<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to _______________
Commission File No. 0-25728
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SECURITY FEDERAL BANCORP, INC.
---------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-1134627
- --------------------------------- -----------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2301 UNIVERSITY BOULEVARD, TUSCALOOSA, ALABAMA 35401-1593
- ----------------------------------------------- ---------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (205) 345-8800
--------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [_]
The registrant's revenues for its most recent fiscal year were $6,218,267
As of December 13, 1996, the aggregate market value of the 432,831 shares of
Common Stock of the registrant issued and outstanding held by non-affiliates on
such date was approximately $7.9 million based on the last known sale price of
$18.25 per share of the registrant's Common Stock on October 10, 1996. For
purposes of this calculation, it is not assumed that directors, executive
officers and beneficial owners of more than 5% of the registrant's outstanding
voting stock are not affiliates.
The total number of outstanding shares of the registrant's common stock at
December 13, 1996 was 671,469.
Transitional small business disclosure format: No.
DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents (other than exhibits) incorporated by
reference (and the Part of the Form 10-KSB into which the document is
incorporated):
1. Current Report on Form 8-K dated February 19, 1996 (Part II).
2. Portions of Proxy Statement for 1997 Annual Meeting of Stockholders to
be filed not later than 120 days after the fiscal year ended September 30, 1996
(Part III).
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
- --------------------------------
GENERAL
THE COMPANY. Security Federal Bancorp, Inc. (the "Company"), a Delaware
corporation, was incorporated under the laws of the State of Delaware to become
a savings institution holding company with Security Federal Bank ("Security
Federal" or the "Bank") as its subsidiary. The Company was incorporated at the
direction of the Board of Directors of the Bank in June 1994. On March 31,
1995, the Bank converted from mutual to stock form as a wholly owned subsidiary
of the Company (the "Conversion") and adopted its present name. In conjunction
with the Conversion, the Company issued 671,469 shares of its common stock to
the public.
The Company is classified as a unitary savings and loan holding company
subject to regulation by the Office of Thrift Supervision ("OTS") of the
Department of the Treasury. Prior to its acquisition of the Bank, the Company
had no significant assets and no liabilities and engaged in no business
activities. Since the acquisition, the Company has not engaged in any
significant activity other than holding the stock of the Bank and operating the
business of a savings bank through the Bank. Accordingly, the information set
forth in this report, including financial statements and related data, relates
primarily to the Bank.
The executive offices of the Company are located at 2301 University
Boulevard, Tuscaloosa, Alabama 35401-1593, and its telephone number is (205)
345-8800.
THE BANK. Security Federal was formed in 1965 as a federally chartered
mutual savings and loan association. In 1966, the Bank obtained federal
insurance of accounts, became a member of the FHLB of Atlanta, and commenced
operations. In 1990, the Bank converted to a federally chartered mutual savings
bank and changed its name to Security Federal Bank, a Federal Savings Bank. On
March 31, 1995, the Bank converted to the stock form of ownership and adopted
its current name. The Bank operates through its sole office in Tuscaloosa,
Alabama.
The Bank is principally engaged in the business of accepting deposits from
the general public and investing these funds primarily in loans secured by first
mortgages on one- to four-family residential properties located in its market
area. The Bank also originates loans secured by savings accounts and
infrequently originates commercial loans. At September 30, 1996, the Bank had
total assets of $77.0 million, deposits of $61.2 million, net loans receivable
of $70.0 million and retained earnings of $4.5 million.
The Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF"), which is administered by the Federal Deposit Insurance Corporation
("FDIC") up to applicable limits for each depositor. The Bank is a member of
the Federal Home Loan Bank ("FHLB") of Atlanta, which is one of the 12 district
banks comprising the FHLB System. The Bank is subject to comprehensive
examination, supervision and regulation by the OTS and the FDIC. Such
regulation is intended primarily for the protection of depositors.
Security Federal's executive offices are located at 2301 University
Boulevard, Tuscaloosa, Alabama 35401-1593 and its telephone number is (205)
345-8800.
RECENT DEVELOPMENTS
Deposit Insurance Premium Disparity and Special Assessment of SAIF Members.
On August 8, 1995, the FDIC approved a significant reduction in the deposit
insurance premiums charged to those financial institutions that are members of
the Bank Insurance Fund ("BIF"). No similar reduction was approved for
institutions, such as the Bank, that are members of the SAIF. This amendment
created a significant disparity between the deposit insurance premiums paid by
BIF and SAIF members. On September 30, 1996, the President signed legislation
to recapitalize the SAIF, thereby alleviating this disparity. The Bank was
assessed a one-time assessment of 65.7 basis points imposed on SAIF-insured
deposits at March 31, 1995. The payment of the special assessment of $381,113
on a pre-
2
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tax basis adversely affected the Bank's financial condition and results of
operations. For additional information see "Regulation of the Bank -- Deposit
Insurance."
MARKET AREA
The Bank considers its primary area for deposits and lending to consist of
the Tuscaloosa metropolitan statistical area, consisting of Tuscaloosa County.
To a lesser extent, the Bank also conducts operations in the neighboring
counties of Jefferson, Bibb, Hale, Greene, Pickens and Fayette.
The metropolitan Tuscaloosa area has a diversified economy based on a
combination of services, education, trade, manufacturing and government.
Employers include Jim Walters Resources (mining), Uniroyal Goodrich and JVC, as
well as four large hospitals and the University of Alabama. Based upon the 1992
census, Tuscaloosa and Tuscaloosa County have populations of approximately
78,000 and 153,000, respectively. In addition, approximately 19,000 full time
students attending the University of Alabama are not included in these
population statistics.
The unemployment rate for Tuscaloosa County in October 1996 was 3.5%,
compared to rates of 5% and 5.2% for the State of Alabama and the United States,
respectively. The relatively low unemployment rate is believed to reflect the
overall stability of Tuscaloosa County's economy. Economic development in the
Bank's market area also is believed to stabilize employment.
Mercedes Benz, a European automaker, is currently constructing a plant
within Tuscaloosa County. The plant is expected to be operational within the
next year, and is expected to employ approximately 1,500 persons.
LENDING ACTIVITIES
General. The principal lending activity of Security Federal is the
origination of conventional mortgage loans for the purpose of purchasing or
refinancing owner-occupied one-to four-family residential properties in the
Bank's primary market area. At September 30, 1996, one- to four-family mortgage
loans constituted 84.0% of the Bank's gross loan portfolio. A majority of such
mortgage loans have adjustable rates, although a significant amount of fixed
rate mortgage loans are also originated. The Bank also originates multi-family
residential, construction and commercial real estate loans, as well as a small
amount of consumer loans primarily secured by deposits.
Prior to the 1980s, the Bank's residential lending activities consisted
primarily of originating fixed rate mortgage loans with maturities of up to 30
years for retention in the loan portfolio. Fundamental changes in the
regulation of savings institutions in the early 1980s and then prevailing
economic conditions combined to increase significantly both the level and
volatility of the Bank's cost of funds. Since the early 1980s, the Bank has
sought to build a more rate-sensitive loan portfolio by originating adjustable
rate mortgages in addition to continuing to originate fixed-rate mortgage loans.
Adjustable rate mortgages generally are indexed to the weekly average rate on
United States Treasury securities adjusted to a constant maturity, usually one
year ("U.S. Treasury Constant Maturity Index"). At September 30, 1996, the
Bank's one- to four-family mortgage loan portfolio consisted of 60.9% of
adjustable rate loans and 39.1% of fixed rate loans. Most mortgage loans are
underwritten to qualify for sale in the secondary market.
The Bank continues to originate fixed-rate one- to four-family mortgage
loans in response to consumer demand generated by the decline in market interest
rates. In an environment of declining interest rates which continues to
prevail, borrowers tended to prefer long term, fixed rate mortgage loans rather
than adjustable rate mortgage loans with short-term interest rate changes.
Security Federal nonetheless continued to originate adjustable-rate mortgage
loans. Although most of the Bank's fixed-rate loans are originated for sale in
the secondary market, the Bank's fixed-rate loan originations depend upon the
level of interest rate risk that the Bank is willing to accept given its
capital, profitability and other factors. The Bank continues to emphasize
pricing of its adjustable rate mortgage loans to continue attracting this type
of loan.
3
<PAGE>
The Bank intends to continue actively monitoring the interest rate
environment, prepayment activity, interest rate risk and other factors in
developing its strategy with respect to the volume and pricing of its fixed rate
loans and in its lending activities generally.
Savings institutions generally are subject to the lending limits applicable
to national banks. With certain limited exceptions, the maximum amount that a
savings institution or a national bank may lend to any borrower (including
certain related entities of the borrower) at one time may not exceed 15% of the
unimpaired capital and surplus of the institution, plus an additional 10% of
unimpaired capital and surplus for loans fully secured by readily marketable
collateral. Savings institutions are additionally authorized to make loans to
one borrower, for any purpose, in an amount not to exceed $500,000 or, by order
of the Director of OTS, in an amount not to exceed the lesser of $30,000,000 or
30% of unimpaired capital and surplus to develop residential housing, provided:
(i) the purchase price of each single-family dwelling in the development does
not exceed $500,000; (ii) the savings institution is in compliance with its
fully phased-in capital requirements; (iii) the loans comply with applicable
loan-to-value requirements; and (iv) the aggregate amount of loans made under
this authority does not exceed 150% of unimpaired capital and surplus.
At September 30, 1996, the maximum amount that the Bank could have loaned
to any one borrower without prior OTS approval was $1.24 million. The Bank's
five largest loans to one borrower outstanding at September 30, 1996 ranged from
$1,507,503 to $808,725. At September 30, 1996, the Bank had one loan that
exceeded the lending limit. This loan inadvertently resulted from the Bank
calculating the lending limit on a consolidated basis including the capital of
its holding company. According to OTS regulations, however, the lending limit is
based solely on the capital of the Bank. Though management is considering
appropriate measures to comply with the regulations, management does not expect
the Bank to experience any loss as a result of inadvertently exceeding the
lending limit. The Bank's future lending will consider the lending limit without
consideration of the holding company's capital.
Loan Portfolio Composition. The following table sets forth selected data
relating to the composition of the Bank's loan portfolio by type of loan at the
dates indicated. At September 30, 1996, the Bank had no concentrations of loans
exceeding 10% of total loans that are not otherwise disclosed below.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------
1994 1995 1996
----------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Type of Loan:
- ------------
Real estate loans --
Construction loans................ $ 4,334 7.83% $ 6,015 9.64% $ 6,240 8.52%
One- to four-family residential... 45,142 81.60 51,281 82.17 60,014 84.06
Multi-family...................... 3,418 6.18 2,715 4.35 3,478 4.75
Commercial........................ 1,870 3.38 1,885 3.02 1,410 1.93
Non-mortgage loans --
Savings account loans............. 559 1.01 507 .81 468 .63
Home improvement loans............ 1 -- 5 .01 7 .01
Home equity loans................. -- -- -- -- 70 .10
Commercial business............... -- -- -- -- -- --
------- ------ ------- ------ ------- ------
55,324 100.00% 62,408 100.00% 71,687 100.00%
====== ====== ======
Less:
Loans in process.................. 1,579 1,958 2,409
Deferred loan fees................ 242 309 437
Loan loss reserve................. 330 330 330
------- ------- -------
Total.......................... $53,173 $59,811 $68,511
======= ======= =======
</TABLE>
4
<PAGE>
Loan Maturity Schedule. The following table sets forth certain information
at September 30, 1996 regarding the dollar amount of loans maturing in the
Bank's portfolio based on their contractual terms to maturity, including
scheduled repayments of principal. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported as
due in one year or less.
<TABLE>
<CAPTION>
DUE DURING THE DUE AFTER
YEAR ENDING 3 THROUGH
1 MONTH 3 MONTHS 6 MONTHS SEPTEMBER 30, 5 YEARS AFTER
THROUGH THROUGH THROUGH --------------------- SEPTEMBER 30,
3 MONTHS 6 MONTHS 1 YEAR 1998 1999 1996
-------- -------- ------- --------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage......... $ 224 $ 6 $ 128 $ 325 $ 104 $1,738
Real estate construction/
permanent.................. 1,691 821 2,227 76 -- --
Consumer..................... 57 22 190 47 136 95
------ ---- ------ ----- ----- ------
Total................... $1,972 $849 $2,545 $ 448 $ 240 $1,833
====== ==== ====== ===== ===== ======
<CAPTION>
DUE AFTER DUE AFTER
5 THROUGH 10 THROUGH DUE AFTER 15
10 YEARS AFTER 15 YEARS AFTER YEARS AFTER
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1996 TOTAL
-------------- -------------- -------------- -----
<S> <C> <C> <C> <C>
Real estate mortgage......... $3,667 $10,161 $48,549 $64,902
Real estate construction/
permanent.................. 55 50 1,320 6,240
Consumer..................... -- -- -- 545
------ ------- ------- -------
Total................... $3,722 $10,211 $49,869 $71,687
====== ======= ======= =======
</TABLE>
The following table sets forth at September 30, 1996, the dollar amount of
all loans due more than one year after September 30, 1996 which have
predetermined interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
PREDETERMINED FLOATING OR
RATES ADJUSTABLE RATES
------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Real estate mortgage....... $23,414 $41,128
Real estate construction... 946 555
Consumer................... -- 278
------- -------
Total.................. $24,360 $41,961
======= =======
</TABLE>
5
<PAGE>
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such assets. The average life of long-term loans is
substantially less than their contractual terms, due to prepayments. In
addition, "due-on-sale" clauses in mortgage loans generally give Security
Federal the right to declare a loan due and payable in the event, among other
things, that a borrower sells the real property subject to the mortgage and the
loan is not repaid. Due-on-sale clauses are a means of increasing the rate on
existing mortgage loans during periods of rising interest rates and increasing
the turnover of mortgage loans in the Bank's portfolio. The average life of
mortgage loans tends to increase when current mortgage loan market rates are
substantially higher than rates on existing mortgage loans and tends to decrease
when current mortgage loan market rates are substantially lower than rates on
existing mortgage loans. The approximate average length of time that loans made
by the Bank on one- to four-family residences remain outstanding is seven years.
One- to Four-Family Real Estate Lending. The primary emphasis of the
Bank's lending activity is the origination of loans secured by first mortgages
on owner-occupied, one- to four-family residential properties. The purchase
price or appraisal value of most of such residences is currently in
approximately the $95,000 to $105,000 range, with Security Federal's loan
amounts averaging approximately $85,000. Management believes that price range
includes the majority of the single family properties in the Bank's market area.
At September 30, 1996, $60.0 million or 83.7% of the Bank's gross loan portfolio
consisted of loans secured by one- to four-family residential real properties
which were primarily owner-occupied, single-family residences primarily located
in the Bank's market area.
The Bank's lending policies generally limit the maximum loan-to-value ratio
on mortgage loans secured by owner-occupied properties up to 95% of the lesser
of the appraised value or purchase price, with private mortgage insurance
required on loans with loan-to-value ratios in excess of 80%. The maximum loan-
to-value ratio on mortgage loans secured by non-owner-occupied properties is
80%.
Security Federal originates fixed-rate mortgage loans on one- to-four
family residential properties with terms to maturity of up to 30 years.
Although most such loans are amortized on a monthly basis, with principal and
interest due each month, some fixed-rate loans are originated on a long-term
amortizing basis with balloon payments due up to 7 years from date of
origination. Security Federal originated $24.6 million in fixed-rate one- to-
four family mortgage loans during the year ended September 30, 1996. Such loans
are originated primarily for sale in the secondary market. A small number of
loans have been sold in prior years to individuals and other lending
institutions.
Security Federal began originating conventional residential mortgage loans
with adjustable rates in the early 1980's, in response to fluctuating interest
rates. Currently, the Bank principally offers adjustable-rate mortgage loans
with rate adjustments indexed to the U.S. Treasury Constant Maturity Index. The
primary adjustable rate product is a five year adjustable rate mortgage loan
that has a 2% cap on yearly adjustments and a 6% adjustment cap over the life of
the loan. Security Federal originated $8.73 million in adjustable rate one-to-
four family mortgage loans during the year ended September 30, 1996. Such loans
are primarily originated for the Bank's own loan portfolio. However, from time
to time the Bank may sell adjustable rate loans in the secondary market for
liquidity.
The retention of adjustable-rate mortgage loans in the Bank's portfolio
helps reduce the Bank's exposure to changes in interest rates. However, there
are unquantifiable credit risks resulting from potential increased costs to the
borrower as a result of repricing of adjustable-rate mortgage loans. It is
possible that during periods of rising interest rates, the risk of default on
adjustable-rate mortgage loans may increase due to the upward adjustment of
interest cost to the borrower. Further, although adjustable-rate mortgage loans
allow the Bank to increase the sensitivity of its asset base to changes in
interest rates, the extent of this interest sensitivity is limited by the
periodic and lifetime interest rate adjustment limitations. Accordingly, there
can be no assurance that yields on the Bank's adjustable-rate mortgages will
adjust sufficiently to compensate for increases, if any, in the Bank's cost of
funds.
6
<PAGE>
Construction Lending. Security Federal engages in construction lending,
involving loans to qualified borrowers for construction of one- to four-family
residential properties. These properties are primarily located in the Bank's
market area. At September 30, 1996 the Bank's loan portfolio included $6.24
million of loans secured by properties under construction, the majority of which
were construction/permanent loans structured to become permanent loans upon the
completion of construction. To a lesser extent, the Bank also originates
interim construction loans structured to be repaid in full upon completion of
construction and receipt of permanent financing. All construction loans are
secured by a first lien on the property under construction. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
Construction/permanent loans generally have adjustable or fixed interest
rates and are underwritten in accordance with the same terms and requirements as
the Bank's permanent mortgages, except the loans generally provide for
disbursement in stages during a construction period of up to six months, during
which period the borrower is required to make monthly payments of accrued
interest on the outstanding loan balance. Borrowers must satisfy all credit
requirements which would apply to the Bank's permanent mortgage loan financing
for the subject property.
Construction financing generally is considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project having a value which is insufficient to assure full repayment.
The ability of a developer to sell developed lots or completed dwelling units
will depend on, among other things, demand, pricing, availability of comparable
properties and economic conditions. The Bank has sought to minimize this risk
by limiting construction lending to qualified borrowers in the Bank's market
area and by limiting the aggregate amount of outstanding construction loans.
Multi-Family and Commercial Real Estate Lending. Although Security Federal
has not actively pursued multi-family and commercial real estate lending because
of its emphasis on providing mortgage loans secured by one- to four-family
residences, the Bank originates limited amounts of such loans in order to
benefit from the higher origination fees and interest rates, as well as shorter
terms to maturity, than can be obtained from single-family mortgage loans.
Security Federal's multi-family loans are primarily secured by apartment
buildings in the Bank's market area. The commercial real estate loans
originated by the Bank have generally been made to small businesses and have
primarily been secured by first mortgages on commercial real property as well as
personal guarantees. At September 30, 1996, loans on commercial real estate
properties constituted approximately $3.48 million, or 4.85% of the Bank's gross
loan portfolio.
Multi-family and commercial real estate lending entails significant
additional risks as compared to one- to four-family residential lending. For
example, such loans typically involve large loans to single borrowers or related
borrowers, the payment experience on such loans is typically dependent on the
successful operation of the project, and these risks can be significantly
affected by the supply and demand conditions in the market for commercial
property and multi-family residential units. To minimize these risks, Security
Federal generally limits such lending to its market area and to borrowers with
which it has substantial experience or who are otherwise well known to the Bank.
It is the Bank's current policy to obtain personal guarantees and current
financial statements from all principals obtaining commercial real estate loans.
Substantially all of the properties securing the Bank's multi-family and
commercial real estate loans are inspected by the Bank's lending personnel
before the loan is made. The Bank also obtains appraisals on each property in
accordance with applicable regulations. If such loans later become delinquent,
the Bank contacts and works with the borrower to resolve the delinquency before
initiating foreclosure proceedings.
7
<PAGE>
Consumer Lending. Security Federal does not emphasize consumer lending.
The Bank's consumer loans primarily consist of loans secured by deposit account
balances. The Bank generally makes certificate of deposit loans for up to 90%
of the face amount of the certificate. The interest rate on these loans
generally is 2.0% above the rate paid on the certificate, and interest is billed
on a quarterly basis. These loans are payable on demand, and the account must be
assigned to the Bank as collateral for the loan. At September 30, 1996 such
loans amounted to $468,000, or .65% of the Bank's gross loan portfolio.
Although the Bank does not currently intend to originate consumer loans
other than consumer loans secured by deposit account balances, in the future the
Bank may consider engaging in other types of consumer lending. Consumer loans
not secured by a deposit account balance generally involve more risk than first
mortgage one- to four-family residential real estate loans. Repossessed
collateral for a defaulted loan may not provide an adequate source of repayment
of the outstanding loan balance as a result of damage, loss or depreciation, and
the remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, loan collections are dependent on
the borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Further, the application of various federal and state laws, including federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered. These loans may also give rise to claims and defenses by a borrower
against the Bank, and a borrower may be able to assert against the Bank claims
and defenses which it has against the seller of the underlying collateral. In
underwriting consumer loans, the Bank considers the borrower's credit history,
an analysis of the borrower's income, expenses and ability to repay the loan and
the value of the collateral.
Commercial Business Lending. Security Federal does not solicit commercial
business loans, and at September 30, 1996, had no commercial business loans
outstanding. In the future the Bank may consider engaging in commercial
business lending, particularly the origination of commercial business loans on a
selected basis and in limited amounts to small and medium sized businesses in
its market area. Commercial business loans may be larger and involve greater
risk than other types of lending. Because payments on such loans are often
dependent on successful operation of the business involved, repayment of such
loans may be subject to a greater extent to adverse conditions in the economy.
It is anticipated that any such lending would be restricted to borrowers with
which the Bank has substantial experience or who are otherwise well known to
Security Federal.
Loan Solicitation and Processing. Loan originations primarily come from
walk-in customers and referrals by realtors, homebuilders, depositors and
borrowers. Loan applications are underwritten and closed on the Bank's own loan
guidelines.
Upon receipt of a loan application from a prospective borrower, a credit
report and verifications are ordered to verify specific information relating to
the loan applicant's employment, income and credit standing. An appraisal of
the real estate intended to secure the proposed loan is undertaken by an
independent appraiser approved by the Bank.
The Board of Directors of Security Federal has the responsibility and
authority for general supervision over the loan policies of the Bank. All
loans, regardless of dollar amount, are approved prior to closing by a loan
committee comprised of three Bank directors.
Loan applicants are promptly notified of the decision of the Bank. The
Bank generally issues loan commitments for a term not to exceed 60 days.
Security Federal currently charges a fee of .25% of the loan amount to guarantee
the interest rate up to 60 days. If an approved loan is not funded within 60
days, the applicant must re-apply. It has been management's experience that
less than 10% of commitments expire without being funded. Fire and casualty
insurance are required for all loans as appropriate, and a title opinion or
title insurance is required for loans secured by real estate.
8
<PAGE>
Originations and Sales of Loans. The following table sets forth certain
information with respect to originations and sales of loans during the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans originated:
Real estate loans:
Construction loans........ $ 5,632 $ 7,127 $ 8,740
One- to four-family....... 28,805 19,875 33,331
Multi-family.............. -- -- 1,091
Commercial................ 36 -- --
Consumer loans.............. 322 7 13
Commercial business loans... -- 61 --
------- ------- -------
Total loans originated... $34,795 $27,070 $43,175
======= ======= =======
Loan purchased:
Real estate loans:
Commercial loans.......... $ -- $ -- $ --
------- ------- -------
Total loans purchased.... $ -- $ -- $ --
======= ======= =======
Loans sold:
Whole loans................. $22,605 $ 9,374 $15,336
------- ------- -------
Total loans sold......... $22,605 $ 9,374 $15,336
======= ======= =======
</TABLE>
Security Federal sold $15.34 million of its residential mortgage loans in
the year ended September 30, 1996. Almost all loans are sold in the secondary
market to the Federal Home Loan Mortgage Corporation ("FHLMC"), although a small
number of loans have, from time to time, been sold to individual investors and
other institutions. Security Federal does not retain any participation interest
in any loans which are sold, but in most cases the Bank retains servicing rights
on the loans sold. As of September 30, 1996, the Bank was servicing 1,132 loans
totaling $71.8 million. During the year ended September 30, 1996, loan
servicing fees amounted to approximately 3.5% of total gross income. See Note 4
of Notes to Consolidated Financial Statements.
Interest Rates and Loan Fees. Interest rates charged by the Bank on
mortgage loans are primarily determined by competitive loan rates offered in its
market area. Mortgage loan rates reflect factors such as general interest rate
levels, the supply of money available to the savings industry and the demand for
such loans. These factors are in turn affected by general economic conditions,
the monetary policies of the Federal government, including the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"), the
general supply of money in the economy, tax policies and governmental budget
matters.
In addition to the interest earned on loans, the Bank receives fees in
connection with loan commitments and originations, loan modifications, late
payments and fees for miscellaneous services related to its loans. The Bank
charges a fee for its costs associated with the origination of adjustable rate
mortgage loans and fixed rate mortgage loans in addition to a 1% origination
fee. All fee income is recognized by the Bank in accordance with guidelines
established by Statement of Financial Accounting Standards ("SFAS") No. 91.
To the extent that loans are originated or acquired for the portfolio, SFAS
No. 91 limits immediate recognition of loan origination or acquisition fees as
revenues and requires that such income (net of certain loan origination or
acquisition costs) be recognized over the estimated life of such loans and
thereby reduces the amount
9
<PAGE>
of revenue recognized by Security Federal at the time such loans are originated
or acquired. At September 30, 1996, the Bank had received $436,000 of loan fees
that had been deferred and were being recognized as income over the estimated
lives of the related loans.
Asset Classification and Allowance for Loan Losses. Federal regulations
require savings associations to review their assets on a regular basis and to
classify them as "substandard," "doubtful" or "loss," if warranted. Assets
classified as substandard or doubtful require the institution to establish
general allowances for loan losses. If an asset or portion thereof is
classified loss, the insured institution must either establish specified
allowances for loan losses in the amount of 100% of the portion of the asset
classified loss, or charge off such amount. An asset which does not currently
warrant classification but which possesses weaknesses or deficiencies deserving
close attention is required to be designated as "special mention." Currently,
general loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses do not qualify as regulatory capital. See "Regulation of the Bank --
Regulatory Capital Requirements." OTS examiners may disagree with the insured
institution's classifications and amounts reserved. If an institution does not
agree with an examiner's classification of an asset, it may appeal this
determination to the OTS. The Bank has an asset classification committee,
consisting of four employees of the Bank, including President John F. Harvard,
which meets monthly to review assets and determine whether those assets should
be classified pursuant to OTS regulations. Through the committee, the Bank has
determined that at September 30, 1996 it had $1,030,000 in assets classified as
substandard, and no assets classified as doubtful, loss, or "special mention."
For additional information, see " -- Non-Performing Loans and Other Problem
Assets."
In originating loans, the Bank recognizes that credit losses will be
experienced 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, general economic conditions and, in the case of a secured loan, the
quality of the security for the loan. It is management's policy to maintain an
adequate general allowance for loan losses based on, among other things, the
Bank's and the industry's historical loan loss experience, evaluation of
economic conditions and regular reviews of delinquencies and loan portfolio
quality and risk. The Bank increases its allowance for loan losses by charging
provisions for possible loan losses against the Bank's income. Management
continues to actively monitor the Bank's asset quality and to charge off loans
against the allowance for loan losses when appropriate. Although management
believes it uses the best information available to make determinations with
respect to the allowance for loan losses, future adjustments may be necessary if
economic conditions differ substantially from the economic conditions in the
assumptions used in making the initial determinations.
The Bank was examined by the OTS in May 1995 and its loan loss allowance
was considered by the OTS to be adequate as of that time. While the Bank
believes it has established its existing allowances for loan losses in
accordance with generally accepted accounting principles, there can be no
assurance that regulators, in reviewing the Bank's loan portfolio during future
examinations, will not request the Bank to significantly increase its allowance
for loan losses, thereby negatively effecting the Bank's financial condition and
earnings.
10
<PAGE>
The following table sets forth an analysis of the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------
1994 1995 1996
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period.......... $ 330 $ 330 $ 330
------ ------ ------
Loans charged-off:
Real estate -- mortgage:
Residential......................... -- -- --
Commercial.......................... -- -- --
Real estate -- construction........... -- -- --
Commercial business................... -- -- --
Consumer.............................. -- -- --
------ ------ ------
Total charge-offs....................... -- -- --
------ ------ ------
Recoveries:
Real estate -- mortgage:
Residential......................... -- -- --
Commercial.......................... -- -- --
Real estate -- construction........... -- -- --
Commercial business................... -- -- --
Consumer.............................. -- -- --
Total recoveries........................ -- -- --
Net loans charged-off................... -- -- --
Provision for loan losses............... -- -- --
------ ------ ------
Balance at end of period................ $ 330 $ 330 $ 330
====== ====== ======
Ratio of net charge-offs to average
loans outstanding during the period... -- % -- % -- %
Allowance for loan losses to total
loans receivable, gross............... .60% .53% .46%
====== ====== ======
</TABLE>
11
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any category.
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------------------------------------------------
1994 1995 1996
--------------------------- ------------------------ ----------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
EACH CATEGORY EACH CATEGORY EACH CATEGORY
TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ -------------- ------ ------------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate - mortgage:
Residential (1)...................... $ 185 87.78% $ 186 86.57% $121 88.92%
Commercial........................... 91 3.38 110 3.01 91 1.93
Real estate - construction............. 49 7.83 31 9.59 114 8.52
Consumer............................... 5 1.01 3 .83 4 .64
----- ------ ----- ------ ---- ------
Total allowance for loan losses... $ 330 100.00% $ 330 100.00% $330 100.00%
===== ====== ===== ====== ==== ======
</TABLE>
___________________
(1) Includes multi-family.
Non-Performing Loans and Other Problem Assets. Management reviews the
Bank's loans on a regular basis. After mortgage loans become past due more than
90 days, the Bank places them on non-accrual status. The Bank has had a
favorable loan loss history, and has not charged off any residential real estate
loans during fiscal years 1994, 1995 and 1996, respectively. See Note 4 of Notes
to Consolidated Financial Statements.
The Bank's collection procedures provide that when a loan becomes past due
10 days, the borrower is contacted by mail, and payment is requested. If
payment is not promptly received, the borrower is contacted again, and efforts
are made to formulate an affirmative plan to cure the delinquency. After a loan
becomes past due 90 days, the Bank generally initiates legal proceedings. Loans
delinquent 90 days or greater are managed based on a workout plan developed by
the Bank and the borrower.
Real estate acquired by the Bank as a result of foreclosure is classified
as real estate owned until such time as it is sold. When such property is
acquired, it is recorded at the lower of the unpaid principal balance or its net
realizable value. Any required write-down of the loan to its appraised fair
market value less selling costs upon foreclosure is charged against the
valuation allowance for real estate owned. The Bank generally attempts to sell
the property at a price no less than its net book value; however, the Bank will
consider a slight discount to the appraised value to expedite the return of the
funds to an earning status.
12
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. No loans were recorded as
restructured loans within the meaning of SFAS No. 15 at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------
1994 1995 1996
------ ----- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis: (1)
Real estate:
Construction.................................. $ 180 $ -- $ 426
Residential (2)............................... 521 95 268
Commercial.................................... 223 333 --
Commercial business............................. -- -- --
Consumer........................................ -- -- --
------ ----- ------
Total........................................ $ 924 $ 428 $ 694
====== ===== ======
Accruing loans which are contractually past due
90 days or more:
Real estate:
Construction.................................. $ -- $ -- $ --
Residential................................... 49 -- 372
Commercial.................................... -- -- --
Commercial business............................. -- -- --
Consumer........................................ -- -- --
------ ----- ------
Total........................................ $ 49 $ -- $ 372
====== ===== ======
Total of non-performing loans................ $ 973 $ 428 $1,066
Real estate owned................................. 162 162 117
------ ----- ------
Total non-performing assets....................... $1,135 $ 590 $1,183
====== ===== ======
- ----------------
</TABLE>
(1) Payments received on a non-accrual loan are either applied to the
outstanding principal balance or recorded as interest income, depending on
assessment of the collectibility of the loan.
(2) Includes multi-family loans.
Management believes there was no single non-performing asset at September
30, 1996 which presents a significant risk of loss to Security Federal except
for one office building located in Atlanta, Georgia in which the Bank has a
42.45% participation interest and which is held as real estate owned. The
Bank's portion of the book value of the buildings was $82,243 at September 30,
1996. During the fiscal year ending September 30, 1996, the Bank sold an office
building in the same complex for approximately its remaining book value. In
addition, there was an offer on the second building for approximately its book
value plus closing costs. Management monitors this asset and believes net book
value of the asset's consistent with the Bank's probable net recovery on the
eventual sale of the asset.
The Bank establishes general reserves for all classified loans, and the
loan is written down to an amount the Bank determines to be the fair value of
the property based on regular inspections of the property by management.
Updated appraisals generally are not conducted until after a loan enters
foreclosure proceedings, and there may be risks associated with not obtaining
updated appraisals on classified loans. The most significant risk could be a
market value substantially below the current book value of the property, thereby
requiring a charge against the valuation allowance for real estate owned.
However, due to the relatively small number of classified loans in the Bank's
portfolio, the small number of large commercial real estate loans in the
portfolio, the origination of commercial real estate loans only in the Bank's
market area, and the fact that inspections by management
13
<PAGE>
are conducted regularly, management does not consider the lack of obtaining
updated appraisals on classified loans as a significant risk.
At September 30, 1996, management had identified 16 loans aggregating
approximately $1.39 million, which were between 60 and 89 days delinquent and
were not reflected in the preceding table, but as to which known information
about possible credit problems of borrowers caused management to have doubts as
to the ability of the borrowers to comply with present loan repayment terms.
Management does not expect Security Federal to experience any material loss on
these loans in the future.
During the year ended September 30, 1996, gross interest income of $21,000
would have been recorded on loans accounted for on a non-accrual basis if the
loans had been current throughout the respective periods. No interest on such
loans was included in income during these periods.
INVESTMENT ACTIVITIES
Security Federal is permitted under federal law to make certain
investments, including investments in securities issued by various federal
agencies and state and municipal governments, deposits at the FHLB of Atlanta,
certificates of deposits in federally insured institutions, certain bankers'
acceptances and federal funds. The Bank may also invest, subject to certain
limitations, in commercial paper having one of the two highest investment
ratings of a nationally recognized credit rating agency, and certain other types
of corporate debt securities and mutual funds. Federal regulations require the
Bank to maintain an investment in FHLB of Atlanta stock and a minimum amount of
liquid assets which may be invested in cash and specified securities. From time
to time, the OTS adjusts the percentage of liquid assets which savings
institutions are required to all maintain. For additional information, see
"Regulation of the Bank --Liquidity Requirements."
The Bank invests in investment securities in order to diversify its assets,
manage cash flow, obtain yield and maintain the minimum levels of liquid assets
required by regulatory authorities. Such investments generally include
purchases of federal government and agency securities and qualified deposits in
the FHLB of Atlanta and in other financial institutions. The investment
portfolio consists of short- and intermediate-term investments, which mature in
five years or less. The cash and investment portfolio has increased in recent
periods, as excess cash flow resulting from loan portfolio shrinkage has largely
been maintained in cash and investments. At September 30, 1996, the Bank had no
forward commitments to purchase or sell any securities. The Bank's investment
policy prohibits the purchase of junk bonds, mortgage derivatives or futures.
Investment decisions generally are made by the Investment Committee consisting
of Directors Sealy, Moore and Harvard.
14
<PAGE>
The following table sets forth the carrying value of the Bank's investment
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------
1994 1995 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Investment securities:
U.S. government and agency obligations..... $3,751 $7,147 $2,985
State and municipal obligations............ -- -- --
------ ------ ------
Total investment securities............. 3,751 7,147 2,985
Interest-earning deposits and certificates... 5,584 977 993
FHLB stock................................... 498 508 539
------ ------ ------
Total investments....................... $9,833 $8,632 $4,517
====== ====== ======
</TABLE>
See Note 3 of the Notes to Consolidated Financial Statements.
15
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for the Bank's investment portfolio at
September 30, 1996.
<TABLE>
<CAPTION>
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS
------------------- ------------------- -------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and
agency securities........ $ -- --% $2,984 6.29% $ -- --%
Other...................... -- -- -- -- -- --
Interest-earning deposits.... 993 5.31 -- -- -- --
FHLB stock................... -- -- -- -- -- --
-------- ------ --------
Total................... $ 993 5.31 $2,984 6.29 $ -- --
======== ====== ========
<CAPTION>
MORE THAN TEN TOTAL
YEARS INVESTMENT PORTFOLIO
------------------ -------------------------------
CARRYING AVERAGE CARRYING MARKET AVERAGE
VALUE YIELD VALUE VALUE YIELD
-------- -------- -------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Investment securities:
U.S. government and
agency securities........ $ -- --% $2,984 $2,984 6.29%
Other...................... 1 -- 1 1 --
Interest-earning deposits.... -- -- 993 993 5.31
FHLB stock................... 539 7.25 539 539 7.25
---- ------ ------
Total................... $540 7.25 $4,517 $4,517 6.19
==== ====== ======
</TABLE>
16
<PAGE>
MORTGAGE-BACKED SECURITIES
In 1991 and prior years, Security Federal maintained a portfolio of
Government National Mortgage Association ("GNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") participation certificates. Such certificates are
guaranteed by their respective agencies as to principal and interest. Mortgage-
backed securities generally entitle the Bank to receive a pro rata portion of
the cash flows from an identified pool of mortgages. Although mortgage-backed
securities yield from 30 to 100 basis points less than the loans which are
exchanged for such securities, they present substantially lower credit risk and
more liquidity than individual loans and may be used to collateralize
obligations of the Bank. Although the Bank held no mortgage-backed securities
at September 30, 1996, in the future the Bank may determine to invest again in
such securities based on liquidity levels and overall lending activity.
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
General. Deposits and sales of loans are the primary sources of the Bank's
funds for lending and other investment purposes. In addition to deposits and
sales of loans, Security Federal derives funds from loan principal repayments,
maturing investment securities, and interest payments. Loan repayments and
interest payments are a relatively stable source of funds, while deposit inflows
and outflows are significantly influenced by general interest rates and money
market conditions. Borrowings must be used to supplement Security Federal's
available funds, and from time to time Security Federal has borrowed funds from
the FHLB of Atlanta. See Note 12 of Notes to Consolidated Financial Statements.
Deposits. Deposits are attracted principally from within the Bank's
primary market area through the offering of passbook savings accounts and
certificates of deposit ranging in term from six months to five years. Security
Federal advertises regularly on radio and television and in the local newspaper
depending on the Bank's need for deposits. Deposit account terms vary,
principally on the basis of the minimum balance required, the time periods the
funds must remain on deposit and the interest rate. The Bank also offers
individual retirement accounts ("IRAs").
The Bank's policies are designed primarily to attract deposits from local
residents rather than to solicit deposits from areas outside its primary market.
The Bank does not accept deposits from brokers. Interest rates paid, maturity
terms, service fees and withdrawal penalties are established by the Bank on a
periodic basis. Determination of rates and terms are predicated upon a
combination of then prevailing economic conditions, Treasury yield information,
competition, other relevant market data, prior period deposit activity, a survey
of local deposit rates and the Bank's need for funds. Deposit pricing is
established weekly by senior management. Historically, Security Federal has
paid deposit rates at the upper end of its market area.
Over the last several years, the balances of total deposits have shown a
steady increase, as management has followed a moderate growth strategy to
support lending activities and to leverage the operations and fixed assets of
the Bank.
17
<PAGE>
Savings deposits in the Bank as of September 30, 1996 were represented by
the various types of savings programs described below.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
INTEREST MINIMUM MINIMUM PERCENTAGE OF
RATE TERM CATEGORY AMOUNT BALANCES TOTAL SAVINGS
- -------- ------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
3.50% None Passbook Savings Accounts $ 50 $ 3,711 6.06%
Certificates of Deposit
-----------------------
4.99 180 days 180 Fixed-Term, Fixed-Rate 2,500 3,085 5.04
5.80 12-month Fixed-Term, Fixed-Rate 1,000 20,442 33.37
5.70 18-month Fixed-Term, IRA Accounts 100 1,492 2.44
6.70 36-month Fixed-Term, IRA Accounts 100 54 .09
6.76 60-month Fixed-Term, IRA Accounts 100 1,417 2.31
6.10 18-month Fixed-Term, Fixed-Rate 1,000 6,256 10.21
6.01 24-month Fixed-Term, Fixed-Rate 1,000 12,507 20.42
6.38 30-month Fixed-Term, Fixed-Rate 1,000 1,125 1.84
6.40 36-month Fixed-Term, Fixed-Rate 1,000 3,411 5.57
6.54 48-month Fixed-Term, Fixed-Rate 1,000 1,073 1.75
6.18 60-month Fixed-Term, Fixed-Rate 1,000 6,679 10.90
------- ------
$61,252 100.00%
======= ======
</TABLE>
See Note 17 of Notes to Consolidated Financial Statements.
At this time, Security Federal does not offer checking accounts. The Bank
is currently considering whether the benefits of offering those accounts
outweigh the administration and maintenance costs of such accounts.
The following table sets forth, for the periods indicated, the average
balances and interest rates based on month-end balances for interest-bearing
passbook deposits and time deposits.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------
1994 1995 1996
---------------------- ---------------------- ----------------------
INTEREST- INTEREST- INTEREST-
BEARING BEARING BEARING
PASSBOOK TIME PASSBOOK TIME PASSBOOK TIME
DEPOSITS DEPOSITS DEPOSITS DEPOSITS DEPOSITS DEPOSITS
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Average Balance... $6,049 $51,645 $4,399 $53,024 $3,821 $54,892
Average Rate...... 3.48% 4.90% 3.50% 6.29% 3.50% 6.25%
</TABLE>
18
<PAGE>
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Bank between the dates indicated.
<TABLE>
<CAPTION>
INCREASE INCREASE
(DECREASE) (DECREASE)
BALANCE AT FROM BALANCE AT FROM
SEPTEMBER 30, % SEPTEMBER SEPTEMBER 30, % SEPTEMBER
1994 DEPOSIT 30, 1993 1995 DEPOSITS 30, 1994
------- --------- --------- ------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Passbook and regular
savings..................... $ 5,102 8.55% $ (2,140) $ 3,688 6.47% $ (1,414)
Certificates:
6 month..................... 5,305 8.89 (4,420) 4,436 7.79 (869)
12 month.................... 13,233 22.17 408 6,622 11.62 (6,611)
IRA accounts................. 2,630 4.41 73 3,045 5.34 415
1 - 3 year certificates...... 24,279 40.69 8,903 31,117 54.62 6,838
4 - 5 year certificates...... 9,124 15.29 1,063 8,067 14.16 (1,057)
------- ------ --------- ------- ------ ---------
Total $59,673 100.00% $ 3,887 $56,975 100.00% $ (2,698)
======= ====== ========= ======= ====== =========
<CAPTION>
INCREASE
(DECREASE)
BALANCE AT FROM
SEPTEMBER 30, % SEPTEMBER
1996 DEPOSITS 30, 1995
------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Passbook and regular
savings..................... $ 3,711 6.06% $ 23
Certificates:
6 month..................... 3,085 5.04 (1,351)
12 month.................... 20,442 33.37 13,820
IRA accounts................. 2,963 4.84 (82)
1 - 3 year certificates...... 23,299 38.04 (7,818)
4 - 5 year certificates...... 7,752 12.65 (315)
------- ------ ---------
Total $61,252 100.00% $ 4,277
======= ====== =========
</TABLE>
19
<PAGE>
Time Deposits by Rates. The following table sets forth the time deposits
in the Bank classified by nominal rates at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
2 - 3.99%... $ 7,798 $ -- $ --
4 - 5.99%... 40,873 27,830 43,423
6 - 7.99%... 5,034 25,368 14,118
8 - 9.99%... 866 89 --
------- ------- -------
$54,571 $53,287 $57,541
======= ======= =======
</TABLE>
Time Deposit Maturity Schedule. The following table sets forth the amount
and maturities of time deposits at September 30, 1996.
<TABLE>
<CAPTION>
AMOUNT DUE
-----------------------------------------------------
LESS THAN AFTER
RATE ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL
- ---- --------- --------- --------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
2 - 3.99%................................ $ -- $ -- $ -- $ -- $ --
4 - 5.99%................................ 28,411 12,399 2,126 487 43,423
6 - 7.99%................................ 5,884 5,107 826 2,301 14,118
------- ------- ------ ------- -------
$34,295 $17,506 $2,952 $ 2,788 $57,541
======= ======= ====== ======= =======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of September 30,
1996.
<TABLE>
<CAPTION>
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------- ------------
(IN THOUSANDS)
<S> <C>
Three months or less............ $ 101
Over three through six months... 849
Over six through 12 months...... 2,232
Over 12 months.................. 2,337
------
Total........................ $5,519
======
</TABLE>
20
<PAGE>
Savings Deposit Activity. The following table sets forth the savings
activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1994 1995 1996
------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits............................... $34,069 $38,676 $ 30,340
Withdrawals............................ 31,772 42,945 (28,424)
------- ------- --------
Net increase (decrease)
before interest credited........... 2,297 (4,269) 1,916
Interest credited...................... 1,590 1,571 2,361
------- ------- --------
Net increase in savings deposits... $ 3,887 $(2,698) $ 4,277
======= ======= ========
</TABLE>
The Bank expects that a significant amount of the certificates of deposit
expiring within the twelve months following September 30, 1996 will be renewed.
Should such deposits not be renewed, the Bank expects to rely upon its excess
liquidity and/or borrowings from the FHLB of Atlanta as short-term funding
alternatives.
The Bank generally does not offer premiums for deposits and does not offer
interest rates on deposits which exceed the highest rates offered by other
financial institutions in its market area. From time to time the Bank has
instituted promotional programs which resulted in increased rates being paid on
deposits. Management's strategy is to maintain slow and measured growth for the
Bank.
The Bank does not have any comprehensive plan to attract IRA funds.
However, the Bank is considering the benefits of offering new products in order
to attract new deposits.
Borrowings. Total borrowings were $2.84 million at September 30, 1996 and
consisted entirely of advances from the FHLB of Atlanta. This amount consists
of four separate advances, the first for $585,000 taken in 1991 for a 20-year
term with an interest cost of 3.0% utilized to fund an affordable housing
program extended by the Bank. The other three advances were all taken in the
fiscal year ended September 30, 1996 and are short-term advances with a maturity
of one year. These advances were for $1,000,000, $500,000, and $750,000 for a
total of $2,250,000. Each of these advances has a variable interest rate that
was 6.05% at September 30, 1996.
The following table sets forth certain information regarding borrowings by
the Bank at the dates and for the periods indicated:
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED SEPTEMBER 30,
------------------------
1994 1995 1996
------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amounts outstanding at end of period:
Long-term borrowings from FHLB - Atlanta.... $ 585 $ 585 $ 585
Short-term borrowings from FHLB - Atlanta... -- 700 2,250
Mortgage note payable....................... 44 425 40
Weighted average rate paid on:
Long-term borrowings from FHLB - Atlanta.... 3.00% 3.00% 3.00%
Short-term borrowings from FHLB - Atlanta... -- 7.00 6.05
Mortgage note payable....................... 8.00 8.00 8.00
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
------------------------
1994 1995 1996
----- ----- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Maximum amount of borrowings outstanding
at any month end:
Long-term borrowings from FHLB - Atlanta.... $ 585 $ 585 $ 585
Short-term borrowings from FHLB - Atlanta... -- 700 4,150
Mortgage note payable....................... 46 44 42
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
-------------------------
1994 1995 1996
----- ----- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Approximate average borrowings outstanding
with respect to:
Long-term borrowings from FHLB - Atlanta.... $ 585 $ 585 $ 585
Short-term borrowings from FHLB - Atlanta... -- 158 1,172
Mortgage note payable....................... 45 43 41
Approximate weighted average rate paid on:
Long-term borrowings from FHLB - Atlanta.... 3.00% 3.00% 3.00%
Short-term borrowings from FHLB - Atlanta... -- 5.62 5.26
Mortgage note payable....................... 8.00 8.00 8.00
</TABLE>
Savings deposits historically have been the primary source of funds for the
Bank's lending and investment activities and for its general business
activities. The Bank is authorized, however, to use advances from the FHLB of
Atlanta to supplement its supply of lendable funds and to meet deposit
withdrawal requirements. Advances from the FHLB are secured by the Bank's stock
in the FHLB and a portion of the Bank's mortgage loans. See Note 12 of Notes to
Consolidated Financial Statements.
The FHLB of Atlanta functions as a central reserve bank providing credit
for savings institutions and certain other member financial institutions. As a
member, Security Federal is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. See "Regulation of the Bank --
Federal Home Loan Bank System."
SUBSIDIARY ACTIVITIES
As a federally chartered savings bank, Security Federal is permitted to
invest an amount equal to 2% of its assets in subsidiaries with an additional
investment of 1% of assets where such investment serves primarily community,
inner-city, and community development purposes. Under such limitations, as of
September 30, 1996 Security Federal was authorized to invest up to approximately
$2.3 million in the stock of or loans to subsidiaries including the additional
1% investment for community inner-city and community development purposes.
Institutions meeting regulatory capital requirements, which Security Federal
currently does, may invest up to 50% of their regulatory capital in conforming
first mortgage loans to subsidiaries in which they own 10% or more of the
capital stock.
The Bank does not own any service corporations.
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EMPLOYEES
As of September 30, 1996, Security Federal had seventeen full-time and two
part-time employees, none of whom was represented by a collective bargaining
agreement. Security Federal believes that it enjoys good relations with its
personnel.
COMPETITION
Security Federal has experienced substantial and increasing competition
both in attracting and retaining savings deposits and in the making of mortgage
and other loans. Primary competition for savings deposits and other financial
services comes from eight commercial banks and other financial institutions (one
other thrift institution and eight credit unions) located in its primary market
area. In addition to numerous local financial institutions, the services and
attractive rates offered by investment and insurance companies provide
significant competition. The primary factors in competing for loans are
interest rates and loan origination fees and the range of services offered by
various financial institutions. Competition for origination of real estate
loans normally comes from other savings institutions, commercial banks, credit
unions, mortgage companies, investment companies and finance companies.
The Bank's primary competition comes from institutions headquartered in
Tuscaloosa, as well as numerous additional regional commercial banks, which have
branch offices located in the Bank's market area. Many competing financial
institutions have financial resources substantially greater than Security
Federal and offer a wider array of deposits and loan products.
The Bank is a community oriented financial institution serving its market
area with deposit services, residential and commercial real estate loans and
loans secured by savings deposits. Management considers Security Federal's
reputation for financial strength and quality customer service as its major
competitive advantage in attracting and retaining customers in its market area.
While the Bank is subject to competition from other financial institutions which
may have greater financial and marketing resources, management believes Security
Federal benefits by its community orientation.
REGULATION OF THE BANK
GENERAL. As a savings association, Security Federal is subject to
extensive regulation by the OTS. The lending activities and other investments
of the Bank must comply with various federal regulatory requirements. The OTS
will periodically examine the Bank for compliance with various regulatory
requirements. The FDIC also has the authority to conduct examinations of SAIF
members. The Bank must file reports with OTS describing its activities and
financial condition. The Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors. Certain of these
regulatory require ments are referred to below or appear elsewhere herein.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB System,
which consists of twelve district Federal Home Loan Banks subject to supervision
and regulation by the Federal Housing Finance Board ("FHFB"). The FHLBs provide
a central credit facility primarily for member institutions. As a member of the
FHLB of Atlanta, the Bank is required to acquire and hold shares of capital
stock in the FHLB of Atlanta in an amount at least equal to 1% of the aggregate
unpaid principal of its home mortgage loans, home purchase contracts, and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB of Atlanta, whichever is greater. The Bank was in
compliance with this requirement with investment in FHLB of Atlanta stock at
September 30, 1996 of $539,000. The FHLB of Atlanta serves as a reserve or
central bank for its member institutions within its assigned district. 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. Long-term advances may only be made for the purpose of providing funds
for residential housing finance. See "Deposit Activity and Other Sources of
Funds -- Borrowings."
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LIQUIDITY REQUIREMENTS. The Bank is required to maintain average daily
balances of liquid assets (cash, certain time deposits, bankers' acceptances,
highly rated corporate debt and commercial paper, securities of certain
mutual funds, and specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a specified
percentage (currently 5%) of its net withdrawable savings deposits plus short-
term borrowings. The Bank is also required to maintain average daily balances
of short-term liquid assets at a specified percentage (currently 1%) of the
total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average daily liquidity and short-term ratios of the Bank for
the month ended September 30, 1996 were 6.86% and 2.10%, respectively.
QUALIFIED THRIFT LENDER TEST. The Banks are subject to OTS regulations
which use the concept of a Qualified Thrift Lender to determine eligibility for
Federal Home Loan Bank advances and for certain other purposes. To qualify as a
Qualified Thrift Lender, a savings institution must maintain at least 65% of its
"portfolio" assets in Qualified Thrift Investments. Portfolio assets are
defined to include total assets less intangibles, property used by a savings
institution in its business and liquidity investments in an amount not exceeding
20% of assets. Qualified Thrift Investments consist of (i) loans, equity
positions or securities related to domestic, residential real estate or
manufactured housing, (ii) 50% of the dollar amount of residential mortgage
loans subject to sale under certain conditions, and (iii) stock in a Federal
Home Loan Bank or the FHLMC. In addition, subject to a 20% of portfolio assets
limit, savings institutions are able to treat as Qualified Thrift Investments
200% of their investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas. To be
qualified as a Qualified Thrift Lender, a savings institution must maintain its
status as a Qualified Thrift Lender for nine out of every 12 months. Failure to
qualify as a Qualified Thrift Lender results in a number of sanctions, including
the imposition of certain operating restrictions imposed on national banks and a
restriction on obtaining additional advances from the Federal Home Loan Bank
System. Upon failure to qualify as a Qualified Thrift Lender for two years, a
savings institution must convert to a commercial bank in excess of the required
percentage.
At September 30, 1996, approximately 97.28% of the Banks' portfolio assets
were invested in Qualified Thrift Investments.
DIVIDEND LIMITATIONS. Under OTS regulations, the Bank may not pay
dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the Bank at the time of its conversion
to stock form. In addition, savings association subsidiaries of savings and
loan holding companies are required to give the OTS 30 days prior notice of any
proposed declaration of dividends to the holding company.
OTS regulations impose additional limitations on the payment of dividends
and other capital distributions (including stock repurchases and cash mergers)
by the Bank. Under these regulations, a savings association that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed capital
distribution, has total capital (as defined by OTS regulation) that is equal to
or greater than the amount of its fully phased-in capital requirements (a "Tier
1 Association") is generally permitted without OTS approval after notice, to
make capital distributions during a calendar year in the amount equal to the
higher of (i) 75% of its net income over the most recent four-quarter period or
(ii) up to 100% of its net income to date during the calendar year plus an
amount that would reduce by one-half the amount by which its total capital-to-
assets ratio exceeded regulatory capital requirements at the beginning of the
calendar year. A savings association with total capital immediately prior to,
or on a pro forma basis after giving effect to a proposed capital distribution,
equal to or in excess of current minimum capital requirements but less than the
fully phased-in requirements (a "Tier 2 Association") is permitted, after
notice, to make capital distributions without OTS approval of up to 75% of its
net income for the previous four quarters, less dividends already paid for such
period. A savings association that fails to meet current minimum capital
requirements (a "Tier 3 Association") is prohibited from making any capital
contributions without the prior approval of the OTS. Tier 1 Associations that
have been notified by the OTS that they are in need of more than normal
supervision will be treated as either a Tier 2 or Tier 3 Association. At
September 30, 1996, the Bank was a Tier 1 Association.
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<PAGE>
The Bank is prohibited from making any capital distributions if after
making the distribution, it would be undercapitalized as defined in the OTS'
prompt corrective action regulations. See " -- Prompt Corrective Regulatory
Action." After consultation with the FDIC, the OTS may permit a savings
association to repurchase, redeem, retire or otherwise acquire shares or
ownership interests if the repurchase, redemption, retirement or other
acquisition: (i) is made in connection with the issuance of additional shares or
other obligations of the institution in at least an equivalent amount; and (ii)
will reduce the institution's financial obligations or otherwise improve the
institution's financial condition.
In addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to the Company without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions. See " -- Taxation." The
Company intends to make full use of this favorable tax treatment afforded to the
Bank and the Company and does not contemplate use of any earnings of the Bank in
a manner which would limit the Bank's bad debt deduction or create federal tax
liabilities.
REGULATORY CAPITAL REQUIREMENTS. Under OTS regulations, savings
associations must maintain "tangible" capital equal to 1.5% of adjusted total
assets, "core" capital equal to 3% of adjusted total assets and a combination of
core and "supplementary" capital equal to 8% of "risk-weighted" assets. In
addition, the OTS has recently adopted regulations which impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8%, a ratio of Tier 1 capital to risk-weighted assets of less
than 4% or a ratio of Tier 1 capital to adjusted total assets of less than 4%
(or 3% if the institution is rated composite 1 under the OTS examination rating
system). For purposes of these regulations, Tier 1 capital has the same
definitions as core capital. See "-- Prompt Corrective Regulatory Action."
Core capital is defined as common stockholders' equity (including retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying supervisory
goodwill." Core capital is generally reduced by the amount of the savings
association's intangible assets for which no market exists. Limited exceptions
to the rules requiring the deduction of intangible assets are provided for
mortgage servicing rights, purchased credit card relationships and qualifying
supervisory goodwill held by an eligible savings association. Tangible capital
is given the same definition as core capital but does not include qualifying
supervisory goodwill and is reduced by the amount of all the savings
association's intangible assets with only a limited exception for purchased
mortgage servicing rights and purchased credit card relationships.
Both core and tangible capital are further reduced by an amount equal to
savings association's debt and equity investments in subsidiaries engaged in
activities not permissible to national banks other than subsidiaries engaged in
activities undertaken as agent for customers or in mortgage banking activities
and subsidiary depository institutions or their holding companies. As of
September 30, 1996, the Bank had no investments in, or extensions of credit to,
subsidiaries engaged in activities not permitted to national banks.
"Adjusted total assets" are a savings association's total assets as
determined under generally accepted accounting principles ("GAAP"), increased by
certain goodwill amounts and by a pro-rated portion of the assets of
subsidiaries in which the savings association holds a minority interest and
which are not engaged in activities for which the capital rules require the
savings association to net its debt and equity investments in such subsidiaries
against capital, as well as a pro-rated portion of the assets of other
subsidiaries for which netting is not fully required under phase-in rules.
Adjusted total assets are reduced by the amount of assets that have been
deducted from capital, the portion of savings association's investments in
subsidiaries that must be netted against capital under the capital rules and,
for purposes of the core capital requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital requirement, a
savings association is allowed to use both core capital and supplementary
capital, provided the amount of supplementary capital used does not exceed the
savings association's core capital. Supplementary capital is defined to include
certain preferred stock issues, nonwithdrawable accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital instruments and a portion of the savings association's general
loss allowances. Total core
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<PAGE>
and supplementary capital are reduced by the amount of capital instruments held
by other depository institutions pursuant to reciprocal arrangements and, after
July 1, 1990, by an increasing percentage of the savings association's high
loan-to-value ratio land loans and non-residential construction loans, and
certain equity investments not otherwise deducted from core and tangible
capital.
The risk-based capital requirement is measured against risk-weighted
assets, which equal the sum of each on-balance-sheet asset and the credit-
equivalent amount of each off-balance-sheet item after being multiplied by an
assigned risk weight. Under the OTS risk-weighting system, cash and securities
backed by the full faith and credit of the U.S. government are given a 0% risk
weight. Mortgage-backed securities that qualify under the Secondary Mortgage
Enhancement Act, including those issued, or fully guaranteed as to principal and
interest, by the FNMA or FHLMC, are assigned a 20% risk weight. Single-family
first mortgages not more than 90 days past due with loan-to-value ratios under
80%, multi-family mortgages (maximum 36 dwelling units) with loan-to-value
ratios under 80% and certain qualifying loans for the construction of one- to
four-family residences pre-sold to home purchasers are assigned a risk weight of
50%. Consumer loans, non-qualifying residential construction loans and
commercial real estate loans, repossessed assets and assets more than 90 days
past due, as well as all other assets not specifically categorized, are assigned
a risk weight of 100%. The portion of equity investments not deducted from core
or supplementary capital is assigned a 100% risk-weight. OTS capital
regulations require savings institutions to maintain minimum total capital,
consisting of core capital plus supplemental capital, equal to 8% of risk-
weighted assets.
The table below presents the Bank's capital position at September 30, 1996,
relative to its various minimum regulatory capital requirements.
<TABLE>
<CAPTION>
PERCENT
OF
AMOUNT ASSETS(1)
---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Tangible capital................. $7,895 10.31%
Tangible capital requirement..... 1,149 1.50
------ -----
Excess......................... $6,746 8.81%
====== =====
Core capital..................... $7,895 10.31%
Core capital requirement......... 2,299 3.00
------ -----
Excess......................... $5,596 7.31%
====== =====
Total regulatory capital......... $8,159 20.41%
Risk-based capital requirement... 3,198 8.00
------ -----
Excess......................... $4,961 12.41%
====== =====
- -------------------
</TABLE>
(1) Based upon adjusted total assets of $76.6 million for purposes of the
tangible and core capital requirements, and risk-weighted assets of $39.98
million for purposes of the risk-weighted capital requirements. See Note
16 of Notes to Consolidated Financial Statements.
The OTS has proposed an amendment to its capital regulations establishing a
minimum core capital ratio of 3% for institutions rated CAMEL 1 under the OTS
examination rating system. For all other institutions, the minimum core capital
ratio will be from 4% to 5%. In determining the amount of additional core
capital, the OTS will assess both the quality of risk management systems and the
level of overall risk in each individual institution through the supervisory
process on a case-by-case basis.
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<PAGE>
The risk-based capital standards of the OTS requires savings institutions
with more than a "normal" level of interest rate risk to maintain additional
total capital. An institution's interest rate risk will be measured in terms of
the sensitivity of its "net portfolio value" to changes in interest rates. Net
portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. A savings institution
will be considered to have a "normal" level of interest rate risk exposure if
the decline in its net portfolio value after an immediate 200 basis point
increase or decrease in market interest rates (whichever results in the greater
decline) is less than two percent of the current estimated economic value of its
assets. An institution with a greater than normal interest rate risk will be
required to deduct from total capital, for purposes of calculating its risk-
based capital requirement, an amount (the "interest rate risk component") equal
to one-half the difference between the institution's measured interest rate risk
and the normal level of interest rate risk, multiplied by the economic value of
its total assets.
The OTS calculates the sensitivity of an institution's net portfolio value
based on data submitted by the institution in a schedule to its quarterly Thrift
Financial Report and using the interest rate risk measurement model adopted by
the OTS. The amount of the interest rate risk component, if any, to be deducted
from an institution's total capital will be based on the institution's Thrift
Financial Report filed two quarters earlier. Savings institutions with less
than $300 million in assets and a risk-based capital ratio above 12% are
generally exempt from filing the interest rate risk schedule with their Thrift
Financial Reports. However, the OTS will require any exempt institution that it
determines may have a high level of interest rate risk exposure to file such
schedule on a quarterly basis and may be subject to an additional capital
requirement based upon its level of interest rate risk as compared to its peers.
Due to its size and risk-based capital level, the Bank is exempt from the
interest rate risk component.
In addition to requiring generally applicable capital standards for savings
institutions, the Director of the OTS is authorized to establish the minimum
level of capital for an institution at such amount or at such ratio of capital-
to-assets as the Director determines to be necessary or appropriate for such
institution in light of the particular circumstances of the institution. The
Director of the OTS may treat the failure of any institution to maintain capital
at or above such level as an unsafe or unsound practice and may issue a
directive requiring any institution which fails to maintain capital at or above
the minimum level required by the Director to submit and adhere to a plan for
increasing capital. Such an order may be enforced in the same manner as an
order issued by the FDIC.
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA"), the federal banking regulators are
required to take prompt corrective action if an insured depository institution
fails to satisfy certain minimum capital requirements, including a leverage
limit, a risk-based capital requirement and any other measure of capital deemed
appropriate by the federal banking regulators for measuring the capital adequacy
of an insured depository institution. All institutions, regardless of their
capital levels, are restricted from making any capital distribution or paying
any management fees if the institution would thereafter fail to satisfy the
minimum levels for any of its capital requirements. An institution that fails
to meet the minimum level for any relevant capital measure (an "undercapitalized
institution") may be: (i) subject to increased monitoring by the appropriate
federal banking regulator; (ii) required to submit an acceptable capital
restoration plan within 45 days; (iii) subject to asset growth limits; and (iv)
required to obtain prior regulatory approval for acquisitions, branching and new
lines of businesses. The capital restoration plan must include a guarantee by
the institution's holding company that the institution will comply with the plan
until it has been adequately capitalized on average for four consecutive
quarters, under which the holding company would be liable up to the lesser of 5%
of the institution's total assets or the amount necessary to bring the
institution into capital compliance as of the date it failed to comply with its
capital restoration plan. A "significantly undercapitalized" institution, as
well as any undercapitalized institution that did not submit an acceptable
capital restoration plan, may be subject to regulatory demands for
recapitalization, broader application of restrictions on transactions with
affiliates, limitations on interest rates paid on deposits, asset growth and
other activities, possible replacement of directors and officers, and
restrictions on capital distributions by any bank holding company controlling
the institution. Any company controlling the institution could also be required
to divest the institution or the institution could be required to divest
subsidiaries.
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<PAGE>
The senior executive officers of a significantly undercapitalized institution
may not receive bonuses or increases in compensation without prior approval of
the OTS and the institution is prohibited from making payments of principal or
interest on its subordinated debt, with certain exceptions. In their discretion,
the federal banking regulators may also impose the foregoing sanctions on an
undercapitalized institution if the regulators determine that such actions are
necessary to carry out the purposes of the prompt corrective action provisions.
If an institution's ratio of tangible capital to total assets falls below a
"critical capital level," the institution will be subject to conservatorship or
receivership within 90 days unless periodic determinations are made that
forbearance from such action would better protect the deposit insurance fund.
Unless appropriate findings and certifications are made by the appropriate
federal bank regulatory agencies, a critically undercapitalized institution must
be placed in receivership if it remains critically undercapitalized on average
during the calendar quarter beginning 270 days after the date it became
critically undercapitalized.
Federal banking regulators, including the OTS, have adopted regulations
implementing the prompt corrective action provisions of FDICIA. Under these
regulations, the federal banking regulators will measure a depository
institution's capital adequacy on the basis of the institution's total risk-
based capital ratio (the ratio of its total capital to risk-weighted assets),
Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted
assets) and leverage ratio (the ratio of its core capital to adjusted total
assets). A savings association that is not subject to an order or written
directive to meet or maintain a specific capital level will be deemed "well
capitalized" if it also has: (i) a total risk-based capital ratio of 10% or
greater; (ii) a Tier 1 risk-based capital ratio of 6% or greater; and (iii) a
leverage ratio of 5% or greater. An "adequately capitalized" savings
association is a savings association that does not meet the definition of well
capitalized and has: (i) a total risk-based capital ratio of 8% or greater; (ii)
a Tier 1 capital risk-based ratio of 4% or greater; and (iii) a leverage ratio
of 4% or greater (or 3% or greater if the savings association has a composite 1
CAMEL rating). An "undercapitalized institution" is a savings association that
has (i) a total risk-based capital ratio less than 8%; or (ii) a Tier 1 risk-
based capital ratio of less than 4%; or (iii) a leverage ratio of less than 4%
(or 3% if the association has a composite 1 CAMEL rating). A "significantly
undercapitalized" institution is defined as a savings association that has: (i)
a total risk-based capital ratio of less than 6%; or (ii) a Tier 1 risk-based
capital ratio of less than 3%; or (iii) a leverage ratio of less than 3%. A
"critically undercapitalized" savings association is defined as a savings
association that has a ratio of "tangible equity" to total assets of less than
2%. Tangible equity is defined as core capital plus cumulative perpetual
preferred stock (and related surplus) less all intangibles other than qualifying
supervisory goodwill and certain purchased mortgage servicing rights. The OTS
may reclassify a well capitalized savings association as adequately capitalized
and may require an adequately capitalized or undercapitalized association to
comply with the supervisory actions applicable to associations in the next lower
capital category if the OTS determines, after notice and an opportunity for a
hearing, that the savings association is in an unsafe or unsound condition or
that the association has received and not corrected a less-than-satisfactory
rating for any CAMEL rating category. At September 30, 1996, the Bank was "well
capitalized" under OTS regulations.
SAFETY AND SOUNDNESS GUIDELINES. Under FDICIA, as amended by the Riegle
Community Development and Regulatory Improvement Act of 1994 (the "CDRI Act"),
each federal banking agency is required to establish safety and soundness
standards for institutions under its authority. On July 10, 1995, the Federal
banking agencies, including the OTS, released Interagency Guidelines
Establishing Standards for Safety and Soundness and published a final rule
establishing deadlines for submission and review of safety and soundness
compliance plans. The final rule and the guidelines become effective on August
9, 1995. The guidelines require savings institutions to maintain internal
controls and information systems and internal audit systems that are appropriate
for the size, nature and scope of the institution's business. The guidelines
also establish certain basic standards for loan documentation, credit
underwriting, interest rate risk exposure, and asset growth. The guidelines
further provide that savings institutions should maintain safeguards to prevent
the payment of compensation, fees and benefits that are excessive or that could
lead to material financial loss, and should take into account factors such as
comparable compensation practices at comparable institutions. If the OTS
determines that a savings institution is not in compliance with the safety and
soundness guidelines, it may require the institution to submit an acceptable
plan to achieve compliance with the guidelines. A savings institution must
submit an acceptable compliance plan to the OTS within 30 days of receipt of a
request for such a plan. Failure to submit or implement a compliance plan may
subject the institution to
28
<PAGE>
regulatory sanctions. Management believes that the Bank already meets
substantially all the standards adopted in the interagency guidelines, and
therefore does not believe that implementation of these regulatory standards
will materially affect the Bank's operations.
Additionally under FDICIA, as amended by the CDRI Act, the federal banking
agencies are required to establish standards relating to the asset quality and
earnings that the agencies determine to be appropriate. On July 10, 1995, the
Federal banking agencies, including the OTS, issued proposed guidelines relating
to asset quality and earnings. Under the proposed guidelines, a savings
institution should maintain systems, commensurate with its size and the nature
and scope of its operations, to identify problem assets and prevent
deterioration in those assets as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital and reserves.
Management believes that the asset quality and earnings standards, in the form
proposed by the banking agencies, would not have a material effect on the Bank's
operations.
DEPOSIT INSURANCE. The Bank is required to pay assessments based on a
percent of its insured deposits to the FDIC for insurance of its deposits by the
SAIF. Under the Federal Deposit Insurance Act, the FDIC is required to set
semi-annual assessments for SAIF-insured institutions to maintain the designated
reserve ratio of the SAIF at 1.25% of estimated insured deposits or at a higher
percentage of estimated insured deposits that the FDIC determines to be
justified for that year by circumstances raising a significant risk of
substantial future losses to the SAIF.
Under the risk-based deposit insurance assessment system adopted by the
FDIC, the assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC, which is
determined by the institution's capital level and supervisory evaluations.
Based on the data reported to regulators for the date closest to the last day of
the seventh month preceding the semi-annual assessment period, institutions are
assigned to one of three capital groups -- well capitalized, adequately
capitalized or undercapitalized --using the same percentage criteria as under
the prompt corrective action regulations. See " -- Prompt Corrective Regulatory
Action." Within each capital group, institutions are assigned to one of three
subgroups on the basis of supervisory evaluations by the institution's primary
supervisory authority and such other information as the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. Subgroup A consists of financially sound institutions
with only a few minor weaknesses. Subgroup B consists of institutions that
demonstrate weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk of loss to the deposit
insurance fund. Subgroup C consists of institutions that pose a substantial
probability of loss to the deposit insurance fund unless effective corrective
action is taken. The assessment rate for SAIF-insured institutions had ranged
from 0.23% of deposits for well capitalized institutions in Subgroup A to 0.31%
of deposits for undercapitalized institutions in Subgroup C while assessments
for over 90% of the BIF members had been the statutory minimum of $2,000.
Recently enacted legislation provided for a one-time assessment of 65.7 basis
points of insured deposits as of March 31, 1995, that fully capitalized the SAIF
and had the effect of reducing future SAIF assessments. Accordingly, although
the special assessment resulted in one-time charges to the Bank totalling
approximately $381,113 pre-tax, the recapitalization of the SAIF had the effect
of reducing the Bank's future deposit insurance premiums to the SAIF. Under the
recently enacted legislation, both BIF and SAIF members will be assessed an
amount for the Financing Corporation ("FICO") Bond payments. BIF members will
be assessed approximately 1.3 basis points while the SAIF rate will be
approximately 6.4 basis points until January 1, 2000. At that time, BIF and
SAIF members will begin pro rata sharing of the payment at an expected rate of
2.43 basis points.
The FDIC has proposed a rule that would lower the regular semi-annual SAIF
assessment rates by establishing a base assessment rate schedule ranging from 4
to 31 basis points effective October 1, 1996. The rule widens the range between
the lowest and highest assessment rates among healthy and troubled institutions
with the intent of creating an incentive for savings institutions to control
risk-taking behavior. The rule also prevents the FDIC from collecting more funds
than needed to maintain the SAIF's capitalization at 1.25% of insured deposits.
Under law, the FDIC may not impose semi-annual assessments which would
cause it to collect more funds than are necessary to maintain the SAIF's
designated reserve ratio. As a result, the base assessment rate schedule
29
<PAGE>
will be immediately modified in two ways. The first modification, applying to
institutions such as certain BIF-members and SAIF-member banks that do not pay
assessments to the FICO, reduces the base assessment rate by 4 basis points for
a range from 0 to 27 basis points. The second modification sets a special
interim rate schedule from 18 to 27 basis points for the period from October 1,
1996 to December 31, 1996 for SAIF-member savings associations that pay
assessments to the FICO. After December 31, 1996, the special interim rates
would terminate and these institutions would also pay the base assessment rate
as reduced by the 4 basis point adjustment. Any excess funds collected by the
FDIC in the last six months of 1996 would be refunded or credited, with
interest, to the institution.
SAIF members are generally prohibited from converting to the status of BIF
members, or merging with or transferring assets to a BIF member before the date
on which the SAIF first meets or exceeds the designated reserve ratio. The
FDIC, however, may approve such a transaction in the case of a SAIF member in
default or if the transaction involves an insubstantial portion of the deposits
of each participant. In addition, mergers, transfers of assets and assumptions
of liabilities may be approved by the appropriate bank regulator so long as
deposit insurance premiums continue to be paid to the SAIF for deposits
attributable to the SAIF members plus an adjustment for the annual rate of
growth of deposits in the surviving bank without regard to subsequent
acquisitions. Each depository institution participating in a SAIF-to-BIF
conversion transaction is required to pay an exit fee to SAIF and an entrance
fee to BIF. A savings association that adopts a commercial bank or savings bank
charter prior to the date on which the SAIF first meets or exceeds the
designated reserve ratio must remain a SAIF member.
The FDIC has adopted a regulation which provides that any insured
depository institution with a ratio of Tier 1 capital to total assets of less
than 2% will be deemed to be operating in an unsafe or unsound condition, which
would constitute grounds for the initiation of termination of deposit insurance
proceedings. The FDIC, however, would not initiate termination of insurance
proceedings if the depository institution has entered into and is in compliance
with a written agreement with its primary regulator, and the FDIC is a party to
the agreement, to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority interests in consolidated subsidiaries, minus all intangible assets
other than mortgage servicing rights and qualifying supervisory goodwill
eligible for inclusion in core capital under OTS regulations and minus
identified losses and investments in certain securities subsidiaries. Insured
depository institutions with Tier 1 capital equal to or greater than 2% of total
assets may also be deemed to be operating in an unsafe or unsound condition
notwithstanding such capital level. The regulation further provides that in
considering applications that must be submitted to it by savings associations,
the FDIC will take into account whether the savings association is meeting with
the Tier 1 capital requirement for state non-member banks of 4% of total assets
for all but the most highly rated state non-member banks.
FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve
Board, all FDIC-insured depository institutions must maintain average daily
reserves against their net transaction accounts. This percentage is subject to
adjustment by the Federal Reserve Board. No reserves are required to be
maintained on the first $4.4 million of transaction accounts, reserves equal to
3% must be maintained on the next $49.3 million of transaction accounts, and a
reserve of 10% must be maintained against all remaining transaction accounts.
Because required reserves must be maintained in the form of vault cash or in a
non-interest bearing account at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce the amount of the institution's interest-
earning assets. As of September 30, 1996, the Bank met its reserve
requirements.
TRANSACTIONS WITH AFFILIATES. Transactions between savings associations
and any affiliate are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings association is any company or entity which
controls, is controlled by or is under common control with the savings
association. In a holding company context, the parent holding company of a
savings association (such as the Company) and any companies which are controlled
by such parent holding company are affiliates of the savings association.
Generally, Sections 23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and contain an aggregate
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limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, no savings association may (i) loan or otherwise extend
credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, or (ii) purchase or
invest in any stocks, bonds, debentures, notes or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the savings
association.
Savings associations are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's
Regulation O thereunder on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, executive officer or
greater than 10% stockholder of a savings association and certain affiliated
interests of such persons, may not exceed, together with all other outstanding
loans to such person and affiliated interests, the association's loans to one
borrower limit (generally equal to 15% of the institution's unimpaired capital
and surplus) and all loans to such persons may not exceed the institution's
unimpaired capital and unimpaired surplus. Section 22(h) also prohibits loans,
above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10% stockholders of a savings
association, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the association with any
"interested" director not participating in the voting. Regulation O prescribes
the loan amount (which includes all other outstanding loans to such person), as
to which such prior board of director approval is required, as being the greater
of $25,000 or 5% of capital and surplus (up to $500,000). Further, Section
22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also prohibits a depository
institution from paying the overdrafts of any of its executive officers or
directors.
Savings associations are further subject to the requirements and
restrictions of Section 22(g) of the Federal Reserve Act on loans to executive
officers and the restrictions of 12 U.S.C. (S) 1972 on certain tying
arrangements and extensions of credit by correspondent banks. Section 22(g) of
the Federal Reserve Act requires that loans to executive officers of depository
institutions not be made on terms more favorable than those afforded to other
borrowers, and imposes reporting requirements for any additional restrictions on
the type, amount and terms of credits to such officers. Section 1972 (i)
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions, and (ii)
prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
REGULATION OF THE COMPANY
GENERAL. The Company is a unitary savings and loan holding company within
the meaning of the Home Owners' Loan Act. As such, the Company is registered
with the OTS and subject to OTS regulations, examinations, supervision and
reporting requirements.
ACTIVITIES RESTRICTIONS. The Board of Directors of the Company presently
intends to operate the Company as a unitary savings and loan holding company.
There are generally no restrictions on the activities of a unitary savings and
loan holding company. However, if the Director of OTS determines that there is
reasonable cause to believe that the continuation by a savings and loan holding
company of an activity constitutes a serious risk to the financial safety,
soundness, or stability of its subsidiary savings association, the Director of
OTS may impose such restrictions as deemed necessary to address such risk
including limiting (i) payment of dividends by the savings association, (ii)
transactions between the savings association and its affiliates, and (iii) any
activities of the savings
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<PAGE>
association that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings association.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if the savings association subsidiary of
such a holding company fails to meet the QTL Test, then such unitary holding
company shall also presently become subject to the activities restrictions
applicable to multiple holding companies and unless the savings association
requalifies as a QTL within one year thereafter, register as, and become subject
to, the restrictions applicable to a bank holding company.
If the Company were to acquire control of another savings association,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
Test, the activities of the Company and any of its subsidiaries (other than the
Bank or other subsidiary savings institutions) would thereafter be subject to
further restrictions. The Home Owners' Loan Act, as amended by FIRREA, provides
that, among other things, no multiple savings and loan holding company or
subsidiary thereof which is not a savings association shall commence or continue
for a limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity, upon prior notice to, and
no objection by the OTS, other than (i) furnishing or performing management
services for a subsidiary savings association, (ii) conducting an insurance
agency or escrow business, (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings institution, (iv) holding or managing
properties used or occupied by a subsidiary savings institution, (v) acting as
trustee under deeds of trust, (vi) those activities previously directly
authorized by the Federal Savings and Loan Insurance Corporation 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 Director of OTS by regulation prohibits or limits
such activities for savings and loan holding companies. Those activities
described in (vii) above must also be approved by the Director of OTS prior to
being engaged in by a multiple holding company.
RESTRICTIONS ON ACQUISITIONS. Savings and loan holding companies are
prohibited from acquiring, without prior approval of the Director of OTS, (i)
control of any other savings association or savings and loan holding company or
substantially all the assets thereof or (ii) more than 5% of the voting shares
of a savings association or holding company thereof which is not a subsidiary.
Under certain circumstances, a registered savings and loan holding company is
permitted to acquire, with the approval of the Director of OTS, up to 15% of the
voting shares of an under-capitalized savings association pursuant to a
"qualified stock issuance" without that savings association being deemed
controlled by the holding company. In order for the shares acquired to
constitute a "qualified stock issuance," the shares must consist of previously
unissued stock or treasury shares, the shares must be acquired for cash, the
savings and loan holding company's other subsidiaries must have tangible capital
of at least 6-1/2% of total assets, there must not be more than one common
director or officer between the savings and loan holding company and the issuing
savings association and transactions between the savings association and the
savings and loan holding company and any of its affiliates must conform to
Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval
of the Director of OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy or otherwise more than 25% of
such company's stock, may also acquire control of any savings association, other
than a subsidiary savings association, or of any other savings and loan holding
company.
The Director of OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state if: (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the association to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
association pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the statutes of the state in which the
association to be acquired is located specifically permit institutions to be
acquired by state-chartered associations or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
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The OTS has recently amended its regulations to permit federal associations
to branch in any state or states of the United States and its territories.
Except in supervisory cases or when interstate branching is otherwise permitted
by state law or other statutory provision, a federal association may not
establish an out-of-state branch unless (i) the federal association qualifies as
a "domestic building and loan association" under (S)7701(a)(19) of the Internal
Revenue Code of 1986, as amended (the "Code") and the total assets attributable
to all branches of the association in the state would qualify such branches
taken as a whole for treatment as a domestic building and loan association and
(ii) such branch would not result in (a) formation of a prohibited multi-state
multiple savings and loan holding company or (b) a violation of certain
statutory restrictions on branching by savings association subsidiaries of
banking holding companies. Federal associations generally may not establish new
branches unless the association meets or exceeds minimum regulatory capital
requirements. The OTS will also consider the association's record of compliance
with the Community Reinvestment Act of 1977 in connection with any branch
application.
The Bank Holding Company Act of 1956 authorizes the Federal Reserve Board
to approve an application by a bank holding company to acquire control of any
savings association. Pursuant to rules promulgated by the Federal Reserve
Board, owning, controlling or operating a savings association is a permissible
activity for bank holding companies if the savings association engages only in
deposit-taking activities and lending and other activities that are permissible
for bank holding companies. In approving such an application, the Federal
Reserve Board may not impose any restriction on transactions between the savings
association and its holding company affiliates except as required by Sections
23A and 23B of the Federal Reserve Act.
A bank holding company that controls a savings association may merge or
consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings association plus an annual deposit growth
increment. In addition, the transaction must comply with the restrictions on
interstate acquisitions of commercial banks under the Bank Holding Company Act
of 1956.
TAXATION
GENERAL. The Company and the Bank file separate federal income tax returns
and state excise tax returns on a calendar year basis.
FEDERAL INCOME TAXATION. Thrift institutions are subject to the provisions
of the Code in the same general manner as other corporations. However,
institutions such as Security Federal which meet certain definitional tests and
other conditions prescribed by the Code may benefit from certain favorable
provisions regarding their deductions from taxable income for annual additions
to their bad debt reserve. For purposes of the bad debt reserve deduction,
loans are separated into "qualifying real property loans," which generally are
loans secured by interests in certain real property, and nonqualifying loans,
which are all other loans. The bad debt reserve deduction with respect to
nonqualifying loans must be based on actual loss experience. For tax years
beginning before January 1, 1996, the amount of the bad debt reserve deduction
with respect to qualifying real property loans may be based upon actual loss
experience (the "experience method") or a percentage of taxable income
determined without regard to such deduction (the "percentage of taxable income
method").
Legislation that is effective for tax years beginning after December 31,
1995 requires institutions to recapture into taxable income over a six taxable
year period the portion of the tax loan reserve that exceeds the pre-1988 tax
loan loss reserve. The Bank will no longer be allowed to use the reserve method
for tax loan loss provisions, but would be allowed to use the experience method
of accounting for bad debts. There will be no future effect on net
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<PAGE>
income from the recapture because the taxes on these bad debts reserves has
already been accrued as a deferred tax liability.
The legislation provides for a suspension of this recapture if the
institution meets the "residential loan requirement." This requirement is met
if the principal amount of residential loans that the institution originates
during its first taxable year after December 31, 1995, exceeds the average of
the principal amounts of residential loans made by the institution during the
six most recent taxable years beginning before January 1, 1996. If the
requirement is met, the recapture is suspended until a taxable year beginning
December 31, 1997, or until the residential loan requirement is not met in a
subsequent year. Security Federal expects to meet this requirement for the
taxable year ended December 31, 1996.
Security Federal historically elected to use the percentage of taxable
income method. Under the percentage of taxable income method, the bad debt
reserve deduction for qualifying real property loans is computed as a
percentage, which Congress has reduced from as much as 60% in prior years to 8%
of taxable income, with certain adjustments, effective for taxable years
beginning after 1986. The allowable deduction under the percentage of taxable
income method (the "percentage bad debt deduction") for taxable years beginning
before 1987 was scaled downward in the event that less than 82% of the total
dollar amount of the assets of an association were within certain designated
categories. When the percentage method bad debt deduction was lowered to 8%, the
82% qualifying assets requirement was lowered to 60%. For all taxable years,
there is no deduction in the event that less than 60% of the total dollar amount
of the assets of an association falls within such categories. Moreover, in such
case, Security Federal could be required to recapture, generally over a period
of up to four years, their existing bad debt reserve. As of September 30, 1996,
more than the required amount of the Bank's total assets fell within such
category.
The bad debt deduction under the percentage of taxable income method is
subject to certain limitations. First, the amount added to the reserve for
losses on qualifying real property loans may not exceed the amount necessary to
increase the balance of such reserve at the close of the taxable year to 6% of
such loans outstanding at the end of the taxable year. Further, the addition to
the reserve for losses on qualifying real property loans cannot exceed the
amount which, when added to that year's addition to the bad debt reserve for
losses on nonqualifying loans, equals the amount by which 12% of total deposits
or withdrawable accounts of depositors at year-end exceeds the sum of surplus,
undivided profits and reserves at the beginning of the year. Finally, the
percentage bad debt deduction under the percentage of taxable income method is
reduced by the deduction for losses on nonqualifying loans.
Earnings appropriated to an institution's bad debt reserve and claimed as a
tax deduction are not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount is included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
Security Federal's federal corporate income tax returns have not been
audited in the last five years.
STATE INCOME TAXATION. The State of Alabama imposes a 6.0% excise tax on
the earnings of financial institutions such as Security Federal. The 6.0%
excise tax also would apply to the Company. In addition to the excise taxes,
the State of Alabama imposes an annual state franchise tax for domestic and
foreign corporations. A domestic corporation, including a federally chartered
stock savings bank domiciled in Alabama, is assessed a domestic franchise tax of
approximately 1.0% based on the par value of its common stock. Foreign
corporations, such as the Company which is incorporated in Delaware, are
assessed a foreign franchise tax of 0.3% based on a total of capital (as defined
by statute) deemed to be employed in the State of Alabama. The foreign
corporation's investment in the capital of an Alabama corporation is excluded
from the taxable base. The Company is also subject to the Delaware franchise
tax.
See Note 6 of Notes to Consolidated Financial Statements.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following information is supplied with respect to executive officers of
the Company. There are no arrangements or understandings pursuant to which any
of the executive officers were selected as an officer, and no executive officer
is related to any other director or officer of the Company by blood, marriage or
adoption.
Name and Age* Position
------------- --------
John F. Harvard, 52 President and Chief Operating Officer
and Secretary and Treasurer
Marlin D. Moore, Jr., 59 Chairman of the Board and Chief
Executive Officer
T. Gary Fitts, 62 Vice President
- --------------------
* Age at September 30, 1996.
The principal occupation of each executive officer is set forth below.
JOHN F. HARVARD has been President and Chief Operating Officer of the
Company and the Bank since December 1995, and has served as the Bank's Secretary
and Treasurer since joining the Bank in 1972. Prior to December 1995, Mr.
Harvard also served as Managing Officer of the Company and the Bank. Mr.
Harvard is a member of the Chamber of Commerce of West Alabama, the Homebuilders
Association of Tuscaloosa and the Tuscaloosa Board of Realtors. He also serves
as a director for the Alabama League of Savings Institutions.
MARLIN D. MOORE, JR. is co-owner of Pritchett-Moore, Inc., a real estate
and insurance company, in Tuscaloosa, Alabama. Mr. Moore has been Chairman of
the Board and Chief Executive Officer of the Company and the Bank since December
1995, and previously had served as Vice President of the Bank. Mr. Moore has
served on the Board of the Industrial Development Authority of Tuscaloosa, the
Chamber of Commerce of West Alabama and the President's Cabinet at the
University of Alabama. He also serves as a member of the advisory board of
Amsouth Bank and as a director of the Birmingham Board of Directors of the
Federal Reserve Bank of Atlanta.
T. GARY FITTS is President of Fitts Agency, Inc. in Tuscaloosa, Alabama, an
insurance agency. Mr. Fitts has served as Vice President of the Bank since
1990. He is a member and past president of the Tuscaloosa Rotary Club and a
member of the Chamber of Commerce of West Alabama. He also serves as the State
National Director for Alabama Independent Insurance Agents and as an advisory
director of the Tuscaloosa Board of Directors of Compass Bank. As Vice
President of the Bank, Mr. Fitts serves as a member of the Bank's executive
committee and would be available to exercise the authority of the President, if
the President were unable to serve. Mr. Fitts is not separately compensated for
his services as Vice President of the Bank.
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<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The following table sets forth the location and certain additional
information regarding the Bank's offices at September 30, 1996.
<TABLE>
<CAPTION>
Year Owned or Square
Opened Leased Footage Net Book Value
------ -------- ------- --------------
<S> <C> <C> <C> <C>
MAIN OFFICE:
2301 University Boulevard
Tuscaloosa, Alabama 1984 Owned 7,700 $1.09 million
</TABLE>
See Note 5 of Notes to Consolidated Financial Statements.
Intrieve, Inc. (formerly Savings and Loan Data Center), Cincinnati, Ohio,
performs data processing and record keeping for Security Federal.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Although Security Federal, from time to time, is involved in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which Security Federal is a party or to which any of its property
is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------
At the present time, there is no established public trading market in which
shares of the Common Stock are regularly traded, nor are there any uniformly
quoted prices for such shares. There were 671,469 shares of the Common Stock
outstanding and approximately 107 holders of record of the Common Stock (not
including shares held in "street name") as of September 30, 1996. The last
known sale of the Common Stock was on October 10, 1996 at $18.25 per share. On
November 6, 1995, the Company paid a special dividend of $.20 per share. On
March 31, 1996 and on September 30, 1996, the Company paid special dividends of
$.30 per share. On December 27, 1996, the Company paid a special cash
distribution, substantially all of which is expected to qualify as a return of
capital, in the amount of $3.00 per share.
The Board of Directors of the Company periodically reviews its dividend
policy in light of the performance of the Company and the Bank. Any change in
the Company's dividend policy, as determined by the Board of Directors, will
depend on the Company's debt and equity structure, earnings, regulatory capital
requirements, and other factors, including economic conditions, regulatory
restrictions, and tax considerations.
Security Federal may not declare or pay a cash dividend on or repurchase
any of its stock if the effect would be to reduce retained earnings of the Bank
below the capital requirements of the OTS or the amount then required for the
liquidation account that was established by the Bank at the time of the mutual-
to-stock conversion for the benefit of certain depositors at that time. Federal
regulations adopted by the OTS impose certain limitations on the payment of
dividends and other capital distributions, including stock repurchases by the
Bank. OTS regulations utilize a tiered approach which permits various levels of
distributions based primarily upon an institution's capital level and net
income. Based upon current OTS regulations, the Bank may make capital
distributions during a calendar year up to the greater of (1) 100% of its net
earnings to date during the calendar year plus an amount equal
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<PAGE>
to one-half of the amount by which its total capital-to-assets ratio exceeded
its fully phased-in capital-to-assets ratio at the beginning of the calendar
year or (2) 75% of its net income during the most recent four quarter period. At
September 30, 1996, before payment of the special distribution described above,
approximately $3.01 million was available for payment of dividends from the Bank
to the Company under the above mentioned OTS restrictions. Capital distributions
by the Bank are further subject to a 30-day advance written notice to the OTS.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------------------------------------------------------------------
GENERAL
The earnings of Security Federal depend primarily on its level of net
interest income, which is the difference between interest earned on Security
Federal's interest-earning assets, consisting primarily of mortgage loans,
interest-bearing deposits at other institutions, investment securities and other
investments, and the interest paid on interest-bearing liabilities which have
consisted primarily of savings deposits. Net interest income is a function of
Security Federal's interest rate spread, which is the difference between the
average yield on interest-earning assets and the average rate paid on interest-
bearing liabilities, as well as a function of the average balance of interest-
earning assets as compared to interest-bearing liabilities. Security Federal's
earnings are also affected by its level of non-interest income including
primarily gains on the sale of investments and service fees and charges, and
non-interest expense, including primarily compensation and employee benefits,
occupancy and equipment expenses and SAIF deposit insurance premiums. Earnings
of Security Federal also are affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, which events are
beyond the control of Security Federal. See "Recent Development" below.
ASSET/LIABILITY MANAGEMENT
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is interest rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities. A gap is considered negative when the
amount of interest rate sensitive liabilities exceeds the amount of interest
rate sensitive assets. During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income while a positive gap would
tend to positively affect net interest income. Similarly, during a period of
falling interest rates, a negative gap would tend to positively affect net
interest income while a positive gap would tend to adversely affect net interest
income.
Security Federal's strategy in recent years has been to reduce its exposure
to interest rate risk generally by emphasizing the origination of one- to four-
family adjustable rate loans and short term construction loans for portfolio
whenever market conditions permit and by selling fixed-rate one-to four-family
mortgage loans in the secondary market. Funds held for liquidity and other
excess funds are invested in short and medium term U.S. Government and agency
securities and other short-term investments such as the daily investment account
at the Federal Home Loan Bank of Atlanta. By maintaining a significant
percentage of its assets in cash, other liquid investments and adjustable rate
mortgage loans, Security Federal is able to reinvest or reprice a higher
percentage of its assets more quickly in response to changes in market interest
rates, thereby reducing its exposure to interest rate volatility. In addition
to emphasizing adjustable rate loans and high levels of liquidity, Security
Federal offers competitive rates on deposit accounts and prices certificates of
deposit to provide customers with incentives to choose certificates of deposit
with longer terms. Due to the current interest rate environment, however,
certificates of deposit with longer terms generally are not attractive to
customers.
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<PAGE>
FINANCIAL CONDITION
The Company's total assets increased by $5.1 million, or 7.8%, from $65.4
million at September 30, 1994 to $70.5 million at September 30, 1995, primarily
as a result of the capital raised in the Company's initial securities offering
which closed March 31, 1995. Loans receivable increased by $6.4 million, or
12.2%, from $53.2 million at September 30, 1994 to $59.6 million at September
30, 1995. Investment securities increased by $3.4 million, or 90.7%, from $3.8
million at September 30, 1994 to $7.2 million at September 30, 1995. These
increases were partially offset by a decrease of $4.9 million, or 95.2%, in
FHLB-Overnight Deposits from $5.1 million at September 30, 1994 to $244,000 at
September 30, 1995.
Deposits decreased by $2.7 million, or 4.5%, from $59.7 million at
September 30, 1994 to $57.0 million at September 30, 1995 primarily as a result
of depositors drawing funds out of deposit accounts for the purchase of shares
in the Company's initial securities offering.
The Company's total assets increased by $6.5 million, or 9.2%, from $70.5
million at September 30, 1995 to $77.0 million at September 30, 1996, primarily
as a result of an increase in loans receivable of $8.9 million, or 14.9%, from
$59.6 million at September 30, 1995 to $68.5 million at September 30, 1996.
Loans held for sale increased by $1.3 million, or 765%, from $175,000 at
September 30, 1995 to $1.5 million at September 30, 1996. These increases were
partially offset by a decrease of $4.2 million, or 56.3%, in investment
securities from $7.1 million at September 30, 1995 to $2.98 million at September
30, 1996.
The Company's total liabilities increased by $6.7 million, or 11.3%, from
$59.6 million at September 30, 1995 to $66.4 million at September 30, 1996,
primarily as a result of an increase in deposits of $4.3 million, or 7.5%, from
$57.0 million at September 30, 1995 to $61.3 million at September 30, 1996. In
addition, advances from the Federal Home Loan Bank increased by $1.5 million, or
120.6%, from $1.3 million at September 30, 1995 to $2.8 million at September 30,
1996. Other liabilities increased by $698,000, or 949%, from $74,000 at
September 30, 1995 to $771,000 at September 30, 1996. This increase was caused
by the one-time Savings Association Insurance Fund (SAIF) assessment payable of
$381,000 accrued at year end and an increase in the accrued director's
retirement plan of $239,000. Refer to note 24 of the Consolidated Financial
Statements concerning the SAIF assessment and note 21 concerning the directors'
retirement plan.
RESULTS OF OPERATIONS
The earnings of the Company depend primarily on Security Federal's level of
net interest income, which is the difference between interest earned on Security
Federal's interest-earning assets, consisting primarily of mortgage loans,
consumer loans, and investment securities, and the interest paid on interest-
bearing liabilities. Net income totaled $435,000, $552,000 and $364,000 for the
fiscal years 1994, 1995 and 1996, respectively.
Interest Income. Total interest income increased by $657,000, or 14.5%,
from $4.5 million for the year ended September 30, 1994 to $5.2 million for the
year ended September 30, 1995. This was primarily due to an increase in
interest income on mortgage loans of $487,000, from $4.1 million for the year
ended September 30, 1994 to $4.6 million for the year ended September 30, 1995,
and due to an increase in interest income on investments of $165,000, from
$360,000 for the year ended September 30, 1994 to $525,000 for the year ended
September 30, 1995. The increase in interest income on loans generally
reflected rising market rates in an increasing interest rate environment. The
increase in interest income on investments reflected additional purchases of
investment securities during the year ended September 30, 1995 compared to the
previous year. Additionally, the Company had an increase in interest-earning
assets for the year ended September 30, 1995 compared to the year ended
September 30, 1994 due to the proceeds received in the initial securities
offering. Average interest-earning assets increased from $61.3 million for the
year ended September 30, 1994 to $64.7 million for the year ended September 30,
1995. This increase in available funds for investment in interest-earning
assets contributed to the increase in interest income for the year ended
September 30, 1995 over interest income for the year ended September 30, 1994.
38
<PAGE>
Total interest income increased by $832,000, or 16.1%, from $5.2 million
for the year ended September 30, 1995 to $6.0 million for the year ended
September 30, 1996. This was primarily due to an increase in interest income
on mortgage loans of $879,000, from $4.6 million for the year ended September
30, 1995 to $5.5 million for the year ended September 30, 1996. The increase in
interest income on loans generally reflects the increases in the volume of loans
receivable held. Additionally, the Company had an increase in interest-earning
assets for the year ended September 30, 1996 compared to the year ended
September 30, 1995. Average interest-earning assets increased from $64.7
million for the year ended September 30, 1995 to $71.1 million for the year
ended September 30, 1996. This increase in available funds for investment in
interest-earning assets contributed to the increase in interest income for the
year ended September 30, 1996 over interest income for the year ended September
30, 1995.
Interest Expense. Total interest expense increased by $447,000, or 16.2%,
from $2.8 million for the year ended September 30, 1994 to $3.2 million for the
year ended September 30, 1995. This was primarily due to an increase in
interest expense on deposits of $438,000, or 16.0%, from $2.7 million for the
year ended September 30, 1994 to $3.2 million for the year ended September 30,
1995. The increase in interest expense generally reflected rising market rates
in an increasing interest rate environment.
Total interest expense increased by $399,000, or 12.4%, from $3.2 million
for the year ended September 30, 1995 to $3.6 million for the year ended
September 30, 1996. This was primarily due to an increase in interest expense
on deposits of $347,000, or 10.9%, from $3.2 million for the year ended
September 30, 1995 to $3.5 million for the year ended September 30, 1996. The
increase in interest expense generally reflects the growth of deposit is by $4.3
million from 1995 to 1996 in addition to rising market rates in an increasing
interest rate environment.
Net Interest Income. Net interest income increased by $210,000, or 12.0%,
from $1.8 million for the year ended September 30, 1994 to $2.0 million for the
year ended September 30, 1995. This was primarily due to interest rates on
loans adjusting to higher yields in an increasing interest rate environment.
Additionally, the increase in available funds for investment in interest-earning
assets for the year ended September 30, 1995 compared to the same period for the
prior year lead to part of the increase in net interest income.
Net interest income increased by $433,000, or 22.0%, from $2.0 million for
the year ended September 30, 1995 to $2.4 million for the year ended September
30, 1996. This was primarily due to increases in the volume of interest-earning
assets and interest-bearing liabilities and the positive spread between interest
earning asset yields and interest-bearing liability rates.
Provision for Losses. No provision against income was made for losses on
loans during the years ended September 30, 1994, 1995 or 1996 because management
deemed the existing balance in the allowance for losses account to be adequate
based on their knowledge of known and inherent risk characteristics of the loan
portfolio.
Security Federal maintains an allowance for losses on loans based on
management's review and classification of the loan portfolio. Factors
considered in evaluating loans include analyses of the borrowers' ability to
pay, past collection experience, risk characteristics of individual loans or
groups of similar loans and underlying collateral, current and prospective
economic conditions, status of nonperforming loans, and regulatory reviews
conducted in the regulatory examination process. A classification system is
used to rank loans and real estate owned based on similar characteristics. The
classification system is considered adequate to provide for losses based on
management's evaluation of known and inherent risk characteristics of the loan
portfolio, the fair value of the underlying collateral, and current economic
conditions, and the fact that the actual loss exposure for the Bank has been
minimal. However, there can be no assurance that additional losses will not be
incurred.
Once classified, a standard percentage range is applied to each
classification, and the provision for losses on loans and foreclosed real estate
owned is adjusted with an applicable charge being made to expense. Total non-
performing assets were $1,135,000, $590,000 and $1,183,000 at September 30,
1994, 1995 and 1996, respectively. The significant fluctuations in non-
performing assets were believed to be attributable primarily to the relatively
small number of loans in the Bank's portfolio. The ratio of the allowance for
loan losses to non-performing loans was 29.1%, 55.9% and 27.9% at September 30,
1994, 1995 and 1996, respectively. Management recognizes that these
39
<PAGE>
ratios are less than those of comparable institutions. However, generally
restricting residential lending to the Bank's market area is believed to have
limited Security Federal's credit risk and historical losses.
Non-Interest Income. Non-interest income for the year ended September 30,
1995 decreased by $51,000, or 18.5%, as compared to the year ended September 30,
1994. This decrease in non-interest income was primarily due to increased
losses experienced on sales of loans of $32,000 and a decrease in loan servicing
fee income of $24,000 as compared to the same period for the previous year.
Non-interest income for the year ended September 30, 1996 decreased by
$17,000, or 7.6%, as compared to the year ended September 30, 1995. This
decrease was primarily due to an increase in the loss incurred on sales of loans
of $58,000 offset by an increase in gains on sales of investments of $35,000 as
compared to the same period for the previous year.
Non-Interest Expense. Non-interest expense decreased by $43,000, or 3.2%,
to $1.3 million for the year ended September 30, 1995 from $1.4 million for the
year ended September 30, 1994. The decrease resulted from a reduction in
salaries and benefits of $29,000 due to a reduction in personnel, a reduction of
$40,000 in writedowns of real estate owned as no further declines in value were
incurred, and a reduction in expenses of real estate owned of $21,000. These
reductions were partially offset by an increase in other operating expenses of
$51,000.
Non-interest expense increased by $745,000 or 56.6%, to $2.1 million for
the year ended September 30, 1996 from $1.3 million for the year ended September
30, 1995. The largest portion of the increase relates to the one-time deposit
insurance assessment of $381,000 assessed by the Savings Association Insurance
Fund to recapitalize the fund. After recapitalization, regular deposit
insurance assessments are expected to decrease significantly in future periods.
The increase in non-interest expense also resulted from an increase in salaries
and benefits of $245,000, or 37.0%, which was primarily caused by the
acceleration of expenses incurred for the directors' retirement plan and
management recognition plan upon the death of two participants. Other operating
expenses increased by $109,000, or 38.6%, due to the additional costs associated
with operating the holding company.
Income Taxes. Effective October 1, 1991, Security Federal adopted the
provisions of SFAS No. 109 "Accounting for Income Taxes" which requires deferred
taxes to be accounted for using the asset and liability method. Security
Federal elected to restate the statement of income for the year ended September
30, 1991. The cumulative effect of this change was to decrease net income by
$26,760 for the year ended September 30, 1991. The adoption of SFAS No. 109
should result in a more consistent effective tax rate in future years. Income
tax provisions for the years ended September 30, 1996, 1995 and 1994 are
generally reflective of the amounts of Security Federal's pre-tax income and the
effective income tax rate then in effect. For additional information, see Notes
1 and 6 of the Notes to Consolidated Financial Statements.
The provision for income taxes increased by $86,000, or 36.1%, to $324,000
for the year ended September 30, 1995 from $238,000 for the year ended September
30, 1994, primarily as a result of the increase in income before taxes.
The provision for income taxes decreased by $141,000, or 43.4%, to $184,000
for the year ended September 30, 1996 from $324,000 for the year ended September
30, 1995, primarily as a result of the decrease in income before taxes.
40
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Net interest income is affected by (i) the difference ("interest rate
spread") between rates of interest earned on interest-earning assets and rates
of interest paid on interest-bearing liabilities and (ii) the relative amounts
of interest-earning assets and interest-bearing liabilities. When interest-
earning assets approximate or exceed interest-bearing liabilities, any positive
interest rate spread will generate net interest income. Savings institutions
have traditionally used interest rate spreads as a measure of net interest
income. Another indication of an institution's net interest income is its "net
yield on interest-earning assets" which is net interest income divided by
average interest-earning assets. The following table sets forth certain
information relating to average interest-earning assets and interest-bearing
liabilities and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented. During the periods
indicated, non-accruing loans are included in the net loan category. During the
years ended September 30, 1996, 1995, and 1994, loan fees included in interest
income totaled $496,000, $245,000, and $469,000 respectively. Average balances
are derived from month-end average balances. Management does not believe that
the use of month-end average balances instead of average daily balances has
caused any material difference in the information presented.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------
1994 1995
------------------------------- -----------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
--------- --------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable........... $52,375 $4,162 7.95% $56,399 $4,654 8.25%
Investment securities...... 1,615 82 5.08 5,798 372 6.42
Short-term investment and
other interest-earning
assets.................... 7,286 277 3.80 2,539 153 6.00
------- ------ ------- ------
Total interest-earning
assets.................. 61,276 4,521 7.38 64,736 5,179 8.00
------ ------
Non-interest-earning assets.. 2,341 2,526
------- -------
Total assets............. $63,617 $67,262
======= =======
Interest-bearing liabilities:
Deposits................... $57,694 $2,743 4.75 $57,423 $3,181 5.54
Borrowings................. 630 21 3.33 829 30 3.62
------- ------ ------- ------
Total interest-bearing
liabilities............. 58,324 2,764 4.74 58,252 3,211 5.51
------ ------
Non-interest-bearing
liabilities................. 1,215 1,341
------- -------
Total liabilities........ 59,539 59,593
Stockholders' Equity......... 4,078 7,669
------- -------
Total liabilities and
stockholders' equity..... $63,617 $67,262
======= =======
Net interest income.......... $1,757 $1,968
====== ======
Interest rate spread......... 2.64% 2.49%
====== ======
Net yield on interest-earning
assets...................... 2.87% 3.04%
====== ======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities................ 105.06% 111.13%
====== ======
<PAGE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------- AT SEPTEMBER 30,
1996 1996
----------------------------- ------------------
AVERAGE AVERAGE
AVERAGE YIELD/ YIELD/
BALANCE INTEREST COST BALANCE COST
------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable........... $63,627 $5,536 8.70% $70,025 7.92%
Investment securities...... 5,697 372 6.53 3,524 6.44
Short-term investment and
other interest-earning
assets.................... 1,814 103 5.68 993 5.31
------- ------ -------
Total interest-earning
assets.................. 71,138 6,011 8.45 74,542 7.82
------
Non-interest-earning assets.. 2,185 2,453
------- -------
Total assets............. $73,323 $76,995
======= =======
Interest-bearing liabilities:
Deposits................... $61,721 3,528 5.72 $61,252 5.63
Borrowings................. 1,797 82 4.56 2,875 4.74
------- ------ -------
Total interest-bearing
liabilities............. 63,518 3,610 5.68 64,127 5.62
------
Non-interest-bearing
liabilities................. 1,805 2,246
------- -------
Total liabilities........ 65,323 66,373
Stockholders' Equity......... 8,000 10,622
------- -------
Total liabilities and
stockholders' equity.... $73,323 $76,995
======= =======
Net interest income.......... $2,401
======
Interest rate spread......... 2.77% 2.20%
====== ======
Net yield on interest-earning
assets...................... 3.38%
======
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities................ 112.00% 116.24%
====== ======
</TABLE>
41
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (i) changes in volume (changes in volume
multiplied by old rate); (ii) changes in rate (changes in rate multiplied by old
volume); and (iii) changes in rate-volume (changes in rate multiplied by changes
in volume).
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
1994 VS. 1995 1995 VS. 1996
--------------------------------------- ---------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
--------------------------------------- ---------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
------- ------ --------- -------- ------- ------ ------ -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loan portfolio.................... $ 321 $ 158 $ 13 $ 492 $596 $ 254 $32 $882
Investment securities............. 212 22 56 290 (6) 6 -- --
Other interest-earning assets..... (180) 160 (104) (124) (44) (8) 2 (50)
----- ----- ----- ----- ---- ----- --- ----
Total interest-earning assets... 353 340 (35) 658 546 252 34 832
Interest expense:
Savings deposits.................. (14) 455 (3) 438 236 103 8 347
Borrowings and FHLB advances...... 7 1 1 9 35 8 9 52
----- ----- ----- ----- ---- ----- --- ----
Total interest-bearing
liabilities................... (7) 456 (2) 447 271 111 17 399
----- ----- ----- ----- ---- ----- --- ----
Change in net interest income....... $ 360 $(118) $ (33) $ 211 $275 $ 141 $17 $433
===== ===== ===== ===== ==== ===== === ====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Security Federal is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio currently is 5.0%.
Security Federal's liquidity ratio averaged 6.9% during the month of September
1996. Security Federal adjusts its liquidity levels in order to meet funding
needs of deposit outflows, payment of real estate taxes on mortgage loans and
repayment of borrowings and loan commitments. Security Federal also adjusts
liquidity as appropriate to meet its asset and liability management objectives.
Security Federal's primary sources of funds are deposits, sale of mortgage
loans, amortization and prepayment of loans, maturities of investment securities
and other investments, and earnings and funds provided from operations. While
scheduled principal repayments on loans are a relatively predictable source of
funds, deposit flows and loan prepayments are greatly influenced by interest
rates, economic conditions, and competition. Security Federal manages the
pricing of its deposits to maintain a desired deposit balance. In addition,
Security Federal invests in short-term interest-earning assets, which provide
liquidity to meet lending requirements. At September 30, 1996, $.99 million, or
21.98%, of Security Federal's investment portfolio was scheduled to mature in
one year or less, and $2.99 million, or 66.1%, was scheduled to mature in one to
five years. At September 30, 1996, certificates of deposit which were scheduled
to mature in one year or less totaled $23.52 million. Assets qualifying for
liquidity outstanding at September 30, 1996 amounted to $3.9 million. For
additional information about cash flows from Security Federal's operating,
financing and investing activities, see the Statements of Cash Flows included in
the Consolidated Financial Statements.
During the year ended September 30, 1996, cash and cash equivalents (cash
and short-term investments with maturities less than 90 days) decreased by
$201,688 primarily due to loan originations in excess of repayments and sales
of $9.1 million, a net increase in loans held for sale of $1.34 million and cash
dividends of $537,175. These
42
<PAGE>
decreases in cash and cash equivalents were offset by net proceeds from sales of
investments of $3.02 million, proceeds from maturities of investment securities
of $1.0 million increase in borrowings from the FHLB of $1.5 million and
increases in certificates of deposit of $4.2 million.
Security Federal had $1.09 million in outstanding loan commitments at
September 30, 1996 and loan applications and approvals have remained consistent
since then. Security Federal expects to fund its loan originations through
principal and interest payments on loans, proceeds from securities as maturities
occur, the sale of mortgage loans in the secondary market and, if necessary,
borrowed funds. Management expects that funds provided from these sources will
be adequate to meet Security Federal's needs.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements, and notes thereto, presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of the Bank's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Bank are
monetary in nature. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
Disclosures of Fair Value of Financial Instruments. In December 1991, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 107, "Disclosures About Fair Value of
Financial Instruments." SFAS No. 107 requires all entities to disclose the fair
value of financial instruments (both assets and liabilities recognized and not
recognized in the statements of financial condition) for which it is practicable
to estimate the fair value, except those financial instruments specifically
excluded. The disclosure shall be either in the body of the financial
statements or in the accompanying notes and shall include the methods and
significant assumptions used to estimate the fair value of a financial
instrument or a class of financial instruments as well as the reasons why it is
not practicable to estimate fair value. SFAS No. 107 is effective for fiscal
years ending after December 15, 1992 for companies with assets of greater than
$150 million. For companies with assets of less than $150 million, SFAS No. 107
is effective for fiscal years ending after December 15, 1995. The Bank adopted
the disclosure requirements of SFAS No. 107 for the fiscal year ended September
30, 1996.
Accounting for Impaired Loans. In September 1993, the FASB issued SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114 requires
that specified impaired loans be measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, or, as an
alternative, at the fair value of the collateral or the observable market price
of the loan. SFAS No. 114 does not apply to large groups of small balance,
homogeneous loans that are collectively evaluated for impairment. Subsequent to
October 1994, the FASB issued SFAS No. 118 "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures" as an amendment to
SFAS No. 114. SFAS No. 118 amends the disclosure requirements of SFAS No. 114
to require information about the recorded investment in certain impaired loans
and about how a creditor recognizes interest income related to those impaired
loans. SFAS No. 114, as amended by SFAS No. 118, is effective for years
beginning after December 15, 1994. The Company adopted SFAS No. 114 as of July
1, 1995, as required, without a material effect on the Company's consolidated
financial condition or results of operations.
Accounting for Stock-Based Compensation. In October 1994, the FASB issued
SFAS No. 123 entitled "Accounting for Stock Based Compensation." SFAS No. 123
establishes a fair value based method of accounting for stock-based compensation
paid to employees. SFAS No. 123 recognizes the fair value of an award of stock
or stock options on the grant date and is effective for transactions occurring
after December 1995. Companies are allowed to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting, which
generally does not result in compensation expense recognition for most plans.
Companies that
43
<PAGE>
elect to remain with the existing accounting are required to disclose in a
footnote to the financial statements pro forma net earnings and, if presented,
earnings per share, as if SFAS No. 123 had been adopted. Management has
determined that the Company will continue to account for stock-based
compensation pursuant to Accounting Principles Board Opinion No. 25, and
therefore adoption of the disclosure provisions set forth in SFAS No. 123 will
not have a material effect on the Company's consolidated financial condition or
results of operations.
Derivative Financial Instruments. In October 1994, the FASB issued SFAS
No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments," which is applicable for financial statements issued for
fiscal years ending after December 15, 1994, except for entities with less than
$150 million in total assets for which it is effective for fiscal years ending
after December 15, 1995. SFAS No. 119 requires the disclosure of the amounts,
nature and terms of derivative financial instruments that are not subject to
SFAS No. 105 because they do not result in off-balance sheet risk of accounting
loss. SFAS No. 119 requires that a distinction be made between financial
instruments held or issued for trading purposes and financial instruments held
or issued for purposes other than trading. It also amends SFAS No. 105 and SFAS
No. 107 to require that distinction in certain disclosures required by those
statements. The Company adopted SFAS No. 119 on July 1, 1995, as required,
without material effect on consolidated financial condition or results of
operations.
Accounting for Transfers of Financial Assets. In June 1996, the FASB
issued SFAS No. 125, "Accounting for Transfer of Financial Assets, Servicing
Rights, and Extinguishment of Liabilities," that provides accounting guidance on
transfers of financial assets, servicing of financial assets, and extinguishment
of liabilities. SFAS No. 125 introduces an approach to accounting for transfers
of financial assets that provides a means of dealing with more complex
transactions in which the seller disposes of only a partial interest in the
assets, retains rights or obligations, makes use of special purpose entities in
the transaction, or otherwise has continuing involvement with the transferred
assets. The new accounting method, the financial components approach, provides
that the carrying amount of the financial assets transferred be allocated to
components of the transaction based on their relative fair values. SFAS No. 125
provides criteria for determining whether control of assets has been
relinquished and whether a sale has occurred. If the transfer does not qualify
as a sale, it is accounted for as a secured borrowing. Transactions subject to
the provisions of SFAS No. 125 include, among others, transfers involving
repurchase agreements, securitizations of financial assets, loan participations,
factoring arrangements, and transfers of receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or
liability that is purchased or assumed is initially recognized at its fair
value. Servicing assets and liabilities are amortized in proportion to and over
the period of estimated net servicing income or net servicing loss and are
subject to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet
only if the debtor either pays the creditor and is relieved of its obligations
for the liability or is legally released from being the primary obligor. SFAS
No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996 and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management does not believe that adoption of SFAS No. 125 will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
Accounting for Impaired Assets. In March 1995, the FASB issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," effective for fiscal years beginning after December
15, 1995. This statement requires the recognition of impairment losses when
conditions indicate that long-lived assets are impaired and the undiscounted
cash flows estimated to be generated by the assets are less than the asset's
carrying amount. The Company will adopt SFAS No. 121 in the first quarter of
the fiscal year ending September 30, 1997, and does not anticipate that the
effect of the adoption will be material to the consolidated financial
statements.
44
<PAGE>
Accounting for Mortgage Servicing Rights. In May 1995, the FASB issued
SFAS No. 122, "Accounting for Mortgage Servicing Rights, an Amendment of FASB
65," effective for fiscal years beginning after December 15, 1995. When a
company has a definitive plan to sell or securitize mortgage loans it originated
and intends to retain the mortgage servicing rights, SFAS No. 122 requires that
the cost of mortgage servicing rights are capitalized separately from the cost
of originating the loan. Under statement 65, only mortgage servicing rights
that are purchased are capitalized. SFAS No. 122 eliminates the disparity
between the treatment of mortgage servicing rights obtained through loan
origination and those that are purchased from other parties. In addition, SFAS
No. 122 requires that capitalized mortgage servicing rights should be amortized
in proportion to and over the period of estimated servicing income and should be
evaluated for impairment based on their fair value. The Company will adopt SFAS
No. 122 in the first quarter of the fiscal year ending September 30, 1997.
Management does not expect that the adoption will have a material effect on the
Company's consolidated financial statements.
RECENT DEVELOPMENT
The Bank's savings deposits are insured by the Savings Association
Insurance Fund ("SAIF"), which is administered by the FDIC. Prior to October 1,
1996, the assessment rate currently ranged from 0.23% of deposits for well
capitalized institutions to 0.31% of deposits for undercapitalized institutions.
The FDIC also administers the Bank Insurance Fund ("BIF"), which has the
same designated reserve ratio as the SAIF. The FDIC amended the BIF risk-based
assessment schedule which lowered the deposit insurance assessment rate for most
commercial banks and other depository institutions with deposits insured by the
BIF to a range of from 0.31% of insured deposits for undercapitalized BIF-
insured institutions to a statutory minimum of $2,000 annually for well-
capitalized institutions, which constitute over 90% of BIF-insured institutions.
These revisions to the BIF assessment rate schedule created a substantial
disparity in the deposit insurance premiums paid by BIF and SAIF members and
placed SAIF-insured savings institutions such as the Bank at a significant
competitive disadvantage to BIF-insured institutions.
On September 30, 1996, the President signed legislation to recapitalize the
SAIF, alleviating this disparity. This legislation provides for a one-time
assessment of 65.7 basis points to be imposed on all SAIF-insured deposits at
March 31, 1995 to cause the SAIF to be fully capitalized by reaching its
designated reserve ratio of 1.25% of SAIF-insured deposits. The payment of a
special assessment adversely affected the Bank's financial condition and results
of operations, resulting in a net charge of approximately $383,113, on a pre-tax
basis. Payment of the special assessment was made by November 27, 1996.
However, once the special assessment was paid and the SAIF recapitalized, it had
the effect of reducing the Bank's deposit insurance premiums to the SAIF,
thereby increasing net income in future periods, and restoring competitive
equality between BIF-insured and SAIF-insured institutions. In light of the
effect of the special assessment on the SAIF reserve ratio, the FDIC has
recently issued new deposit insurance assessment rates for the periods
occurring, after October 1, 1996, which range 4 to 31 basis points, with an
immediate adjustment reduced by 4 basis points to 0 to 22 basis points for
certain SAIF-insured institutions. Other SAIF institutions, such as the Bank,
will be subject to a special interim rate schedule of 18 to 27 basis points for
the period from October 1 to December 31, 1996 and thereafter will be assessed
at the 0 to 27 basis point rate.
Legislation has also been introduced in Congress that provides for the
elimination of the distinctions between banks and thrifts under federal law.
The legislation may require the automatic conversion of all federally chartered
savings associations such as the Bank into national banks by a specified
deadline. It could impose activities restrictions and restrictions on branches,
and it could also compel the holding companies of such institutions to be
subject to the more restrictive regulations that govern holding companies of
banks rather than thrifts. The legislation also could restrict current or
future activities of the Bank and the Company, and it could also increase
regulatory compliance costs because of the new regulatory structure to which the
Bank and the Company would be subject. While there currently are substantial
impediments to converting from SAIF to BIF deposit insurance, recent legislation
substantially reduced the adverse federal tax consequences of thrifts converting
to banks (see below). The Bank cannot predict at this time whether any pending
legislation ultimately will be enacted in its current form or, if enacted,
whether such legislation would remedy some or all of the related adverse
financial and tax effects.
45
<PAGE>
Legislation enacted in August 1996 repealed the percentage of taxable
income method of calculating the bad debt reserve. Savings institutions, like
the Bank, which have previously used that method are required to recapture into
taxable income post-1987 reserves in excess of the reserves calculated under the
experience method. Beginning with the first taxable year beginning after
December 31, 1995, savings institutions, such as the Bank, will be treated the
same as commercial banks. Institutions with less than $500 million in assets
will still be permitted to make deductible bad debt additions to reserves, but
only using the experience method. The maximum amount the Bank is expected to
recapture is approximately $470,000 of its tax bad debt reserves. The recapture
will not affect the Bank's net income or equity because the related tax expense
has already been accrued.
The legislation provides for a suspension of this recapture if the
institution meets the "residential loan requirement." This requirement is met
if the principal amount of residential loans that the institution originates
during its first taxable year after December 31, 1995, exceeds the average of
the principal amounts of residential loans made by the institution during the
six most recent taxable years beginning before January 1, 1996. If the
requirement is met, the recapture is suspended until a taxable year beginning
after December 31, 1997, or until the residential loan requirement is not met in
a subsequent year. Security Federal expects to meet this requirement for the
taxable year ended December 31, 1996.
46
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
47
<PAGE>
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
SEPTEMBER 30, 1996 AND 1995
CONTENTS
--------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITOR'S REPORT 1-2
CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 3-4
CONSOLIDATED STATEMENTS OF INCOME 5-6
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 7
CONSOLIDATED STATEMENTS OF CASH FLOWS 8-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11-39
</TABLE>
SEE INDEPENDENT AUDITOR'S REPORT.
<PAGE>
DECEMBER 10, 1996
BOARD OF DIRECTORS AND STOCKHOLDERS
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
INDEPENDENT AUDITOR'S REPORT
----------------------------
WE HAVE AUDITED THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION OF
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY, AS OF SEPTEMBER 30, 1996, AND
THE RELATED STATEMENTS OF INCOME, CHANGES IN STOCKHOLDERS' EQUITY AND CASH FLOWS
FOR THE YEAR THEN ENDED. THESE STATEMENTS ARE THE RESPONSIBILITY OF THE
COMPANY'S MANAGEMENT. OUR RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE
FINANCIAL STATEMENTS BASED ON OUR AUDITS. THE FINANCIAL STATEMENTS OF SECURITY
FEDERAL BANCORP, INC., AND SUBSIDIARY, AS OF SEPTEMBER 30, 1995, AND FOR EACH OF
THE TWO YEARS THEN ENDED WERE AUDITED BY OTHER AUDITORS WHOSE OPINION DATED
NOVEMBER 14, 1995, WAS UNQUALIFIED. AS STATED IN NOTE 25, THE COMPANY HAS
RESTATED ITS FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1995, AND FOR EACH OF THE
TWO YEARS THEN ENDED TO REPORT DEFERRED INCOME TAXES FOR THE TEMPORARY
DIFFERENCE IN THE ALLOWANCE FOR LOAN LOSSES FOR FINANCIAL AND TAX REPORTING
PURPOSES IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. THE OTHER
AUDITORS REPORTED ON THE FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1995, AND FOR
THE TWO YEARS THEN ENDED BEFORE THE RESTATEMENT.
WE CONDUCTED OUR AUDIT IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING
STANDARDS. THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDIT TO OBTAIN
REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS ARE FREE OF MATERIAL
MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING
THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS. AN AUDIT 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 AUDIT PROVIDES A REASONABLE BASIS FOR OUR OPINION.
IN OUR OPINION, THE 1996 FINANCIAL STATEMENTS REFERRED TO ABOVE PRESENT
FAIRLY, IN ALL MATERIAL RESPECTS, THE FINANCIAL POSITION OF SECURITY FEDERAL
BANCORP, INC., AND SUBSIDIARY, AS OF SEPTEMBER 30, 1996, AND THE RESULTS OF ITS
OPERATIONS AND ITS CASH FLOWS FOR THE YEAR THEN ENDED IN CONFORMITY WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
<PAGE>
BOARD OF DIRECTORS AND STOCKHOLDERS
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
DECEMBER 10, 1996
PAGE 2
WE ALSO AUDITED THE ADJUSTMENTS DESCRIBED IN NOTE 25 THAT WERE APPLIED TO
RESTATE THE 1995 AND 1994 FINANCIAL STATEMENTS. IN OUR OPINION, SUCH
ADJUSTMENTS ARE APPROPRIATE AND HAVE BEEN PROPERLY APPLIED.
/s/ Jamison, Money, Farmer & Co., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
TUSCALOOSA, ALABAMA
<PAGE>
[LETTERHEAD OF MORRISON AND SMITH]
INDEPENDENT AUDITOR'S REPORT
----------------------------
Board of Directors
Security Federal Bancorp, Inc.
and Subsidiaries
Tuscaloosa, Alabama
Gentlemen:
We have audited the accompanying consolidated statements of financial
condition of Security Federal Bancorp, Inc. and Subsidiaries, Tuscaloosa,
Alabama, as of September 30, 1994 and 1995, and the related consolidated
statements of income, retained earnings, and cash flows for each of the years in
the three year period ended September 30, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 financial position of Security
Federal Bancorp, Inc. and Subsidiaries as of September 30, 1994 and 1995, and
the results of operations and cash flows for each of the years in the three year
period ended September 30, 1995, in conformity with generally accepted
accounting principles.
/s/ Morrison and Smith
MORRISON AND SMITH
Certified Public Accountants
November 14, 1995
<PAGE>
3
SECURITY FEDERAL BANCORP, INC,, AND SUBSIDIARY
TUSCALOOSA, ALABAMA
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1996 AND 1995
- -------------------------------------------------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
RESTATED
1 9 9 6 1 9 9 5
----------- -----------
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 44,271 $ 80,216
CASH AND CASH EQUIVALENTS - INTEREST-BEARING DEPOSITS 567,305 733,048
FEDERAL HOME LOAN BANK - OVERNIGHT DEPOSITS 426,084 243,713
INVESTMENT SECURITIES:
SECURITIES HELD-TO-MATURITY (FAIR VALUE OF
$996,875 AT SEPTEMBER 30, 1995) - 1,000,000
SECURITIES AVAILABLE-FOR-SALE, AT FAIR VALUE 2,984,586 6,146,859
LOANS HELD FOR SALE, NET OF DEFERRED FEES 1,514,050 175,000
LOANS RECEIVABLE - NET 68,510,569 59,635,779
REAL ESTATE OWNED 117,217 162,072
OFFICE PROPERTIES AND EQUIPMENT 1,155,670 1,220,003
FEDERAL HOME LOAN BANK STOCK - AT COST 539,000 507,900
ACCRUED INTEREST AND DIVIDENDS RECEIVABLE 421,300 488,552
DEFERRED TAX ASSET 258,109 65,218
OTHER ASSETS 456,635 82,124
----------- -----------
TOTAL ASSETS $76,994,796 $70,540,484
=========== ===========
</TABLE>
SEE INDEPENDENT AUDITOR'S REPORT.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
4
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1996 AND 1995
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
RESTATED
1 9 9 6 1 9 9 5
---------- -----------
<S> <C> <C>
DEPOSITS $61,252,015 $56,975,131
CHECKS OUTSTANDING IN EXCESS OF DEPOSITS 174,177 -
ADVANCES FROM FEDERAL HOME LOAN BANK 2,835,000 1,285,000
ADVANCES FROM BORROWERS FOR TAXES AND INSURANCE 662,689 731,404
INCOME AND EXCISE TAX PAYABLE - CURRENT 338,073 150,148
UNREMITTED COLLECTIONS ON MORTGAGE LOANS SERVICED 299,630 377,099
MORTGAGE NOTE PAYABLE 39,597 42,055
ACCRUED EXPENSES AND OTHER LIABILITIES 771,371 73,526
----------- -----------
TOTAL LIABILITIES 66,372,552 59,634,363
----------- -----------
STOCKHOLDERS' EQUITY:
COMMON STOCK, $.01 PAR VALUE, 1,900,000
SHARES AUTHORIZED, 671,469 SHARES
ISSUED AND OUTSTANDING 6,714 6,714
ADDITIONAL PAID-IN CAPITAL 6,144,956 6,144,956
NET UNREALIZED GAIN (LOSS) ON EQUITY SECURITIES
AVAILABLE-FOR-SALE, NET OF DEFERRED TAX (58,800) 51,757
RETAINED EARNINGS, SUBSTANTIALLY RESTRICTED 4,529,374 4,702,694
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 10,622,244 10,906,121
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $76,994,796 $70,540,484
=========== ===========
</TABLE>
SEE INDEPENDENT AUDITOR'S REPORT.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
5
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5 1 9 9 4
--------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
LOANS:
MORTGAGE LOANS $5,494,427 $4,615,011 $4,127,684
CONSUMER AND OTHER LOANS 41,652 39,025 34,080
INVESTMENT SECURITIES, MORTGAGE BACKED
SECURITIES, AND FHLB OVERNIGHT
DEPOSITS 475,274 524,801 359,862
---------- ---------- ----------
TOTAL INTEREST INCOME 6,011,353 5,178,837 4,521,626
---------- ---------- ----------
INTEREST EXPENSE:
DEPOSITS - SAVINGS 134,397 154,144 210,693
DEPOSITS - CERTIFICATES 3,393,451 3,027,167 2,532,572
MORTGAGE NOTE PAYABLE 3,275 3,464 3,638
BORROWED FUNDS 79,204 26,444 17,550
---------- ---------- ----------
TOTAL INTEREST EXPENSE 3,610,327 3,211,219 2,764,453
---------- ---------- ----------
NET INTEREST INCOME 2,401,026 1,967,618 1,757,173
---------- ---------- ----------
NON-INTEREST INCOME:
SERVICING FEES 219,634 203,963 228,380
INCOME FROM LATE CHARGES 33,030 26,987 26,311
OTHER OPERATING REVENUE 9,417 21,605 17,419
GAIN ON SALE OF REAL ESTATE OWNED - 4,125 7,471
(LOSS) ON SALE OF LOANS (96,502) (37,966) (5,106)
GAIN ON SALE OF INVESTMENTS 41,335 6,237 -
LOSS FROM PERMANENT DECLINE IN VALUE
OF INVESTMENTS - (1,125) -
---------- ---------- ----------
TOTAL NON-INTEREST INCOME 206,914 223,826 274,475
---------- ---------- ----------
</TABLE>
(CONTINUED)
SEE INDEPENDENT AUDITOR'S REPORT.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
6
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5 1 9 9 4
--------- ---------- ----------
<S> <C> <C> <C>
NON-INTEREST EXPENSE:
SALARIES AND EMPLOYEE BENEFITS $ 905,371 $ 660,830 $ 690,310
NET OCCUPANCY EXPENSE 117,251 141,613 147,492
EQUIPMENT EXPENSE 97,989 67,855 65,714
OTS/FDIC PREMIUMS 543,999 157,566 157,097
WRITEDOWN OF REAL ESTATE OWNED - - 40,000
NET EXPENSES OF REAL ESTATE OWNED 3,378 4,706 25,549
OTHER OPERATING EXPENSES 392,386 283,104 232,442
---------- ---------- ----------
TOTAL NON-INTEREST EXPENSE 2,060,374 1,315,674 1,358,604
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 547,566 875,770 673,044
---------- ---------- ----------
INCOME TAX EXPENSE:
CURRENT EXPENSE 306,241 358,847 250,275
DEFERRED EXPENSE (BENEFIT) (122,530) ( 34,364) (11,903)
---------- ---------- ----------
TOTAL INCOME TAX EXPENSE 183,711 324,483 238,372
---------- ---------- ----------
NET INCOME $ 363,855 $ 551,287 $ 434,672
========== ========== ==========
EARNINGS PER COMMON SHARE $ .54 $ .82 $ -
========== ========== ==========
</TABLE>
SEE INDEPENDENT AUDITOR'S REPORT.
SEE NOTES TO FINANCIAL STATMENTS.
<PAGE>
7
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET
UNREALIZED
LOSS ON RETAINED
ADDITIONAL SECURITIES EARNINGS TOTAL
COMMON PAID-IN AVAILABLE SUBSTANTIALLY STOCKHOLDERS'
STOCK CAPITAL FOR SALE RESTRICTED EQUITY
------ ---------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1993, AS ORIGINALLY REPORTED $ - $ - ($1,125) $3,797,065 $ 3,795,940
------ ---------- -------- ---------- -----------
PRIOR PERIOD ADJUSTMENT (NOTE 25) - - - 121,111 121,111
------ ---------- -------- ---------- -----------
BALANCE, SEPTEMBER 30, 1993, AS RESTATED - - (1,125) 3,918,176 3,917,051
NET INCOME FOR THE YEAR ENDED SEPTEMBER 30, 1994 - - - 434,672 434,672
------ ---------- -------- ---------- -----------
BALANCE, SEPTEMBER 30, 1994 - - (1,125) 4,352,848 4,351,723
SALE OF 671,469 SHARES OF COMMON STOCK 6,714 6,144,956 - - 6,151,670
NET INCOME FOR THE YEAR ENDED SEPTEMBER 30,
1995 - - - 551,287 551,287
DIVIDENDS DECLARED AND PAID - $.30 PER SHARE - - - (201,441) (201,441)
CHANGE IN NET UNREALIZED LOSS ON SECURITIES
AVAILABLE-FOR-SALE, NET OF DEFERRED TAX - - 52,882 - 52,882
------ ---------- -------- ---------- -----------
BALANCE, SEPTEMBER 30, 1995 6,714 6,144,956 51,757 4,702,694 10,906,121
NET INCOME FOR THE YEAR ENDED SEPTEMBER 30, 1996 - - - 363,855 363,855
DIVIDENDS DECLARED AND PAID - $.80 PER SHARE - - - (537,175) (537,175)
CHANGE IN NET UNREALIZED LOSS ON SECURITIES
AVAILABLE FOR SALE, NET OF DEFERRED TAX - - (110,557) - (110,557)
------ ---------- -------- ---------- -----------
BALANCE, SEPTEMBER 30, 1996 $6,714 $6,144,956 ($58,800) $4,529,374 $10,622,244
====== ========== ======== ========== ===========
</TABLE>
SEE INDEPENDENT AUDITOR'S REPORT.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
8
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
----------------------------------------------------
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5 1 9 9 4
--------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 363,855 $ 551,287 $434,672
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
(GAIN) LOSS ON SALE OF ASSETS 55,167 (9,237) (7,471)
DEPRECIATION EXPENSE FOR PROPERTY
AND EQUIPMENT 70,469 84,558 89,553
WRITEDOWN OF REAL ESTATE OWNED - - 40,000
AMORTIZATION OF PREMIUMS/DISCOUNTS
ON INVESTMENTS 2,006 2,597 2,588
STOCK DIVIDENDS ON FEDERAL HOME LOAN
BANK STOCK - - (12,200)
DEFERRED TAXES (192,891) - -
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ACCRUED
INTEREST AND DIVIDEND
RECEIVABLE 67,252 (193,282) (25,892)
(INCREASE) DECREASE IN OTHER ASSETS (374,511) 152,811 (14,145)
INCREASE (DECREASE) IN ACCRUED
INTEREST PAYABLE 2,470 29,272 (18,737)
INCREASE (DECREASE) IN ACCOUNTS
PAYABLE 426,760 (7,497) 756
INCREASE IN DEFERRED LOAN FEES 126,894 67,121 4,592
INCREASE (DECREASE) IN OTHER
LIABILITIES 268,613 29,631 (19,710)
INCREASE (DECREASE) IN INCOME
TAX PAYABLE 256,520 99,881 (122,309)
NET (INCREASE) DECREASE IN LOANS
HELD FOR SALE (1,339,050) (175,000) 617,330
----------- --------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (266,446) 632,142 969,027
----------- --------- --------
</TABLE>
(CONTINUED)
SEE INDEPENDENT AUDITOR'S REPORT.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
9
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (CONTINUED)
----------------------------------------------------
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5 1 9 9 4
---------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
SALES (PURCHASES) OF U. S. GOVERNMENT
TREASURIES AND AGENCIES $ 3,022,452 ($ 3,802,085) ($ 3,752,461)
RECEIVED ON SALES OF REAL ESTATE OWNED 79,829 520,396 162,159
MATURITIES/REDEMPTIONS OF TREASURIES
AND AGENCIES 1,000,000 500,000 -
(PURCHASE) SALES OF FEDERAL HOME LOAN
BANK - OVERNIGHT DEPOSIT (182,371) 4,866,710 (3,308,430)
LOAN ORIGINATIONS, NET OF REPAYMENTS (24,197,487) (16,672,001) (20,359,099)
STOCK CONVERSION COSTS INCURRED - - (137,121)
PURCHASE OF STOCK IN FEDERAL HOME
LOAN BANK (31,100) (10,400) -
PURCHASES OF OFFICE PROPERTIES AND
EQUIPMENT (6,136) (1,691) (45,969)
PROCEEDS FROM SALES OF LOANS 15,064,327 9,622,016 22,606,997
------------ ------------ ------------
NET CASH (USED IN)
INVESTING ACTIVITIES (5,250,486) (4,977,055) (4,833,924)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
NET PROCEEDS FROM SALE OF STOCK - 6,151,671 -
NET INCREASE (DECREASE) IN ADVANCES FROM
BORROWERS FOR TAX AND INSURANCE (68,715) 95,818 10,883
INCREASE IN BANK OVERDRAFT 174,177 - -
REPAYMENTS OF MORTGAGE NOTES PAYABLE (2,458) ( 2,270) (2,096)
NET INCREASE (DECREASE) FROM UNREMITTED
COLLECTIONS ON MORTGAGE LOANS SERVICED (77,469) 257,383 11,653
BORROWINGS FROM FEDERAL HOME LOAN
BANK ADVANCES 1,550,000 700,000 -
NET INCREASE (DECREASE) IN SAVINGS ACCOUNTS 23,393 (1,413,960) (2,140,230)
</TABLE>
(CONTINUED)
SEE INDEPENDENT AUDITOR'S REPORT.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
10
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (CONTINUED)
----------------------------------------------------
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5 1 9 9 4
---------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES (CONTINUED):
NET INCREASE (DECREASE) IN CERTIFICATES OF
DEPOSIT $4,253,491 ($1,284,348) $6,027,875
CASH DIVIDENDS PAID (537,175) (201,441) -
---------- ----------- ----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 5,315,244 4,302,853 3,908,085
---------- ------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (201,688) (42,060) 43,188
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 813,264 855,324 812,136
---------- ------------ -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 611,576 $ 813,264 $ 855,324
========== ============ ===========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
-------------------------------------------------
DURING THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994, CASH WAS PAID AS
FOLLOWS:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5 1 9 9 4
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST ON DEPOSITS, ADVANCES AND OTHER
BORROWINGS $3,607,857 $3,181,947 $2,783,190
INCOME TAXES 120,082 230,312 360,681
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
--------------------------------------------------------------------
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5 1 9 9 4
----------- ------------ ----------
<S> <C> <C> <C>
DEPOSIT ACCOUNTS CONVERTED TO PURCHASE
STOCK $ - $1,641,346 $ -
</TABLE>
SEE INDEPENDPENT AUDITOR'S REPORT.
SEE NOTES TO FINANCIAL STATEMENTS.
<PAGE>
11
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
A. BASIS OF PRESENTATION AND NATURE OF OPERATIONS
----------------------------------------------
THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDE THE ACCOUNTS OF
SECURITY FEDERAL BANCORP, INC. (THE "COMPANY") AND ITS WHOLLY-OWNED
SUBSIDIARY, SECURITY FEDERAL BANK, (THE "BANK"). ALL SIGNIFICANT
INTERCOMPANY BALANCES AND TRANSACTIONS ARE ELIMINATED IN
CONSOLIDATION. SECURITY FEDERAL IS ENGAGED PRINCIPALLY IN ACCEPTING
DEPOSITS FROM INDIVIDUALS AND CORPORATE CUSTOMERS AND INVESTING THOSE
FUNDS IN LOANS SECURED BY FIRST MORTGAGES PRIMARILY FOR ONE TO FOUR
FAMILY RESIDENCES. SECURITY FEDERAL HAS ONE MAIN OFFICE LOCATED IN
TUSCALOOSA, ALABAMA, THAT SERVES THE WEST ALABAMA AREA.
B. ORGANIZATION
------------
SECURITY FEDERAL BANCORP, INC., WAS INCORPORATED IN JUNE, 1994,
FOR THE PURPOSE OF ACTING AS A SAVINGS AND LOAN HOLDING COMPANY WITH
THE BANK AS ITS SOLE SUBSIDIARY. ON MARCH 31, 1995, THE COMPANY
ACQUIRED ALL OF THE COMMON STOCK OF THE BANK UPON ITS CONVERSION FROM
MUTUAL TO STOCK FORM. THE COMPANY'S PRINCIPAL BUSINESS IS THE BUSINESS
OF THE BANK. THE BANK IS A FEDERALLY CHARTERED STOCK SAVINGS BANK AND
A MEMBER OF THE FEDERAL HOME LOAN BANK SYSTEM. THE CONSOLIDATED
FINANCIAL STATEMENTS, AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 1996
AND 1995, INCLUDE THE ACCOUNTS OF THE COMPANY AND THE BANK. PRIOR TO
1995 AND THE CONVERSION, THE FINANCIAL STATEMENTS INCLUDE THE ACCOUNTS
OF THE BANK ONLY.
C. GENERAL
-------
RECORDS ARE MAINTAINED ON THE ACCRUAL METHOD FOR FINANCIAL
REPORTING AND TAX PURPOSES. THE BANK PROVIDES FINANCIAL SERVICES TO
INDIVIDUALS AND CORPORATE CUSTOMERS, AND IS SUBJECT TO COMPETITION
FROM OTHER FINANCIAL INSTITUTIONS.
THE BANK IS A MEMBER OF THE FEDERAL HOME LOAN BANK SYSTEM AND IS
SUBJECT TO REGULATION BY THE OFFICE OF THRIFT SUPERVISION. AS A MEMBER
OF THIS SYSTEM, THE BANK IS REQUIRED TO MAINTAIN AN INVESTMENT IN
CAPITAL STOCK OF THE FEDERAL HOME LOAN BANK IN ATLANTA. THE BANK
MAINTAINS INSURANCE ON SAVINGS DEPOSITS WITHIN CERTAIN LIMITATIONS AS
A MEMBER OF THE SAVINGS ASSOCIATION INSURANCE FUND WHICH IS
ADMINISTERED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION.
(CONTINUED)
<PAGE>
12
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------
D. VALUATION OF ALLOWANCE FOR LOSSES
---------------------------------
THE ALLOWANCE FOR LOAN LOSSES IS MAINTAINED AT A LEVEL WHICH IS
CONSIDERED ADEQUATE TO PROVIDE FOR LOSSES BASED UPON MANAGEMENT'S
EVALUATION OF KNOWN AND INHERENT RISK CHARACTERISTICS OF THE LOAN
PORTFOLIO, THE FAIR VALUE OF UNDERLYING COLLATERAL, CURRENT ECONOMIC
CONDITIONS, AND OTHER PERTINENT FACTORS. A PROVISION FOR LOAN LOSSES
IS CHARGED TO OPERATIONS BASED ON MANAGEMENT'S PERIODIC EVALUATION OF
THESE RISKS.
E. LOAN FEES
---------
NONREFUNDABLE FEES FOR MAKING LOANS ARE DEFERRED TO THE EXTENT
THAT THEY EXCEED THE DIRECT COSTS OF UNDERWRITING AND CLOSING LOANS.
THESE DEFERRED FEES ARE AMORTIZED TO INCOME OVER THE CONTRACTUAL LIFE
OF THE MORTGAGE LOAN IN ACCORDANCE WITH STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 91, AS AN ADJUSTMENT TO THE YIELD OF SUCH
LOANS.
F. DEPRECIATION
------------
DEPRECIATION IS COMPUTED ON THE STRAIGHT-LINE AND ACCELERATED
METHODS OVER THE ESTIMATED USEFUL LIVES OF THE APPLICABLE ASSETS.
USEFUL LIVES RANGE GENERALLY FROM FIVE TO THIRTY-ONE YEARS.
G. REAL ESTATE OWNED
-----------------
REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS IS INITIALLY RECORDED
AT THE LOWER OF COST OR FAIR VALUE OF THE ASSET ACQUIRED AND,
SUBSEQUENTLY, AT THE LOWER OF COST OR FAIR VALUE MINUS ESTIMATED COST
TO SELL. COSTS OF HOLDING REAL ESTATE ACQUIRED IN SETTLEMENT OF LOANS
ARE REFLECTED IN INCOME CURRENTLY. IMPROVEMENTS TO THE REAL ESTATE ARE
CAPITALIZED AS A PART OF THE CARRYING VALUE. GAINS OR LOSSES ON SALES
OF SUCH REAL ESTATE ARE TAKEN INTO INCOME BASED ON THE BANK'S INITIAL
AND CONTINUING INVESTMENT IN THE PROPERTY. VALUATIONS ARE PERIODICALLY
PERFORMED BY MANAGEMENT, AND AN ALLOWANCE OR LOSS IS ESTABLISHED BY A
CHARGE TO OPERATIONS IF THE CARRYING VALUE OF A PROPERTY EXCEEDS ITS
ESTIMATED FAIR VALUE.
H. CASH AND CASH EQUIVALENTS
-------------------------
CASH AND CASH EQUIVALENTS CONSIST OF CASH ON HAND OF $4,050 AT
SEPTEMBER 30, 1996 AND 1995, AND FUNDS ON DEPOSIT WITH BANKS WITH
ORIGINAL MATURITIES OF THREE MONTHS OR LESS OF $607,526 AND $809,214
AT SEPTEMBER 30, 1996 AND 1995, RESPECTIVELY.
(CONTINUED)
<PAGE>
13
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------
I. INCOME TAXES
------------
DEFERRED TAXES ARE PROVIDED WHEN INCOME AND EXPENSES ARE
RECOGNIZED IN DIFFERENT PERIODS FOR FINANCIAL REPORTING PURPOSES AND
FOR PURPOSES OF COMPUTING INCOME TAXES CURRENTLY PAYABLE.
SECURITY FEDERAL BANCORP, INC., ACCOUNTS FOR INCOME TAXES USING
THE LIABILITY METHOD PURSUANT TO STATEMENT OF FINANCIAL ACCOUNTING
STANDARDS (SFAS) NO. 109, "ACCOUNTING FOR INCOME TAXES." THE OBJECTIVE
OF THE ASSET AND LIABILITY METHOD, AS PRESCRIBED UNDER SFAS NO. 109,
IS TO ESTABLISH DEFERRED TAX ASSETS AND LIABILITIES FOR THE TEMPORARY
DIFFERENCES BETWEEN THE FINANCIAL REPORTING BASIS AND THE TAX BASIS OF
THE COMPANY'S ASSETS AND LIABILITIES AT ENACTED TAX RATES EXPECTED TO
BE IN EFFECT WHEN SUCH AMOUNTS ARE REALIZED OR SETTLED. SECURITY
FEDERAL BANCORP, INC., AND ITS SOLE SUBSIDIARY, SECURITY FEDERAL BANK,
FILE SEPARATE FEDERAL AND STATE INCOME TAX RETURNS.
J. LOANS RECEIVABLE
----------------
LOANS RECEIVABLE ARE CARRIED AT COST, AS THE COMPANY HAS THE
INTENT AND THE ABILITY TO HOLD THEM UNTIL MATURITY. GENERALLY,
INTEREST IS CREDITED TO INCOME AS EARNED; HOWEVER, ON LOANS DELINQUENT
MORE THAN 90 DAYS, THE INTEREST IS NOT ACCRUED UNLESS SUCH INTEREST IS
ULTIMATELY COLLECTED, AND IS CREDITED TO INCOME IN THE YEAR RECEIVED.
K. DEBT AND EQUITY SECURITIES
--------------------------
EFFECTIVE OCTOBER 1, 1993, SECURITY FEDERAL BANK ADOPTED THE
PROVISIONS OF FINANCIAL ACCOUNTING STANDARDS NO. 115, "ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES."
THE STATEMENT GENERALLY REQUIRES THAT DEBT AND EQUITY SECURITIES
THAT HAVE READILY DETERMINABLE FAIR VALUES BE CARRIED AT FAIR VALUE
UNLESS THEY ARE INTENDED TO BE HELD TO MATURITY. SECURITIES WILL BE
CLASSIFIED AS HELD-FOR-INVESTMENT AND CARRIED AT AMORTIZED COST ONLY
IF THERE IS A POSITIVE INTENT AND ABILITY TO HOLD THOSE SECURITIES TO
MATURITY. IF NOT CLASSIFIED AS HELD-FOR-INVESTMENT, SUCH SECURITIES
WOULD BE CLASSIFIED AS TRADING SECURITIES OR SECURITIES AVAILABLE-FOR-
SALE. NET UNREALIZED HOLDING GAINS OR LOSSES FOR SECURITIES AVAILABLE-
FOR-SALE WOULD BE EXCLUDED FROM EARNINGS AND REPORTED AS A SEPARATE
COMPONENT OF STOCKHOLDERS' EQUITY.
(CONTINUED)
<PAGE>
14
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------
L. LOAN SERVICING FEES
-------------------
THE BANK SELLS LOANS WITH SERVICING RETAINED. LOANS ARE
GENERALLY SOLD TO FHLMC, AND THE CONTRACTUAL SERVICING FEE IS SET AT
THEN NORMAL SERVICING FEE RATES. LOAN SERVICING COSTS ARE CHARGED TO
EXPENSE AS INCURRED.
IN MAY, 1995, THE FINANCIAL ACCOUNTING STANDARDS BOARD ISSUED
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 122, "ACCOUNTING FOR
MORTGAGE SERVICING RIGHTS, AN AMENDMENT OF FASB 65," EFFECTIVE FOR
FISCAL YEARS BEGINNING AFTER DECEMBER 15, 1995. WHEN A COMPANY HAS A
DEFINITIVE PLAN TO SELL OR SECURITIZE MORTGAGE LOANS IT ORIGINATED AND
INTENDS TO RETAIN THE MORTGAGE SERVICING RIGHTS, STATEMENT NO. 122
REQUIRES THAT THE COST OF MORTGAGE SERVICING RIGHTS ARE CAPITALIZED
SEPARATELY FROM THE COST OF ORIGINATING THE LOAN. UNDER STATEMENT NO.
65, ONLY MORTGAGE SERVICING RIGHTS THAT ARE PURCHASED ARE CAPITALIZED.
STATEMENT NO. 122 ELIMINATES THE DISPARITY BETWEEN THE TREATMENT OF
MORTGAGE SERVICING RIGHTS OBTAINED THROUGH LOAN ORIGINATION AND THOSE
THAT ARE PURCHASED FROM OTHER PARTIES. IN ADDITION, STATEMENT NO. 122
REQUIRES THAT CAPITALIZED MORTGAGE SERVICING RIGHTS SHOULD BE
AMORTIZED IN PROPORTION TO AND OVER THE PERIOD OF ESTIMATED SERVICING
INCOME AND SHOULD BE EVALUATED FOR IMPAIRMENT BASED ON THEIR FAIR
VALUE. THE COMPANY WILL ADOPT STATEMENT NO. 122 IN THE FIRST QUARTER
OF THE FISCAL YEAR ENDING SEPTEMBER 30, 1997. MANAGEMENT DOES NOT
EXPECT THE ADOPTION TO HAVE A MATERIAL EFFECT ON THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS.
M. GAINS (LOSSES) ON SALES OF LOANS
--------------------------------
GAINS (LOSSES) ON SALES OF MORTGAGE LOANS ARE RECOGNIZED AT THE
TIME OF SETTLEMENT.
N. LOANS HELD FOR SALE
-------------------
LOANS HELD FOR SALE ARE NONRECOURSE LOANS WHICH MANAGEMENT HAS
GIVEN A COMMITMENT TO SELL TO FHLMC AND REPRESENT ALL THE LOANS THAT
MANAGEMENT INTENDS TO SELL. THE LOANS HAVE BEEN CLOSED, BUT NOT YET
DELIVERED AS OF THE BALANCE SHEET DATE. THE INTEREST RATES HAVE BEEN
LOCKED-IN SO THAT THE BANK SUFFERS NO INTEREST RATE RISK AND NO
RESULTANT GAIN OR LOSS ON SALE. THEREFORE, THESE LOANS ARE CARRIED AT
COST WHICH APPROXIMATES MARKET VALUE.
(CONTINUED)
<PAGE>
15
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------
O. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
-----------------------------------------------------------
THE PREPARATION OF FINANCIAL STATEMENTS IN CONFORMITY WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES REQUIRES MANAGEMENT TO MAKE
ESTIMATES AND ASSUMPTIONS THAT AFFECT THE REPORTED AMOUNTS OF ASSETS
AND LIABILITIES AND DISCLOSURE OF CONTINGENT ASSETS AND LIABILITIES AT
THE DATE OF THE FINANCIAL STATEMENTS AND THE REPORTED AMOUNTS OF
REVENUES AND EXPENSES DURING THE REPORTING PERIOD. ACTUAL RESULTS
COULD DIFFER FROM THOSE ESTIMATES.
MATERIAL ESTIMATES THAT ARE PARTICULARLY SUSCEPTIBLE TO
SIGNIFICANT CHANGE RELATE TO THE DETERMINATION OF THE ALLOWANCES FOR
LOSSES ON LOANS AND THE VALUATION OF REAL ESTATE ACQUIRED IN
CONNECTION WITH FORECLOSURES OR IN SATISFACTION OF LOANS. IN
CONNECTION WITH THE DETERMINATION OF THE ALLOWANCES FOR LOSSES ON
LOANS AND FORECLOSED REAL ESTATE, MANAGEMENT OBTAINS INDEPENDENT
APPRAISALS FOR SIGNIFICANT PROPERTIES.
WHILE MANAGEMENT USES AVAILABLE INFORMATION TO RECOGNIZE LOSSES
ON LOANS AND FORECLOSED REAL ESTATE, FUTURE ADDITIONS TO THE
ALLOWANCES MAY BE NECESSARY BASED ON CHANGES IN LOCAL ECONOMIC
CONDITIONS. IN ADDITION, REGULATORY AGENCIES, AS AN INTEGRAL PART OF
THEIR EXAMINATION PROCESS, PERIODICALLY REVIEW THE BANK'S ALLOWANCES
FOR LOSSES ON LOANS AND FORECLOSED REAL ESTATE. SUCH AGENCIES MAY
REQUIRE THE BANK TO RECOGNIZE ADDITIONS TO THE ALLOWANCES BASED ON
THEIR JUDGEMENTS ABOUT INFORMATION AVAILABLE TO THEM AT THE TIME OF
THEIR EXAMINATION. BECAUSE OF THESE FACTORS, IT IS REASONABLY POSSIBLE
THAT THE ALLOWANCES FOR LOSSES ON LOANS AND FORECLOSED REAL ESTATE MAY
CHANGE MATERIALLY IN THE NEAR TERM.
P. ADVERTISING COSTS
-----------------
THE COMPANY EXPENSES ADVERTISING COSTS AS THEY ARE INCURRED.
ADVERTISING EXPENSE WAS $60,307, $57,414 AND $65,507 FOR THE YEARS
ENDED SEPTEMBER 30, 1996, 1995 AND 1994, RESPECTIVELY.
Q. IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------
IN MARCH, 1995, THE FINANCIAL ACCOUNTING STANDARDS BOARD ISSUED
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121, "ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF," EFFECTIVE FOR FISCAL YEARS BEGINNING AFTER DECEMBER 15,
1995. THIS STATEMENT REQUIRES THE RECOGNITION OF IMPAIRMENT LOSSES
WHEN CONDITIONS INDICATE THAT LONG-LIVED ASSETS ARE IMPAIRED AND THE
UNDISCOUNTED CASH FLOWS ESTIMATED TO BE GENERATED BY THE ASSETS ARE
LESS THAN THE ASSET'S CARRYING AMOUNT. THE COMPANY WILL ADOPT
STATEMENT NO. 121 IN THE FIRST QUARTER OF THE FISCAL YEAR ENDING
SEPTEMBER 30, 1997, AND DOES NOT ANTICIPATE THAT THE EFFECT OF THE
ADOPTION WILL BE MATERIAL TO THE CONSOLIDATED FINANCIAL STATEMENTS.
(CONTINUED)
<PAGE>
16
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------
R. EARNINGS PER SHARE
------------------
EARNINGS PER SHARE COMPUTATIONS ARE BASED UPON THE WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING DURING THE PERIODS. THE DILUTIVE
EFFECT OF SHARES ISSUABLE UNDER STOCK OPTIONS AND STOCK AWARDS GRANTED
BY THE COMPANY IS IMMATERIAL.
2. RELATED PARTY TRANSACTIONS
--------------------------
THE BANK HAS LOANS OUTSTANDING AT SEPTEMBER 30, 1996 AND 1995, TO
DIRECTORS, OFFICERS, AND EMPLOYEES AS FOLLOWS:
<TABLE>
1 9 9 6 1 9 9 5
------- --------
<S> <C> <C>
BEGINNING BALANCE $ 558,110 $584,876
REDUCTIONS (296,628) (26,766)
--------- --------
ENDING BALANCE $ 261,482 $558,110
========= ========
</TABLE>
THESE ARE LOANS MADE DURING THE NORMAL COURSE OF BUSINESS AND THE
RATES, COLLATERAL AND TERMS ARE EQUIVALENT TO THOSE THAT ARE REQUIRED FOR
SIMILAR LOANS MADE AT ARMS LENGTH.
THE FORMER PRESIDENT OF THE COMPANY SERVED AS LEGAL COUNSEL FOR THE
BANK AND PROVIDED TITLE SERVICES TO CUSTOMERS ON LOANS MADE. TITLE FEES
WERE COLLECTED FROM CUSTOMERS AT THE TIME OF CLOSING AND WERE PAID TO
INSURED TITLES OF TUSCALOOSA, INC., A CORPORATION WHOLLY-OWNED BY THE
PRESIDENT. NONE OF THIS AMOUNT IS INCLUDED IN EXPENSE ON THE CONSOLIDATED
STATEMENTS OF INCOME OF THE COMPANY. FOR THE YEARS ENDED SEPTEMBER 30, 1996
AND 1995, THE AMOUNT PAID TO INSURED TITLES OF TUSCALOOSA, INC., TOTALED
$163,261 AND $116,352, RESPECTIVELY.
DURING THE FISCAL YEAR ENDED SEPTEMBER 30, 1996, VARIOUS COMPANIES
OWNED BY THREE DIRECTORS OF THE COMPANY RECEIVED $203,820 IN REAL ESTATE
COMMISSIONS AND HOMEOWNER'S INSURANCE PREMIUMS FROM THE CLOSING OF MORTGAGE
LOANS ORIGINATED BY THE BANK. THE FEES ARE COLLECTED FROM THE BUYERS AND
SELLERS AT CLOSING, AND THUS, ARE NOT INCLUDED IN EXPENSES ON THE
CONSOLIDATED STATEMENTS OF INCOME OF THE COMPANY.
(CONTINUED)
<PAGE>
17
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
3. INVESTMENT SECURITIES
---------------------
SEPTEMBER 30, 1996
------------------
SECURITIES AVAILABLE-FOR-SALE CONSISTED OF THE FOLLOWING:
<TABLE>
<CAPTION>
FAIR UNREALIZED
MATURITY MARKET GAIN
DESCRIPTION DATE RATE VALUE COST (LOSS)
- --------------------------------------- -------- ----- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
U. S. GOVERNMENT (INCLUDING
AGENCIES:
FEDERAL AGRICULTURAL MORTGAGE
CORPORATION STOCK - - $ 875 $ 875 $ -
FEDERAL NATIONAL MORTGAGE
ASSOCIATION BOND 12/13/00 6.29% 2,983,711 3,076,602 (92,891)
---------- ---------- ----------
$2,984,586 $3,077,477 ($ 92,891)
========== ========== ==========
</TABLE>
SEPTEMBER 30, 1995
------------------
SECURITIES AVAILABLE-FOR-SALE CONSISTED OF THE FOLLOWING:
<TABLE>
<CAPTION>
FAIR UNREALIZED
MATURITY MARKET GAIN
DESCRIPTION DATE RATE VALUE COST (LOSS)
- ----------------------------------------- -------- ---- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
U. S. GOVERNMENT (INCLUDING
AGENCIES:
FEDERAL AGRICULTURAL MORTGAGE
CORPORATION STOCK - - $ 875 $ 875 $ -
U. S. TREASURY NOTE 02/28/97 6.75% 253,203 251,895 1,308
FEDERAL HOME LOAN MORTGAGE
CORP. BOND 06/08/97 6.51 252,031 250,955 1,076
FEDERAL HOME LOAN BANK BOND 05/05/00 7.00 2,020,000 1,988,542 31,458
FEDERAL HOME LOAN BANK BOND 05/09/00 7.00 3,105,750 3,061,223 44,527
FEDERAL NATIONAL MORTGAGE
ASSOCIATION BOND 03/10/98 8.20 261,719 258,065 3,654
FEDERAL NATIONAL MORTGAGE
ASSOCIATION BOND 08/11/99 7.00 253,281 249,042 4,239
---------- ---------- ----------
$6,146,859 $6,060,597 $ 86,262
========== ========== ==========
</TABLE>
(CONTINUED)
<PAGE>
18
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
3. INVESTMENT SECURITIES (CONTINUED)
---------------------
SECURITIES HELD-TO-MATURITY CONSISTED OF THE FOLLOWING:
<TABLE>
<CAPTION>
FAIR UNREALIZED
MATURITY MARKET GAIN
DESCRIPTION DATE RATE VALUE COST (LOSS)
- ------------------------- -------- ----- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
U. S. TREASURY NOTE 12/31/95 4.25% $996,875 $1,000,000 ($ 3,125)
======== ========== ==========
</TABLE>
ALL BONDS, NOTES AND DEBENTURES CLASSIFIED AS HELD-TO-MATURITY ARE
CARRIED AT COST, ADJUSTED FOR PREMIUMS AND DISCOUNTS THAT ARE RECOGNIZED IN
INCOME USING THE INTEREST METHOD TO MATURITY. ALL BONDS, NOTES, DEBENTURES
AND EQUITY SECURITIES CLASSIFIED AS AVAILABLE-FOR-SALE ARE CARRIED AT THE
LOWER OF COST OR ESTIMATED FAIR MARKET VALUE IN THE AGGREGATE. NET
UNREALIZED GAIN OR LOSSES ARE RECOGNIZED THROUGH A VALUATION ALLOWANCE THAT
IS SHOWN AS AN INCREASE OR REDUCTION IN THE CARRYING VALUE OF RELATED
SECURITIES AND A CORRESPONDING INCREASE OR REDUCTION IN STOCKHOLDERS'
EQUITY.
THE FOLLOWING IS A SUMMARY OF MATURITIES OF SECURITIES HELD-TO-
MATURITY AND AVAILABLE-FOR-SALE AS OF SEPTEMBER 30, 1996:
<TABLE>
<CAPTION>
SECURITIES HELD-TO-MATURITY SECURITIES AVAILABLE-FOR-SALE
--------------------------- -----------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ----- ---------- -----------
<S> <C> <C> <C> <C>
AMOUNTS MATURING IN:
ONE YEAR OR LESS $- $- $ - $-
AFTER ONE YEAR THROUGH FIVE YEARS - - 3,076,602 2,983,711
AFTER FIVE YEARS THROUGH TEN YEARS - - - -
AFTER TEN YEARS - - 875 875
--------- ----- ---------- -----------
$ - $ - $3,077,477 $2,984,586
========= ===== ========== ===========
</TABLE>
DURING THE FISCAL YEAR ENDED SEPTEMBER 30, 1996, SECURITIES CLASSIFIED
AS AVAILABLE-FOR-SALE WERE SOLD FOR TOTAL PROCEEDS OF $6,101,797, RESULTING
IN GROSS REALIZED GAINS OF $41,335. NET UNREALIZED LOSSES ON AVAILABLE-FOR-
SALE SECURITIES OF $92,891 WERE ACCRUED, RESULTING IN A NET DECREASE IN
STOCKHOLDERS' EQUITY. IN ADDITION, MATURITIES OF SECURITIES CLASSIFIED AS
HELD-TO-MATURITY TOTALED $1,000,000 DURING THE YEAR ENDED SEPTEMBER 30,
1996.
(CONTINUED)
<PAGE>
19
SECURITY FEDERAL BANCORPO, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
3. INVESTMENT SECURITIES (CONTINUED)
---------------------
DURING THE FISCAL YEAR ENDED SEPTEMBER 30, 1995, SECURITIES CLASSIFIED
AS HELD-TO-MATURITY TOTALING $1,238,802 IN AMORTIZED COST WERE SOLD,
RESULTING IN GROSS REALIZED GAINS OF $6,237. THE SECURITIES WERE SOLD BASED
ON THE CASH FLOW NEEDS OF THE BANK. DUE TO ANTICIPATED FUTURE SALES OF
SECURITIES BASED ON CONTINUING CASH FLOW NEEDS, AND DUE TO THE FACT THAT
SECURITIES WERE SOLD DURING THE FISCAL YEAR ENDED SEPTEMBER 30, 1995, THE
DECISION WAS MADE TO RECLASSIFY SECURITIES HAVING MATURITY DATES OF MORE
THAN THREE MONTHS FROM SEPTEMBER 30, 1995, WITH AMORTIZED COST OF
$6,059,722 FROM THE HELD-TO-MATURITY CLASSIFICATION TO THE AVAILABLE-FOR-
SALE CLASSIFICATION, RESULTING IN UNREALIZED GAINS OF $86,262. A DEFERRED
TAX LIABILITY OF $34,505 WAS ACCRUED, RESULTING IN A NET INCREASE IN
STOCKHOLDERS' EQUITY OF $51,757. ADDITIONALLY, MATURITIES OF SECURITIES
CLASSIFIED AS HELD-TO-MATURITY TOTALED $500,000 DURING THE YEAR ENDED
SEPTEMBER 30, 1995.
NO GROSS PROCEEDS FROM SALES OR MATURITIES OF INVESTMENTS OCCURRED
DURING THE YEAR ENDED SEPTEMBER 30, 1994.
4. LOANS RECEIVABLE
----------------
LOANS RECEIVABLE AT SEPTEMBER 30, 1996 AND 1995, CONSISTED OF THE
FOLLOWING:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
----------- -----------
<S> <C> <C>
REAL ESTATE LOANS:
ONE TO FOUR FAMILY RESIDENTIAL LOANS $60,014,323 $51,632,850
CONSTRUCTIONS LOANS 6,239,389 6,014,932
MULTI-FAMILY LOANS 3,478,064 2,716,009
COMMERCIAL LOANS 1,410,218 1,357,547
----------- -----------
TOTAL REAL ESTATE LOANS 71,141,994 61,721,338
CONSUMER LOANS 544,648 512,432
----------- -----------
TOTAL LOANS RECEIVABLE 71,686,642 62,233,770
LESS:
UNEARNED DISCOUNTS ON HOME IMPROVEMENT LOANS 1,838 584
UNDISBURSED PORTION OF LOANS IN PROCESS 2,408,300 1,958,366
DEFERRED FEES ON MORTGAGE LOANS 435,932 309,038
ALLOWANCE FOR LOSSES 330,003 330,003
----------- -----------
$68,510,569 $59,635,779
=========== ===========
</TABLE>
(CONTINUED)
<PAGE>
20
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
4. LOANS RECEIVABLE (CONTINUED)
----------------
A SUMMARY OF THE ALLOWANCE FOR LOAN LOSSES AT SEPTEMBER 30, 1996 AND
1995, IS SHOWN BELOW:
<TABLE>
<S> <C>
BALANCE AT SEPTEMBER 30, 1994 $330,003
ADDITIONS TO ALLOWANCE FOR YEAR ENDED SEPTEMBER 30, 1995 -
--------
BALANCE AT SEPTEMBER 30, 1995 330,003
ADDITION TO ALLOWANCE FOR YEAR ENDED SEPTEMBER 30, 1996 -
--------
BALANCE AT SEPTEMBER 30, 1996 $330,003
========
</TABLE>
WHILE MANAGEMENT USES AVAILABLE INFORMATION TO RECOGNIZE LOSSES ON
LOANS, FUTURE ADDITIONS MAY BE NECESSARY BASED ON CHANGES IN ECONOMIC
CONDITIONS. THE BANK IS SUBJECT TO THE REGULATIONS OF CERTAIN FEDERAL
AGENCIES AND UNDERGOES PERIODIC EXAMINATIONS BY THOSE AGENCIES. AS AN
INTEGRAL PART OF THE EXAMINATIONS, THE REGULATORY AGENCIES PERIODICALLY
REVIEW THE BANK'S ALLOWANCE FOR LOSSES ON LOANS. SUCH AGENCIES MAY REQUIRE
THE BANK TO RECOGNIZE ADDITIONS TO THE ALLOWANCE BASED ON THEIR JUDGMENT
ABOUT INFORMATION AVAILABLE TO THEM AT THE TIME OF THEIR EXAMINATION.
LOAN BALANCES MORE THAN 90 DAYS DELINQUENT THAT HAD REACHED NON-
ACCRUAL STATUS TOTALED APPROXIMATELY $695,879 AND $428,000 AT SEPTEMBER 30,
1996 AND 1995, RESPECTIVELY. GROSS INTEREST INCOME OF $21,021 AND $13,000
WOULD HAVE BEEN RECORDED ON THESE LOANS FOR THE YEARS ENDED SEPTEMBER 30,
1996 AND 1995, RESPECTIVELY. NO INTEREST ON SUCH LOANS WAS INCLUDED IN
INCOME DURING THESE PERIODS.
MORTGAGE LOANS SERVICED FOR OTHERS ARE NOT INCLUDED IN THE
ACCOMPANYING STATEMENTS OF FINANCIAL CONDITION. THE UNPAID PRINCIPAL
BALANCES OF THESE LOANS AT SEPTEMBER 30, 1996 AND 1995, CONSISTED OF THE
FOLLOWING:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
----------- -----------
<S> <C> <C>
MORTGAGE LOANS SERVICED FOR:
FHLMC $70,575,970 $66,504,251
OTHER INVESTORS 1,237,155 1,424,139
----------- -----------
$71,813,125 $67,928,390
=========== ===========
</TABLE>
(CONTINUED)
<PAGE>
21
SECURITY REDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
5. OFFICE PROPERTIES AND EQUIPMENT
-------------------------------
OFFICE PROPERTIES AND EQUIPMENT CONSISTED OF THE FOLLOWING AT
SEPTEMBER 30,1996 AND 1995:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
---------- -----------
<S> <C> <C>
OFFICE FURNITURE AND EQUIPMENT $ 279,198 $ 273,061
---------- ----------
OFFICE BUILDING, LAND AND IMPROVEMENT 1,366,058 1,366,058
---------- ----------
1,645,256 1,639,119
LESS: ACCUMULATED DEPRECIATION 489,586 419,116
---------- ----------
$1,155,670 $1,220,003
========== ==========
</TABLE>
DEPRECIATION AND AMORTIZATION ARE COMPUTED USING BOTH STRAIGHT-LINE
AND ACCELERATED METHODS FOR FINANCIAL REPORTING AND INCOME TAX PURPOSES.
DEPRECIATION EXPENSE TOTALED $89,553, $84,524 AND $70,469 FOR THE YEARS
ENDED SEPTEMBER 30, 1994, 1995 AND 1996, RESPECTIVELY.
6. INCOME TAXES
------------
THE FEDERAL INCOME AND STATE EXCISE TAX RETURNS OF THE COMPANY ARE
FILED ON A CALENDAR YEAR BASIS WHILE THE FINANCIAL STATEMENTS ARE PRESENTED
ON A FISCAL YEAR BASIS.
INCOME TAX EXPENSE FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND
1994, IS AS FOLLOWS:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ----- -----
<S> <C> <C> <C>
SEPTEMBER 30, 1996:
CURRENT $ 267,354 $ 38,887 $ 306,241
DEFERRED (104,150) (18,380) (122,530)
---------- --------- ---------
$ 163,204 $ 20,507 $ 183,711
========== ========= =========
SEPTEMBER 30, 1995:
CURRENT $ 315,606 $ 43,241 $ 358,847
DEFERRED (29,209) (5,155) (34,364)
---------- --------- ---------
$ 286,397 $ 38,086 $ 324,483
========== ========= =========
SEPTEMBER 30, 1994:
CURRENT $ 228,290 $ 21,985 $ 250,275
DEFERRED (10,118) (1,785) (11,903)
---------- --------- ---------
$ 218,172 $ 20,200 $ 238,372
========== ========= =========
</TABLE>
(CONTINUED)
<PAGE>
22
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
6. INCOME TAXES (CONTINUED)
------------
INCLUDED IN THESE AMOUNTS ARE INCOME TAXES OF APPROXIMATELY $15,200,
$2,300, AND $-0- IN 1996, 1995 AND 1994, RESPECTIVELY, RELATED TO THE SALES
OF INVESTMENT SECURITIES.
TEMPORARY DIFFERENCES THAT GAVE RISE TO SIGNIFICANT PORTIONS OF THE
DEFERRED TAX ASSET AT SEPTEMBER 30, 1996 AND 1995, RELATED TO THE
FOLLOWING:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
--------- ---------
<S> <C> <C>
UNREALIZED (GAIN) LOSS ON INVESTMENT SECURITIES
AVAILABLE-FOR-SALE $ 34,091 ($ 34,505)
STOCK DIVIDENDS, FHLB STOCK (72,005) (78,480)
DEFERRED COMPENSATION PLAN - 193,500
RESERVE FOR LOAN LOSSES (38,030) (67,061)
DIRECTOR'S RETIREMENT PLAN 97,857 11,254
SAIF ASSESSMENT PAYABLE 139,868 -
DEFERRED FEES 69,058 24,510
OTHER, NET 27,270 16,000
--------- ---------
$258,109 $ 65,218
======== =========
</TABLE>
AT SEPTEMBER 30, 1996, 1995 AND 1994, RETAINED EARNINGS INCLUDE
$712,606 OF ACCUMULATED TAX RESERVES FOR BAD DEBTS FOR WHICH NO DEFERRED
INCOME TAX LIABILITY HAS BEEN ACCRUED. THESE AMOUNTS REPRESENT ALLOCATIONS
OF INCOME TO BAD DEBT DEDUCTIONS FOR TAX PURPOSES ONLY. REDUCTION OF THESE
RESERVES FOR PURPOSES OTHER THAN TAX BAD-DEBT LOSSES OR ADJUSTMENTS ARISING
FROM CARRYBACK OF NET OPERATING LOSSES WOULD CREATE INCOME FOR TAX
PURPOSES, WHICH WOULD BE SUBJECT TO THE THEN-CURRENT CORPORATE INCOME TAX
RATE. THE UNRECORDED DEFERRED LIABILITY ON THESE AMOUNTS WAS APPROXIMATELY
$261,527 AT SEPTEMBER 30, 1996 AND 1995.
TOTAL INCOME TAX EXPENSE DIFFERED FROM THE AMOUNTS COMPUTED BY
APPLYING THE STATUTORY FEDERAL RATE OF 34% TO INCOME BEFORE INCOME TAXES AS
A RESULT OF THE FOLLOWING:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5 1 9 9 4
--------- --------- ---------
<S> <C> <C> <C>
EXPECTED FEDERAL INCOME TAX EXPENSE $186,172 $ 297,762 $228,835
ITEMS EFFECTIVE INCOME TAX EXPENSE:
ALLOWABLE BAD DEBT DEDUCTION, NET - ( 28,977) -
STATE TAX, NET 7,659 57,900 26,093
OTHER (10,120) ( 2,202) (16,556)
-------- --------- ---------
$183,711 $ 324,483 $238,372
======== ========= =========
EFFECTIVE TAX RATE 34% 37% 36%
======== ======== ========
</TABLE>
(CONTINUED)
<PAGE>
23
SECUIRTY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
7. PROFIT SHARING PLAN AND DEFERRED COMPENSATION PLAN
--------------------------------------------------
THE BOARD OF DIRECTORS ADOPTED A PROFIT SHARING PLAN IN OCTOBER, 1988
AND THE PLAN COVERS SUBSTANTIALLY ALL EMPLOYEES. CONTRIBUTIONS TO THE PLAN
ARE AT THE DISCRETION OF THE BOARD OF DIRECTORS AND THE PLAN IS MAINTAINED
ON A CALENDAR YEAR. DURING CALENDAR YEARS 1995, 1994 AND 1993,
CONTRIBUTIONS TO THE PLAN CHARGED TO OPERATIONS WERE $49,701, $60,412, AND
$43,041, RESPECTIVELY.
ADDITIONALLY, IN 1988, THE BOARD OF DIRECTORS ADOPTED A NON-QUALIFIED
DEFERRED COMPENSATION PLAN TO COVER THE FORMER PRESIDENT OF THE BANK.
DURING THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994, $16,250, $65,000
AND $65,000, RESPECTIVELY, WAS CONTRIBUTED TO THE PLAN AND CHARGED TO
OPERATIONS. UPON THE DEATH OF THE FORMER PRESIDENT OF THE BANK IN DECEMBER,
1995, THE ASSETS OF THE PLAN WERE DISTRIBUTED TO HIS BENEFICIARIES.
8. OTHER OPERATING EXPENSES
------------------------
OTHER OPERATING EXPENSES FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995
AND 1994, ARE SHOWN BELOW:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5 1 9 9 4
----------- -------- ---------
<S> <C> <C> <C>
ADVERTISING $ 60,307 $ 57,414 $ 65,507
PROFESSIONAL SERVICES 134,253 51,452 23,435
STATIONERY, PRINTING AND OFFICE SUPPLIES 52,479 48,097 61,432
OTHER EXPENSES 145,347 126,141 82,068
-------- -------- ---------
$392,386 $283,104 $232,442
======== ======== =========
</TABLE>
9. OTHER ASSETS
------------
OTHER ASSETS CONSISTED OF THE FOLLOWING AT SEPTEMBER 30, 1996 AND
1995:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
-------- --------
<S> <C> <C>
MANAGEMENT RECOGNITION PLAN TRUST $354,690 $ -
STOCK IN SAVINGS AND LOAN DATA CORPORATION 15,000 15,000
PREPAID EXPENSES AND OTHER ASSETS 86,945 67,124
-------- ---------
TOTAL OTHER ASSETS $456,635 $ 82,124
======== =========
</TABLE>
(CONTINUED)
<PAGE>
24
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
10. ACCRUED EXPENSES AND OTHER LIABILITIES
--------------------------------------
ACCRUED EXPENSES AND OTHER LIABILITIES CONSISTED OF THE FOLLOWING AT
SEPTEMBER 30, 1996 AND 1995:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
--------- ---------
<S> <C> <C>
ACCRUED INTEREST PAYABLE $ 36,932 $34,462
ACCOUNTS PAYABLE 45,766 2,073
REFUNDABLE LOAN APPLICATION FEES 6,614 8,728
PAYROLL TAXES PAYABLE - 129
ACCRUED DIRECTOR'S RETIREMENT PLAN 266,640 28,134
ACCOUNTS PAYABLE - SAIF ASSESSMENT 381,113 -
ACCRUED MANAGEMENT RECOGNITION PLAN 34,306 -
-------- -------
$771,371 $73,526
======== =======
</TABLE>
11. FEDERAL HOME LOAN BANK STOCK
----------------------------
THE BANK IS A MEMBER OF THE FEDERAL HOME LOAN BANK SYSTEM AND IS
REQUIRED TO MAINTAIN AN INVESTMENT IN THE STOCK OF THE FEDERAL HOME LOAN
BANK OF ATLANTA EQUAL TO AT LEAST 1% OF THE UNPAID PRINCIPAL BALANCES OF
ITS RESIDENTIAL MORTGAGE LOANS, .3% OF ITS TOTAL ASSETS OR 5% OF ITS
OUTSTANDING ADVANCES FROM FHLB-ATLANTA. PURCHASES AND SALES OF STOCK ARE
MADE DIRECTLY WITH FHLB-ATLANTA. THE STOCK OWNERSHIP IS EVALUATED ANNUALLY
ON DECEMBER 31. AS OF THE LATEST ANNUAL EVALUATION, THE BANK MET ITS STOCK
OWNERSHIP REQUIREMENT.
12. ADVANCES FROM FEDERAL HOME LOAN BANK
------------------------------------
ADVANCES FROM FEDERAL HOME LOAN BANK AT SEPTEMBER 30, 1996, CONSISTED
OF A $585,000 LOAN MADE TO SECURITY FEDERAL BANK FOR A TERM OF TWENTY YEARS
AT A 3% FIXED RATE OF INTEREST WHICH IS DUE ON AUGUST 5, 2011, AND VARIOUS
SHORT-TERM ADVANCES AT VARIABLE RATES OF INTEREST AS FOLLOWS. THE ADVANCES
WERE COLLATERALIZED BY CERTAIN FIRST MORTGAGE LOANS TOTALING $4,659,755 AT
SEPTEMBER 30, 1996.
<TABLE>
<CAPTION>
INTEREST
DATE MATURITY RATE AT
GRANTED DATE 9/30/96 BALANCE
- ----------------- -------- ------- ----------
<S> <C> <C> <C>
05/07/96 05/07/97 6.05% $1,000,000
09/12/96 09/12/97 6.05 500,000
09/19/96 09/19/97 6.05 750,000
----------
$2,250,000
==========
</TABLE>
(CONTINUED)
<PAGE>
25
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOSSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
12. ADVANCES FROM FEDERAL HOME LOAN BANK (CONTINUED)
------------------------------------
AT SEPTEMBER 30, 1995, ADVANCES FROM FEDERAL HOME LOAN BANK CONSISTED
OF A $585,000 LOAN MADE TO SECURITY FEDERAL BANK FOR A TERM OF TWENTY YEARS
AT A 3% FIXED RATE OF INTEREST WHICH IS DUE ON AUGUST 5, 2011, AND A SHORT-
TERM ADVANCE OF $700,000 MADE AUGUST 1, 1995, WITH A DUE DATE OF AUGUST 1,
1996, AND A VARIABLE RATE OF INTEREST, THE RATE BEING 7% AT SEPTEMBER 30,
1995. THE ADVANCES WERE COLLATERALIZED BY CERTAIN FIRST MORTGAGE LOANS
TOTALING $3,601,130 AT SEPTEMBER 30, 1995.
PRINCIPAL AMOUNTS DUE OVER THE NEXT FIVE FISCAL YEARS ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SEPTEMBER 30, AMOUNT
---------------- ----------
<S> <C>
1997 $2,250,000
1998 -
1999 -
2000 -
2001 -
THEREAFTER 585,000
----------
$2,835,000
==========
</TABLE>
13. CONCENTRATION OF CREDIT RISK
----------------------------
THE BANK GRANTS CONSUMER, COMMERCIAL AND RESIDENTIAL LOANS TO VARIOUS
CUSTOMERS PRIMARILY IN THE WEST CENTRAL ALABAMA REGION.
THE COMPANY MAINTAINS CASH BALANCES AT VARIOUS LOCAL FINANCIAL
INSTITUTIONS. CASH ACCOUNTS AT THESE BANKS ARE INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION FOR UP TO $100,000. AMOUNTS IN EXCESS OF
INSURED LIMITS WERE APPROXIMATELY $1,343,713 AT SEPTEMBER 30, 1996. THE
EXCESS IS COMPUTED BASED ON THE BALANCE OF EACH ACCOUNT ACCORDING TO EACH
INSTITUTION AT SEPTEMBER 30, 1996. THE BALANCE OF THE ACCOUNTS INCLUDED IN
CASH AND CASH EQUIVALENTS AS SHOWN ON THE CONSOLIDATED STATEMENT OF
FINANCIAL CONDITION WILL VARY FROM THE BALANCE ACCORDING TO THE FINANCIAL
INSTITUTION BY THE AMOUNT OF ANY OUTSTANDING CHECKS OR DEPOSITS IN TRANSIT
AT SEPTEMBER 30, 1996.
(CONTINUED)
<PAGE>
26
SECURITY FEDERAL BANCORP, NIC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
14. COMMITMENTS AND CONTINGENCIES
-----------------------------
AT SEPTEMBER 30, 1996 AND 1995, OUTSTANDING COMMITMENTS TO ORIGINATE
BOTH FIXED AND VARIABLE RATE LOANS AMOUNTED TO $1,090,000 AND $1,249,006,
RESPECTIVELY. COMMITMENT PERIODS RANGED FROM 30 TO 90 DAYS FROM THE DATE OF
COMMITMENT WITH INTEREST ON FIXED RATE LOANS EXPECTED TO RANGE FROM 7.25%
TO 8.125% BASED ON MATURITIES. OF THE FIXED RATE LOAN COMMITMENTS, NO RATES
WERE LOCKED IN AT SEPTEMBER 30, 1996.
COMMITMENTS TO SELL MORTGAGE LOANS AMOUNTED TO $1,632,050 AND
$1,266,000 AT SEPTEMBER 30, 1996 AND 1995, RESPECTIVELY. OF THE $1,632,050
IN COMMITMENTS AT SEPTEMBER 30, 1996, $1,514,050 WAS FUNDED. OF THE
$1,266,000 IN COMMITMENTS AT SEPTEMBER 30, 1995, $175,000 WAS FUNDED.
COMMITMENTS TO EXTEND CREDIT MAY INVOLVE, TO VARYING DEGREES, ELEMENTS
OF CREDIT RISK AND INTEREST RATE RISK IN EXCESS OF THE AMOUNT RECOGNIZED IN
THE STATEMENT OF FINANCIAL CONDITION. THE AMOUNT OF CREDIT LOSS IN THE
EVENT OF NONPERFORMANCE BY THE OTHER PARTY TO THE COMMITMENT IS REPRESENTED
BY THE CONTRACTUAL AMOUNT OF THE LOAN WHEN ORIGINATED. INTEREST RATE RISK
ON COMMITMENTS TO EXTEND CREDIT RESULTS FROM THE POSSIBILITY THAT INTEREST
RATES MAY HAVE MOVED UNFAVORABLY FROM THE POSITION OF THE BANK SINCE THE
TIME THE COMMITMENT WAS MADE.
OTHER THAN THE COMMITMENTS DISCUSSED IN THE PRECEDING PARAGRAPH, THE
BANK HAS NOT ENGAGED IN ANY TRANSACTIONS THAT WOULD GIVE RISE TO POTENTIAL
OFF-BALANCE SHEET CREDIT LOSSES. ACCORDINGLY, NO RESERVE FOR SUCH LOSSES
HAS BEEN ESTABLISHED.
15. SEGMENT INFORMATION
-------------------
THE PRIMARY OPERATIONS OF THE BANK CONSIST OF THE ORIGINATION AND
SERVICING OF ONE-TO-FOUR FAMILY MORTGAGE LOANS. THE TABLE BELOW PROVIDES
SUMMARIZED INFORMATION BY BUSINESS SEGMENT.
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
--------- ---------
<S> <C> <C>
REVENUE FROM UNAFFILIATED CUSTOMERS:
MORTGAGE BANKING $ 123,132 $ 165,997
OTHER 6,095,135 5,236,666
---------- ----------
$6,218,267 $5,402,663
========== ==========
OPERATING PROFIT:
MORTGAGE BANKING $ 86,069 $ 125,626
OTHER 461,497 750,144
---------- ----------
$ 547,566 $ 875,770
========== ==========
</TABLE>
(CONTINUED)
<PAGE>
27
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
15. SEGMENT INFORMATION (CONTINUED)
-------------------
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
----------- -----------
<S> <C> <C>
IDENTIFIABLE ASSETS:
MORTGAGE BANKING $ 1,514,050 $ 175,702
OTHER 75,480,746 70,364,782
----------- -----------
$76,994,796 $70,540,484
=========== ===========
</TABLE>
REVENUES ARE COMPRISED OF INTEREST INCOME, LOAN FEES, LOAN SERVICING
REVENUE, NET GAINS OR LOSSES ON INTEREST-EARNING ASSETS AND REAL ESTATE
ACTIVITIES DEPOSIT ACCOUNT OPERATIONS AND OTHER INCOME.
OPERATING PROFIT IS INTEREST INCOME LESS INTEREST EXPENSE, PROVISION
FOR LOSSES, AND OPERATING EXPENSES. GENERAL OVERHEAD EXPENSES NOT DIRECTLY
ATTRIBUTABLE TO A SEGMENT ARE ALLOCATED TO ALL SEGMENTS.
IDENTIFIABLE ASSETS BY SEGMENTS ARE THOSE ASSETS USED EXCLUSIVELY BY
SUCH SEGMENT.
16. FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT ("FIRREA") OF
-------------------------------------------------------------------------
1989
- ----
FIRREA WAS SIGNED INTO LAW ON AUGUST 9, 1989; REGULATIONS FOR SAVINGS
INSTITUTIONS' MINIMUM CAPITAL REQUIREMENTS WENT INTO EFFECT ON DECEMBER 7,
1989. IN ADDITION TO ITS CAPITAL REQUIREMENTS, FIRREA INCLUDED PROVISIONS
FOR CHANGES IN THE FEDERAL REGULATORY STRUCTURE FOR INSTITUTIONS INCLUDING
A NEW DEPOSIT INSURANCE SYSTEM, INCREASED DEPOSIT INSURANCE PREMIUMS, AND
RESTRICTED INVESTMENT ACTIVITIES WITH RESPECT TO NON-INVESTMENT-GRADE
CORPORATE DEBT AND CERTAIN OTHER INVESTMENTS. FIRREA ALSO INCREASED THE
REQUIRED RATIO OF HOUSING RELATED ASSETS IN ORDER TO QUALIFY AS A SAVINGS
INSTITUTION.
THE REGULATIONS REQUIRE INSTITUTIONS TO HAVE A MINIMUM REGULATORY
TANGIBLE CAPITAL EQUAL TO 1.5 PERCENT OF TOTAL ASSETS, A MINIMUM CORE
CAPITAL EQUAL TO 3 PERCENT OF TOTAL ASSETS AND RISK-BASED CAPITAL EQUAL TO
8 PERCENT OF TOTAL RISK-WEIGHTED ASSETS.
THE BANK AT SEPTEMBER 30, 1996, MET THE REGULATORY CAPITAL
REQUIREMENTS AS DEFINED BY FIRREA. AT SEPTEMBER 30, 1996, THE BANK'S
REGULATORY TANGIBLE CAPITAL WAS $7,894,856 OR 10.31 PERCENT OF TOTAL
ASSETS, CORE CAPITAL WAS $7,894,856 OR 10.31 PERCENT OF TOTAL ASSETS, AND
RISK-BASED CAPITAL WAS $8,158,859 OR 20.41 PERCENT OF TOTAL RISK-WEIGHTED
ASSETS, AS DEFINED BY FIRREA.
A RECONCILIATION OF GAAP CAPITAL TO REGULATORY CAPITAL IS SHOWN ON THE
FOLLOWING PAGE.
(CONTINUED)
<PAGE>
28
SECURITY FEDERAL BANCORP, INC., AND SUBSIDARY
TUSCALOOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
16. FINANCIAL INSTITUTIONS REFORM, RECOVERY AND ENFORCEMENT ACT ("FIRREA") OF
1989 (CONTINUED) UNAUDITED
<TABLE>
<CAPTION>
UNAUDITED
REGULATORY
-------------------------------------------------------------
GAAP TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
1996 GAAP CAPITAL $7,836,056 $7,836,056 $7,836,056 $7,836,056
- ------------------- ==========
ADDITIONAL CAPITAL ITEMS:
GENERAL VALUATION ALLOWANCES LESS
ASSETS REQUIRED TO BE DEDUCTED - - 264,003
UNREALIZED LOSSES ON AVAILABLE-FOR-
SALE SECURITIES 58,800 58,800 58,800
---------- ----------
REGULATORY CAPITAL - COMPUTED 7,894,856 7,894,856 8,158,859
- ----------------------------------------
MINIMUM CAPITAL REQUIREMENTS 1,149,320 2,298,640 3,197,609
---------- ---------- ----------
REGULATORY CAPITAL - EXCESS $6,745,536 $5,596,216 $4,961,250
========== ========== ==========
<CAPTION>
UNAUDITED
REGULATORY
-------------------------------------------------------------
GAAP TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
--------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
1995 GAAP CAPITAL $7,735,128 $7,735,128 $7,735,128 $7,735,128
- ------------------- ==========
ADDITIONAL CAPITAL ITEMS:
GENERAL VALUATION ALLOWANCES LESS
ASSETS REQUIRED TO BE DEDUCTED - - 199,000
---------- ---------- ----------
REGULATORY CAPITAL - COMPUTED 7,735,128 7,735,128 7,934,128
- ----------------------------------------
MINIMUM CAPITAL REQUIREMENTS 1,057,121 2,114,242 2,876,000
---------- ---------- ----------
REGULATORY CAPITAL - EXCESS $6,678,007 $5,620,886 $5,058,128
========== ========== ==========
</TABLE>
(CONTINUED)
<PAGE>
29
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
17. SAVINGS ACCOUNTS
----------------
SAVINGS ACCOUNTS ARE SEGREGATED BY ORIGINAL MATURITY DATE AND INTEREST
RATE AS FOLLOWS:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RATE AT
9-30-96 1 9 9 6 1 9 9 5
---------- --------- ---------
<S> <C> <C> <C>
PASSBOOK ACCOUNTS
- --------------------------------------------
3.50% AT SEPTEMBER 30, 1996, AND 1995 3.50% $ 3,711,419 $ 3,688,026
----------- -----------
TOTAL PASSBOOK ACCOUNTS 3,711,419 3,688,026
----------- -----------
CERTIFICATE ACCOUNTS
- --------------------------------------------
6 MONTHS OR LESS
4.875% TO 5.125% AT SEPTEMBER 30, 1996
5.50% TO 6.00% AT SEPTEMBER 30, 1995 4.99 3,084,513 4,435,524
6 MONTHS TO 12 MONTHS
5.00% TO 6.125% AT SEPTEMBER 30, 1996
5.00% TO 6.625% AT SEPTEMBER 30, 1995 5.80 20,442,302 6,622,299
OVER 1 YEAR TO 3 YEARS
4.875% TO 7.1% AT SEPTEMBER 30, 1996
4.125% TO 7.50% AT SEPTEMBER 30, 1995 6.09 24,845,975 32,871,362
MORE THAN 3 YEARS
5.5% TO 7.25% AT SEPTEMBER 30, 1996
5.25% TO 8.50% AT SEPTEMBER 30, 1995 6.31 9,167,806 9,357,920
----------- -----------
TOTAL CERTIFICATE ACCOUNTS 57,540,596 53,287,105
----------- -----------
TOTAL DEPOSITS $61,252,015 $56,975,131
=========== ===========
</TABLE>
(CONTINUED)
<PAGE>
30
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
17. SAVINGS ACCOUNTS (CONTINUED)
----------------
AT SEPTEMBER 30, 1996 AND 1995, SCHEDULED MATURITIES OF CERTIFICATE
ACCOUNTS ARE AS FOLLOWS:
SEPTEMBER 30, 1996:
- -------------------
<TABLE>
<CAPTION>
AMOUNT DUE
------------------------------------------------------------------
TWO AFTER
LESS THAN ONE TO TO THREE THREE
RATE ONE YEAR TWO YEARS YEARS YEARS TOTAL
- ------------------------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
4 TO 5.99% $28,411,060 $12,399,150 $2,125,800 $ 486,931 $43,422,941
6 TO 7.99% 5,883,933 5,106,879 825,635 2,301,208 14,117,655
8% AND ABOVE - - - - -
----------- ----------- ---------- ---------- -----------
$34,294,993 $17,506,029 $2,951,435 $2,788,139 $57,540,596
=========== =========== ========== ========== ===========
SEPTEMBER 30, 1995:
- -------------------
<CAPTION>
AMOUNT DUE
------------------------------------------------------------------
TWO AFTER
LESS THAN ONE TO TO THREE THREE
RATE ONE YEAR TWO YEARS YEARS YEARS TOTAL
- ------------------------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
4 TO 5.99% $19,600,452 $ 4,514,628 $2,288,581 $1,426,178 $27,829,839
6 TO 7.99% 15,046,511 4,996,966 2,230,123 3,094,774 25,368,374
8% AND ABOVE 88,892 - - - 88,892
----------- ----------- ---------- ---------- -----------
$34,735,855 $ 9,511,594 $4,518,704 $4,520,952 $53,287,105
=========== =========== ========== ========== ===========
</TABLE>
CERTIFICATE ACCOUNTS WITH BALANCES EQUAL TO OR EXCEEDING $100,000 WERE
APPROXIMATELY $5,519,000 AND $12,606,000 AT SEPTEMBER 30, 1996 AND 1995,
RESPECTIVELY.
18. MORTGAGE NOTE PAYABLE
---------------------
MORTGAGE NOTE PAYABLE REPRESENTS A NOTE PAYABLE $477.82 MONTHLY, WITH
INTEREST AT 8%, AMORTIZED OVER 15 YEARS. THE NOTE IS SECURED BY A MORTGAGE
ON PROPERTY WHICH IS PART OF THE OFFICE BUILDING. PRINCIPAL AMOUNTS DUE
OVER THE NEXT FIVE FISCAL YEARS ARE SHOWN ON THE FOLLOWING PAGE.
(CONTINUED)
<PAGE>
31
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TURCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
18. MORTGAGE NOTE PAYABLE (CONTINUED)
---------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, AMOUNT
------------- ------
<S> <C>
1997 $ 2,662
1998 2,883
1999 3,123
2000 3,382
2001 3,663
THEREAFTER 23,884
-------
$39,597
=======
</TABLE>
19. ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
-----------------------------------------
ACCRUED INTEREST AND DIVIDENDS RECEIVABLE CONSISTED OF THE FOLLOWING:
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
---------- ---------
<S> <C> <C>
ACCRUED INTEREST ON LOANS $353,737 $314,613
ACCRUED INTEREST ON INVESTMENTS 58,563 164,939
ACCRUED DIVIDENDS ON FEDERAL HOME LOAN BANK STOCK 9,000 9,000
-------- ---------
$421,300 $488,552
======== =========
</TABLE>
20. STOCK CONVERSION
----------------
ON MARCH 31, 1995, SECURITY FEDERAL BANK (THE "BANK"), FORMERLY KNOWN
AS SECURITY FEDERAL BANK, A FEDERAL SAVINGS BANK, COMPLETED ITS CONVERSION
FROM MUTUAL TO STOCK FORM. SECURITY FEDERAL BANCORP, INC. (THE "COMPANY"),
A DELAWARE CORPORATION, WAS FORMED TO ACT AS THE HOLDING COMPANY OF THE
BANK. ON THE DATE OF CONVERSION, THE COMPANY COMPLETED THE SALE OF 671,469
SHARES OF COMMON STOCK, $.01 PAR VALUE PER SHARE, TO DEPOSITORS AT $10.00
PER SHARE. NET PROCEEDS FROM THE ABOVE TRANSACTIONS, AFTER DEDUCTING
OFFERING EXPENSES, WERE $6.15 MILLION.
(CONTINUED)
<PAGE>
32
SECURITY REDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
21. DIRECTOR'S RETIREMENT PLAN
--------------------------
IN CONJUNCTION WITH THE PLAN OF CONVERSION, THE BANK ADOPTED A
DIRECTOR'S RETIREMENT PLAN FOR THE EMPLOYEE AND NON-EMPLOYEE DIRECTORS.
FOLLOWING TERMINATION OF SERVICE ON THE BOARD, EACH DIRECTOR WOULD RECEIVE
MONTHLY BENEFITS FOR A TEN YEAR PERIOD IN AN AMOUNT EQUAL TO THE PRODUCT OF
HIS OR HER BENEFIT PERCENTAGE, HIS OR HER VESTED PERCENTAGE AND $700. THE
BENEFIT PERCENTAGE IS BASED ON OVERALL YEARS OF SERVICE ON THE BOARD, AND
INCREASES IN INCREMENTS OF 33-1/3% FROM 0% FOR LESS THAN FIVE YEARS OF
SERVICE, TO 33-1/3% FOR FIVE TO NINE YEARS OF SERVICE, TO 66-2/3% FOR TEN
TO FOURTEEN YEARS OF SERVICE AND TO 100% FOR FIFTEEN OR MORE YEARS OF
SERVICE. THE VESTED PERCENTAGE EQUALS 33-1/3% IF THE PARTICIPANT SERVES ON
THE BOARD FOR ONE YEAR FOLLOWING THE DATE OF CONVERSION, INCREASES TO 66-
2/3% IF THE PARTICIPANT COMPLETES A SECOND YEAR OF SERVICE FOLLOWING THE
DATE OF CONVERSION, AND BECOMES 100% IF THE PARTICIPANT COMPLETES A THIRD
YEAR OF SERVICE FOLLOWING THE DATE OF CONVERSION. IN THE EVENT A
PARTICIPANT DIES BEFORE BEGINNING TO COLLECT ANY BENEFITS UNDER THE PLAN,
THE VESTED PERCENTAGE BECOMES 100% AND THE PARTICIPANT IS DUE 100% OF THE
PRESENT VALUE OF BENEFITS OTHERWISE PAYABLE. IN THE EVENT OF A CHANGE OF
CONTROL OF THE BANK OR THE FAILURE OF A DIRECTOR TO BE RE-ELECTED AFTER
BEING NOMINATED TO THE BOARD, THE VESTED PERCENTAGE BECOMES 100%. AT
SEPTEMBER 30, 1996 AND 1995, THE BANK HAD ACCRUED $266,640 AND $28,134,
RESPECTIVELY, OF BENEFITS PAYABLE UNDER THE DIRECTOR'S RETIREMENT PLAN.
INCLUDED IN THE $266,640 AT SEPTEMBER 30, 1996, IS APPROXIMATELY $129,300
FOR ACCRUED BENEFITS PAYABLE DUE TO THE DEATH OF TWO PARTICIPANTS.
22. OTHER BENEFIT PLANS
-------------------
THE BOARD OF DIRECTORS OF THE COMPANY, AT A SPECIAL STOCKHOLDERS'
MEETING HELD NOVEMBER 20, 1995, APPROVED THE ADOPTION OF AN EMPLOYEE STOCK
OWNERSHIP PLAN, A MANAGEMENT RECOGNITION PLAN, AND A STOCK OPTION AND
INCENTIVE PLAN.
UNDER THE EMPLOYEE STOCK OWNERSHIP PLAN, A TRUST WILL BE ESTABLISHED
TO PURCHASE, ON THE OPEN MARKET, A NUMBER OF SHARES OF STOCK EQUAL TO 8% OF
THE COMPANY'S COMMON STOCK ISSUED IN THE CONVERSION. THE COMPANY WILL LOAN
THE TRUST AN AMOUNT SUFFICIENT TO ALLOW IT TO PURCHASE THE SHARES.
GENERALLY, ALL EMPLOYEES COMPLETING ONE YEAR OF SERVICE AND HAVING ATTAINED
AGE 21 WILL BE ELIGIBLE TO PARTICIPATE IN THE PLAN. AN AMOUNT SUFFICIENT TO
REPAY THE LOAN OVER A TEN YEAR PERIOD WILL BE PAID TO THE TRUST AND
EXPENSED BY THE COMPANY. VESTING OCCURS AT THE END OF THE FIVE YEARS OF
SERVICE AND ACCELERATES TO 100% UPON DEATH, DISABILITY OR ATTAINMENT OF AGE
65. AT SEPTEMBER 30, 1996, THE PLAN WAS UNFUNDED.
(CONTINUED)
<PAGE>
33
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
22. OTHER BENEFIT PLANS (CONTINUED)
-------------------
THE MANAGEMENT RECOGNITION PLAN PROVIDES FOR THE PURCHASE OF
OUTSTANDING SHARES OF COMPANY COMMON STOCK EQUAL TO 4% OF THE SHARES ISSUED
IN THE CONVERSION. NON-EMPLOYEE AND EMPLOYEE DIRECTORS WILL BE ENTITLED TO
PLAN SHARE AWARDS AS OF THE PLAN'S EFFECTIVE DATE TOTALING 10,743 SHARES.
FUTURE AWARDS WILL BE MADE BY A COMMITTEE CONSISTING OF THREE NON-EMPLOYEE
DIRECTORS. VESTING WILL OCCUR AT THE RATE OF 20% PER YEAR OVER FIVE YEARS
AND ACCELERATES TO 100% UPON A PARTICIPANT'S DEATH OR DISABILITY.
AS OF SEPTEMBER 30, 1996, $34,306 OF EXPENSE IS REFLECTED IN THE
FINANCIAL STATEMENTS FOR ACCRUED BENEFITS PAYABLE UNDER THE MANAGEMENT
RECOGNITION PLAN DUE TO THE DEATH OF A PARTICIPANT.
DURING THE QUARTER ENDED MARCH 31, 1996, PURCHASES TOTALING $354,690
WERE MADE ON THE OPEN MARKET OF THE HOLDING COMPANY STOCK TO BE USED FOR
PLAN SHARE AWARDS UNDER THE MANAGEMENT RECOGNITION PLAN. THESE PURCHASES
WILL BE USED TO PAY OUT PLAN SHARE AWARDS AS PARTICIPANTS VEST.
THE STOCK OPTION AND INCENTIVE PLAN PROVIDES FOR THE ISSUANCE OF NEW
SHARES OF COMPANY COMMON STOCK EQUAL TO 10% OF THE SHARE ISSUED IN THE
CONVERSION. AT THE PLAN'S EFFECTIVE DATE, THE NON-EMPLOYEE AND EMPLOYEE
DIRECTORS WERE GRANTED OPTIONS AT AN OPTION PRICE OF $13.75, ON 26,857
SHARES. THE OPTIONS ARE EXERCISABLE AT THE RATE OF 20% PER YEAR FOLLOWING
THE DATE OF THE GRANT AND HAVE A TERM OF TEN YEARS. THE OPTIONS BECOME
IMMEDIATELY EXERCISABLE UPON DEATH OR DISABILITY. THE PLAN ALSO CONTAINS
PROVISIONS FOR EXPIRATION OF THE OPTIONS FOLLOWING TERMINATION OF SERVICES.
23. SECURITY FEDERAL BANCORP, INC., - HOLDING COMPANY ONLY FINANCIAL
----------------------------------------------------------------
INFORMATION
- -----------
THE CONDENSED STATEMENT ON THE FOLLOWING PAGE SUMMARIZES THE FINANCIAL
POSITION, OPERATING RESULTS AND CASH FLOWS OF SECURITY FEDERAL BANCORP,
INC. (PARENT COMPANY ONLY).
(CONTINUED)
<PAGE>
34
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
23. SECURITY FEDERAL BANCORP, INC., - HOLDING COMPANY ONLY FINANCIAL
----------------------------------------------------------------
INFORMATION (CONTINUED)
- -----------
CONDENSED STATEMENT OF FINANCIAL CONDITION
------------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
----------- -----------
<S> <C> <C>
CASH AND BALANCES WITH BANK $- $ 524
CERTIFICATE OF DEPOSIT WITH SECURITY FEDERAL BANK 2,846,824 3,170,470
INVESTMENT IN SUBSIDIARY 3,615,152 3,408,437
---------- ----------
TOTAL ASSETS $6,461,976 $6,579,431
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
ACCOUNTS PAYABLE $ 38,787 $ -
INCOME TAXES PAYABLE 21,848 -
-----------
TOTAL LIABILITIES 60,635 -
STOCKHOLDERS' EQUITY 6,401,341 6,579,431
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $6,461,976 $6,579,431
========== ===========
CONDENSED STATEMENT OF INCOME
-----------------------------
<CAPTION>
1 9 9 6 1 9 9 5
----------- -------------
<S> <C> <C>
INTEREST INCOME $ 215,299 $ 99,973
OTHER OPERATING EXPENSES (125,611) (4,815)
---------- -----------
NET INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARY 89,688 95,158
APPLICABLE INCOME TAXES (66,842) -
---------- -----------
NET INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME
OF SUBSIDIARY 22,846 95,158
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 206,715 332,602
---------- -----------
NET INCOME $ 229,561 $ 427,760
========== ===========
</TABLE>
(CONTINUED)
<PAGE>
35
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
23. SECURITY FEDERAL BANCORP, INC., - HOLDING COMPANY ONLY FINANCIAL
----------------------------------------------------------------
INFORMATION (CONTINUED)
- -----------
CONDENSED STATEMENT OF CASH FLOWS
- ---------------------------------
<TABLE>
<CAPTION>
1 9 9 6 1 9 9 5
---------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
NET INCOME $ 229,561 $ 427,760
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH
PROVIDED BY OPERATING ACTIVITIES:
EQUITY IN UNDISTRIBUTED NET INCOME OF
SUBSIDIARY (206,715) (332,602)
INCREASE IN ACCOUNTS PAYABLE AND INCOME
TAXES PAYABLE 60,635 -
OTHER ADJUSTMENTS (4,770) -
--------- ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 78,711 95,158
-------- ------------
INVESTING ACTIVITIES:
INVESTMENT IN CERTIFICATE OF DEPOSIT WITH SECURITY
FEDERAL BANK 323,646 (3,170,470)
INVESTMENT IN SUBSIDIARY - ( 3,075,834)
-------- ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 323,646 (6,246,304)
-------- ------------
FINANCING ACTIVITIES:
PROCEEDS FROM STOCK CONVERSION, NET OF EXPENSES - 6,151,670
CASH DIVIDENDS PAID (402,881) -
-------- ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (402,881) 6,151,670
-------- ------------
NET INCREASE (DECREASE) IN CASH (524) 524
CASH, BEGINNING OF YEAR 524 -
-------- ------------
CASH, END OF YEAR $ - $ 524
======== ============
</TABLE>
(CONTINUED)
<PAGE>
36
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
24. DEPOSIT AGREEMENT
-----------------
THE BANK'S DEPOSITS ARE INSURED BY THE SAVINGS ASSOCIATION INSURANCE
FUND (SAIF), WHICH IS INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION.
ON SEPTEMBER 30, 1996, LEGISLATION WAS ENACTED CONTAINING PROVISIONS TO
RECAPITALIZE THE SAIF BY CHARGING A ONE TIME ASSESSMENT OF 65.7 BASIS
POINTS ON ALL SAIF-INSURED DEPOSITS AS OF MARCH 31, 1995. THIS SPECIAL
ASSESSMENT WAS ACCRUED AT SEPTEMBER 30, 1996, AND RESULTED IN A PRE-TAX
CHARGE OF $381,113 TO INCOME FROM OPERATIONS. THIS ASSESSMENT WILL FULLY
CAPITALIZE THE SAIF AND WILL EQUALIZE THE DISPARITY BETWEEN PREMIUMS PAID
BY THOSE INSTITUTIONS COVERED UNDER THE SAIF AND THOSE COVERED UNDER THE
BANK INSURANCE FUND. THE ASSESSMENT WILL EFFECTIVELY REDUCE FUTURE SAIF
PREMIUMS, THEREBY INCREASING NET INCOME FOR FUTURE PERIODS.
25. PRIOR PERIOD ADJUSTMENT
-----------------------
THE DEFERRED TAX EFFECT OF THE ALLOWANCE FOR LOAN LOSSES OF $330,000
WAS NOT RECOGNIZED IN PRIOR PERIODS. THIS RESULTED IN THE FOLLOWING
RESTATEMENT OF RETAINED EARNINGS AND THE DEFERRED LIABILITY AS OF SEPTEMBER
30, 1993, 1994, AND 1995, AS SHOWN BELOW:
<TABLE>
<CAPTION>
DEFERRED
RETAINED TAX ASSET
EARNINGS (LIABILITY)
---------- -----------
<S> <C> <C>
AS PREVIOUSLY REPORTED, SEPTEMBER 30, 1993 $3,797,065 ($ 67,655)
UNRECORDED DEFERRED TAX ASSET 121,111 121,111
---------- ----------
AS ADJUSTED $3,918,176 $ 53,456
========== ==========
AS PREVIOUSLY REPORTED, SEPTEMBER 30, 1994 $4,231,737 ($ 55,752)
UNRECORDED DEFERRED TAX ASSET 121,111 121,111
---------- ----------
AS ADJUSTED $4,352,848 $ 65,359
========== ==========
AS PREVIOUSLY REPORTED, SEPTEMBER 30, 1995 $4,581,583 ($ 55,893)
UNRECORDED DEFERRED TAX ASSET 121,111 121,111
---------- ----------
AS ADJUSTED $4,702,694 $ 65,218
========== ==========
</TABLE>
(CONTINUED)
<PAGE>
37
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
26. FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
THE FOLLOWING METHODS AND ASSUMPTIONS WERE USED BY THE COMPANY IN
ESTIMATING ITS FAIR VALUE DISCLOSURES FOR FINANCIAL INSTRUMENTS AS OF
SEPTEMBER 30, 1996. MANAGEMENT HAD ELECTED NOT TO EARLY IMPLEMENT STATEMENT
ON FINANCIAL ACCOUNTING STANDARDS NO. 107; THEREFORE, THE INFORMATION
CONCERNING FAIR VALUES AT SEPTEMBER 30, 1995, IS NOT AVAILABLE AND IT WAS
NOT PRACTICAL TO OBTAIN THOSE VALUES.
CASH AND CASH EQUIVALENTS: THE CARRYING AMOUNT REPORTED IN THE
-------------------------
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION IS A REASONABLE ESTIMATE OF
FAIR VALUE.
FEDERAL HOME LOAN BANK INTEREST-BEARING DEPOSITS: THE CARRYING AMOUNT
------------------------------------------------
REPORTED IN THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION IS A
REASONABLE ESTIMATE OF FAIR VALUE.
INVESTMENT SECURITIES: ESTIMATED FAIR VALUES ARE BASED ON QUOTED MARKET
---------------------
PRICES, IF AVAILABLE. IF QUOTED MARKET PRICES ARE NOT AVAILABLE, ESTIMATED
FAIR VALUES ARE BASED ON OTHER AVAILABLE INFORMATION.
LOANS RECEIVABLE: ESTIMATED FAIR VALUES FOR ADJUSTABLE RATE LOANS, WHICH
----------------
MAY BE REPRICED FREQUENTLY AND HAVE NO SIGNIFICANT CREDIT RISK, ARE BASED
ON CARRYING VALUE. ESTIMATED FAIR VALUES OF ALL OTHER LOANS ARE ESTIMATED
BY DISCOUNTING THE FUTURE CASH FLOWS USING THE CURRENT RATES AT WHICH
SIMILAR LOANS WOULD BE MADE TO BORROWERS WITH SIMILAR CREDIT RATINGS AND
FOR THE SAME REMAINING MATURITIES. THE CARRYING AMOUNTS OF ACCRUED INTEREST
RECEIVABLE AND DIVIDENDS RECEIVABLE REPORTED IN THE CONSOLIDATED STATEMENT
OF FINANCIAL CONDITION ARE A REASONABLE ESTIMATE OF FAIR VALUE.
LOANS HELD FOR SALE, NET OF DEFERRED FEES: ESTIMATED FAIR VALUES FOR LOANS
-----------------------------------------
HELD FOR RESALE ARE BASED ON THE QUOTED MARKET PRICES FOR THOSE LOANS AT
SEPTEMBER 30, 1996.
DEPOSIT LIABILITIES: THE FAIR VALUE OF SAVINGS ACCOUNTS IS THE AMOUNT
-------------------
PAYABLE ON DEMAND AT THE REPORTING DATE. THE FAIR VALUE OF FIXED-MATURITY
CERTIFICATES OF DEPOSIT IS ESTIMATED BY DISCOUNTED CASH FLOW ANALYSES,
USING THE INTEREST RATES CURRENTLY OFFERED FOR DEPOSITS OF SIMILAR
REMAINING MATURITIES.
CHECKS OUTSTANDING IN EXCESS OF DEPOSITS: THE CARRYING AMOUNT REPORTED IN
----------------------------------------
THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION IS A REASONABLE ESTIMATE
OF FAIR VALUE.
ADVANCES FROM FEDERAL HOME LOAN BANK: THE CARRYING AMOUNT OF ADVANCES FROM
------------------------------------
THE FEDERAL HOME LOAN BANK APPROXIMATES FAIR VALUE AS THE CURRENT RATE FOR
NEW ADVANCES FROM THE FEDERAL HOME LOAN BANK IS THE SAME AS THE RATE FOR
THE ADVANCES RECEIVED AS OF THE REPORTING DATE. THE COMPANY HAS AVAILABLE
SIGNIFICANT AMOUNTS AT THE FEDERAL HOME LOAN BANK FROM WHICH ADDITIONAL
ADVANCES COULD BE DRAWN.
(CONTINUED)
<PAGE>
38
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
- -------------------------------------------------------------------------------
26. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
-----------------------------------
ADVANCES FROM BORROWERS FOR TAXES AND INSURANCE: THE CARRYING AMOUNT
-----------------------------------------------
REPORTED IN THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION IS A
REASONABLE ESTIMATE OF FAIR VALUE.
UNREMITTED COLLECTIONS ON MORTGAGE LOANS SERVICED: THE CARRYING AMOUNT
-------------------------------------------------
REPORTED IN THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION IS A
REASONABLE ESTIMATE OF FAIR VALUE.
MORTGAGE NOTE PAYABLE: THE CARRYING AMOUNT OF MORTGAGE NOTE PAYABLE
---------------------
APPROXIMATES FAIR VALUE AS THE INTEREST RATE FOR THE MORTGAGE NOTE PAYABLE
IS THE INTEREST RATE CURRENTLY AVAILABLE TO THE COMPANY FOR DEBT WITH
SIMILAR AMOUNT, TERMS AND REMAINING MATURITIES.
<TABLE>
<CAPTION>
ESTIMATED
CARRYING FAIR
AMOUNT VALUE
----------- -----------
<S> <C> <C>
FINANCIAL ASSETS
----------------
CASH AND CASH EQUIVALENTS $ 611,576 $ 611,576
FEDERAL HOME LOAN BANK - INTEREST BEARING DEPOSITS 426,084 426,084
INVESTMENT SECURITIES 2,984,586 2,984,586
LOANS RECEIVABLE 68,510,569 68,449,662
LOANS HELD FOR SALE, NET OF DEFERRED FEES 1,514,050 1,510,265
ACCRUED INTEREST AND DIVIDENDS RECEIVABLE 421,300 421,300
FINANCIAL LIABILITIES
---------------------
DEPOSITS 61,252,015 61,257,289
CHECKS OUTSTANDING IN EXCESS OF DEPOSITS 174,177 174,177
ADVANCES FROM FEDERAL HOME LOAN BANK 2,835,000 2,835,000
ADVANCES FROM BORROWERS FOR TAXES AND INSURANCE 662,689 662,689
UNREMITTED COLLECTIONS ON MORTGAGE LOANS SERVICED 299,630 299,630
MORTGAGE NOTE PAYABLE 39,597 39,597
</TABLE>
(CONTINUED)
<PAGE>
39
SECURITY FEDERAL BANCORP, INC., AND SUBSIDIARY
TUSCALOOSA, ALABAMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
27. SUBSEQUENT EVENTS
-----------------
ON DECEMBER 10, 1996, THE BOARD OF DIRECTORS OF THE COMPANY DECLARED A
ONE-TIME CASH DISTRIBUTION IN THE AMOUNT OF $3.00 PER SHARE TO ALL
STOCKHOLDERS OF RECORD ON DECEMBER 19, 1996. THE TOTAL DISTRIBUTION OF
APPROXIMATELY $2.02 MILLION WILL BE PAYABLE ON DECEMBER 27, 1996. THE
COMPANY EXPECTS THAT SUBSTANTIALLY ALL OF THE DISTRIBUTION WILL QUALIFY AS
A NON-TAXABLE RETURN OF CAPITAL TO THE STOCKHOLDERS. TO DETERMINE THE TAX
STATUS OF THE DISTRIBUTION, THE COMPANY HAS FILED A REQUEST WITH THE
INTERNAL REVENUE SERVICE TO ISSUE A PRIVATE LETTER RULING. IF THE RULING IS
FAVORABLE, THE PORTION OF THE DISTRIBUTION THAT IS TREATED AS A RETURN OF
CAPITAL WILL NOT BE SUBJECT TO INCOME TAX, BUT INSTEAD WILL REDUCE THE
STOCKHOLDERS' BASIS IN EACH SHARE OF STOCK OWNED.
SEE INDEPENDENT AUDITOR'S REPORT.
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
---------------------------------------------------------------
For information regarding the registrant's change of accountants effective
April 1, 1996, see the registrant's Current Report on Form 8-K, as amended,
dated February 19, 1996.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------------------
For information concerning the Board of Directors of the Company, the
information contained under the section captioned "Proposal I -- Election of
Directors" in the Company's definitive proxy statement for the Company's 1997
Annual Meeting of Stockholders to be filed not later than 120 days after the
fiscal year ended September 30, 1996 (the "Proxy Statement") is incorporated
herein by reference.
Information regarding executive officers of the Company is contained in the
section captioned "Executive Officers of the Registrant" under Part I hereof and
is incorporated herein by reference.
The information regarding compliance with Section 16(a) of the Exchange Act
contained in the section captioned "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the section captioned "Election of
Directors -- Executive Compensation and Other Benefits" in the Proxy Statement
is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information required by this item is incorporated herein by reference to
the section captioned "Voting Securities and Security Ownership" in the Proxy
Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Election of Directors -- Transactions with Management"
in the Proxy Statement.
PART IV
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
- ------------------------------------------------
(a) List of Documents Filed as Part of this Report:
(1) Financial Statements. The following financial statements are filed at
--------------------
Item 7 hereof:
Independent Auditors' Reports
Balance Sheets as of September 30, 1996 and 1995
48
<PAGE>
Statements of Income for the Years in the Three-
Year Period Ended September 30, 1996
Statements of Stockholders' Equity for the Years in the
Three-Year Period Ended September 30, 1996
Statements of Cash Flows for the Years in the Three-
Year Period Ended September 30, 1996
Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules. All schedules for which provision is
-----------------------------
made in the applicable accounting regulations of the Securities and Exchange
Commission are omitted because of the absence of conditions under which they are
required or because the required information is included in the consolidated
financial statements and related notes thereto.
(3) Exhibits. The following is a list of exhibits filed as part of this
--------
Annual Report on Form 10-KSB and is also the Exhibit Index.
No. Exhibits
-- --------
3.1* Certificate of Incorporation of Security Federal Bancorp, Inc.
3.2* Bylaws of Security Federal Bancorp, Inc.
10.1* Security Federal Bank Retirement Plan for Directors
10.2* Security Federal Savings and Loan Association of Tuscaloosa
Profit Sharing Retirement Plan
10.3* Security Federal Bancorp, Inc. 1995 Stock Option and Incentive Plan
10.4* Employment Agreements with John F. Harvard
21** Subsidiaries of the Registrant
23(a) Consent of Morrison and Smith
23(b) Consent of Jamison, Money, Farmer & Co.
27 Financial Data Schedule
- --------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 33-83912).
** Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended September 30, 1995.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
-------------------
during the last quarter of the fiscal year covered by this report on Form 10-
KSB, except the registrant filed a Current Report on Form 8-K dated August 5,
1996 reporting under Item 5 the announcement that its Board of Directors
intended to declare a one-time cash distribution to the holders of the
registrant's common stock, upon receipt of confirmation that substantially all
of the distribution would qualify as a non-taxable return of capital to
stockholders and that the distribution would not have a significant adverse
effect on the registrant's tax-qualified employee benefit plans. The registrant
reported that, subject to prior receipt of a satisfactory private letter ruling
from the Internal Revenue Service, it intended to pay to its stockholders a
distribution in the amount of $3.00 per share in the third quarter of 1996, or
in the early part of the fourth quarter, depending upon when the private letter
ruling was received. For additional information, see Item 5 of Part II hereof.
49
<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, as of the date set
forth below.
SECURITY FEDERAL BANCORP, INC.
Date: December 30, 1996 By: /s/ John F. Harvard
--------------------------------
John F. Harvard
President
(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 in the capacities indicated as of the date set forth above.
/s/ Marlin D. Moore, Jr.
- -------------------------------------------------
Marlin D. Moore, Jr.
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
/s/ John F. Harvard
- -------------------------------------------------
John F. Harvard
President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
/s/ T. Gary Fitts
- -------------------------------------------------
T. Gary Fitts
Vice President and Director
/s/ Russell S. Lee
- -------------------------------------------------
Russell S. Lee
Director
/s/ Charles O. Sealy, Jr.
- -------------------------------------------------
Charles O. Sealy, Jr.
Director
- -------------------------------------------------
W. Ford Simpson, Jr.
Director
- -------------------------------------------------
E. B. Stansell
Director
50
<PAGE>
Exhibit 23(a)
[LETTERHEAD OF MORRISON AND SMITH]
December 18, 1996
Board of Directors
Security Federal Bancorp, Inc.
2301 University Boulevard
Tuscaloosa, AL 35401
We consent to incorporation by reference in this Annual Report (Form 10-K)
of Security Federal Bancorp, Inc., of our report dated November 14, 1995,
relating to the consolidated statements of financial condition of Security
Federal Bancorp, Inc., and Subsidiary, as of September 30, 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the two year period ended September 30, 1995,
which appears in the 1996 Annual Report to the Stockholders of Security Federal
Bancorp, Inc.
/s/ Morrison and Smith
MORRISON AND SMITH
Certified Public Accountants
<PAGE>
Exhibit 23(b)
[LETTERHEAD OF JAMISON, MONEY, FARMER & CO., P.C.]
December 18, 1996
Board of Directors
Security Federal Bancorp, Inc.
2301 University Boulevard
Tuscaloosa, AL 35401
We consent to incorporation by reference in this Annual Report (Form 10-K)
of Security Federal Bancorp, Inc., of our report dated December 10, 1996,
relating to the consolidated statement of financial condition of Security
Federal Bancorp, Inc., and Subsidiary, as of September 30, 1996, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the year then ended, which appears in the 1996 Annual Report to the
Stockholders of Security Federal Bancorp, Inc.
/s/ Jamison, Money, Farmer & Co., P.C.
--------------------------------------
JAMISON, MONEY, FARMER & CO., P.C.
Tuscaloosa, Alabama
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<PAGE>
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