-----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, GlZfLeBbaMd8Z/Wm/Ej2Hg/vlRQ+go4evTnybFEr72dGmosBNXjmtXbaSuSSXudm OV3l4Bu78ZXT4y3R++mCSA== 0000939057-97-000173.txt : 19971113 0000939057-97-000173.hdr.sgml : 19971113 ACCESSION NUMBER: 0000939057-97-000173 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 SROS: NASD 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-16120 FILM NUMBER: 97716596 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 10QSB 1 SECURITY FEDERAL CORPORATION FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10 - QSB (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number: 0-16120 SECURITY FEDERAL CORPORATION Delaware 57-0858504 (State or other jurisdiction of (IRS Employer incorporation or organization)Identification Number) 1705 Whiskey Road, Aiken, South Carolina 29801 (Address of Principal Executive Office) (Zip code) (803) 641-3000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Class Outstanding Shares at ----- --------------------- Common Stock September 30, 1997 $0.01 Par Value 417,122 INDEX SECURITY FEDERAL CORPORATION PART I - FINANCIAL INFORMATION (UNAUDITED) PAGE --------------------------------- ---- Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets at September 30, 1997 and March 31, 1997 2 Consolidated Statements of Income for the Three months ended September 30, 1997 and 1996 3-4 Six months ended September 30, 1997 and 1996 5-6 Consolidated Statement of Shareholders' Equity 7 Consolidated Statements of Cash Flows 8-9 Notes to Consolidated Financial Statements 10-13 Item 2. Management's Discussion and Analysis Financial Condition and Results of Operations 14-17 PART II. OTHER INFORMATION ----------------- Other Information 18 Signatures 19 SCHEDULES OMITTED All schedules other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information is included in the consolidated financial statements and related notes. SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (UNAUDITED) SEPTEMBER 30, MARCH 31, 1997 1997 ASSETS --------- --------- Cash and cash equivalents $ 6,686,743 $ 7,903,637 Investment and mortgage-backed securities: Available for sale: (Amortized cost of $45,861,400 45,913,577 24,215,667 at September 30, 1997 and $24,484,644 at March 31, 1997) Held to maturity: (Fair market value of 10,107,208 12,754,769 $10,143,932 at September 30, 1997 and $12,598,186 at March 31, 1997) Loans receivable net: Held for sale 867,242 211,212 Held for investment: (Net of allowance of 143,607,954 146,558,261 $2,034,079 at September 30, 1997 and $1,767,483 at March 31, 1997) ----------- ----------- 144,475,196 146,769,473 ----------- ----------- Accrued interest receivable: Loans 850,782 820,730 Mortgage-backed securities 37,793 38,909 Investments 526,001 363,109 Premises and equipment, net 3,867,836 3,952,149 Federal Home Loan Bank stock, at cost 785,700 1,210,300 Real estate acquired in settlement of loans 44,535 52,009 Real estate held for development and sale 736,747 840,813 Other assets 2,863,831 3,148,980 ----------- ----------- TOTAL ASSETS 217,320,549 201,645,945 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposit accounts $173,498,802 $168,060,858 Advances from Federal Home Loan Bank 22,578,000 14,114,000 Other borrowed money 167,342 204,397 Advance payments by borrowers for taxes and insurance 409,698 244,449 Other liabilities 3,480,425 2,840,212 ----------- ----------- TOTAL LIABILITIES 200,134,267 185,463,916 ----------- ----------- STOCKHOLDERS' EQUITY: Serial preferred stock, $.01 par value; authorized shares - 200,000; issued and outstanding, none Common stock, $.01 par value; authorized shares - 1,000,000; issued and outstanding shares, 417,122 at September 30, 1997 and March 31, 1997 4,171 4,171 Additional paid-in capital 3,958,603 3,958,603 Unrealized net gain (loss) on securities available 32,371 (166,872) for sale, net of income taxes Retained earnings, substantially restricted 13,191,137 12,386,127 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 17,186,282 16,182,029 =========== =========== TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $217,320,549 $201,645,945 =========== =========== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 2 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30, 1997 1996 Interest income: --------- --------- Loans $ 3,354,200 $ 3,405,577 Mortgage-backed securities 83,509 84,511 Investment securities 645,433 526,675 Other 19,534 16,640 --------------- ------------- Total interest income 4,102,676 4,033,403 --------------- ------------- Interest expense: NOW and money market accounts 288,254 237,337 Passbook accounts 75,831 88,132 Certificate accounts 1,287,136 1,373,492 Advances and other borrowed money 275,015 317,729 --------------- ------------- Total interest expense 1,926,236 2,016,690 --------------- ------------- Net interest income 2,176,440 2,016,713 Provision for loan losses 240,000 75,000 --------------- ------------- Net interest income after provision for Loan losses 1,936,440 1,941,713 --------------- ------------- Other income: Gain on sale of loans 45,121 71,955 Loan servicing fees 90,053 84,947 Service fees on deposit accounts 238,475 204,611 Income (loss) from real estate operations 16,875 (69,545) Other 164,203 27,197 --------------- ------------- Total other income 581,561 292,331 --------------- ------------- General and administrative expenses: Salaries and employee benefits 833,961 808,184 Occupancy 124,686 103,588 Advertising 107,227 55,700 Depreciation and maintenance of equipment 218,885 167,333 FDIC insurance premiums 19,158 65,502 FDIC SAIF Assessment 0 705,489 Amortization of intangibles 116,310 116,310 Other 435,702 507,353 --------------- ------------- Total general and administrative expenses 1,855,929 2,529,459 --------------- ------------- (Continued) 3 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30, 1997 1996 --------------- ------------- Income (loss) before income taxes 662,072 (295,415) Provision (benefit) for income taxes 228,436 (118,280) --------------- ------------- Net income (loss) $ 433,636 $ (177,135) =============== ============= Net income (loss) per common share $ 1.04 $ (0.43) ============== ============= Cash dividend on common stock $ 0.06 $ 0.05 ============== ============= Weighted average shares outstanding $ 417,122 $ 413,184 ============== ============= SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) SIX MONTHS ENDED SEPTEMBER 30, 1997 1996 --------------- ------------- Interest income: Loans $ 6,663,201 $ 6,781,064 Mortgage-backed securities 168,006 178,897 Investment securities 1,197,307 1,041,114 Other 38,077 36,972 --------------- ------------- Total interest income 8,066,591 8,038,047 --------------- ------------- Interest expense: NOW and money market accounts 493,579 469,439 Passbook accounts 151,823 175,811 Certificate accounts 2,531,711 2,776,944 Advances and other borrowed money 529,880 665,856 --------------- ------------- Total interest expense 3,706,993 4,088,050 --------------- ------------- Net interest income 4,359,598 3,949,997 Provision for loan losses 390,000 150,000 --------------- ------------- Net interest income after provision for Loan losses 3,969,598 3,799,997 --------------- ------------- Other income: Gain on sale of loans 75,212 102,085 Loan servicing fees 173,400 168,073 Service fees on deposit accounts 434,771 390,248 Income (loss) from real estate operations 46,915 (43,640) Other 244,920 63,837 --------------- ------------- Total other income 1,002,091 653,730 --------------- ------------- General and administrative expenses: Salaries and employee benefits 1,730,787 1,630,851 Occupancy 237,072 199,604 Advertising 185,998 90,519 Depreciation and maintenance of equipment 376,465 327,699 FDIC insurance premiums 38,592 158,344 FDIC SAIF Assessment 0 705,489 Amortization of intangibles 232,620 232,620 Other 847,108 986,865 --------------- ------------- Total general and administrative expenses 3,648,642 4,331,991 --------------- ------------- (Continued) 5 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) SIX MONTHS ENDED SEPTEMBER 30 1997 1996 --------------- ------------- Income before income taxes 1,323,047 121,736 Provision for income taxes 467,983 20,371 --------------- ------------- Net income $ 855,064 $ 101,365 =============== ============= Net income per common share $ 2.05 $ 0.25 ============== ============= Cash dividend on common stock $ 0.12 $ 0.10 ============== ============= Weighted average shares outstanding $ 417,122 $ 413,184 ============== ============= SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 6 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) UNREALIZED NET LOSS ON ADDITIONAL SECURITIES COMMON PAID-IN AVAILABLE RETAINED STOCK CAPITAL FOR SALE EARNINGS TOTAL ------ ------- --------- -------- --------- Beginning balance, March 31, 1997 4,171 3,958,603 (166,872) 12,386,127 16,182,029 Net income ----- ----- ----- 855,064 855,064 Cash dividend ----- ----- ----- (50,054) (50,054) Exercise of stock options ----- ----- Decrease in unrealized ----- ----- 199,243 ----- 199,243 net loss/increase in unrealized net gain on securities available for sale, net of tax ------ ------- --------- -------- --------- Ending balance, September 30, 1997 4,171 3,958,603 32,371 13,191,137 17,186,282 ====== ========= ========= ========== ========== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 7 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED SEPTEMBER 30 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: -------- -------- Net Income $ 855,064 $ 101,365 Adjustments to reconcile net income to net Cash provided by operating activities: Depreciation expense 322,415 305,148 Amortization of purchase accounting adjustments 232,620 232,620 Discount accretion and premium amortization (15,084) 95,228 Provisions for losses on loans and real estate 390,000 250,000 Gain on sale of loans (102,085) (75,212) Gain on sale of real estate (89,677) (18,189) Amortization of deferred fees on loans (45,307) (63,715) Proceeds from sale of loans held for sale 5,176,055 8,929,732 Origination of loans for sale (5,730,000) (8,580,340) (Increase) decrease in accrued interest receivable: Loans (30,052) (102,929) Mortgage-backed securities 1,116 (14,331) Investments (162,892) (17,315) Increase (decrease) in advance payments by 165,249 (7) borrowers Other, net 580,155 1,170,541 ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,547,577 $ 2,212,596 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Principal repayments on mortgage-backed securities 148,436 347,665 Purchase of investment securities available for sale (26,862,547) (2,973,203) Maturities of investment securities available for sale 5,500,000 8,500,000 Purchase of investment securities held to maturity 0 (3,482,461) Maturities of investment securities held to maturity 2,500,000 1,000,000 Purchase of FHLB Stock (424,600) 0 Redemption of FHLB Stock 0 72,000 (Increase) decrease in loans to customers 2,462,377 (1,366,286) Investment in real estate held for development (105,939) (242,979) Proceeds from sale of real estate held for development 253,920 382,088 Proceeds from sale of real estate acquired through 218,184 414,124 foreclosure Purchase of premises and equipment (269,137) (281,184) ------------ ------------ NET CASH USED BY INVESTING ACTIVITIES $(16,579,306) $2,369,764 ------------ ------------ (Continued) 8 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued) SIX MONTHS ENDED SEPTEMBER, 30 1997 1996 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in deposit accounts $ 5,437,944 $(2,148,451) Proceeds from FHLB advances 59,900,000 37,925,000 Repayment of FHLB advances (51,436,000) (40,943,000) Repayment of other borrowings $ (37,055) 0 Dividends to shareholders $ (50,054) (41,318) ------------ ------------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES $13,814,835 $(5,207,769) ------------ ------------ Net decrease in cash and cash equivalents (1,216,894) (625,409) Cash and cash equivalents at beginning of period 7,903,637 9,823,664 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,686,743 $ 9,198,255 ============ ============ Supplemental disclosure of cash flow information: Cash paid during the period for : Interest $ 3,321,574 $ 3,570,152 Income taxes $ 316,500 $ 306,000 Additions to real estate acquired through $ 164,948 $ 88,590 foreclosure Decrease in unrealized net loss/ increase in unrealized net gain on securities available for sale, net of taxes $ 199,243 $ 24,600 Securitization of loans receivable $ 0 $ 2,796,062 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 9 SECURITY FEDERAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-QSB and therefore do not include all disclosures necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with general accepted accounting principles. Such statements are unaudited but, in the opinion of management, reflect all adjustments, all of which are of a normal recurring nature, necessary for a fair presentation of results for the selected interim periods. Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in The Annual Report to Stockholders when reviewing interim financial statements. The results of operations for the three month period ended September 30, 1997 are not necessarily indicative of the results, which may be expected for the entire fiscal year. 2. PRINCIPLES OF CONSOLIDATION The accompanying unaudited consolidated financial statements include the accounts of Security Federal Corporation (the "Company") and its wholly-owned subsidiary, Security Federal Bank (the "Bank"), and its wholly owned subsidiary Security Financial Services Corporation ("SFSC"). SFSC engages primarily in investment brokerage services. Also included in consolidation are two real estate partnerships, which the Company purchased from SFSC in December 1995 at fair market value. 3. LOANS RECEIVABLE, NET Loans receivable, net at September 30, 1997 and March 31, 1997, consisted of the following: Loans held for sale were $867,242 and $211,212 at September 30, 1997 and March 31, 1997 respectively. Loans held for investment: September 30, 1997 March 31, 1997 ----------- ----------- Residential real estate $45,825,997 $50,534,682 Consumer 46,544,468 46,894,063 Commercial real estate 5,023,970 6,527,692 Commercial business 50,516,069 46,047,825 ----------- ----------- $147,910,504 $150,004,262 Less: Allowance for possible loan loss $ 2,034,079 $ 1,767,483 Loans in process 2,001,694 1,375,319 Deferred loan fees 266,777 303,199 ----------- ----------- 4,302,550 3,446,001 ----------- ----------- $143,607,954 $144,804,959 ============ ============ The following is a reconciliation of the allowance for possible loan losses: September 30, 1997 September 30,1996 ----------- ----------- Beginning balance $ 1,767,483 $ 1,758,688 Provision 390,000 150,000 Charge-offs (157,189) (170,075) Recoveries 33,785 9,911 ----------- ----------- Ending balance $ 2,034,079 $ 1,748,524 =========== =========== 10 SECURITY FEDERAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. SECURITIES INVESTMENT AND MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE - ------------------------------------------------------------- The amortized cost, gross unrealized gains gross unrealized losses and market values of investment and mortgage-backed securities held to maturity are as follows: SEPTEMBER 30, 1997 Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- -------- US Government and agency Obligations $45,861,400 $126,418 $74,241 $45,913,577 Mortgage-backed securities 0 0 0 0 --------- ---------- ---------- -------- Total $45,861,400 $126,418 $74,241 $45,913,577 =========== ======== ======== =========== MARCH 31, 1997 Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- -------- US Government and agency Obligations 24,484,644 0 268,977 24,215,667 Mortgage-backed securities 0 0 0 0 --------- ---------- ---------- -------- Total 24,484,644 0 268,977 24,215,667 ========== ========== ========= ========== INVESTMENT AND MORTGAGE-BACKED SECURITIES, HELD TO MATURITY The amortized cost, gross unrealized gains, gross unrealized losses and market values of investment and mortgage-backed securities available for sale are as follows: SEPTEMBER 30, 1997 Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- --------- --------- US Government and agency Obligations 5,479,564 28,026 21,840 5,485,750 Mortgage-backed securities 4,627,644 50,406 19,868 4,658,182 --------- ---------- --------- --------- Total 10,107,208 78,432 41,708 10,143,932 11 SECURITY FEDERAL CORPORATION AND SUBSIDIARY INVESTMENT AND MORTGAGE-BACKED SECURITIES, HELD TO MATURITY (CONTINUED) - ----------------------------------------------------------- MARCH 31, 1997 Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- --------- --------- US Government and agency obligations 7,978,201 14,797 163,799 7,829,199 Mortgage-backed securities 4,776,568 15,976 23,557 4,768,987 --------- ---------- --------- --------- Total 12,754,769 30,773 187,356 12,598,186 ========== ========== ========= ========== 5. DEPOSITS A summary of deposit accounts by type with weighted average rates are as follows: September 30, 1997 March 31, 1997 Demand Accounts: Balance Rate Balance Rate ------- ---- ------- ---- Checking $43,880,031 1.33% $43,601,652 1.36% Money Market 23,599,471 4.43% 11,640,884 2.80% Regular Savings 12,472,042 2.47% 13,451,308 2.49% ---------- ---- ---------- ---- Total demand accounts $79,951,544 2.42% $68,693,844 1.83% Certificate Accounts: 0 - 4.99% $ 175,701 $ 3,935,588 5.00 - 6.99% 93,239,591 95,234,017 7.00 - 8.99% 131,966 197,409 ----------- ----------- Total certificate accounts 93,547,258 5.42% 99,367,014 5.40% ----------- ----- ----------- ----- Total deposit accounts $173,498,802 4.04% $168,060,858 3.94% ============ ----- =========== ----- 6. FEDERAL HOME LOAN BANK ADVANCES Federal Home Loan Bank Advances are summarized by year of maturity and weighted average interest rate in the table below: Fiscal Year Due September 30, 1997 March 31, 1997 - --------------- ------------------ -------------- Balance Rate Balance Rate ------- ---- ------- ---- 1998 $10,452,000 5.98% $11,952,000 5.88% 1999 5, 490,000 6.06% 490,000 8.65% 2000 528,000 8.70% 528,000 8.70% 2001 856,000 8.75% 856,000 8.75% thereafter 5, 270,000 5.81% 288,000 7.97% ---------- ---- --------- ---- $22,596,000 6.13% $14,114,000 6.30% ========== ========== 12 SECURITY FEDERAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. REGULATORY MATTERS The following table reconciles the Bank's stockholders' equity to its various regulatory capital positions: (Dollars in thousands) September 30, 1997 March 31, 1997 ------------------ --------------- Bank's Stockholders' Equity $ 16,400 $ 15,362 Unrealized loss (gain) on available for sale securities, net of tax (32) 167 Reduction for goodwill and other intangibles (2,279) (2,511) ------- ------- Tangible capital 14,089 13,018 Qualifying core deposits and intangible assets 863 938 ------- ------- Core capital 14,952 13,956 Supplemental capital 1,733 1,627 ------ ------ Risk-based capital $ 16,685 $ 15,583 ====== ====== The following table compares the Bank's capital levels relative to the applicable regulatory requirements at September 30, 1997. (Dollars in thousands) Amount Percent Actual Actual Excess Required Required Amount Percent Excess Percent -------- -------- ------ ------- ------ ------- Tangible capital $ 3,216 1.5% $14,089 6.57% $10,873 5.07% Core capital 6,459 3.0% 14,952 6.95% 8,493 3.95% Risk-based capital 11,088 8.0% 16,685 12.04% 5,597 4.04% The Bank's regulatory capital amounts and ratios are as follow as of the dates indicated: To Be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollars in thousands) September 30, 1997 Risk-based Capital $16,685 12.0% $11,088 8.0% $13,860 10.0% (to risk weighted assets) Core Capital 14,952 7.0 6,459 3.0 12,917 6.0 (to adjusted tangible assets) Tangible Capital 14,089 6.6 3,216 1.5 10,721 5.0 (to tangible assets) September 30, 1996 Risk-based Capital $15,342 11.4% $10,776 8.0% $13,470 10.0% (to risk weighted assets) Core Capital $13,657 6.5 6,264 3.0 12,529 6.0 (to adjusted tangible assets) Tangible Capital 12,628 6.1 3,117 1.5 10,389 5.0 (to tangible assets) 13 SECURITY FEDERAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION CHANGES IN FINANCIAL CONDITION Total assets of the Company increased $15.7 million or 7.8% during the six months ended September 30, 1997, primarily due to an increase of $19.1 million in investment securities offset partially by an $2.3 million decrease in total net loans receivable. Commercial business loans increased $ 4.5 million since the beginning of the fiscal year, while residential real estate loans decreased $ 4.0 million. The decrease in residential loans is due to the relatively low interest rate environment, where most borrowers elect a fixed rate loan, which the Bank immediately sells on the secondary market, as opposed to an adjustable rate loan, which the Bank retains in its portfolio. The increase in commercial business loans is part management's strategy of increasing small business loans. Commercial business loans generally improve the Bank's yield in its portfolio and reprice typically in one year or less, but also inherently carry more credit risk than typical residential real estate loans. The increase in investment during the period is part of the Bank's asset liability strategy to use leverage and earn a spread of investments yields over cost of borrowings and deposits. Deposits increased $5.4 million or 3.2% during the six months ended of September 30, 1997, while Federal Home Loan Bank advances increased $8.5 million to fund the Bank's growth in assets. Money market deposit accounts increased $12.0 million since March 31, 1997 due to the Bank's more aggressive pricing and marketing strategy to attract those deposits. Certificates of deposit decreased $5.8 million as many accounts transferred to the money market account. The Board of Directors declared the twenty-sixth and twenty-seventh consecutive quarterly dividend of $.06 per share in May and August 1997, which totaled $50,000. Unrealized net losses on securities available for sale decreased by $199,000 to a net gain of $32,000 during the six months ended September 30, 1997. Net income for the six-month period was $855,064. These items combined to increase the Company's stockholders' equity by $1.0 million or 6.2% during the six months ended September 30, 1997. Book value per share stood at $41.20 at September 30, 1997 compared to $38.79 at March 31, 1997. LIQUIDITY AND CAPITAL RESOURCES In accordance with Office of Thrift Supervision regulations, the Bank is required to maintain a liquidity ratio at specified levels, which are subject to change. Currently, a minimum of 5.0% of the combined total of deposits and certain borrowings must be maintained in the form of cash or eligible investments. During the six months ended September 30, 1997, the Bank maintained an average liquidity of 27.34% compared to 20.83% for the same period in 1996. The Bank's current liquidity level is in line with management's objectives and deemed adequate to meet requirements of normal operations, potential deposits outflows and loan demand while still allowing for optimal investment of funds and return on assets. Loan repayments and maturities of investments are a significant source of funds to the Bank, whereas loan disbursements are a primary use of the Bank's funds. During the six months ended September 30, 1997, loan repayments and securitizations exceeded loan disbursements resulting in a $2.3 million of 1.6% decrease in total net loan receivable. Deposits and other borrowings are also an important source of funds for the Bank. During the six month period ended September 30, 1997, deposits increased $5.4 million while FHLB advances increased $8.5 million. At September 30, 1997, Security Federal had $82.2 million of certificates of deposit coming due within one year. Based on previous experience, a major portion of these certificates will be re-deposited. Capital resources at September 30, 1997 are sufficient to meet outstanding mortgage loan commitments of $171,000 and unused lines of credit of $20.7 million. Management believes that the Bank's short-term and long-term liquidity needs will continue to be supported by the Bank's deposit base and borrowing capacity. 14 SECURITY FEDERAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION ACCOUNTING AND REPORTING CHANGES In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 128, Earnings per Share, which is effective for both interim and annual periods ending after December 15, 1997. This statement supersedes Accounting Principles Board Opinion No. 15, Earnings per Share. The purpose of this statement is to simplify current reporting and make U.S. reporting comparable to international standards. The statement requires dual presentation of basic and diluted EPS by entities with complex capital structures (as defined by the statement). The Company anticipates that adoption of this standard will not have a material affect on EPS. Also, in February 1997, the FASB issued SFAS No. 129, Disclosure of Information about Capital Structure, which is effective for financial statements for periods ending after December 15, 1997. This statement applies to both public and nonpublic entities. The new statement requires no change for entities subject to the existing requirements. The Company anticipates that adoption of the standard will not have a material affect on the Company. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Enterprises are required to classify items of "other comprehensive income" by their nature in the financial statement and display the balance of other comprehensive income separately in the equity section of a statement of financial position. Statement 130 is effective for both interim and annual periods beginning after December 15, 1997. Earlier application is permitted. Comparative financial statements provided for earlier periods are required to be reclassified to reflect the provisions of this statement. The Company will adopt Statement 130 effective March 31, 1998, and will provide the required disclosures in the Company's Form 10QSB and Annual Report. In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. This statement establishes standards for the way public business companies are to report information about operating segments in annual financial statements and requires those companies to report selected information about operating segments in interim financial reports issued to shareholders. Statement 131 is effective for financial statements for periods beginning after December 15, 1997. Earlier application is encouraged. In the initial year of application, comparative information for earlier years is to be restated, unless it is impractical to do so. Statement 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application shall be reported in financial statements for interim periods in the second year of application. It is not anticipated that this standard will materially effect the Company's current method of financial reporting. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements, related notes, and other financial information presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than does the effect of inflation 15 SECURITY FEDERAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION YEAR 2000 CONSIDERATIONS The Bank has begun to take steps to ensure that its core operating software and hardware along with ancillary software packages are year 2000 compliant. Letters have been sent to several vendors to ensure they are ready for the year 2000. The Bank's main processing software and hardware vendors have replied that they are year 2000 compliance in all materials respects. Other vendors are either compliant or say they will be complaint by the year 2000. The Bank will continue to study this issue to ensure that all software will be complaint in a timely manner. The Bank does not anticipate any expenditures on the year 2000 issue will be material. RESULTS OF OPERATIONS - --------------------- NET INCOME Security Federal Corporation's net income was $434,000 and $855,000 or $1.04 and $2.05 per share for the three and six months ended September 30, 1997, respectively. These earnings are increases of $611,000 and $754,000 for the three and six months ended September 30, 1997, compared to the same periods in 1996 due primarily to a one-time charge taken in the September 1996 quarter of $ 705,000 pre-tax, as a result of legislation enacting a special assessment to recapitalize the Federal Deposit Insurance Corporation's Savings Association Insurance Fund (SAIF). Without the one-time charge, net income would have risen by $ 173,000 or 67% and $316,000 or 59% for the three months ended September 30, 1997. These increases are attributable to increases in net interest income and other income. NET INTEREST INCOME Net interest income increased by $160,000 or 7.9% and $410,000 or 10.4% for the three and six months ended September 30, 1997 compared to the same periods in 1996 due mainly to decreases in interest expense on both deposits and borrowings and increases in investment interest income offset partially by decreases in interest income on loans receivable. Interest income on loans decreased $51,000 or 1.5% and $118,000 or 1.7% for the three and six month periods due to lower average total outstanding loan balances in the 1997 periods compared to 1996. Investment, mortgage-backed, and other securities interest income increased $121,000 or 19.2% and $146,407 or 11.6% for the three and six months ended September 30, 1997 in comparison to the same periods one year earlier due to the larger average investment balances and a higher average yield in the overall investment portfolio in the 1997 periods. Total interest income increased $69,000 or 1.7% and $29,000 or 0.4% during the three and six month ended September 30, 1997, respectively. Total interest expense decreased $90,000 or 4.5% and $381,000 or 9.3% during the three and six month periods due to lower average balances in both deposit balances and advances and other borrowings and a slightly lower average cost of funds. Interest expense on deposits decreased $48,000 or 2.8% and $245,081 or 7.2% during the three and six months ended September 30, 1997 compared to the 1996 periods. Interest expense on advances and other borrowings decreased $43,000 or 13.4% and $136,000 or 20.4% during those periods. PROVISION FOR LOAN LOSSES Security Federal's provision for loan losses increased $165,000 to $240,000 for the quarter ended September 30, 1997, compared to the September 1996 quarter. For the six months ended September 30, 1997 compared to the same period one year ago, the provision for loan losses increased $240,000 to $390,000. The increases in the provision expense are a result of management's continual analysis of the loan portfolio and the Bank's increasing percentage of commercial loans, which are inherently riskier than single family mortgage loans, in the Bank's loan portfolio. During the six months ended September 30, 1997, net charge-offs were $123,000 compared to $160,000 for the six months ended September 30, 1996. Non-accrual loans at September 30, 1997 were $3.6 million compared to $1.4 million at March 31, 1997. 16 SECURITY FEDERAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS The growth in non-accrual loans occurred due to one $600,000 commercial loan secured by real estate and several smaller consumer and commercial loans becoming 60 days or more past due. The Bank designates all loans 60 or more days past due as non-accrual, while most institutions only consider loans of 90 days or more delinquent as non-accrual. The allowances for loan losses as a percentage of total loans were 1.40% at September 30, 1997 and 1.19% at March 31, 1997. Further additions to the Bank's allowance for loan losses are dependent on, among other things, the performance of the Bank's loan portfolio, changes in real estate values, interest rates, and the economy. A major employer in the Aiken area, the Savannah River Site, has experienced several major downsizings of personnel the past few years. More layoffs at the site are possible in the coming year, which could have some impact on the local economy. Bridgestone-Firestone has begun construction of a tire manufacturing plant in the Aiken area, which is projected to generate approximately 800 jobs in the next few years. Management continues to monitor its loan portfolio for the impact of local economic changes. OTHER INCOME Total other income increased $289,000 and $348,000 for the three and six months ended September 30, 1997 as compared to the same periods one year ago. Gain on sale of loans increased $ 27,000 in both the three and six month periods. Loan servicing fees increased $5,000 in both periods. Service fees on deposit accounts increased $34,000 in the three months and $46,000 in the six months ended September 30, 1997. Income from real estate operations increased $86,000 and $91,000 respectively. The increases in the 1997 periods are attributable to a $100,000 provision expense on the value of real estate acquired for development booked in the September 1996 quarter. Other income, which encompasses credit life insurance commissions, safe deposit rental income, gain on sale of repossessed assets, annuity and stock brokerage commissions through Security Financial Services and other miscellaneous fees, increased $137,000 during the three months and $140,000 during the six months ended September 30, 1997. These increases in income are attributable primarily to an increase in customer's usage of Security Financial Services and gains on the sale of repossessed real estate. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses decreased $674,000 and $ 683,000 during the three and six months ended September 30, 1997 due to the $ 705,000 one-time pre-tax charge of $ 705,000 for the FDIC SAIF special assessment in September 1996. Without this charge, general and administrative expenses would have increased $32,000 or 1.8% during the three month period and $22,000 or 0.6% during the six month period. Compensation and employee benefits increased $26,000 or 3.2% and $100,000 or 6.1% during the three and six months ended September 30, 1997, due to normal annual salary increases and addition of a few additional employees to operate the bank's in-house computer system which was installed in late January 1997. The Bank previously outsourced its data processing to a contract provider, which charged approximately $ 30,000 per month. Data processing expense was categorized in other expenses, which decreased $72,000 in the three months, and $140,000 during the six months ended September 30, 1997 due mainly to bringing data processing in-house. Other expenses in the other expense category consist of legal expense, professional and consulting expense, stationary and office supplies, real estate owned expenses, and other miscellaneous expenses. Occupancy expense increased $21,000 and $27,000 respectively in both periods due to some building remodeling which occurred in October 1996. Depreciation and maintenance of equipment increased $52,000 and $49,000 respectively due to the above mentioned computer conversion, the addition of a wide area computer network in November 1996, and the purchase of newer personal computers for back office utilization in fiscal 1998. FDIC insurance premiums dropped $46,000 and $120,000 during the three and six month periods ended September 30, 1997 compared to the same periods in 1996, due to the previously mentioned FDIC SAIF recapitalization. Amortization of intangible expense remained constant at $ 116,000 for the three months and $233, 000 for the six months ended in September 1997 and 1996. 17 SECURITY FEDERAL CORPORATION AND SUBSIDIARY OTHER INFORMATION Item 1 Legal Proceedings ----------------- The Company is not engaged in any legal proceedings of a material nature at the present time. From time to time, the Bank is a party to legal proceedings in the ordinary course of business wherein it enforces its security interest in mortgage loans it has made. Item 2 Changes in Securities --------------------- Not applicable. Item 3 Defaults upon Senior Securities ------------------------------- None Item 4 Submission of Matters to a Vote of Security Holders --------------------------------------------------- The election of directors was presented for vote to shareholders at the Annual Meeting on July 15, 1997. Votes for Timothy W. Simmons were as follows: 355,040 votes for, 50 votes withheld. Votes for T. Clifton Weeks were as follows: 355,090 votes for, no votes withheld. Continuing as directors were Dr. Robert E. Alexander, William Clyburn, Senator Thomas L. Moore, G. L. Toole III, and Harry O. Weeks Jr. Item 5 Other Information ----------------- None Item 6 Exhibits and Reports on Form 8-K -------------------------------- Exhibit 27 Financial Data Schedule No reports on Form 8-K were filed during the period under report. 18 SECURITY FEDERAL CORPORATION AND SUBSIDIARY SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to the signed on its behalf by the undersigned thereunto duly authorized. Security Federal Corporation Date: November 13, 1997 By: /s/ROY G. LINDBURG ----------------- ------------------ Roy G. Lindburg Treasurer/CFO Duly Authorized Representative 19 EX-27 2
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