income increased $57,000 to $8.7 million in fiscal 1999 compared
to $8.6 million in fiscal 1998 despite a 37 basis point decline in the net
yield on interest-earning assets. The increase was accomplished by an average
increase in interest-earning assets of $20.3 million while interest-bearing
liabilities increased on average only $14.1 million. The Bank has been
successful in attracting demand deposits and utilizing a strategy of
attracting money market accounts and arbitraging those funds into investments
and mortgage-backed securities.
Interest income on loans decreased $418,000 or 3.2% during fiscal 1999 because
of a 24 basis point decline in the average yield on loans during the year as
balances remained fairly constant on average. Interest income on investment
securities, mortgage-backed securities, and other securities increased $1.1
million to $4.6 million during fiscal 1999 due to the previously mentioned
arbitrage. The overall average yield in the total investment portfolio
decreased 29 basis points to an average yield of 6.04% during fiscal 1999.
Interest expense on deposits increased $868,000 in the year ended March 31,
1999 compared to one year earlier. Interest-bearing deposits increased an
average of $17.2 million as money market accounts grew an average of $16.6
million during fiscal 1999. The average cost of interest-bearing deposits
also increased 8 basis points. Interest expense on FHLB advances and other
borrowings decreased $231,000 during the year as average borrowings declined
$3.1 million and the average cost of borrowings decreased 24 basis points.
Provision for Loan Losses
The provision for loan losses during fiscal 1999 decreased $180,000 to
$600,000 due to a decline in net charge-offs in fiscal 1999 and Management's
monthly reviews of the loan portfolio. Net charge-offs were $397,000 in
fiscal 1999 compared to $1.0 million in fiscal 1998. The ratio of the
allowance for loan losses to total loans at March 31, 1999 was 1.14% compared
to 1.09% at March 31, 1998. Based on its reviews of the loan portfolio,
Management believes the allowance for loan losses is adequate based on
Management's estimates of losses inherent in the loan portfolio, although
there can be no guarantee as to these estimates. In addition, bank regulatory
agencies may require additions to the allowance for loan losses based on their
judgments and estimates as part of their examination process.
Other Income
Other income increased $637,000 or 31.8% from $2.0 million in fiscal 1998 to
$2.6 million in fiscal 1999. Gain on sale of loans increased $475,000 to
$670,000 during fiscal 1999 compared to $195,000 during fiscal 1998 due to the
hiring of two additional mortgage loan originators and increased loan
refinancing due to lower mortgage rates. The Bank sells the majority of its
fixed rate mortgages. Loan servicing fees decreased $21,000 or 6.0% as the
majority of new production fixed rate loans are sold with servicing released.
Service fees on deposit accounts grew $16,000 or 1.9% due to the growth in the
number of demand deposits. Income from real estate operations increased
$5,000 or 4.6%. Other miscellaneous income consisting of net gains on sales
of REO's, credit life insurance commissions, discount brokerage and annuity
sales commissions, and other miscellaneous fees increased $177,000 during
fiscal 1999 due to increases in the gain on the sale of REO and on annuity
sales commissions.
13
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Comparison of the Years Ended March 31, 1999 and 1998, Continued
General and Administrative Expenses
General and administrative expenses increased $742,000 or 10.3% to $8.0
million during fiscal 1999 compared to $7.2 million during fiscal 1998 due to
increases in salaries and employee benefits and depreciation and maintenance
of equipment expenses. Salaries and employee benefits expense grew $564,000
or 16.0% due to an increase of staff in customer service positions and an
increase in staffing to handle the increase in the volume of mortgage loans.
Occupancy expense increased $25,000 or 5.4% as the Clearwater Banking Center
was remodeled and new quarters for the Auditing and Purchasing Departments
were renovated and occupied during the year. Advertising expense and
amortization of intangible expenses were virtually the same in both fiscal
1998 and 1999. Depreciation and maintenance of equipment expense increased
$83,000 or 11.4% as certain systems and equipment were upgraded. Federal
Deposit Insurance Corporation (FDIC) insurance premiums increased $2,100 or
2.7% during the year. Other miscellaneous expenses such as REO expense;
legal, professional, and consulting expenses; stationery and office supplies;
and other sundry expenses decreased $67,000 or 4.1% during the period.
Income Taxes
Income taxes increased $39,000 or 4.3% to $947,000 in the year ended March 31,
1999 compared to $908,000 expensed in fiscal 1998 as a result of an increase
in taxable income. The effective tax rate was 34% for 1999 and 35% for 1998.
14
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Regulatory Capital
The following table reconciles the Bank's shareholders' equity to its various
regulatory capital positions:
March 31,
----------------------
2000 1999
-------- --------
(In Thousands)
Shareholders' Equity (1) (2) $ 21,043 $ 19,007
Reduction For Goodwill And Other Intangibles 1,116 1,581
-------- --------
Tangible Capital 19,927 17,426
-------- --------
Qualifying Core Deposit Intangibles 559 664
Core Capital 20,486 18,090
-------- --------
Supplemental Capital 2,121 1,715
Less Assets Required To Be Deducted 103 -
-------- --------
Total Risk-Based Capital $ 22,504 $ 19,805
======== ========
(1) FOR 2000 AND 1999, INCLUDES UNREALIZED LOSSES OF $1,629,000 AND
$128,000, RESPECTIVELY ON AVAILABLE FOR SALE SECURITIES..
(2) FOR 2000 AND 1999, EXCLUDES EQUITY OF SECURITY FEDERAL CORPORATION, THE
PARENT.
The following table compares the Bank's capital levels relative to regulatory
requirements at March 31, 2000:
Amount Percent Actual Actual Excess Excess
Required Required Amount Percent Amount Percent
-------- -------- ------ ------- ------ -------
(Dollars in Thousands)
Tangible Capital $ 6,097 2.0% $19,927 6.5% $13,830 4.5%
Tier 1 Leverage
(Core) Capital 12,216 4.0% 20,486 6.7% 8,270 2.7%
Tier 1 Risk-Based
(Core) Capital 7,227 4.0% 20,486 11.3% 13,259 7.3%
Total Risk-Based
Capital $14,453 8.0% $22,504 12.5% $ 8,051 4.5%
Liquidity and Capital Resources
Liquidity refers to the ability of the Bank to generate sufficient cash flows
to fund current loan demand, repay maturing borrowings, fund maturing deposit
withdrawals, and meet operating expenses. The Bank's primary sources of funds
include loan repayments, loan sales, increased deposits, advances from the
FHLB, and cash flow generated from operations. The need for funds varies
among periods depending on funding needs as well as the rate of amortization
and prepayment on loans. The use of FHLB advances varies depending on their
relative costs.
The principal use of the Bank's funds is the origination of mortgages and
other loans and the purchase of investments and mortgage-backed securities.
Loan originations were $102.5 million in fiscal 2000 compared to $87.7 million
in fiscal 1999 and $49.3 million in fiscal 1998. Purchases of investments and
mortgage-backed securities were $30.4 million in fiscal 2000 compared to $69.4
million in fiscal 1999 and $54.9 million in fiscal 1998.
Outstanding loan commitments for which the Bank has not obtained prior
commitments to purchase from other institutional investors amounted to $1.4
million at March 31, 2000 compared to $514,000 at March 31, 1999. In
addition, unused lines of credit on home equity loans, credit cards, and other
loans amounted to $23.5 million at March 31, 2000. Management does not
anticipate that the percentage of funds drawn on unused lines of credit will
increase substantially over amounts currently utilized. Funding of
undisbursed loans-in-process of $7.8 million at March 31, 2000 and commitments
to originate loans and future advances on lines of credit are expected to be
provided from loan amortizations and prepayments, deposit inflows, and
short-term borrowing capacity.
15
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources, Continued
The Bank is required under applicable Federal regulations to maintain a
liquidity ratio at specified levels that are subject to change. Currently, a
minimum of 4.0% of the combined total of deposits and certain borrowings must
be maintained in the form of cash or eligible investments. At March 31, 2000,
the Bank's liquidity ratio was approximately 31%. Management believes that
liquidity during fiscal 2000 can be met through the Bank's deposit base and
borrowing ability and from maturing investments. See "Consolidated Statements
of Cash Flows" in the consolidated financial statements.
Accounting and Reporting Changes
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 is effective
for financial statements for all fiscal quarters of all fiscal years beginning
after June 15, 1999. In June 1999, the FASB issue SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities Deferral of the Effective
Date of FASB Statement No. 133." SFAS No. 133, as amended, is now effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000.
The Company does not believe the provisions of SFAS No. 133 will have a
significant impact on the financial statements upon adoption.
Impact of Inflation and Changing Prices
The consolidated financial statements, related notes, and other financial
information presented herein have been prepared in accordance with Generally
Accepted Accounting Principles (GAAP) that require the measurement of
financial position and operating results in terms of historical dollars
without considering changes in relative purchasing power over time due to
inflation. Unlike most industrial companies, substantially all of the assets
and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
Year 2000 Considerations
The Company experienced no problems with the century date rollover to January
1, 2000. All computer and related systems were monitored and are operating
normally for the year 2000. These systems will continued to be monitored
during the year 2000 and beyond.
16
<PAGE>
(Letterhead of Elliott, Davis & Company, LLP)
Report of Independent Certified Public Accountants
Shareholders and Board of Directors
Security Federal Corporation and Subsidiaries
Aiken, South Carolina
We have audited the accompanying consolidated balance sheets of Security
Federal Corporation and Subsidiaries as of March 31, 2000 and 1999, and the
related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended March 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Security Federal Corporation and Subsidiaries as of March 31, 2000 and 1999
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended March 31, 2000, in conformity with
generally accepted accounting principles.
/s/ Elliott, Davis & Company, LLP
Elliott, Davis & Company, L.L.P.
Greenville, South Carolina
May 24, 2000
17
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31,
--------------------------
2000 1999
------------ ------------
ASSETS:
Cash And Cash Equivalents $ 7,416,702 $ 6,951,347
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized Cost of
$91,446,235 and $82,240,153 at March
31, 2000 and 1999, Respectively) 88,820,651 82,035,772
Held To Maturity: (Market Value of $2,634,400
and $3,579,500 at March 31, 2000 and 1999,
Respectively) 2,710,103 3,532,863
------------ ------------
Total Investment And Mortgage-Backed Securities 91,530,754 85,568,635
------------ ------------
Loans Receivable, Net:
Held For Sale 1,295,676 1,604,300
Held For Investment: (Net of Allowance of
$2,120,767 and $1,715,068 at March 31, 2000
and 1999, Respectively) 191,704,890 150,381,301
------------ ------------
Total Loans Receivable, Net 193,000,566 151,985,601
------------ ------------
Accrued Interest Receivable:
Loans 963,219 657,153
Mortgage-Backed Securities 204,003 146,739
Investments 761,428 803,696
------------ ------------
Total Accrued Interest Receivable 1,928,650 1,607,588
------------ ------------
Premises And Equipment, Net 4,284,693 4,198,774
Federal Home Loan Bank Stock, At Cost 2,605,600 1,245,000
Real Estate Acquired In Settlement Of Loans 332,000 154,143
Real Estate Held For Development And Sale 535,878 552,111
Other Assets 3,167,115 2,454,724
------------ ------------
Total Assets $304,801,958 $254,717,923
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposit Accounts $228,823,331 $216,532,683
Advances From Federal Home Loan Bank 50,611,000 14,600,000
Other Borrowings 2,210,500 869,270
Advance Payments By Borrowers For Taxes
And Insurance 373,660 274,067
Other Liabilities 3,024,766 2,881,461
------------ ------------
Total Liabilities 285,043,257 235,157,481
------------ ------------
Shareholders' Equity:
Serial Preferred Stock, $.01 Par Value;
Authorized 200,000 Shares; Issued And
Outstanding, None - -
Common Stock, $.01 Par Value; Authorized
5,000,000 Shares, Issued And Outstanding
Shares, 838,524 at March 31, 2000;
Authorized 1,000,000 Shares, Issued And
Outstanding Shares, 842,120 at March 31, 1999 8,421 8,421
Additional Paid-In Capital 3,993,733 3,993,733
Indirect Guarantee Of Employee Stock Ownership
Trust Debt (186,803) -
Accumulated Other Comprehensive Loss (1,629,150) (127,738)
Retained Earnings, Substantially Restricted 17,572,500 15,686,026
------------ ------------
Total Shareholders' Equity 19,758,701 19,560,442
------------ ------------
Total Liabilities And Shareholders' Equity $304,801,958 $254,717,923
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended March 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Interest Income:
Loans $ 14,204,384 $ 12,707,359 $ 13,125,227
Mortgage-Backed Securities 2,038,716 863,443 328,948
Investment Securities 3,493,565 3,610,039 3,095,035
Other 68,696 130,669 68,530
------------ ------------ ------------
Total Interest Income 19,805,361 17,311,510 16,617,740
------------ ------------ ------------
Interest Expense:
NOW And Money Market Accounts 2,827,007 2,124,348 1,260,074
Passbook Accounts 318,378 288,950 300,461
Certificate Accounts 5,355,057 5,206,502 5,190,929
Advances And Other Borrowed Money 1,877,812 1,018,022 1,249,508
------------ ------------ ------------
Total Interest Expense 10,378,254 8,637,822 8,000,972
------------ ------------ ------------
Net Interest Income 9,427,107 8,673,688 8,616,768
Provision For Loan Losses 750,000 600,000 780,000
------------ ------------ ------------
Net Interest Income After
Provision For Loan Losses 8,677,107 8,073,688 7,836,768
------------ ------------ ------------
Other Income:
Gain On Sale Of Investment
Securities 3,896 - 15,423
Gain On Sale Of Loans 257,044 669,757 194,844
Loan Servicing Fees 291,193 326,424 347,098
Service Fees On Deposit Accounts 1,106,007 873,716 857,298
Income From Real Estate Operations 71,117 109,007 104,194
Other 566,742 662,426 485,611
------------ ------------ ------------
Total Other Income 2,295,999 2,641,330 2,004,468
------------ ------------ ------------
General And Administrative Expenses:
Compensation And Employee Benefits 4,196,630 4,096,201 3,532,201
Occupancy 522,392 492,863 467,415
Advertising 165,567 334,627 334,091
Depreciation And Maintenance
Of Equipment 895,498 807,042 724,434
Amortization Of Intangibles 465,240 465,240 465,240
FDIC Insurance Premiums 78,743 79,326 77,248
Other 1,521,146 1,686,540 1,619,685
------------ ------------ ------------
Total General And Administrative
Expenses 7,845,216 7,961,839 7,220,314
------------ ------------ ------------
Income Before Income Taxes 3,127,890 2,753,179 2,620,922
Provision For Income Taxes 1,106,677 947,430 908,293
------------ ------------ ------------
Net Income $ 2,021,213 $ 1,805,749 $ 1,712,629
============ ============ ============
Net Income Per Common Share (Basic) $ 2.41 $ 2.14 $ 2.04
============ ============ ============
Net Income Per Common Share
(Diluted) $ 2.39 $ 2.13 $ 2.04
============ ============ ============
Cash Dividend Per Share On
Common Stock $ .16 $ .14 $ .12
============ ============ ============
Weighted Average Shares
Outstanding (Basic) 840,322 842,120 837,546
============ ============ ============
Weighted Average Shares
Outstanding (Diluted) 847,099 845,844 839,996
============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years Ended March 31, 2000, 1999 and 1998
<TABLE>
Additional Accumulated Other
Common Paid-In Comprehensive Retained
Stock Capital Income/Loss Earnings Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance At March 31, 1997 $ 4,171 $ 3,958,603 $ (166,872) $12,386,127 $16,182,029
Net Income - - - 1,712,629 1,712,629
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Gains
On Securities Available
For Sale - - 252,610 - 252,610
Reclassification Adjustment
For Gains Included In
Net Income - - (10,025) - (10,025)
-----------
Comprehensive Income - - - - 1,955,214
Exercise Of Stock Options 40 39,340 - - 39,380
Cash Dividends - - - (100,582) (100,582)
----------- ----------- ----------- ----------- -----------
Balance At March 31, 1998 $ 4,211 $ 3,997,943 $ 75,713 $13,998,174 $18,076,041
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
Additional Accumulated Other
Common Paid-In Comprehensive Retained
Stock Capital Income/Loss Earnings Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance At March 31, 1998 $ 4,211 $ 3,997,943 $ 75,713 $13,998,174 $18,076,041
Net Income - - - 1,805,749 1,805,749
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Losses
On Securities Available
For Sale - - (203,451) - (203,451)
Reclassification Adjustment
For Gains Included In Net
Income - - - - -
-----------
Comprehensive Income - - - - 1,602,298
2-For-1 Stock Split 4,210 (4,210) - - -
Cash Dividends - - - (117,897) (117,897)
----------- ----------- ----------- ----------- -----------
Balance At March 31, 1999 $ 8,421 $ 3,993,733 $ (127,738) $15,686,026 $19,560,442
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
Additional Indirect Accumulated Other
Common Paid-In Guarantee Comprehensive Retained
Stock Capital of ESOP Debt Income/Loss Earnings Total
-------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance At March 31, 1999 $ 8,421 $ 3,993,733 $ $ (127,738) $15,686,026 $19,560,442
Net Income - - - - 2,021,213 2,021,213
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding Losses
On Securities Available
For Sale - - - (1,498,841) - (1,498,841)
Reclassification Adjust-
ment For Gains Included
In Net Income - - - (2,571) - (2,571)
-----------
Comprehensive Income - - - - - 519,801
Increase in Indirect
Guarantee of ESOP Debt - - (186,803) - - (186,803)
Cash Dividends - - - - (134,739) (134,739)
-------- ----------- ---------- ----------- ----------- -----------
Balance At March 31, 2000 $ 8,421 $ 3,993,733 $ (186,803) $(1,629,150) $17,572,500 $19,758,701
======== =========== ========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended March 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,021,213 $ 1,805,749 $ 1,712,629
Adjustments To Reconcile Net Income
To Net Cash Provided By Operating
Activities:
Depreciation 783,805 658,035 633,347
Amortization Of Intangibles 465,240 465,240 465,240
Discount Accretion And Premium
Amortization 144,460 16,741 (48,562)
Provisions For Losses On Loans
And Real Estate 750,000 600,000 780,000
Gain On Sales Of Loans (257,044) (669,757) (194,844)
Gain On Sales Of Investment
Securities (3,896) - (15,423)
Gain On Sale Of Real Estate (60,834) (252,559) (203,394)
Amortization Of Deferred Fees
On Loans (3,859) (198,055) (111,528)
Loss On Disposition Of Premises
And Equipment 6,538 9,479 30,634
Proceeds From Sale Of Loans
Held For Sale 17,184,431 34,395,529 11,447,131
Origination Of Loans For Sale (16,618,763) (34,097,891) (12,273,256)
(Increase) Decrease In Accrued
Interest Receivable:
Loans (306,066) 79,048 84,529
Mortgage-Backed Securities (57,264) (111,045) 3,215
Investments 42,268 (42,291) (398,296)
Increase In Advance Payments
By Borrowers 99,593 7,939 21,679
Other, Net (301,338) (227,310) (14,838)
------------ ------------ ------------
Net Cash Provided By Operating
Activities $ 3,888,484 $ 2,438,852 $ 1,918,263
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase Of Mortgage-Backed
Securities Available For Sale $(17,409,175) $(27,926,399) $ -
Principal Repayments On Mortgage-
Backed Securities Available
For Sale 6,580,795 3,080,957 -
Principal Repayments On Mortgage-
Backed Securities Held To Maturity 750,408 1,155,200 424,192
Purchase Of Investment Securities
Available For Sale (13,006,730) (41,481,782) (54,916,778)
Maturities Of Investment Securities
Available For Sale 11,985,716 38,532,104 22,000,000
Maturities Of Investment Securities
Held To Maturity 71,115 3,541,227 4,121,951
Proceeds From Sales Of Investment
Securities Available For Sale 2,503,985 - 2,982,969
Purchase Of FHLB Stock (1,734,200) - (695,200)
Redemption Of FHLB Stock 373,600 103,600 132,300
(Increase) Decrease In Loans
Receivable (42,357,135) (14,963,098) 9,038,131
Investment In Real Estate Held
For Development (689,318) (425,675) (306,052)
Proceeds From Sale Of Real Estate
Held For Development 776,668 606,350 627,280
Proceeds From Sale Of Real Estate
Acquired Through Foreclosure 99,265 826,683 367,156
Purchase And Improvement Of Premises
And Equipment (888,372) (1,045,528) (539,592)
Proceeds From Sale Of Premises
and Equipment 12,110 7,000 -
------------ ------------ ------------
Net Cash Used By Investing
Activities $(52,931,268) $(37,989,361) $(16,763,643)
------------ ------------ ------------
(Continued)
21
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the Years Ended March 31,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase In Deposit Accounts $ 12,290,648 $ 34,746,735 $ 13,725,090
Proceeds From FHLB Advances 143,350,000 78,600,000 133,785,000
Repayment Of FHLB Advances (107,339,000) (76,126,000) (135,773,000)
Proceeds From Other Borrowings 1,375,995 820,374 -
Repayment Of Other Borrowings (34,765) (80,037) (75,464)
Dividends To Shareholders (134,739) (117,897) (100,582)
Proceeds From Exercise Of Stock
Options - - 39,380
------------ ------------ ------------
Net Cash Provided By Financing
Activities $ 49,508,139 $ 37,843,175 $ 11,600,424
------------ ------------ ------------
Net Increase (Decrease) In Cash
And Cash Equivalents 465,355 2,292,666 (3,244,956)
Cash And Cash Equivalents At
Beginning Of Year 6,951,347 4,658,681 7,903,637
------------ ------------ ------------
Cash And Cash Equivalents At End
Of Year $ 7,416,702 $ 6,951,347 $ 4,658,681
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash Paid During The Period For:
Interest $ 10,592,614 $ 8,657,187 $ 7,766,909
============ ============ ============
Income Taxes $ 1,216,350 $ 1,067,586 $ 816,500
============ ============ ============
Supplemental Schedule Of Non
Cash Transactions:
Additions To Real Estate
Acquired Through Fore-
closure, Net $ 287,405 $ 672,104 $ 381,117
============ ============ ============
(Increase) Decrease In
Unrealized Net Loss On
Securities Available For
Sale, Net Of Taxes $ (1,501,412) $ (203,451) $ 242,585
============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Significant Accounting Policies
-------------------------------
The following is a description of the more significant accounting and
reporting policies used in the preparation and presentation of the
accompanying consolidated financial statements. All significant intercompany
transactions have been eliminated in consolidation.
(a) Basis of Consolidation and Nature of Operations
----------------------------------------------------
The accompanying consolidated financial statements include the accounts
of Security Federal Corporation (the "Company") and its wholly owned
subsidiary, Security Federal Bank (the "Bank") and the Bank's wholly owned
subsidiary, Security Financial Services Corporation ("SFSC"). The Bank is
primarily engaged in the business of accepting savings and demand deposits and
originating mortgage loans and other loans to individuals and small businesses
for various personal and commercial purposes. SFSC consists primarily of
investment brokerage services. Also included in the consolidation is a real
estate partnership.
(b) Cash and Cash Equivalents
------------------------------
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, interest-bearing balances in other banks, and federal
funds sold. Cash equivalents have maturities of three months or less.
(c) Investment and Mortgage-Backed Securities
----------------------------------------------
Investment securities, including mortgage-backed securities, are
classified in one of three categories: held to maturity, available for sale,
or trading. Management determines the appropriate classification of debt
securities at the time of purchase.
Investment securities are classified as held to maturity when the Company
has the positive intent and ability to hold the securities to maturity. These
securities are recorded at cost and adjusted for amortization of premiums and
accretion of discounts over the estimated life of the security using a method
that approximates a level yield. Prepayment assumptions on mortgage-backed
securities are anticipated.
Management classifies investment securities that are not considered to be
held to maturity as available for sale. These type investments are stated at
fair value with unrealized gains and losses, net of tax, reported in a
separate component of shareholders' equity (accumulated other comprehensive
income). Gains and losses from sales of investment and mortgage-backed
securities available for sale are determined using the specific identification
method. The Company has no trading securities.
The Bank maintained liquid assets in excess of the amount required by
regulations. The required amount is 4% of the average daily balances of
deposits and certain borrowings. Liquid assets consist primarily of cash,
time deposits, and certain investment securities.
23
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(d) Allowance for Loan Losses
---------------------------------
The Company provides for loan losses using the allowance method.
Accordingly, all loan losses are charged to the related allowance and all
recoveries are credited to the allowance for loan losses. Additions to the
allowance for loan losses are provided by charges to operations based on
various factors which, in Management's judgment, deserve current recognition
in estimating possible losses. Such factors considered by Management include
the fair value of the underlying collateral; stated guarantees by the
borrower, if applicable; the borrower's ability to repay from other economic
resources; growth and composition of the loan portfolios; the relationship of
the allowance for loan losses to outstanding loans; loss experience;
delinquency trends; and general economic conditions. Management evaluates the
carrying value of the loans periodically and the allowance is adjusted
accordingly. While Management uses the best information available to make
evaluations, future adjustment to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making these
evaluations. Allowances for loan losses are subject to periodic evaluations
by various regulatory authorities and may be subject to adjustments based upon
the information that is available at the time of their examinations.
The Company values impaired loans at the loan's fair value if it is
probable that the Company will be unable to collect all amounts due according
to the terms of the loan agreement at the present value of expected cash
flows; the market price of the loan, if available; or the value of the
underlying collateral. Expected cash flows are required to be discounted at
the loan's effective interest rate. When the ultimate collectibility of an
impaired loan's principal is in doubt, wholly or partially, all cash receipts
are applied to principal. When this doubt does not exist, cash receipts are
applied under the contractual terms of the loan agreement first to interest
then to principal. Once the recorded principal balance has been reduced to
zero, future cash receipts are applied to interest income to the extent that
any interest has been foregone. Further cash receipts are recorded as
recoveries of any amounts previously charged off.
(e) Loans Held for Sale
-------------------
Loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate. Net
unrealized losses are provided for in a valuation allowance by charges to
operations.
(f) Real Estate Acquired in Settlement of Loans (REO)
-------------------------------------------------
REO represents real estate acquired through foreclosure and is initially
recorded at the lower of cost (principal balance of the former mortgage loan
less any specific valuation allowances) or estimated fair value less costs to
sell. Subsequent improvements are capitalized. Costs of holding real estate,
such as property taxes, insurance, general maintenance and interest expense,
are expensed as a period cost. Fair values are reviewed regularly and
allowances for possible losses are established when the carrying value of the
real estate owned exceeds the fair value less estimated costs to sell. Fair
values are generally determined by reference to an outside appraisal.
(g) Real Estate Held for Development and Sale
-----------------------------------------
Real estate held for development and sale and investments in real estate
partnerships are stated at the lower of cost or estimated net realizable
value. Costs directly related to such real estate are capitalized until
construction required to bring these properties to a saleable condition is
completed. Capitalized costs include direct costs incurred during the
improvement period.
Gains on the sale of real estate held for development and sale are
recorded at the time of the sale provided certain criteria relating to
property type, cash down payment, loan terms, and other factors are met. If
these criteria are not met at the date of sale, the gain is deferred and
recognized using the installment or cost recovery method until they are
satisfied, at which time the remaining deferred gain is recorded as income.
Fair values of real estate held for development and sale are reviewed
regularly and allowances for losses are established when the carrying value
exceeds the estimated net realizable value. In determining the estimated net
realizable value, the Company deducts the projected cost to complete and
dispose of the property from the estimated selling price and the estimated
cost to hold the property to an expected date of sale.
24
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(h) Premises and Equipment
----------------------
Premises and equipment are carried at cost, net of accumulated
depreciation. Depreciation of premises and equipment is amortized on a
straight-line method over the estimated useful life of the related asset.
Estimated lives are 7-30 years for buildings and improvements and generally
5-10 years for furniture, fixtures and equipment.
(i) Income Taxes
------------
Deferred tax expense or benefit is recognized for the net change during
the year in the deferred tax liability or asset. That amount together with
income taxes currently payable is the total amount of income tax expense or
benefit for the year. Deferred taxes are provided for in differences in
financial reporting bases for assets and liabilities compared with their tax
bases. Basically, a current tax liability or asset is established for taxes
presently payable or refundable and a deferred tax liability or asset is
established for future tax items. A valuation allowance, if applicable, is
established for deferred tax assets that may not be realized. Tax bad debt
reserves in excess of the base year amount (established as taxable years
ending March 31, 1988 or later) would create a deferred tax liability.
Deferred income taxes are provided for in differences between the provision
for loan losses for financial statement purposes and those allowed for income
tax purposes.
(j) Loan Fees and Costs Associated with Originating Loans
-----------------------------------------------------
The net of loan fees received and direct incremental costs of originating
loans are deferred and amortized over the contractual life of the related
loan. The net fees are recognized as yield adjustments by applying the
interest method. Prepayments are not anticipated.
(k) Intangible Assets
-----------------
Goodwill, which represents the excess of purchase price over fair value
of net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited. The Company assesses the recoverability of
this intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through projected
undiscounted future results. The amount of goodwill impairment, if any, is
measured based on projected discounted future results using a discount rate
reflecting the Company's average cost of funds.
Deposit based premiums, representing the cost of acquiring deposits from
other financial institutions, are included in the balance sheet as "Other
Assets" and are being amortized by charges to operations over the expected
periods to be benefited. The effective amortization period for intangible
assets is approximately 10 years.
(l) Interest Income
---------------
Interest on loans is accrued and credited to income monthly based on the
principal balance outstanding and the contractual rate on the loan. The
Company places loans on non-accrual status when they become greater than 90
days delinquent or when, in the opinion of Management, full collection of
principal or interest is unlikely. The Company provides an allowance for
uncollectible accrued interest on loans that are 90 days delinquent for all
interest accrued prior to the loan being placed on non-accrual status. The
loans are returned to an accrual status when full collection of principal and
interest appears likely.
25
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(m) Fair Value of Financial Instruments
-----------------------------------
The Company discloses the fair value of on- and off-balance sheet
financial instruments when it is practicable to do so. Fair values are based
on quoted market prices, where available; on estimates of present value; or on
other valuation techniques. These estimates are made at a specific point in
time, are subjective in nature, and involve uncertainties and significant
judgment. In addition, the Company does not disclose the fair value of
non-financial instruments. Accordingly, the aggregate fair values presented
do not represent the underlying fair value of the Company.
Fair values for consolidated financial statement reporting purposes are
estimated for loans with similar financial characteristics. These loans are
segregated by the type of loan and consider credit risk, interest rate, and
prepayment characteristics. Each loan category is further segmented into
fixed and adjustable rate categories.
The fair value of performing loans is calculated by discounting scheduled
cash flows through estimated maturity dates. Expected cash flows are
discounted using the Company's current rates that reflect the credit and
interest rate risks inherent in each category of loans. A prepayment
assumption is used as an estimate of the portion of loans that will be repaid
prior to their scheduled maturity.
(n) Earnings Per Share
------------------
Net income per share is computed by dividing consolidated net income by
the weighted average number of common shares outstanding during the period.
The treasury stock method is used to compute the dilutive effect of stock
options in the diluted weighted average number of common shares. All per
share data has been restated to reflect the 2-for-1 stock split issued during
the year ended March 31, 1999.
(o) Use of Estimates
----------------
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles (GAAP) requires Management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of income and expenses during
the reporting periods. Actual results could differ from those estimates.
(p) Recently Issued Accounting Standards
------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133
is effective for financial statements for all fiscal quarters of all fiscal
years beginning after June 15, 1999. In June 1999, the FASB issue SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities Deferral
of the Effective Date of FASB Statement No. 133." SFAS No. 133, as amended,
is now effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. The Company does not believe the provisions of SFAS No. 133
will have a significant impact on the financial statements upon adoption.
(q) Reclassifications
-----------------
Certain amounts in prior years' consolidated financial statements have
been reclassified to conform to current year classifications.
26
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Investment and Mortgage-Backed Securities, Available for Sale
-------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and
fair values of investment and mortgage-backed securities available for sale
are as follows:
March 31, 2000
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair value
----------- ----------- ----------- -----------
U.S. Treasury Notes $ 999,613 $ 1,017 $ - $ 1,000,630
FHLB Securities 42,776,873 - 1,292,682 41,484,191
Federal Farm Credit
Securities 9,957,106 - 240,856 9,716,250
FHLMC Bond 2,049,882 - 85,196 1,964,686
Mortgage-Backed
Securities 35,662,761 1,293 1,009,160 34,654,894
----------- ----------- ----------- -----------
$91,446,235 $ 2,310 $ 2,627,894 $88,820,651
=========== =========== =========== ===========
March 31, 1999
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair value
----------- ----------- ----------- -----------
U.S. Treasury Notes $ 5,003,025 $ 50,570 $ - $ 5,053,595
FHLB Securities 43,466,550 95,568 204,167 43,357,951
Federal Farm Credit
Securities 7,993,230 19,235 26,907 7,985,558
FHLMC Bond 996,204 - 33,414 962,790
Mortgage-Backed
Securities 24,781,144 23,850 129,116 24,675,878
----------- ----------- ----------- -----------
$82,240,153 $ 189,223 $ 393,604 $82,035,772
=========== =========== =========== ===========
The amortized cost and fair value of investment and mortgage-backed
securities available for sale at March 31, 2000 are shown below by contractual
maturity. Expected maturities will differ from contractual maturities because
borrowers have the right to prepay obligations with or without call or
prepayment penalties.
Amortized Cost Fair value
-------------- ----------
Less Than 1 Year $ 4,990,531 $ 4,980,170
1 - 5 Years 29,439,777 28,649,726
More Than 5 Years 21,353,166 20,535,861
Mortgage-Backed Securities 35,662,761 34,654,894
------------ ------------
$ 91,446,235 $ 88,820,651
============ ============
At March 31, 2000, investment and mortgage-backed securities available for
sale of $5,256,000 were pledged as collateral for certain deposit accounts.
The Bank sold no securities in fiscal 1999. The Bank received $2,504,000 and
$2,983,000 proceeds from sales of available for sale securities with
approximately $3,900 and $15,400 recorded in gross gains and no gross losses
in the years ending March 31, 2000 and 1998, respectively.
27
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Investment and Mortgage-Backed Securities, Held to Maturity
-----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and
fair values of investment and mortgage-backed securities held to maturity are
as follows:
March 31, 2000
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair value
----------- ----------- ----------- -----------
FNMA Securities $ 265,707 $ 3,034 $ - $ 268,741
Mortgage-Backed
Securities 2,444,396 2,966 81,703 2,365,659
----------- ----------- ----------- -----------
$ 2,710,103 $ 6,000 $ 81,703 $ 2,634,400
=========== =========== =========== ===========
March 31, 1999
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair value
----------- ----------- ----------- -----------
FNMA Securities $ 336,822 $ 542 $ - $ 337,364
Mortgage-Backed
Securities 3,196,041 46,652 557 3,242,136
----------- ----------- ----------- -----------
$ 3,532,863 $ 47,194 $ 557 $ 3,579,500
=========== =========== =========== ===========
The amortized cost and fair value of investment and mortgage-backed
securities held to maturity at March 31, 2000, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities due
to call features on certain investments.
Amortized Cost Fair value
-------------- ----------
Less Than 1 Year $ - $ -
1 - 5 Years - -
More Than 5 Years 265,707 268,741
Mortgage-Backed Securities 2,444,396 2,365,659
------------- -------------
$ 2,710,103 $ 2,634,400
============= =============
At March 31, 2000, investment and mortgage-backed securities held to
maturity of $2,233,000 were pledged as collateral for certain deposit
accounts.
28
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Loans Receivable, Net
---------------------
Loans Receivable, Net, at March 31 consisted of the following:
2000 1999
------------- -------------
Residential Real Estate Loans $ 98,151,348 $ 65,489,233
Consumer Loans 41,719,221 41,631,602
Commercial Business And Real
Estate Loans 62,062,134 52,325,690
Loans Held For Sale 1,295,676 1,604,300
------------- -------------
$ 203,228,379 $ 161,050,825
------------- -------------
Less:
Allowance For Loan Losses 2,120,767 1,715,068
Loans In Process 7,832,280 7,150,607
Deferred Loan Fees 274,766 199,549
------------- -------------
10,227,813 9,065,224
------------- -------------
Total Loans Receivable, Net $ 193,000,566 $ 151,985,601
============= =============
Changes in the allowance for loan losses for the years ended March 31 are
summarized as follows:
2000 1999 1998
----------- ----------- -----------
Balance At Beginning Of Year $ 1,715,068 $ 1,512,038 $ 1,767,483
Provision For Loan Losses 750,000 600,000 780,000
Charge Offs (383,466) (430,116) (1,293,082)
Recoveries 39,165 33,146 257,637
----------- ----------- -----------
Total Allowance For Loan Losses $ 2,120,767 $ 1,715,068 $ 1,512,038
=========== =========== ===========
The following table sets forth the amount of the Company's non-accrual
loans and the status of the related interest income at March 31.
2000 1999
---------- -----------
Non-Accrual Loans $ 890,000 $ 1,182,256
========== ===========
Interest Income That Would Have Been
Recognized Under Original Terms $ 51,802 $ 110,403
========== ===========
Loans serviced for others at March 31, 2000, 1999 and 1998, were
approximately $54.1 million, $64.0 million, and $79.3 million, respectively.
At March 31, 2000 and 1999, impaired loans amounted to $897,000 and
$880,000, respectively. Losses on impaired loans are accounted for in the
allowance for loan loss. For the years ended March 31, 2000 and 1999, the
average recorded investment in impaired loans was $1.2 million and $860,000
respectively.
29
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Premises and Equipment, Net
---------------------------
Premises and Equipment, Net, at March 31 are summarized as follows:
2000 1999
----------- -----------
Land $ 496,163 $ 496,163
Buildings And Improvements 4,247,498 3,531,942
Furniture And Equipment 4,129,698 4,222,168
----------- -----------
8,873,359 8,250,273
Less Accumulated Depreciation (4,588,666) (4,051,499)
----------- -----------
Total Premises And Equipment, Net $ 4,284,693 $ 4,198,774
=========== ===========
Depreciation expense for the years ended March 31, 2000, 1999, and 1998
was approximately $784,000, $658,000, and $633,000, respectively.
The Bank has entered into non-cancelable operating leases related to
buildings and land. At March 31, 2000, future minimum payments under
non-cancelable operating leases with initial or remaining terms of one year or
more are as follows (by fiscal year):
2001 $ 69,038
2002 45,984
2003 44,998
2004 35,998
2005 35,184
Thereafter 241,836
-----------
$ 473,038
===========
Total rental expense amounted to $69,290, $72,605, and $71,254 for the
years ended March 31, 2000, 1999 and 1998, respectively. Five lease
agreements with monthly expenses of $2,188, $2,014, $493, $407 and $700 have
renewal options of 10, 10, 60, 5, and 20 years, respectively.
(6) FHLB Stock
----------
By law, every federally insured savings institution is required to invest
in FHLB stock. No ready market exists for this stock and it has no quoted
fair value. However, because redemption of this stock has been at par, it is
carried at cost.
The Bank, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount equal to the
greater of: 1) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts, and similar obligations
at the beginning of each year; or, 2) 1/20th of its advances (borrowings) from
the FHLB of Atlanta. The Bank is in compliance with this requirement with an
investment in FHLB of Atlanta stock of $2,605,600 as of March 31, 2000.
30
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Real Estate Operations
----------------------
The Company participated in two real estate joint ventures; Willow Woods
and Currytowne. The Company owns 50% of the Willow Woods partnership and
owned 62.5% of the Currytowne partnership as joint ventures. These joint
ventures have been consolidated into the Company's financial statements since
the Company has voting control in both partnerships. In the latter part of
fiscal 1998, the Company liquidated the remaining assets of the Currytowne
venture. The Company had $159,000 invested in the Willow Woods partnership at
March 31, 2000. Income from real estate operations at March 31 is as follows:
2000 1999 1998
----------- ----------- -----------
Real Estate Held For
Development And Sale:
Sales $ 776,668 $ 606,350 $ 627,280
Cost Of Sales 705,551 497,343 523,086
----------- ----------- -----------
Gross Profit 71,117 109,007 104,194
Other Expenses, Net 90,994 73,849 64,392
----------- ----------- -----------
Net Income (Loss) $ (19,877) $ 35,158 $ 39,802
=========== =========== ===========
The allowance for estimated losses on real estate was $50,000 at March
31, 2000, 1999, and 1998.
Condensed combined financial information for the joint ventures at March
31 is as follows:
2000 1999
----------- -----------
Real Estate Held For Development, Net $ 585,878 $ 552,111
Other Assets 40,689 111,230
Total Assets 626,567 663,341
Liabilities (Principally A Loan
Payable To The Company) 258,167 239,701
----------- -----------
Partners' Equity $ 368,400 $ 423,640
=========== ===========
31
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) Deposits
--------
Deposits outstanding by type of account are summarized as follows:
<TABLE>
At March 31, 2000 At March 31, 1999
------------------------------------ ---------------------------------------
Weighted Interest Rate Weighted Interest Rate
Amount Rate Range Amount Rate Range
------------- ---- ----------- ------------ ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Checking Accounts $ 58,304,679 0.89% 0.00 - 1.09% $ 53,435,702 0.84% 0.00 - 1.09%
Money Market Accts. 51,636,465 4.60% 2.20 - 5.13% 49,369,915 4.70% 2.20 - 5.13%
Passbook Accounts 13,203,395 2.50% 0.00 - 3.00% 11,847,962 2.47% 0.00 - 3.00%
------------- ---- ----------- ------------ ---- -----------
Total $ 123,144,539 2.62% 0.00 - 5.13% $114,653,579 2.67% 0.00 - 5.13%
------------- ---- ----------- ------------ ---- -----------
Certificate Accounts:
0.00 - 4.99% $ 15,575,152 $ 31,100,943
5.00 - 6.99% 90,103,640 70,640,349
7.00 - 8.99% - 137,812
------------- ------------
Total $ 105,678,792 5.41% 4.12 - 6.97% $101,879,104 5.18% 4.17 - 7.25%
------------- ---- ----------- ------------ ---- -----------
Total Deposits $ 228,823,331 3.90% 0.00 - 6.97% $216,532,683 3.85% 0.00 - 7.25%
============= ==== =========== ============ ==== ===========
</TABLE>
The aggregate amount of short-term certificates of deposit with a minimum
denomination of $100,000 was $19,127,000 and $17,584,000 at March 31, 2000 and
1999, respectively. The amounts and scheduled maturities of certificates of
deposit at March 31 are as follows:
March 31,
---------------------------
2000 1999
------------ ------------
Within 1 Year $ 79,879,440 $ 79,899,216
After 1 Year, Within 2 20,389,061 17,187,818
After 2 Years, Within 3 4,251,310 1,017,688
After 3 Years, Within 4 951,273 2,889,504
After 4 Years, Within 5 207,708 884,878
Thereafter - -
------------ ------------
$105,678,792 $101,879,104
============ ============
(9) Advances From Federal Home Loan Bank (FHLB)
-------------------------------------------
Advances from the FHLB at March 31 are summarized by year of maturity and
weighted average interest rate below:
2000 1999
------------------------ -----------------------
Weighted Weighted
Amount Rate Amount Rate
----------- ---- ----------- ----
2000 $ - - $ - -
2001 35,431,000 5.88% 528,000 8.70%
2002 5,000,000 5.71% 856,000 8.75%
2003 5,000,000 6.36% - -
2004 - - 5,000,000 5.69%
Thereafter 5,180,000 6.60% 8,216,000 5.42%
----------- ---- ----------- ----
$50,611,000 5.99% $14,600,000 5.82%
=========== ==== =========== ====
These advances are secured by a blanket collateral agreement with the
FHLB pledging the Bank's portfolio of residential first mortgage loans.
Advances are subject to prepayment penalties.
At March 31, 2000, the Bank had $10.3 million in unused line of credit at
the FHLB.
32
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Income Taxes
------------
Income tax expense is comprised of the following:
For the Years Ended March 31,
-------------------------------------------
2000 1999 1998
----------- ----------- ------------
Current:
Federal $ 1,409,595 $ 997,347 $ 939,750
State - - -
----------- ----------- ------------
Total Current Tax
Expense 1,409,595 997,347 939,750
----------- ----------- ------------
Deferred:
Federal (302,918) (49,917) (26,424)
State - - (5,033)
----------- ----------- ------------
Total Deferred Tax
Expense (302,918) (49,917) (31,457)
----------- ----------- ------------
Total Income Tax
Expense $ 1,106,677 $ 947,430 $ 908,293
=========== =========== ============
The Company's income taxes differ from those computed at the statutory
Federal income tax rate, as follows:
For the Years Ended March 31,
-------------------------------------------
2000 1999 1998
----------- ----------- ------------
Tax At Statutory
Income Tax Rate $ 1,063,483 $ 936,081 $ 891,113
State Income Tax
Benefit, Net - - (13,480)
Other 43,194 11,349 30,660
----------- ----------- ------------
Total Income Tax
Expense $ 1,106,677 $ 947,430 $ 908,293
=========== =========== ============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below.
At March 31,
--------------------------
2000 1999
----------- -----------
Deferred Tax Assets:
Provision For Loan Losses $ 660,089 $ 494,730
Goodwill Tax Basis Over Financial
Statement Basis 363,152 291,474
Net Fees Deferred For Financial
Reporting 58,887 80,902
Unrealized Loss On Securities
Available For Sale 76,642 76,642
Other Real Estate Basis For Tax Purposes
Over Financial Statement Basis 17,000 17,000
Other 85,499 51,370
----------- -----------
Total Gross Deferred Tax Assets 1,261,269 1,012,118
----------- -----------
Deferred Tax Liabilities:
FHLB Stock Basis Over Tax Basis 113,362 113,362
Depreciation 151,088 204,855
----------- -----------
Total Gross Deferred Tax Liability 264,450 318,217
----------- -----------
Net Deferred Tax Asset $ 996,819 $ 693,901
=========== ===========
The balance of the change in the net deferred tax asset results from the
current period deferred tax benefit of $302,918. The net deferred tax asset
is included in other assets in the accompanying consolidated balance sheets.
No valuation allowance for deferred tax assets was required at March 31,
2000 and 1999. The realization of net deferred tax assets may be based on
utilization of carrybacks to prior taxable periods, anticipation of future
taxable income in certain periods, and the utilization of tax planning
strategies. Management has determined that the net deferred tax asset can be
supported based upon these criteria.
33
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Income Taxes, Continued
-----------------------
Retained earnings at March 31, 2000 include tax bad debt reserves of
approximately $2.2 million for which no provision for federal income tax has
been made. If in the future these amounts are used for any purpose other than
to absorb bad debt losses including dividends, stock redemptions, or
distributions in liquidation or the Company ceases to be qualified as a bank,
then these amounts may be subject to federal income tax at the then prevailing
corporate tax rate.
(11) Regulatory Matters
------------------
The Bank is subject to various regulatory capital requirements that are
administered by Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and discretionary actions by
regulators that could have a material adverse effect on the Company. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classifications are also subject to qualitative
judgements by regulators with regard to components, risk weightings, and other
factors.
As of March 31, 2000 and 1999, the Bank was categorized as "well
capitalized" under the regulatory framework for prompt corrective action. To
be categorized as well capitalized, the Bank had to maintain total risk-based
capital, Tier 1 risk-based capital, and Tier 1 leverage ratios at 10%, 6%, and
5%, respectively. There are no conditions or events that Management believes
have changed the Bank's classification.
The Bank's regulatory capital amounts and ratios are as follows as of the
dates indicated:
To Be Well
Capitalized
Under Prompt
Corrective
For Capital Action
Actual Adequacy Provisions
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
March 31, 2000
Tier 1 Risk-Based Core
Capital (To Risk Weighted
Assets) $20,486 11.3% $ 7,227 4.0% $10,840 6.0%
Total Risk-Based Capital
(To Risk Weighted Assets) $22,504 12.5% $14,453 8.0% $18,066 0.0%
Tier 1 Leverage (Core)
Capital (To Adjusted
Tangible Assets) $20,486 6.7% $12,216 4.0% $15,270 5.0%
Tangible Capital
(To Tangible Assets) $19,927 6.5% $ 6,097 2.0% $15,242 5.0%
March 31, 1999
Tier 1 Risk-Based Core
Capital (To Risk Weighted
Assets) $18,090 9.9% $ 7,311 4.0% $10,966 6.0%
Total Risk-Based Capital
(To Risk Weighted Assets) $19,805 10.8% $14,622 8.0% $18,277 10.0%
Tier 1 Leverage (Core)
Capital (To Adjusted
Tangible Assets) $18,090 7.1% $10,147 4.0% $12,683 5.0%
Tangible Capital
(To Tangible Assets) $17,426 6.9% $ 5,060 2.0% $12,650 5.0%
34
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Regulatory Matters, Continued
-----------------------------
The payment of dividends by the Company depends primarily on the ability
of the Bank to pay dividends to the Company. The payment of dividends by the
Bank to the Company is subject to substantial restrictions and would require
prior notice to, and approval of, the Office of Thrift Supervision (OTS).
On September 30, 1996, the President of the United States signed into law
the Deposit Insurance Funds Act of 1996 (Funds Act) which, among other things,
imposed a special one-time assessment on SAIF member institutions, including
the Bank, to recapitalize the SAIF. As required by the Funds Act, the FDIC
imposed a special assessment of 65.7 basis points on SAIF assessable deposits
as of March 31, 1995 that was payable on November 27, 1996. This special
assessment was recognized in the second quarter of fiscal 1997. The Bank took
a charge of $705,000 ($437,000 after-tax) as a result of the special
assessment.
The Funds Act also spreads the obligations for payment of Financing
Corporation (FICO) bonds across all SAIF and Bank Insurance Fund (BIF)
members. As of January 1, 1997, BIF deposits were assessed for FICO payments
at a rate of 20% of the rate assessed on SAIF deposits. Based on current
estimates by the FDIC, BIF deposits will be assessed a FICO payment of 1.3
basis points while SAIF deposits will pay an estimated 6.4 basis points on the
FICO bonds. Full pro rata sharing of the FICO payments between BIF and SAIF
members will occur on the earlier of January 1, 2000 or the date BIF and SAIF
are merged.
As a result of the Funds Act, the FDIC lowered SAIF assessments from 27
basis points to zero effective January 1, 1997, a range comparable to that of
BIF members. SAIF members will continue to make the higher FICO payments
described above. Management cannot predict the level of FDIC insurance
assessments on an on-going basis, whether the savings charter will be
eliminated, or whether the BIF and SAIF will eventually be merged.
(12) Employee Benefit Plans
----------------------
The Company is participating in a multiple employer defined contribution
employee benefit plan covering substantially all employees with one or more
years of service. The Company matches a portion of the employees'
contributions and has a discretionary profit sharing provision. The total
employer contributions were $130,000, $120,000, and $100,000 for the years
ended March 31, 2000, 1999 and 1998, respectively.
The Company has an Employee Stock Ownership Plan (ESOP) for the exclusive
benefit of employee participants. The discretionary contributions for the
years ended March 31, 2000, 1999 and 1998 were $57,000, $61,000, and $51,000,
respectively.
35
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Employee Benefit Plans, Continued
---------------------------------
Certain officers of the Company participate in an incentive stock option
plan. Options are granted at exercise prices not less than the fair value of
the Company's common stock on the date of the grant. There were no shares
granted in fiscal 1998 or fiscal 1999. There were 35,000 shares of options
granted during fiscal 2000. 33,000 shares were granted at an option price of
$50 per share and 2,000 shares were granted at an option price of $55 per
share. At March 31, 2000, the Company had the following options outstanding:
Outstanding Earliest Date Expiration Date
Grant Date Options Option Price Exercisable
---------- ------- ------------ ----------- ---------------
01/07/97 1,156 $ 16.00 01/01/02 12/31/02
01/07/97 1,156 $ 16.00 01/01/03 12/31/03
01/07/97 1,156 $ 16.00 01/01/04 12/31/04
01/07/97 1,156 $ 16.00 01/01/05 12/31/05
01/07/97 1,154 $ 16.00 01/01/06 12/31/06
10/19/99 6,600 $ 50.00 10/01/04 09/30/05
10/19/99 6,600 $ 50.00 10/01/05 09/30/06
10/19/99 6,600 $ 50.00 10/01/06 09/30/07
10/19/99 6,600 $ 50.00 10/01/07 09/30/08
10/19/99 6,600 $ 50.00 10/01/08 09/30/09
10/19/99 2,000 $ 55.00 10/01/03 09/30/04
There were 5,000 additional options available at March 31, 2000.
The Company has elected the disclosure only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost
has been recognized for the stock option plan. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the
grant date for awards in fiscal 1997, consistent with the provisions of SFAS
No. 123, the Company's net income and earnings per share amounts as of March
31 would have been reduced to the pro forma amounts indicated below.
2000 1999 1998
----------- ----------- -----------
Net Income, As Reported $ 2,021,213 $ 1,805,749 $ 1,712,629
Net Income, Pro Forma $ 2,005,458 $ 1,802,583 $ 1,709,455
Net Income Per Common Share
(Basic), As Reported $ 2.41 $ 2.14 $ 2.04
Net Income Per Common Share
(Basic), Pro Forma $ 2.39 $ 2.14 $ 2.04
Net Income Per Common Share
(Diluted), As Reported $ 2.39 $ 2.13 $ 2.04
Net Income Per Common Share
(Diluted), Pro Forma $ 2.37 $ 2.13 $ 2.04
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions for grants: Dividend yield of $.16 per share for 1999 and
$.11 per share for 1997, expected volatility of 30% for 1999 and 20% for 1997,
risk-free interest rate of 5.9%, and expected lives of 6-10 years.
(13) Commitments
-----------
In conjunction with its lending activities, the Bank enters into various
commitments to extend credit and issue letters of credit. Loan commitments
(unfunded loans and unused lines of credit) and letters of credit are issued
to accommodate the financing needs of the Bank's customers. Loan commitments
are agreements by the Bank to lend at a future date, so long as there are no
violations of any conditions established in the agreement. Letters of credit
commit the Bank to make payments on behalf of customers when certain specified
events occur.
Financial instruments where the contract amount represents the Bank's
credit risk include commitments under pre-approved but unused lines of credit
of $22.0 million and $19.4 million and letters of credit of $78,000 and
$306,000 at March 31, 2000 and 1999, respectively.
These loan and letter of credit commitments are subject to the same
credit policies and reviews as loans on the balance sheet. Collateral, both
the amount and nature, is obtained based upon Management's assessment of the
credit risk. Since many of the extensions of credit are expected to expire
without being drawn, the total commitment amounts do not
36
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
necessarily represent future cash requirements. In addition to these loan
commitments noted above, the Bank had unused credit card loan commitments of
$1.5 million at both March 31, 2000 and 1999. Outstanding commitments on
mortgage loans not yet closed amounted to $1.4 million at March 31, 2000.
Such commitments, which are funded subject to certain limitations, extend over
varying periods of time with the majority being funded within 90 days. At
March 31, 2000, the Bank had outstanding commitments to sell approximately
$1.3 million of loans.
(14) Related Party Transactions
--------------------------
At March 31, 2000, the total aggregate indebtedness to the Bank by
executive officers and directors of the Bank, whose individual indebtedness
exceeded $60,000 at any time over the period since April 1, 1998, was
$523,000. There were $76,000 additions to loans to executive officers whose
individual indebtedness exceeded $60,000 during fiscal 2000. Repayments on
these loans totaled approximately $71,000. Loans to all employees, officers,
and directors of the Company, in the aggregate constituted approximately 6.84%
of the total shareholders' equity of the Company at March 31, 2000.
The Company rents office space from a company in which a director and an
officer of the Company and the Bank have an ownership interest. The Bank
incurred expenses of $27,000, $27,000, and $27,000 for rent for the years
ended March 31, 2000, 1999 and 1998, respectively. Management is of the
opinion that the transactions with respect to office rent are made on terms
that are comparable to those which would be made with unaffiliated persons.
(15) Security Federal Corporation Condensed Financial Statements
(Parent Company Only)
-----------------------------------------------------------
The following is condensed financial information of Security Federal
Corporation (Parent Company only). The primary asset is its investment in the
Bank subsidiary and the principal source of income for the Company is equity
in undistributed earnings from the Bank.
Condensed Balance Sheet Data
At March 31,
--------------------------
2000 1999
----------- -----------
Assets:
Cash $ 151,400 $ 239,070
Investment In Security Federal Bank 19,414,475 18,879,810
Investment In Real Estate Partnership 159,204 186,825
Income Tax Receivable From Bank 53,086 43,984
Other Assets 180,983 215,998
----------- -----------
Total Assets $19,959,148 $19,565,687
=========== ===========
Liability And Shareholders' Equity:
Accounts Payable $ 200,447 $ 5,245
Shareholders' Equity 19,758,701 19,560,442
----------- -----------
Total Liabilities And Shareholders'
Equity $19,959,148 $19,565,687
=========== ===========
Condensed Statements of Income Data
For the Years Ended March 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Income:
Equity In Undistributed
Earnings Of Security
Federal Bank $ 2,036,062 $ 1,789,267 $ 1,688,952
Equity In Undistributed Earnings
Of Real Estate Partnerships 12,380 17,581 20,169
Miscellaneous Income 21,599 21,052 17,999
----------- ----------- -----------
$ 2,070,041 $ 1,827,900 $ 1,727,120
Expenses:
Miscellaneous 48,828 22,151 14,491
----------- ----------- -----------
Net Income $ 2,021,213 $ 1,805,749 $ 1,712,629
=========== =========== ===========
37
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Security Federal Corporation Condensed Financial Statements (Parent
Company Only), Continued
-------------------------------------------------------------------
Condensed Statements of Cash Flow Data
For the Years Ended March 31,
----------------------------------------
2000 1999 1998
----------- ----------- -----------
Operating Activities:
Net Income $ 2,021,213 $ 1,805,749 $ 1,712,629
Adjustments To Reconcile Net
Income To Net Cash Provided
By (Used In) Operating
Activities:
Equity In Undistributed
Earnings Of Security Federal
Bank (2,036,062) (1,789,267) (1,688,952)
Equity In Undistributed
Earnings Of Real Estate
Partnerships (12,380) (17,581) (20,169)
(Increase) Decrease In Income
Taxes Receivable And Other
Assets 25,899 (99,570) 109,283
Increase (Decrease) In
Accounts Payable 195,202 2,028 (11,763)
----------- ----------- -----------
Net Cash Provided By (Used In)
Operating Activities $ 193,872 $ (98,641) $ 101,028
----------- ----------- -----------
Investing Activities:
Return Of Capital From Real
Estate Partnerships 40,000 70,438 130,830
Purchase of Stock by ESOP (186,803) - -
----------- ----------- -----------
Net Cash Provided By (Used In)
Investing Activities $ (146,803) $ 70,438 $ 130,830
----------- ----------- -----------
Financing Activities:
Dividends Paid (134,739) (117,897) (100,582)
Exercise Of Stock Options - - 39,380
----------- ----------- -----------
Net Cash Used In Financing
Activities $ (134,739) $ (117,897) $ (61,202)
----------- ----------- -----------
Net Increase (Decrease) In Cash (87,670) (146,100) 170,656
Cash At Beginning Of Year 239,070 385,170 214,514
----------- ----------- -----------
Cash At End Of Year $ 151,400 $ 239,070 $ 385,170
=========== =========== ===========
(16) Carrying Amounts and Fair Value of Financial Instruments
--------------------------------------------------------
The carrying amounts and fair value of financial instruments are
summarized below:
At March 31,
------------------------------------------
2000 1999
-------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(In Thousands)
Financial Assets:
Cash And Cash Equivalents $ 7,417 $ 7,417 $ 6,951 $ 6,951
Investment And Mortgage-Back
Securities $ 91,531 $ 91,455 $ 85,569 $ 85,615
Loans Receivable, Net $193,001 $191,051 $151,986 $151,210
Federal Home Loan Bank Stock $ 2,606 $ 2,606 $ 1,245 $ 1,245
Financial Liabilities:
Deposits:
Checking, Savings, and Money
Market Accounts $123,144 $122,821 $114,654 $115,001
Certificate Accounts $105,679 $105,069 $101,879 $102,330
Advances From Federal Home
Loan Bank $ 50,611 $ 50,108 $ 14,600 $ 14,605
Other Borrowed Money $ 2,211 $ 2,201 $ 869 $ 849
38
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) Carrying Amounts and Fair Value of Financial Instruments, Continued
-------------------------------------------------------------------
At March 31, 2000, the Bank had $24.9 million of off-balance sheet
financial commitments. These commitments are to originate loans and unused
consumer lines of credit and credit card lines. Since these obligations are
based on current market rates, if funded, the original principal is considered
to be a reasonable estimate of fair value.
Fair value estimates are made at a specific point in time, based on
relevant market data and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale the Bank's entire holdings of a particular financial
instrument. Because no active market exists for a significant portion of the
Bank's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions,
current interest rates and prepayment trends, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in any of these
assumptions used in calculating fair value would also significantly affect the
estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. For example, the Bank has significant
assets and liabilities that are not considered financial assets or liabilities
including deposit franchise values, loan servicing portfolios, deferred tax
liabilities, and premises and equipment. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any
of these estimates.
39
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
SHAREHOLDERS INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held at 2:00 p.m., Tuesday, July
18, 2000 at the University of South Carolina - Aiken, Business and Educational
Building, Room 116, 471 University Parkway, Aiken, SC.
STOCK LISTING
The Company's stock is traded over the counter and is only sporadically
traded.
PRICE RANGE OF COMMON STOCK
The table below shows the range of high and low bid prices as reported by the
Robinson-Humphrey Company, Inc., located in Aiken, SC. These prices represent
actual transactions and do not include retail markups, markdowns or
commissions. The Robinson-Humphrey Company creates a market for the stock.
Quarter Ending High Low
-------------- --------- ---------
06-30-98 $ 25.00 $ 25.00
09-30-98 $ 25.00 $ 25.00
12-31-98 $ 37.50 $ 29.00
03-31-99 $ 46.00 $ 45.00
06-30-99 $ 50.00 $ 45.00
09-30-99 $ 51.50 $ 50.00
12-31-99 $ 60.00 $ 60.00
03-31-00 $ 60.00 $ 60.00
As of March 31, 2000, the Company had approximately 287 shareholders and
838,524 outstanding shares of common stock.
DIVIDENDS
The first quarterly dividend on the stock was paid to shareholders on March
15, 1991. Dividends will be paid upon the determination of the Board of
Directors that such payment is consistent with the long-term interest of the
Company. The factors affecting this determination include the Company's
current and projected earnings, operating results, financial condition,
regulatory restrictions, future growth plans and other relevant factors. For
each of the four quarters of fiscal year ending March 31, 1999, the Company
declared and paid quarterly dividends of $0.03, $0.03, $0.04, and $0.04,
respectively. The Company declared and paid dividends of $0.04 per share for
each of the four quarters of the fiscal year ended March 31, 2000.
The ability of the Company to pay dividends depends primarily on the ability
of the Bank to pay dividends to the Company. The Bank may not declare or pay
a cash dividend on its stock or repurchase shares of its stock if the offset
thereof would be to cause its regulatory capital to be reduced below the
amount required for the liquidation account or to meet applicable regulatory
capital requirements. Pursuant to the OTS regulations, Tier 1 Associations
(associations that before and after the proposed distribution meet or exceed
their fully phased-in capital requirements) may make capital distributions
during any calendar year equal to 100% of net income for the year-to-date plus
50% of the amount by which the association's total capital exceeds its fully
phased-in capital requirement as measured at the beginning of the capital
year. However, a Tier 1 Association deemed to be in need of more than normal
supervision by the OTS may be downgraded to a Tier 2 or Tier 3 Association as
a result of such a determination. The Bank is also required to give the OTS
30 days notice prior to the declaration of a dividend. Unlike the Bank, there
is no regulatory restriction on the payment of dividends by the Company.
However, it is subject to the requirements of South Carolina. South Carolina
generally prohibits the Company from paying dividends if, after giving effect
to a proposed dividend, 1) the Company would be unable to pay its debts as
they become due in the normal course of business, or 2) the Company's total
assets would be less than its total liabilities plus the sum that would be
needed to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those receiving the dividend. The
ability of the Company to pay dividends depends primarily on the ability of
the Bank to pay dividends to the Company.
40
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
SHAREHOLDERS INFORMATION
ANNUAL AND OTHER REPORTS
The Company is required to file an annual report on Form 10-KSB for its fiscal
year ended March 31, 2000 with the Securities and Exchange Commission. Copies
of Form 10-KSB, Security Federal Corporation's annual report, and the
Company's quarterly reports may be obtained from any of the following
companies listed below. Additionally, shareholder and/or general inquiries
may be addressed to Mrs. Ruth Vance of Security Federal Corporation.
GENERAL INQUIRIES:
Mrs. Ruth Vance
Security Federal Corporation
1705 Whiskey Road, S
P.O. Box 810
Aiken, SC 29802-0810
Phone: 803-641-3000
TRANSFER AGENT:
Security Federal Corporation
1705 Whiskey Road, S
P.O. Box 810
Aiken, SC 29802-0810
SPECIAL COUNSEL:
Breyer & Associates, PC
Suite 700 East
1100 New York Ave., NW
Washington, DC 20005
INDEPENDENT AUDITORS:
Elliott, Davis & Company, LLP
225 Chesterfield Street, N.W.
P.O. Box 930
Aiken, SC 29802-0930
41
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
BOARD OF DIRECTORS*
------------------------------------------------------------------------------
T. Clifton Weeks
Chairman
Security Federal Corporation
Aiken, SC
Dr. Robert E. Alexander
Chancellor
University of South Carolina at Aiken
Aiken, SC
William Clyburn
Advisor for Community Alliances
Westinghouse Savannah River Co.
Aiken, SC
Senator Thomas L. Moore
President, Boiler Efficiency, Inc.
Clearwater, SC
Timothy W. Simmons
President/Chief Executive Officer
Security Federal Corporation
Aiken, SC
G. L. Toole, III
Attorney-At-Law
Aiken, SC
Harry O. Weeks, Jr.
Business Development Executive
Hutson-Etherredge Companies
Aiken, SC
Directors Emeriti:
Walter E. Brooker, Sr.
President, Brooker's Inc.
Denmark, SC
Robert E. Johnson
Corporate Secretary
Attorney-At-Law (Retired)
Aiken, SC
DENMARK ADVISORY BOARD**
------------------------------------------------------------------------------
Walter E. Brooker, Sr.
President
Brookers's
Inc.
Denmark, SC
David Crum
Attorney-At-Law
Crum, Crum and Crum
Denmark, SC
Jim Harrison
Owner
Jim Harrison Art Gallery
Denmark, SC
Claude E. McCain
President
H.C. McCain Insurance
Agency
Denmark, SC
Rev. Isaiah Odom
Owner
Odom's Auto Sure Auto
Parts
Denmark, SC
NORTH AUGUSTA ADVISORY BOARD**
------------------------------------------------------------------------------
Richard Borden
Owner
Borden Pest Control
North Augusta, SC
Rev. G.L. Brightharp
Owner
G.L. Brightharp & Sons
Mortuary
North Augusta, SC
Helen Butler
Retired Banker
North Augusta, SC
Sen. Thomas L. Moore
President
Boiler Efficiency, Inc.
Clearwater, SC
John Potter
Director of Finance
City of North Augusta
North Augusta, SC
WAGENER ADVISORY BOARD**
------------------------------------------------------------------------------
M. Judson Busbee
Owner
Busbee Hardware
Wagener, SC
Kent G. Ingram
Owner & President
Garvin Oil Company
Wagener, SC
Mary Lybrand
Retired Banker
Wagener, SC
Joy T. Shealy
Assistant Superintendent
Area 4 Schools
Wagener, SC
Richard H. Sumpter
Retired Educator
Wagener, SC
MIDLAND VALLEY ADVISORY BOARD**
------------------------------------------------------------------------------
Charles Hilton
General Manager
Breezy Hill Water &
Sewer
Graniteville, SC
Glenda K. Napier
Co-Owner
Napier Funeral Home
Graniteville, SC
Rev. Nathaniel Irvin, Sr.
Pastor
Old Storm Branch
Baptist Church
Clearwater, SC
Carlton Shealy
Owner
C. Shealy Realty Builders
& Developers
North Augusta, SC
Gloria Bush-Johnson
Consultant
Aiken, SC
Sen. Thomas L. Moore
President
Boiler Efficiency, Inc.
Clearwater, SC
Rev. Dennis Phillips
Pastor
Christian Heritage Church
Graniteville, SC
* Serves as Members of the Board for: Security Federal Corporation, Security
Federal Bank, and Security Financial Services Corporation
** Serves as Members of the Board for: Security Federal Bank
42
<PAGE>
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
SECURITY FEDERAL BANK MANAGEMENT TEAM:
------------------------------------------------------------------------------
T. Clifton Weeks ------------ Chairman
Timothy W. Simmons ------------ President and Chief Executive Officer
G.L. Toole, III ------------ Vice President
Robert E. Johnson ------------ Corporate Secretary
Roy G. Lindburg ------------ Treasurer and Chief Financial Officer
Thomas Clark ------------ Senior Vice President-Commercial/Consumer
Lending
Floyd Blackmon ------------ Senior Vice President-Operations
Frank Thomas ------------ Senior Vice President-Mortgage Loans
Stephen P. Nivens ------------ Regional President-West Columbia
Sandy Bartlett ------------ Vice President-Human Resources
Kathryn Carr ------------ Vice President-Special Assets
Carol McCleskey ------------ Vice President and Branch Coordinator
Harley Henkes ------------ Internal Auditor and Compliance/Security
Officer
Margaret Hurt ------------ Manager, Accounting
Rodney Ingle ------------ Vice President-Business Development/
Commercial Loans
Jack R. Bowles ------------ Vice President-Business Development/
Commercial Loans
Ruth Vance ------------ Assistant Secretary and Assistant Vice
President
Al McKay ------------ Executive Vice President-Security
Financial Services Corp.
Greg Warfield ------------ Vice President-Mortgage Loan Originator
Deborah Vermillion ------------ Vice President-Single-Family Mortgage
Lending
Joseph Taylor ------------ Manager, Information Services
Carolyn Anderson ------------ Assistant Vice President-Operations
Patricia Moseley ------------ Assistant Vice President-Loan and Credit
Card Servicing
Ann Johnson ------------ Assistant Vice President-Purchasing and
Equipment Maintenance
Gabriele Dukes ------------ Assistant Vice President-Financial
Counseling
SECURITY FEDERAL BANK BRANCHES:
------------------------------------------------------------------------------
Whiskey Road ------------ Kathy Williamson, Assistant Vice
President/Manager
North Augusta ------------ Pat Weber, Manager
Denmark ------------ Lee Hutto, Manager
Laurens Street ------------ Vicky Moseley, Manager
Richland Avenue ------------ Jason Redd, Manager
Wal-Mart ------------ Faye Anderson, Manager
Graniteville ------------ Elsie Dicks, Assistant Vice
President/Manager
Langley ------------ Pat Guglieri, Assistant Vice
President/Manager
Clearwater ------------ Gail Dotson, Assistant Vice
President/Manager
Wagener ------------ Todd Lucas, Assistant Vice
President/Manager
43
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
State of Percentage
Parent Subsidiary Incorporation of Ownership
------ ---------- ------------- ------------
Security Federal Security Federal Bank United States 100%
Corporation
Security Federal Bank Security Financial
Services Corporation South Carolina 100%
<PAGE>
Exhibit 23
Consent of Elliott , Davis & Company, LLP
<PAGE>
[Elliott, Davis & Company, LLP Letterhead]
INDEPENDENT AUDITORS' CONSENT
-----------------------------
Board of Directors
Security Federal Corporation:
We consent to the incorporation by reference in the Registration
Statement No. 33-80008 on Form S-8 of our report dated May 24, 2000, relating
to the consolidated balance sheet of Security Federal Corporation and
subsidiary as of March 31, 2000 and the related consolidated statements of
income, shareholders' equity and cash flows for the year then ended, which
report appears in the March 31, 2000 annual report on Form 10-KSB.
/s/Elliott, Davis & Company, LLP
--------------------------------
Elliott, Davis & Company, LLP
Greenville, South Carolina
June 26, 2000
<PAGE>
Exhibit 27
Financial Data Schedule
This schedule contains financial information extracted from the
consolidated financial statements of Security Federal Corporation for the year
ended March 31, 2000 and is qualified in its entirety by reference to such
financial statements. (Dollars in Thousands, except for earnings per share)
Financial Data
as of or for the year
Item Number ended March 31, 2000 Item Description
----------- ----------------------- ----------------
9-03(1) $ 7,417 Cash and due from the Banks
9-03(2) -- Interest-bearing deposits
9-03(3) -- Federal funds sold - purchased
securities for resale
9-03(4) -- Trading account assets
9-03(6) 88,821 Investment and mortgage backed
securities held for sale
9-03(6) 2,710 Investment and mortgage backed
securities held to maturity -
carrying value
9-03(6) 2,634 Investment and mortgage backed
securities held to maturity - market
value
9-03(7) 193,001 Loans
9-03(7)(2) 2,121 Allowance for losses
9-03(11) 304,802 Total assets
9-03(12) 228,823 Deposits
9-03(13) 37,642 Short-term borrowings
9-03(15) 3,399 Other liabilities
9-03(16) 15,180 Long-term debt
9-03(19) -- Preferred stock - mandatory redemption
9-03(20) -- Preferred stock - no mandatory
redemption
9-03(21) 4,002 Common stocks
9-03(22) 15,575 Other stockholders' equity
9-03(23) 304,802 Total liabilities and stockholders'
equity
9-04(1) 14,204 Interest and fees on loans
9-04(2) 5,532 Interest and dividends on investments
9-04(4) 69 Other interest income
9-04(5) 19,805 Total interest income
9-04(6) 8,500 Interest on deposits
9-04(9) 10,378 Total interest expense
9-04(10) 9,427 Net interest income
9-04(11) 750 Provision for loan losses
9-04(13)(h) 4 Investment securities gains/(losses)
9-04(14) 7,845 Other expenses
9-04(15) 3,128 Income/loss before income tax
9-04(17) 3,128 Income/loss before extraordinary items
9-04(18) -- Extraordinary items, less tax
9-04(19) -- Cumulative change in accounting
principles
9-04(20) 2,021 Net income or loss
9-04(21) 2.41 Earnings per share - primary
9-04(21) 2.39 Earnings per share - fully diluted
I.B.5 3.54 Net yield - interest earning assets -
actual
III.C.1.(a) 890 Loans on non-accrual
III.C.1.(b) -- Accruing loans past due 90 days or
more
III.C.2.(c) 784 Troubled debt restructuring
III.C.2 -- Potential problem loans
IV.A.1 1,715 Allowance for loan loss - beginning of
period
IV.A.2 383 Total chargeoffs
IV.A.3 39 Total recoveries
IV.A.4 2,121 Allowance for loan loss - end of
period
IV.B.1 -- Loan loss allowance to allocated to
domestic loans
IV.B.2 -- Loan loss allowance to foreign loans
IV.B.3 2,121 Loan loss allowance - unallocated
<PAGE>
