-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PYuIMbgEqU0I7wKyiE3vcCHj754tSPS49dXfztz3CJ4m5fFip/nXVnLDhiiDM/R9 4M/EgiWkVwkdDzNQpHVXUg== 0000939057-97-000040.txt : 19970429 0000939057-97-000040.hdr.sgml : 19970429 ACCESSION NUMBER: 0000939057-97-000040 CONFORMED SUBMISSION TYPE: 10KSB40/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19970428 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURITY FEDERAL CORPORATION CENTRAL INDEX KEY: 0000818677 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 570858504 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB40/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-16120 FILM NUMBER: 97588237 BUSINESS ADDRESS: STREET 1: P O BOX 810 CITY: AIKEN STATE: SC ZIP: 29802 BUSINESS PHONE: 8036413000 MAIL ADDRESS: STREET 1: P O BOX 810 CITY: AIKEN STATE: SC ZIP: 29802 10KSB40/A 1 AMENDMENT TO 10-KSB FOR SECURITY FED. 0-16120 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________________ FORM 10-KSB/A [X] AMENDED ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-16120 SECURITY FEDERAL CORPORATION - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 57-08580504 - ------------------------------- ----------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1705 Whiskey Road South, Aiken, South Carolina 29803 - ---------------------------------------------- ----------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (803) 641-3000 -------------- 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 $0.01 per share --------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ---- ---- Indicate by check mark whether disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or other information statements incorporated by reference in Part III of this Form 10-KSB or any amendments to this Form 10-KSB. [ ] The registrant's revenues for the fiscal year ended March 31, 1996 were $17,290,356. As of June 14, 1996, there were issued and outstanding 413,184 shares of the registrant's Common Stock. The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average of the bid and asked price of such stock as of June 14, 1996, was $8.3 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant). DOCUMENTS INCORPORATED BY REFERENCE Part III of Form 10-KSB - Proxy Statement for 1996 Annual Meeting of Shareholders. Transitional Small Business Disclosure Format (check one) Yes No X ----- ----- Item 7. Financial Statements -------------------- The audited financial statements of the Company and its subsidiary and the independent auditor's report thereon are set forth on the following pages. 1 Independent Auditors' Report The Board of Directors Security Federal Corporation: We have audited the consolidated balance sheets of Security Federal Corporation and Subsidiary (the "Company") as of March 31, 1996 and 1995 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1996. These consolidated 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 the Company at March 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 1996 in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," on April 1, 1993 and adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" on March 31, 1994. /s/KPMG PEAT MARWICK LLP KPMG PEAT MARWICK LLP Greenville, South Carolina May 9, 1996 2 SECURITY FEDERAL CORPORATION AND SUBSIDIARY Consolidated Balance Sheets March 31, 1996 and 1995 Assets 1996 1995 ---- ---- Cash and cash equivalents $ 9,823,664 5,697,391 Investment and mortgage-backed securities: Available for sale (amortized cost of $31,170,866 and $4,013,080 in 1996 and 1995, respectively) 30,972,406 3,930,626 Held to maturity (market value of $9,913,951, and $37,080,638 in 1996 and 1995, respectively) 10,040,724 38,596,245 ------------ ----------- 41,013,130 42,526,871 ------------ ----------- Loans receivable, net: Held for sale 612,919 776,631 Held for investment (net of allowance of $1,758,688 and $1,955,119 in 1996 and 1995, respectively) 151,526,807 148,200,563 ------------ ----------- 152,139,726 148,977,194 ------------ ----------- Accrued interest receivable: Loans 882,274 755,265 Mortgage-backed securities 23,799 22,328 Investments 450,952 464,229 ------------ ----------- 1,357,025 1,241,822 ------------ ----------- Premises and equipment, net 3,187,185 3,251,171 Federal Home Loan Bank stock, at cost 1,233,200 1,415,100 Real estate acquired in settlement of loans 718,763 1,531,251 Real estate held for development and sale 1,389,579 1,442,723 Other assets 3,953,859 3,865,211 ------------ ----------- Total assets $214,816,131 209,948,734 ============ =========== Liabilities and Shareholders' Equity Liabilities: Deposits 172,374,727 166,274,637 Advances from Federal Home Loan Bank 22,864,000 26,033,000 Other borrowings 350,000 -- Advance payments by borrowers for taxes and insurance 385,708 442,456 Other liabilities 3,407,478 2,709,171 ------------ ----------- Total liabilities 199,381,913 195,459,264 ------------ ----------- Commitments and contingencies Shareholders' equity: Serial preferred stock, $.01 par value; authorized 200,000 shares; issued and outstanding shares, none -- -- Common stock, $.01 par value; authorized 1,000,000 shares; issued and outstanding shares, 413,184 in 1996 and 409,246 in 1995 4,132 4,092 Additional paid-in capital 3,919,262 3,879,922 Unrealized net loss on securities available for sale, net of income taxes (123,125) (51,155) Retained earnings, substantially restricted 11,633,949 10,656,611 ------------ ----------- Total shareholders' equity 15,434,218 14,489,470 ------------ ----------- Total liabilities and shareholders' equity $214,816,131 209,948,734 ============ =========== See accompanying notes to consolidated financial statements. 3 SECURITY FEDERAL CORPORATION AND SUBSIDIARY Consolidated Statements of Income For the years ended March 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Interest income: Loans $ 13,494,840 11,903,824 9,237,564 Mortgage-backed securities 109,998 134,901 265,534 Investment securities 2,123,667 2,276,122 1,289,521 Other 93,789 87,295 197,173 ------------ ---------- ---------- Total interest income 15,822,294 14,402,142 10,989,792 ------------ ---------- ---------- Interest expense: NOW and money market 976,423 1,141,084 931,426 Passbook 347,937 398,600 277,841 Certificates of deposit 5,529,003 3,957,123 3,395,896 Advances and other borrowed money 1,769,178 1,326,248 521,107 ------------ ---------- ---------- Total interest expense 8,622,541 6,823,055 5,126,270 ------------ ---------- ---------- Net interest income 7,199,753 7,579,087 5,863,522 Provision for loan losses (230,000) (300,000) (335,000) ------------ ---------- ---------- Net interest income after provision for loan losses 6,969,753 7,279,087 5,528,522 ------------ ---------- ---------- Other income: Gain (loss) on sales of investment securities -- (2,504) 61,775 Gain on sales of loans 124,677 161,922 625,960 Loan servicing fees 312,653 318,695 290,850 Service fees on deposits 584,420 509,181 384,913 Income from real estate operations 34,068 168,795 123,941 Other 412,244 156,254 311,943 ------------ ---------- ---------- Total other income 1,468,062 1,312,343 1,799,382 ------------ ---------- ---------- General and administrative expenses: Compensation and employee benefits 3,181,844 3,446,231 3,079,072 Occupancy 368,731 373,519 379,209 Advertising 197,575 130,748 154,820 Depreciation and maintenance of equipment 651,676 705,787 723,944 Amortization of intangibles 465,240 465,240 302,158 Federal insurance premiums 387,722 419,040 232,397 Other 1,586,756 1,548,982 1,651,505 ------------ ---------- ---------- Total general and adminis- trative expenses 6,839,544 7,089,547 6,523,105 ------------ ---------- ---------- Income before income taxes and cumulative effect of change in accounting for income taxes 1,598,271 1,501,883 804,799 Income taxes 538,697 499,729 265,906 ------------ ---------- ---------- Income before cumulative effect of change in accounting for income taxes 1,059,574 1,002,154 538,893 Cumulative effect of change in accounting for income taxes -- -- 30,000 ------------ ---------- ---------- Net income $ 1,059,574 1,002,154 568,893 ============ ========== ========== Net income per common share: Before cumulative effect of change in accounting for income taxes $ 2.58 2.48 1.36 Cumulative effect of change in accounting for income taxes -- -- .08 ------------ ---------- ---------- Net income per common share $ 2.58 2.48 1.44 ============ ========== ========== Cash dividend per common share $ .20 .20 .20 ============ ========== ========== Weighted average shares outstanding 410,937 404,750 393,772 ============ ========== ========== See accompanying notes to consolidated financial statements. 4 SECURITY FEDERAL CORPORATION AND SUBSIDIARY Consolidated Statements of Shareholders' Equity For the years ended March 31, 1996, 1995 and 1994 Indirect Guarantee of Unrealized Employee Net Loss Additional Stock on Securities Common Paid-in Ownership Available Retained Stock Capital Trust Debt for Sale Earnings Total ----- ---------- ---------- ---------- -------- ----- Balance at March 31, 1993 $3,938 3,685,436 (15,779) -- 9,245,198 12,918,793 Principal repayment of ESOP note -- -- 15,779 -- -- 15,779 Net income -- -- -- -- 568,893 568,893 Cash dividend -- -- -- -- (78,754) (78,754) Unrealized net loss on securities available for sale, net of tax -- -- -- (44,116) -- (44,116) ----- --------- ------- -------- ---------- ---------- Balance at March 31, 1994 3,938 3,685,436 -- (44,116) 9,735,337 13,380,595 Exercise of stock options 154 194,486 -- -- -- 194,640 Net income -- -- -- -- 1,002,154 1,002,154 Cash dividend -- -- -- -- (80,880) (80,880) Change in un- realized net loss on securities available for sale, net of tax -- -- -- (7,039) -- (7,039) ----- --------- ------- -------- ---------- ---------- Balance at March 31, 1995 4,092 3,879,922 -- (51,155) 10,656,611 14,489,470 Exercise of stock options 40 39,340 -- -- -- 39,380 Net income -- -- -- -- 1,059,574 1,059,574 Cash dividend -- -- -- -- (82,236) (82,236) Change in unreal- ized net loss on securities available for sale, net of tax -- -- -- (71,970) -- (71,970) ----- --------- ------- -------- ---------- ---------- Balance at March 31, 1996 $4,132 3,919,262 -- (123,125) 11,633,949 15,434,218 ====== ========= ======= ======== ========== ========== See accompanying notes to consolidated financial statements. 5 SECURITY FEDERAL CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows For the years ended March 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income $ 1,059,574 1,002,154 568,893 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation 596,677 588,825 526,764 Amortization of purchase accounting adjustments 465,240 465,240 224,290 Discount accretion and premium amortization 210,445 235,467 (93,265) Provisions for losses on loans and real estate 175,000 300,000 395,000 Gain on sale of loans (124,677) (161,922) (625,960) Gain on sale of mortgage- backed securities -- -- (158,433) (Gain) loss on sale of investments -- (2,504) 96,658 (Gain) loss on sale of real estate (180,030) (155,342) (299,211) FHLB stock dividends -- -- (43,300) Amortization of deferred fees on loans (115,867) 110,274 (498,631) Loss on disposition of premises and equipment -- 5,452 89,859 Proceeds from sale of loans held for sale 12,527,406 16,219,422 64,776,520 Origination of loans for sale (12,239,017) (12,979,526) (61,604,678) (Increase) decrease in accrued interest receivable: Loans (127,009) 459,596 (67,744) Mortgage-backed securities (1,471) (3,453) 117,449 Investments 13,277 70,180 (461,745) Increase (decrease) in advance payments by borrowers (56,748) 87,610 14,312 Other, net (419,255) (1,152,180) 3,137,425 ----------- ----------- ----------- Net cash provided (used) by operating activities 1,783,545 5,089,296 6,294,203 ----------- ----------- ----------- Cash flows from investing activities: Increase in cash from branch acquisitions -- -- 39,117,870 Principal repayments on mortgage- backed securities 221,819 561,015 2,265,351 Purchase of investment securities (3,034,529) (500,000) (69,878,442) Proceeds from sales of investment securities -- 1,500,000 7,406,875 Proceeds from sale of mortgage-backed securities -- -- 2,997,318 Proceeds from maturities of investment securities 4,000,000 7,205,155 21,508,342 Purchase of FHLB stock (389,600) (1,053,900) -- Redemption of FHLB stock 571,500 750,000 -- (Increase) decrease in loans to customers (3,544,427) (27,779,097) (6,164,053) Investment in real estate held for development (262,968) (355,155) (242,744) Proceeds from sale of real estate held for development 350,180 625,674 464,035 Proceeds from sale of real estate acquired through foreclosure 1,725,210 804,714 385,717 Increase (decrease) in interest- bearing deposits with banks -- 95,000 -- Proceeds from sales of premises and equipment -- 2,522 -- ----------- ----------- ----------- Net cash provided (used) by investing activities (895,506) (18,396,427) (3,847,670) ----------- ----------- ----------- (Continued) 6 SECURITY FEDERAL CORPORATION AND SUBSIDIARY Consolidated Statements of Cash Flows For the years ended March 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Cash flows from financing activities: Increase (decrease) in deposit accounts $ 6,100,090 (7,158,055) (2,984,047) Proceeds from FHLB advances 100,904,000 153,775,000 17,000,000 Repayment of FHLB advances (104,073,000) (136,358,000) (15,186,000) Proceeds from other borrowings 350,000 -- -- Dividends to shareholders (82,236) (80,880) (78,754) Proceeds from exercise of stock options 39,380 194,640 -- ----------- ----------- ----------- Net cash provided (used) by financing activities 3,238,234 10,372,705 (1,248,801) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 4,126,273 (2,934,426) 1,197,732 Cash and cash equivalents at beginning of period 5,697,391 8,631,817 7,434,085 ----------- ----------- ----------- Cash and cash equivalents at end of period $ 9,823,664 5,697,391 8,631,817 ============ =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 8,402,928 5,398,792 4,559,022 Income taxes $ 424,000 545,242 881,240 Supplemental schedule of non cash transactions: Additions to real estate acquired through foreclosure, net $ 711,760 661,650 1,255,720 Transfer of securities held to maturity to available for sale $ 27,867,170 -- 9,543,589 Change in unrealized net loss on securities available for sale $ 71,970 7,039 44,116 See accompanying notes to consolidated financial statements. 7 Notes to Consolidated Financial Statements (1) Significant Accounting Policies ------------------------------- The following is a description of the more significant accounting and reporting policies used in the preparation and presentation of the accompanying consolidated financial statements. All significant intercompany transactions have been eliminated in consolidation. (a) Basis of Consolidation ---------------------- The accompanying consolidated financial statements include the accounts of Security Federal Corporation (the "Company") and its wholly owned subsidiary, Security Federal Bank (the "Bank") and its wholly subsidiary, Security Financial Services Corporation ("SFSC"). SFSC consists primarily of investment brokerage services. Also included in consolidation are two real estate partnerships, which the Company purchased from SFSC in December 1995 at fair market value. (b) Cash and Cash Equivalents ------------------------- For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, interest-bearing balances in other banks, and federal funds sold. Cash equivalents have maturities of three months or less. (c) Investment and Mortgage-Backed Securities ----------------------------------------- In May 1993 the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 115 (Statement 115), "Accounting for Certain Investments in Debt and Equity Securities". Under Statement 115 investment securities, including mortgage-backed securities, are classified into one of three categories, held to maturity, available for sale or trading. Management determines the appropriate classification of debt securities at the time of purchase. Investment securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. These securities are recorded at cost, adjusted for amortization of premiums and accretion of discounts over the estimated life of the security using a method that approximates a level yield. Prepayment assumptions on mortgage-backed securities are anticipated. Management classifies investment securities not considered as held to maturity as available for sale, which are stated at fair value, with unrealized gains and losses, net of tax, reported in a separate component of shareholders' equity. Gains and losses from sales of investments and mortgage-backed securities available for sale are determined using the specific identification method. The Company has no trading securities. As permitted by Statement 115, the Company initially adopted the statement as of March 31, 1994, the effect of which was to decrease shareholders' equity by $44,116. In November 1995, the FASB issued a guide to implementation of SFAS No. 115 on accounting for certain investments in debt and equity securities which allows for the one-time transfer of certain investments classified as held to maturity to available for sale. The Bank transferred $27.9 million of investments to available for sale. At March 31, 1995, the Bank maintained liquid assets in excess of the amount required by regulations. The required amount is 5% of the average daily balances of deposits and short-term borrowings. Liquid assets consist primarily of cash, including time deposits and investment securities with remaining maturities of less than five years. 8 (1) Significant Accounting Policies, Continued ------------------------------------------ (d) Allowance for Loan Losses ------------------------- The Company provides for loan losses on the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to the allowance for loan losses. Additions to the allowance for loan losses are provided by charges to operations based on various factors which, in management's judgment deserve current recognition in estimating possible losses. Such factors considered by management include the market value of the underlying collateral, stated guarantees by the borrower if applicable, the borrower's ability to repay from other economic resources, growth and composition of the loan portfolios, the relationship of the allowance for loan losses to outstanding loans, loss experience, delinquency trends, and general economic conditions. Management evaluates the carrying value of the loans periodically and the allowance is adjusted accordingly. While management uses the best information available to make evaluations, future adjustment to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations. Allowances for loan losses are subject to periodic evaluations by various regulatory authorities and may be subject to adjustments based upon the information that is available to them at the time of their examinations. On April 1, 1995, the Bank adopted the provisions of SFAS No. 114 Accounting by Creditors for Impairment of a Loan, and SFAS No. 118 Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. SFAS No. 114 requires creditors to evaluate loans for impairment and value those loans for which it is probable that the creditor will be unable to collect all amounts due according to the terms of the loan agreement at the present value of expected cash flows, market price of the loan, if available, or value of the underlying collateral. Expected cash flows are required to be discounted at the loan's effective interest rate. SFAS No. 118 amends SFAS No. 114 to allow a creditor to use existing methods for recognizing interest income on an impaired loan, and requires disclosure of income recognition methods used. The adoption of this standard required no increase to the allowance for loan losses and had no impact on net income for fiscal year 1996. (e) Loans Held for Sale ------------------- Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses are provided for in a valuation allowance by charges to operations. (f) Real Estate Acquired in Settlement of Loans ------------------------------------------- Real estate acquired in settlement of loans represents real estate acquired through foreclosure and is initially recorded at the lower of cost (principal balance of the former mortgage loan less any specific valuation allowances) or estimated fair value less costs to sell. Subsequent improvements are capitalized. Costs of holding real estate, such as property taxes, insurance, general maintenance and interest expense, are expensed as a period cost. Fair values are reviewed regularly and allowances for possible losses are established when the carrying value of the real estate owned exceeds the fair value less estimated costs to sell. Fair values are generally determined by reference to an outside appraisal. (g) Real Estate Held for Development and Sale ----------------------------------------- Real estate purchased for development and sale and investments in real estate partnerships are stated at the lower of cost or estimated net realizable value. Costs directly related to such real estate are capitalized until construction required to bring these properties to a saleable condition is completed. Capitalized costs include direct costs incurred during the improvement period. 9 (1) Significant Accounting Policies, Continued ------------------------------------------ Gains on the sale of real estate purchased for development and sale are recorded at the time of sale provided certain criteria relating to property type, cash down payment, loan terms, and other factors are met. If these criteria are not met at the date of sale, the gain is deferred and recognized using the installment or cost recovery method until they are satisfied, at which time the remaining deferred gain is recorded as income. Market values of real estate purchased for development and sale are reviewed regularly and allowances for losses are established when the carrying value exceeds the estimated net realizable value. In determining the estimated net realizable value, the Company deducts from the estimated selling price the projected cost to complete and dispose of the property and the estimated cost to hold the property to an expected date of sale. (h) Premises and Equipment ---------------------- Premises and equipment are carried at cost, net of accumulated depreciation. Depreciation of premises and equipment is provided principally on a straight-line method over the estimated useful life of the related asset. Estimated lives are seven to thirty years for buildings and improvements and generally five to ten years for furniture, fixtures and equipment. (i) Income Taxes ------------ The Bank adopted SFAS No. 109 "Accounting for Income Taxes effective April 1, 1993." Under SFAS No. 109 deferred tax expense or benefit is recognized for the net change during the year in the deferred tax liability or asset. That amount together with income taxes currently payable is the total amount of income tax expense or benefit for the year. Upon adoption of SFAS No. 109 the Bank realized an addition to net income of $30,000. Deferred taxes are provided for differences in financial reporting bases for assets and liabilities as compared with their tax bases. Basically, a current tax liability or asset is established for taxes presently payable or refundable and a deferred tax liabil- ity or asset is established for future tax items. A valuation allowance, if applicable, is established for deferred tax assets that may not be realized. Tax bad debt reserves in excess of the base year amount (established as taxable years ending March 31, 1988 or later), would create a deferred tax liability. Deferred income taxes are provided for differences between the provision for loan losses for financial statement purposes and those allowed for income tax purposes. Effective April 1, 1993, the Company adopted Statement 109 and has reported the cumulative effect of that change in the method of accounting for income taxes in the 1994 consolidated statement of income. (j) Loan Fees and Costs Associated with Originating Loans ----------------------------------------------------- The net of loan fees received and direct incremental costs of originating loans are deferred and amortized over the contractual life of the related loan. The net fees are recognized as yield adjustments by applying the interest method. Prepayments are not anticipated. 10 (1) Significant Accounting Policies, Continued ------------------------------------------ (k) Intangible Assets ----------------- Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected undiscounted future results. The amount of goodwill impairment, if any, is measured based on projected discounted future results using a discount rate reflecting the Company's average cost of funds. Deposit based premiums, representing the cost of acquiring deposits from other financial institutions, are being amortized by charges to operations over the expected periods to be benefited. The effective amortization period for intangible assets is approximately 10 years. (l) Interest Income --------------- Interest on loans is accrued and credited to income monthly based on the principal balance outstanding and the contractual rate on the loan. The Company places loans on non-accrual status when they become greater than sixty days delinquent or when in the opinion of management, full collection of principal or interest is unlikely. The Company provides an allowance for uncollectible accrued interest on loans which are sixty days delinquent for all interest accrued prior to the loan being placed on non-accrual status. The loans are returned to an accrual status when full collection of principal and interest appears likely. (m) Fair Value of Financial Instruments ----------------------------------- SFAS No. 107 "Disclosures about Fair Value of Financial Instruments" requires disclosure in the financial statements regarding the fair value of on and off-balance sheet financial instruments for which it is practicable to do so. Fair values are based on quoted market prices where available and on esti- mates of present value or other valuation techniques. These estimates are made at a specific point in time and are subjective in nature involving uncertainties and significant judgment. In addition, SFAS No. 107 excludes all non-financial instruments and certain financial instruments from its disclosure requirements. Accordingly, the aggregate fair values presented do not represent the underlying fair value of the Bank. Fair values for consolidated financial statement reporting purposes are estimated for loans with similar financial characteristics. These loans are segregated by type of loan, considering credit risk, interest rate and pre- payment characteristics. Each loan category is further segmented into fixed and adjustable rate categories. The fair value of performing loans is calculated by discounting scheduled cash flows through estimated maturity dates. Expected cash flows are discounted using the Bank's current rates that reflect the credit and interest rate risks inherent in each category of loans. A prepayment assumption is used as an estimate of the portion of loans that will be repaid prior to their scheduled maturity. (n) Earnings Per Share ------------------ Net income per share is computed by dividing consolidated net income by the weighted average number of shares of common stock equivalents outstanding during the period. Common share equivalents include, if applicable, dilutive stock option share equivalents determined by using the treasury stock method. 11 (o) Reclassifications ----------------- Certain amounts in prior years' consolidated financial statements have been reclassified to conform with current year classifications. (2) Branch Acquisition ------------------ On October 21, 1993 the Bank acquired certain assets and certain deposits and other liabilities of four branch offices of NationsBank of South Carolina, N.A. (the "branches"). In connection with the purchase, the Bank paid a deposit premium of approximately $4.4 million. The Company accounted for the acquisition under the purchase method of accounting. The application of the purchase method of accounting resulted in the adjustment of the assets and liabilities acquired based upon their fair market values on the date of acquisition. The Company's consolidated statements of income include the operating results of the acquired branches after October 21, 1993. The assets acquired and liabilities assumed (after purchase accounting adjustments) of the branches at the acquisition date are summarized as follows: Assets acquired: Loans receivable, net $ 15,969,139 Building and equipment 916,155 Premium on deposits and goodwill 3,926,792 Other assets 1,203,799 ------------ Total assets $ 22,015,885 ============ Liabilities assumed: Deposit accounts 61,123,824 Other liabilities 9,931 ------------ Total liabilities 61,133,755 ------------ Cash received $ 39,117,870 ============ At March 31, 1996, the Bank's remaining balances in goodwill and core deposit intangible were $1,693,074 and $1,119,641, respectively. 12 (3) Investment and Mortgage-Backed Securities, Held to Maturity ----------------------------------------------------------- The amortized cost, gross unrealized gains, gross unrealized losses and market values of investment securities held to maturity are as follows: March 31, 1996 ------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ----- FNMA securities $ 1,006,250 7,030 2,016 1,011,264 FHLB securities 5,492,366 -- 138,422 5,353,944 FHLMC bond 1,000,000 -- 10,900 989,100 Mortgage-backed securities 2,542,108 32,651 15,116 2,559,643 ----------- ------ ------- --------- $10,040,724 39,681 166,454 9,913,951 =========== ====== ======= ========= March 31, 1995 ------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ----- U.S. Treasury obligations $27,867,170 -- 992,492 26,874,678 FNMA securities 2,017,770 -- 77,676 1,940,094 FHLB securities 5,500,700 -- 376,029 5,124,671 FFCB securities 500,000 -- 650 499,350 FHLMC bond 1,000,000 -- 69,560 930,440 Mortgage-backed securities 1,710,605 18,979 18,179 1,711,405 ----------- ------ --------- ---------- $38,596,245 18,979 1,534,586 37,080,638 =========== ====== ========= ========== The amortized cost and market value of investments securities held to maturity at March 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without call or prepayment penalties. Amortized Fair Cost Value ---- ----- In one year or less $ 506,250 504,234 After one year through five years 6,992,366 6,850,074 ------------ --------- Mortgage-backed securities 2,542,108 2,559,643 ------------ --------- $ 10,040,724 9,913,951 ============ ========= At March 31, 1996 investment securities of $4,852,500 were pledged as collateral for certain deposit accounts and Federal Home Loan Bank of Atlanta borrowings. 13 (4) Investment and Mortgage-Backed Securities, Available for Sale ------------------------------------------------------------- The amortized cost, gross unrealized gains, gross unrealized losses and market value of investment and mortgage-backed securities available for sale are as follows: March 31, 1996 ------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ----- U.S. Treasury notes $31,170,866 1,782 200,242 30,972,406 =========== ===== ======= ========== March 31, 1995 ------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ----- U.S. Treasury notes $ 4,013,080 -- 82,454 3,930,626 =========== ===== ======= ========== The amortized cost and market value of investment securities available for sale at March 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without call or prepayment penalties. Amortized Fair Cost Value ---- ----- In one year or less $ 23,617,943 23,537,490 After one year through five years 7,552,923 7,434,916 ------------ ---------- $ 31,170,866 30,972,406 ============ ========== 14 (4) Investment and Mortgage-Backed Securities, Available for Sale, Continued -------------------------------------------------------------- Proceeds from the sales of investment and mortgage-backed securities during the years ended March 31, 1996, 1995 and 1994, as well as the gross gains and losses realized are summarized as follows: 1996 1995 1994 ---- ---- ---- Investments: Proceeds from sales $ -- 1,498,085 7,406,875 ========= ========= ========= Gross gains $ -- 1,523 -- ========= ========= ========= Gross losses $ -- 4,027 96,658 ========= ========= ========= Mortgage-backed securities: Proceeds from sales $ -- -- 2,997,318 ========= ========= ========= Gross gains $ -- -- 158,433 ========= ========= ========= Gross losses $ -- -- -- ========= ========= ========= (5) Loans Receivable, Net --------------------- Loans receivable, net at March 31, consisted of the following: 1996 1995 ---- ---- Residential real estate $ 59,951,018 66,226,289 Consumer 44,810,133 44,089,104 Commercial real estate 10,629,652 13,007,516 Commercial business 38,764,035 29,718,456 Loans held for sale 612,919 776,631 ------------ ----------- 154,767,757 153,817,996 ------------ ----------- Less: Allowance for loan losses 1,758,688 1,955,119 Loans in process 474,575 2,419,433 Deferred loan fees 394,768 466,250 ------------ ----------- 2,628,031 4,840,802 ------------ ----------- $152,139,726 148,977,194 ============ =========== 15 (5) Loans Receivable, Net, Continued -------------------------------- Changes in the allowance for loan losses for the years ended March 31, are summarized as follows: 1996 1995 1994 ---- ---- ---- Balance at beginning of year $ 1,955,119 1,735,073 1,190,793 Provision for loan losses 230,000 300,000 335,000 Allowance on acquired loans -- -- 324,479 Charge-offs (471,938) (105,073) (124,689) Recoveries 45,507 25,119 9,490 ----------- --------- --------- Balance at end of year $ 1,758,688 1,955,119 1,735,073 =========== ========= ========= The following table sets forth the amount of the Company's non-accrual loans and the status of the related interest income at March 31: 1996 1995 ---- ---- Non-accrual loans $ 2,572,000 812,000 Interest income which would have been recognized under original terms 82,670 55,308 Interest income actually recognized 54,200 10,303 Loans serviced for others at March 31, 1996, 1995, and 1994, were $93,309,923, $97,636,672, and $100,284,182 respectively. At March 31, 1996, impaired loans amounted to $2,572,000. These loans are well secured and no loss is estimated at this time. For the year ended March 31, 1996, the average recorded investment in impaired loans was $1,879,000 and $54,200 of interest income was recognized on loans while they were impaired. All of this income was recognized using the accrual method of accounting. The Bank originates residential and commercial real estate loans throughout its primary market area located in the south and central regions of South Carolina. Although this region has a diverse economy, much of the area is dependent on the nearby Savannah River Site. Employment at the Savannah River Site is expected to decline in the future. The future impact on the local economy and real estate market could affect the financial status of the Bank's customers. The degree of impact will be affected by the timing and terms associated with the Savannah River Site employment reduction, growth of other sectors of the local economy, etc. Future additions to the Bank's allowance for loan losses are dependent on the performance of the Bank's loan portfolio, the economy, changes in real estate values, and interest rates. There can be no assurance that additions to the allowance will not be required in future periods. Management continues to monitor its loan portfolio for the impact of local economic changes. 16 (6) Premises and Equipment, Net --------------------------- Premises and equipment, net at March 31, are summarized as follows: 1996 1995 ---- ---- Land $ 440,323 371,313 Buildings and improvement 2,998,995 2,711,637 Furniture and equipment 2,936,904 3,337,682 6,376,222 6,420,632 Less accumulated depreciation (3,189,037) (3,169,461) ----------- ---------- $ 3,187,185 3,251,171 =========== ========== Depreciation expense for the years ended March 31, 1996, 1995, and 1994, was $596,677, $588,825, and $526,764, respectively. The Bank has entered into noncancelable operating leases related to buildings and land. At March 31, 1996, future minimum payments under noncancelable operating leases with initial or remaining terms of one year or more are as follows (by fiscal year): 1997 $ 62,980 1998 61,390 1999 48,777 2000 30,165 2001 26,138 Thereafter 6,500 ---------- $ 235,950 ========== Total rental expense amounted to $53,778, $65,127 and $57,081 for the years ended March 31, 1996, 1995 and 1994, respectively. Rental expense has been reduced by sublease revenue of $4,349 in 1994. Five lease agreements with monthly expenses of $1,978, $2,014, $500, $407 and $350 have renewal options of 10, 10, 60, 20 and 10 years, respectively. (7) FHLB Stock ---------- Investment in the stock of the Federal Home Loan Bank is required by law for every Federally insured savings institution. No ready market exists for this stock and it has no quoted market value. However, because redemption of this stock has been at par it is carried at cost. The Bank, as a member of the FHLB of Atlanta, is required to acquire and hold shares of capital stock in the FHLB of Atlanta in an amount equal to the greater of (i) 1.0% of the aggregate outstanding principal amount of residential mortgage loans, home purchase contracts and similar obligations at the beginning of each year, or (ii) 1/20 of its advances (borrowings) from the FHLB of Atlanta. The Bank is in compliance with this requirement with an investment in FHLB of Atlanta stock of $1,233,200 as of March 31, 1996. 17 (8) Real Estate Operations ---------------------- The Company participates in two real estate joint ventures. The Company owns 50 percent (in 1994 SFSC sold 10 percent of its interest in the operations but retained the controlling interest) and 62.5 percent of the joint ventures which have been consolidated into the Company's financial statements. Income from real estate operations was as follows: 1996 1995 1994 ---- ---- ---- Real estate acquired for development and sale: Sales $ 350,180 625,674 1,280,480 Cost of sales (296,508) (460,299) (1,105,515) ---------- --------- ----------- Gross profit 53,672 165,375 174,965 Amortization (deferral) of gain on sale of real estate 25,396 3,420 8,976 Provision for real estate losses (45,000) -- (60,000) ---------- --------- ----------- Income from real estate operations 34,068 168,795 123,941 Other expenses, net 38,535 115,236 37,590 ---------- --------- ----------- Net income $ (4,467) 53,559 86,351 ========== ========= =========== The following is a summary of the allowance for estimated losses on real estate: 1996 1995 1994 ---- ---- ---- Balance at beginning of year $150,000 150,000 90,000 Provision for real estate losses 45,000 -- 60,000 -------- ------- ------- Balance at end of year $195,000 150,000 150,000 ======== ======= ======= Condensed combined financial information for the joint ventures as of March 31 is as follows: 1996 1995 ---- ---- Real estate held for development, net $ 1,389,579 1,442,723 Other assets 71,129 240,400 ----------- --------- Total assets 1,460,708 1,683,123 Liabilities (principally a loan payable to the Bank 277,339 479,394 ----------- --------- Partners equity $ 1,183,369 1,203,729 =========== ========= 18 (9) Deposits -------- Deposits outstanding by type of account at March 31 are summarized as follows: 1996 1995 --------------------------- ------------------------- Weighted Weighted Amount Rate Range Amount Rate Range ------ ---- ----- ------ ---- ----- Checking $42,251,949 1.35% 0 - 1.75% 41,211,492 1.40% 0 - 1.88% Money Market 13,769,693 2.81% 2.75 - 3.00% 16,776,207 3.27 2.20 - 3.44 Passbook accounts 13,615,436 2.50% 0 - 3.00% 14,491,809 2.61 0 - 2.62 ----------- ---- ----------- ---------- ---- ----------- 69,637,078 1.86% 0 - 3.00% 72,479,508 2.07% 0 - 3.44% ----------- ---- ----------- ---------- ---- ----------- Certificate accounts: 0 - 4.99% 5,116,366 44,023,933 5.00 - 6.99% 97,046,823 48,182,486 7.00 - 8.99% 574,460 1,588,710 9.00 - 12.99% -- -- ----------- ---- ----------- ---------- ---- ----------- Total certificates of deposit 102,737,649 5.65% 3.30 - 7.75% 93,795,129 5.17 3.45 - 8.10% ----------- ---- ----------- ---------- ---- ----------- $172,374,727 4.12% 0 - 7.75% 166,274,637 3.82% 0 - 8.10% ============ ==== =========== =========== ==== =========== The aggregate amount of short-term certificates of deposit with a minimum denomination of $100,000 was $9,846,903 and $13,704,756 at March 31, 1996 and 1995, respectively. The amounts and scheduled maturities of certificates of deposit at March 31, are as follows: 1996 1995 ---- ---- Within 1 year $ 83,523,749 65,839,088 After 1 but within 2 years 16,010,769 19,407,870 After 2 but within 3 years 1,659,385 6,548,849 After 3 but within 4 years 1,237,789 1,253,421 After 4 but within 5 years 305,957 745,901 Thereafter -- -- ------------ ---------- $102,737,649 93,795,129 ============ ========== 19 (10) Advances From Federal Home Loan Bank ------------------------------------ Advances from the Federal Home Loan Bank at March 31 are summarized by year of maturity and weighted average interest rate below: 1996 1995 --------------------- ------------------------ Weighted Weighted Amount Rate Amount Rate ------ ---- ------ ---- 1996 $ - --% 19,969,000 6.40% 1997 17,214,000 5.94 414,000 8.45 1998 3,452,000 6.60 3,452,000 6.60 1999 490,000 8.65 490,000 8.65 2000 528,000 8.70 528,000 8.70 Thereafter 1,180,000 8.53 1,180,000 8.53 ------------ ---- ---------- ---- $ 22,864,000 6.29% 26,033,000 6.65% ============ ==== ========== ==== Pursuant to collateral agreements with the FHLB, the Company has pledged all of its stock in the FHLB and qualifying first mortgage loans as collateral for these advances. Advances are subject to prepayment penalties. (11) Income Taxes ------------ Income tax expense for the years ended March 31, is comprised of the following: 1996 1995 1994 ---- ---- ---- Current: Federal $ 571,810 660,413 440,568 State -- -- 16,417 --------- ------- ------- 571,810 660,413 456,985 --------- ------- ------- Deferred: Federal (27,879) (122,537) (163,892) State (5,234) (38,147) (27,187) --------- ------- ------- (33,113) (160,684) (191,079) --------- ------- ------- $ 538,697 499,729 265,906 ========= ======= ======= 20 (11) Income Taxes, Continued ----------------------- The Company's income taxes differ from those computed at the statutory federal income tax rate, as follows: 1996 1995 1994 ---- ---- ---- Tax at statutory income tax rate $ 543,412 510,640 273,632 State income tax expense (benefit),net (3,454) (25,177) (7,108) Other (1,261) 14,266 (618) --------- ------- ------- $ 538,697 499,729 265,906 ========= ======= ======= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31 are presented below. 1996 1995 ---- ---- Deferred tax assets: Provision for loan losses $ 500,572 474,150 Net fees deferred for financial reporting 35,712 176,989 Unrealized loss on securities available for sale 44,036 31,299 Other real estate basis for tax purposes over financial statement basis 74,022 56,940 Other 137,667 79,125 --------- ------- Total gross deferred tax assets 792,009 818,503 --------- ------- Deferred tax liabilities: FHLB stock basis over tax basis 178,999 178,999 Depreciation 193,791 296,960 Other 44,811 13,986 --------- ------- Total gross deferred tax liability 417,601 489,945 --------- ------- Net deferred tax asset $ 374,408 328,558 ========= ======= A portion of the change in the net deferred tax asset relates to unrealized gains and losses on securities available for sale. The related current period deferred tax benefit of $12,737 has been recorded directly to shareholder's equity. The balance of the change in the net deferred tax asset results from the current period deferred tax benefit of $33,113. The net deferred tax asset is included in other assets in the accompanying consolidated balance sheets. No valuation allowance for deferred tax assets was required at April 1, 1995, and for the years ended March 31, 1995 and 1996. The realization of net deferred tax assets may be based on utilization of carrybacks to prior taxable periods, anticipation of future taxable income in certain periods, and the utilization of tax planning strategies. Management has determined that it is more likely than not that the net deferred tax asset can be supported based upon these criteria. 21 (11) Income Taxes, Continued ----------------------- Retained earnings at March 31, 1996 includes tax bad debt reserves of approximately $2.2 million, for which no provision for federal income tax has been made. If, in the future, these amounts are used for any purpose other than to absorb bad debt losses, including dividends, stock redemptions, or distributions in liquidation, or the Company ceases to be qualified as a savings and loan, they may be subject to federal income tax at the then prevailing corporate tax rate. (12) Employee Benefit Plans ---------------------- The Company participates in a multi-employer defined benefit plan. The plan provides defined benefits to substantially all full-time employees of the Company with one or more years of service. Separate actuarial valuations are not available for each participating employer, nor are plan assets segregated. There were no contributions to the plan required for the years ended March 31, 1996, 1995 and 1994. Plan assets exceed the present value of accumulated plan benefits at June 30, 1995, the latest actuarial valuation date. The Company participates in a multiple employer defined contribution em- ployee benefit plan covering substantially all employees with one or more years of service. The Company matches a portion of employees contributions, and the related expenses were $47,116, $96,905, and $77,666 for the years ended March 31, 1996, 1995 and 1994, respectively. The annual contribution is determined at the discretion of the Company's Board of Directors. The Company established an Employee Stock Ownership Plan ("ESOP") to acquire shares of the Company's common stock for the exclusive benefit of the employee participants. The ESOP borrowed $196,880 from a savings institution and purchased 19,688 shares of the Company's common stock. These shares were pledged as collateral for the ESOP debt which was paid in full in fiscal 1994. For the years ended March 31, 1995, 1994 and 1993 the Company recorded expenses related to the ESOP trust of $70,931, $51,291 and $68,472, respectively; of these amounts $518 and $3,190, was for interest on the ESOP note in 1994 and 1993, respectively. During the years ended March 31, 1994 and 1993 the plan repaid $15,779 and $91,138, respectively, of the note payable. Since the plan currently has no unallocated stock, there was no contribution for the year ended March 31, 1996. 22 (12) Employee Benefit Plans, Continued --------------------------------- Certain officers of the Company participate in an incentive stock option plan. Options are granted at exercise prices not less than the fair market value of the Company's common stock on the date of grant. No new options were granted during 1996. A total of 39,377 shares have been granted, exercisable over a period from one to ten years from the date of grant at $10.00 per share. During fiscal 1996, 3,938 options were exercised at $10.00 per share. There were 3,938 options granted but unexercisable at March 31,1996. (13) Commitments ----------- In conjunction with its lending activities, the Bank enters into various commitments to extend credit and issue letters of credit. Loan commitments (unfunded loans and unused lines of credit) and letters of credit are issued to accommodate the financing needs of the Bank's customers. Loan commitments are agreements by the Bank to lend at a future date, so long as there are no violations of any conditions established in the agreement. Letters of credit commit the Bank to make payments on behalf of customers when certain specified events occur. Financial instruments where the contract amount represents the Bank's credit risk include commitments under pre-approved but unused lines of credit of $16,700,000, and $23,129,798 and letters of credit of $129,000 and $124,000 at March 31, 1996 and 1995, respectively. These loan and letter of credit commitments are subject to the same credit policies and reviews as loans on the balance sheet. Collateral, both the amount and nature, is obtained based upon management's assessment of the credit risk. Since many of the extensions of credit are expected to expire without being drawn, the total commitment amounts do not necessarily represent future cash requirements. In addition to these loan commitments noted above, the Bank had unused credit card loan commitments of $885,000 and $963,497 at March 31, 1996 and 1995, respectively. Outstanding commitments on mortgage loans not yet closed amounted to $603,745 at March 31, 1996. Such commitments, which are funded subject to certain limitations, extend over varying periods of time with the majority being funded within 90 days. At March 31, 1996, the Bank had outstanding commitments to sell approximately $613,000 of loans. 23 (14) Regulatory Matters ------------------ Federal regulations require savings institutions to have a minimum regulatory tangible capital equal to 1.5% of adjusted total assets, a minimum core capital ratio equal to 3.0% of adjusted total assets, and risk-based capital equal to 8.0% of risk-weighted assets. As of March 31, 1996, the Bank had regulatory tangible capital equal to 5.82% of total adjusted assets, regulatory core capital equal to 6.32% of total adjusted assets, and risk-based capital equal to 10.57% of risk-weighted assets. As a result, the Bank meets all three of the aforementioned capital requirements. OTS regulations impose various restrictions or requirements on institutions with respect to their ability to pay dividends or make other distributions of capital. (15) Related Party Transactions -------------------------- At March 31, 1996, the total aggregate indebtedness to the Bank by executive officers and directors of the Bank whose individual indebtedness exceeded $60,000 at any time over the period since April 1, 1994 was $440,017. There were no additions to loans to executive officers over $60,000 during fiscal 1996. Repayments on these loans totaled approximately $11,600. Loans to allemployees, officers and directors of the Bank, in the aggregate, constituted approximately 8.2% of the total shareholders' equity of the Bank at March 31, 1996. The Company paid insurance premiums to an insurance agency in which three directors of the Company are also officers, directors and shareholders. The Company incurred expense in the amount of $79,208, and $90,877 for the years ended March 31, 1995 and 1994, respectively, which represented insurance and bond premiums for insurance coverage written for the Company. Of these amounts, $8,062, and $10,874 were the actual commissions earned by the agency. Also, the Bank paid $875, and $1,412 during these years to the agency out of escrow accounts maintained for customers of the Bank. The Company paid approximately $2,000 in premiums in fiscal 1996. The Company rents office space from a company in which a director and an officer of the Company and the Bank have an ownership interest. The Bank incurred expenses of $23,625, $22,995 and $25,511 respectively, for rent and taxes for the years ended March 31, 1996, 1995 and 1994. Management is of the opinion that the transactions with respect to insurance coverage and office rent are made on terms that are comparable to those which would be made with unaffiliated persons. 24 (16) Security Federal Corporation Condensed Financial Statements (Parent Company Only) ------------------------------------------------------------------- The following is condensed financial information of Security Federal Corporation (parent company only); the primary asset of which is its investment in the bank subsidiary, and the principal source of income for the Company is equity in undistributed earnings from the Bank. Condensed Balance Sheet Data March 31, 1996 and 1995 1996 1995 ---- ---- Assets Cash $ 71,795 490,147 Investment in Security Federal Bank 5,007,910 13,981,572 Investment in Real Estate Partnerships 567,726 -- Furniture and equipment, net 0 290 Income tax receivable from Bank 39,654 18,691 Other assets 97,133 -- ----------- ---------- Total assets $15,784,218 14,490,700 =========== ========== Liabilities and Shareholders' Equity Loans Payable $ 350,000 -- Accounts payable -- 1,230 Shareholders' equity 15,434,218 14,489,470 ----------- ---------- Total liabilities and shareholders' equity $15,784,218 14,490,700 =========== ========== Condensed Statements of Income Data For the years ended March 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Income: Equity in undistributed earnings of Security Federal Bank $ 1,098,307 1,038,428 545,022 Equity in undistributed earnings of Real Estate Partnerships 889 -- -- Dividend income -- -- 50,000 Miscellaneous income 927 10 2,595 ----------- --------- ------- 1,100,123 1,038,438 597,617 Expenses: Miscellaneous 40,549 36,284 28,724 ----------- --------- ------- Net income $ 1,059,574 1,002,154 568,893 =========== ========= ======= 25 (16) Security Federal Corporation Condensed Financial Statements (Parent Company Only) Continued ------------------------------------------------------------------- Condensed Statements of Cash Flow Data For the years ended March 31, 1996, 1995 and 1994 1996 1995 1994 ---- ---- ---- Operating activities: Net income $ 1,059,574 1,002,154 568,893 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 290 348 348 Equity in undistributed earnings of Security Federal Bank (1,098,307) (1,038,428) (545,022) Equity in undistributed earnings of real estate partnership (889) -- -- (Increase) decrease in income taxes receivable and other assets (118,096) (3,896) 1,408 Increase (decrease) in accounts payable (1,230) (14,160) (9,394) ----------- --------- -------- Net cash provided by operating activities (158,658) (53,982) 16,233 ----------- --------- -------- Investing activities: Purchase of Real Estate Partnerships from Bank (561,000) -- -- Investment in Real Estate (5,838) -- -- ----------- --------- -------- Net cash used in investing activities (566,838) -- -- ----------- --------- -------- Financing activities: Proceeds of loan 350,000 -- -- Dividends paid (82,236) (80,880) (78,754) Exercise of stock options 39,380 194,640 -- ----------- --------- -------- Net cash used in financing activities 307,144 113,760 (78,754) ----------- --------- -------- Net increase (decrease) in cash and cash equivalents (418,352) 59,778 (62,521) Cash and cash equivalents at beginning of year 490,147 430,369 492,890 ----------- --------- -------- Cash and cash equivalents at end of year $ 71,795 490,147 430,369 =========== ========= ======== 26 (17) Carrying Amounts and Fair Value of Financial Instruments -------------------------------------------------------- The carrying amounts and fair value of financial instruments as of March 31, are summarized below: (In Thousands) 1996 -------------------------- Carrying Estimated Amount Fair Value ------ ---------- Financial Assets Cash and cash equivalents $ 9,824 $ 9,824 Investment and mortgage backed securities 41,013 40,886 Loans receivable, net 152,140 152,537 Federal Home Loan Bank Stock 1,233 1,233 Financial Liabilities Deposits: Checking, Savings, and MMDA accounts $ 69,637 69,637 Certificate accounts 102,738 103,091 Advances from Federal Home Loan Bank 22,864 21,082 Other borrowed money 350 350 The Bank had, at March 31, 1996 $18.2 million of off-balance sheet financial commitments. These commitments are to originate loans and unused consumer lines of credit and credit card lines. Since these obligations are based on current market rates, if funded, the original principal is considered to be a reasonable estimate of fair market value. Fair value estimates are made at a specific point in time, based on relevant market data and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale the Bank's entire holdings of a particular financial instrument. Be- cause no active market exists for a significant portion of the Bank's financial instruments fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, current interest rates and prepayment trends, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in any of these assumptions used in calculating fair value would also significantly affect the estimates. Further, the fair value estimates were calculated as of March 31, 1996. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Bank has significant assets and liabilities that are not considered financial assets or liabilities including deposit franchise value, loan servicing portfolio, deferred tax liabilities, and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. 27 (18) Contingencies ------------- The United States Congress is currently proposing a plan under which the Bank Insurance Fund (BIF), hich is the primary deposit insurance fund for commercial banks, would be merged with the Savings Association Insurance Fund ("SAIF"), which is the primary insurance fund for thrifts and savings banks. In connection with this merger, all members of the SAIF fund would be required to pay a one-time assessment of between 80 and 90 basis points per every $100 of SAIF insured deposit balances as of March 31, 1995. Based on the Bank's deposit balances as of March 31, 1995, the one-time assessment would be approximately $950,000 before tax and approximately $600,000 after tax, if that expense would be tax deductible. In exchange for this one-time assessment, qualifying members of the SAIF fund would receive a reduction in their annual premiums. The measure has not yet passed Congress, and the final provisions and payment date are as yet unknown. In the normal course of business, the Company and subsidiary are periodically involved in litigation. In the opinion of the Company's management none of these cases should have a material adverse effect on the consolidated financial statements. 28 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized. SECURITY FEDERAL CORPORATION Date: April 24, 1997 By: /s/ Roy G. Lindburg ------------------------------------- Roy G. Lindburg Its:Treasurer and Chief Financial Officer ------------------------------------- (Duly Authorized Representative) 29 -----END PRIVACY-ENHANCED MESSAGE-----