-----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, DMbf5fUmINHC/zYbO0x+R+lRZgOhIx32XwUygODCVKaxVZl1tgKWRW0bePelL8g5 BGkZ+XdgsjHY+//Souutgg== 0000939057-98-000136.txt : 19980812 0000939057-98-000136.hdr.sgml : 19980812 ACCESSION NUMBER: 0000939057-98-000136 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980810 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-16120 FILM NUMBER: 98680479 BUSINESS ADDRESS: STREET 1: 1705 WHISKEY RD SOUTH CITY: AIKEN STATE: SC ZIP: 29803 BUSINESS PHONE: 8036413000 MAIL ADDRESS: STREET 1: 1705 WHISKEY RD SOUTH CITY: AIKEN STATE: SC ZIP: 29803 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 June 30, 1998 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 June 30, 1998 $0.01 Par Value 421,060 INDEX SECURITY FEDERAL CORPORATION PART I - FINANCIAL INFORMATION (UNAUDITED) PAGE Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets 2 Consolidated Statements of Income 3-4 Consolidated Statements of Comprehensive Income 4 Consolidated Statement of Shareholders' Equity 5 Consolidated Statements of Cash Flows 6-7 Notes to Consolidated Financial Statements 8-11 Item 2. Management's Discussion and Analysis Financial Condition and Results of Operations 12-15 PART II. OTHER INFORMATION Other Information 16 Signatures 17 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. 1 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (UNAUDITED) JUNE 30, 1998 MARCH 31, 1998 ------------- -------------- ASSETS Cash and cash equivalents $ 6,066,754 $ 4,658,681 Investment and mortgage-backed securities: Available for sale: (Amortized cost of 61,067,688 54,597,270 $60,957,050 at June 30, 1998 and $54,475,231 at March 31, 1998) Held to maturity: (Fair value of 8,050,196 8,215,833 $8,138,302 at June 30, 1998 and $8,297,204 at March 31, 1998) Loans receivable net: Held for sale 1,079,267 1,232,181 Held for investment: (Net of 136,187,153 136,492,252 allowance of $1,555,598 at June 30, ------------ ------------ 1998 and $1,512,038 at March 31, 1998) $137,266,420 $137,724,433 ------------ ------------ Accrued interest receivable: Loans 679,360 736,201 Mortgage-backed securities 54,302 35,694 Investments 774,533 761,405 Premises and equipment, net 3,802,824 3,827,760 Federal Home Loan Bank stock, at cost 1,348,600 1,348,600 Real estate acquired in settlement of loans 179,901 165,170 Real estate held for development and sale 503,194 623,779 Other assets 3,301,255 2,817,090 ------------ ------------ TOTAL ASSETS 223,095,027 215,511,916 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposit accounts $183,190,768 $181,785,948 Advances from Federal Home Loan Bank 17,543,000 12,126,000 Other borrowed money 115,919 128,933 Advance payments by borrowers for taxes and insurance 271,925 266,128 Other liabilities 3,489,778 3,128,866 ------------ ------------ TOTAL LIABILITIES 204,611,390 197,435,875 ------------ ------------ 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 out- standing shares, 421,060 at June 30, 1998 and 421,060 at March 31, 1998 4,211 4,211 Additional paid-in capital 3,997,943 3,997,943 Unrealized net gain on securities 53,175 75,713 available for sale, net of income taxes Retained earnings, substantially restricted 14,428,308 13,998,174 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 18,483,637 18,076,041 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $223,095,027 $215,511,916 ============ ============ SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 2 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED JUNE 30, -------- 1998 1997 ---- ---- Interest income: Loans $ 3,031,855 $ 3,224,504 Mortgage-backed securities 102,843 84,497 Investment securities 1,081,186 636,371 Other 27,852 18,543 --------------- ------------- Total interest income 4,243,736 3,963,915 --------------- ------------- Interest expense: NOW and money market accounts 442,565 205,325 Passbook accounts 74,616 75,992 Certificate accounts 1,279,967 1,244,575 Advances and other borrowed money 278,856 254,865 --------------- ------------- Total interest expense 2,076,004 1,780,757 --------------- ------------- Net interest income 2,167,732 2,183,158 Provision for loan losses 150,000 150,000 --------------- ------------- Net interest income after provision for Loan losses 2,017,732 2,033,158 --------------- ------------- Other income: Gain on sale of loans 98,463 30,130 Loan servicing fees 82,442 83,347 Service fees on deposit accounts 202,475 196,296 Income from real estate operations 67,078 30,040 Other 144,278 80,717 --------------- ------------- Total other income 594,736 420,530 --------------- ------------- General and administrative expenses: Salaries and employee benefits 975,136 896,826 Occupancy 117,361 112,386 Advertising 100,494 78,771 Depreciation and maintenance of equipment 193,510 157,580 FDIC insurance premiums 19,662 19,434 Amortization of intangibles 116,310 116,310 Other 393,711 411,406 --------------- ------------- Total general and administrative expenses 1,916,184 1,792,713 --------------- ------------- (Continued) 3 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED JUNE 30, -------- 1998 1997 ---- ---- Income before income taxes 696,284 660,975 Provision for income taxes 240,886 239,547 --------------- ------------- Net income $ 455,398 $ 421,428 =============== ============= Basic net income per common share $ 1.08 $ 1.01 =============== ============= Diluted net income per common share $ 1.08 $ 1.00 =============== ============= Cash dividend per share on common stock $ 0.06 $ 0.06 =============== ============= Basic weighted average shares outstanding 421,060 417,122 =============== ============= Diluted weighted average shares outstanding 422,493 420,320 =============== ============= SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) THREE MONTHS ENDED JUNE 30, -------- 1998 1997 ---- ---- Net Income $ 455,398 $ 421,428 Other comprehensive Income, net of tax Unrealized gains (losses) on securities: Unrealized holding gains (losses) during the period (25,264) 119,836 -------------- ------------- Net Comprehensive Income $ 430,134 $ 541,264 ============== ============= SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED JUNE 30, 1998 (UNAUDITED) UNREALIZED NET GAIN ADDI- (LOSS) ON TIONAL SECURITIES COMMON PAID-IN AVAILABLE RETAINED STOCK CAPITAL FOR SALE EARNINGS TOTAL ------------------------------------------------------- Beginning balance March 31, 1998 $ 4,211 $3,997,943 $ 75,713 $13,998,174 $18,076,041 Net income ----- ----- ----- 455,398 455,398 Cash dividend ----- ----- ----- (25,264) (25,264) Exercise of stock ----- ----- ----- ----- ----- options Decrease in unrealized ----- ----- (22,538) ----- (22,538) net gain on securities available for sale, net of tax ------------------------------------------------------- Ending balance June 30, 1998 $ 4,211 $3,997,943 $ 53,175 $14,428,308 $18,483,637 ======================================================= SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 5 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED JUNE 30, ------- 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 455,398 $ 421,428 Adjustments to reconcile net income to net Cash provided by operating activities: Depreciation expense 153,131 135,376 Amortization of purchase accounting adjustments 116,310 116,310 Discount accretion and premium amortization (12,531) 310 Provisions for losses on loans and real estate 150,000 150,000 Gain on sale of investments 0 0 Gain on sale of loans (98,463) (30,130) Gain on sale of real estate (83,991) (30,040) Amortization of deferred fees on loans (65,374) (24,275) Proceeds from sale of loans held for sale 5,346,772 1,207,520 Origination of loans for sale (5,095,395) (1,480,210) (Increase) decrease in accrued interest receivable: Loans 56,841 2,733 Mortgage-backed securities (18,608) 1,164 Investments (13,128) (127,935) Increase (decrease) in advance payments by borrowers 5,797 47,035 Other, net (225,773) 217,407 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 670,986 $ 606,693 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Principal repayments on mortgage-backed securities held to maturity 169,711 96,289 Principal repayments on mortgage-backed securities available for sale 67,105 0 Purchase of investment securities available for sale (7,999,375) (7,420,157) Purchase of mortgage-backed securities available for sale (4,201,289) 0 Maturities of investment securities available for sale 5,635,270 2,000,000 Maturities of investment securities held to maturity 0 1,500,000 Purchase of FHLB Stock 0 (156,600) Decrease in loans to customers 40,572 1,567,967 Investment in real estate held for development (168,647) (61,408) Proceeds from sale of real estate held for development 356,310 189,906 Proceeds from sale of real estate acquired through foreclosure 182,083 22,033 Purchase of premises and equipment (128,195) (155,770) ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES $(6,046,455) $(2,417,740) ----------- ----------- (Continued) 6 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued) THREE MONTHS ENDED JUNE 30, ------- 1998 1997 ---- ---- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in deposit accounts $ 1,404,820 $(2,895,414) Proceeds from FHLB advances 25,650,000 13,570,000 Repayment of FHLB advances (20,233,000) (9,638,000) Repayment of other borrowings (13,014) (18,452) Dividends to shareholders (25,264) (25,027) ------------ ----------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES $ 6,783,542 $ 993,107 ------------ ----------- Net increase(decrease) in cash and cash equivalents 1,408,073 (817,940) Cash and cash equivalents at beginning of period 4,658,681 7,903,637 ------------ ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,066,754 $ 7,085,697 ============ =========== Supplemental disclosure of cash flow information: Cash paid during the period for : Interest $ 1,882,941 $ 1,538,426 Income taxes $ 16,936 $ 95,000 Additions to real estate acquired through foreclosure $ 179,901 $ 67,236 Increase(decrease) in unrealized net gain on securities available for sale, net of taxes $ (25,264) $ 119,836 SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 7 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 opinionof 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 June 30, 1998 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 is a real estate partnership, which the Company purchased from SFSC in December 1995 at fair market value. 3. LOANS RECEIVABLE, NET Loans receivable, net, at June 30, 1998 and March 31, 1998, consisted of the following: Loans held for sale were $1,079,267 and $1,232,181 at June 30, 1998 and March 31, 1998 respectively. Loans held for investment: June 30, 1998 March 31, 1998 ------------- -------------- Residential real estate $ 47,223,650 $ 46,450,206 Consumer 44,847,685 46,499,200 Commercial real estate 3,840,886 3,955,462 Commercial business 45,149,198 44,500,079 ------------- -------------- $ 141,061,419 $ 141,404,947 ============= ============== Less: Allowance for possible loan loss $ 1,555,598 $ 1,512,038 Loans in process 3,142,163 3,175,684 Deferred loan fees 176,505 224,973 ------------- -------------- 4,874,266 4,912,695 ------------- -------------- $ 136,187,153 $ 136,492,252 ============= ============== The following is a reconciliation of the allowance for possible loan losses for the three months ending: June 30, 1998 June 30, 1997 ------------- ------------- Beginning balance $ 1,512,038 $ 1,767,483 Provision 150,000 150,000 Charge-offs (115,271) (59,683) Recoveries 8,831 30,263 ------------ ------------ Ending balance $ 1,555,598 $ 1,888,063 ============ ============ 8 PAGE SECURITY FEDERAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. SECURITIES INVESTMENT AND MORTGAGE-BACKED SECURITIES, HELD TO MATURITY - ----------------------------------------------------------- The amortized cost, gross unrealized gains gross unrealized losses and fair values of investment and mortgage-backed securities held to maturity are as follows: JUNE 30, 1998 - ------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- --------- --------- ----------- US Government and agency Obligations $ 3,867,909 $ 21,720 $ 1,780 $ 3,887,849 Mortgage-backed securities 4,182,287 68,603 437 4,250,453 ----------- --------- --------- ----------- Total $ 8,050,196 $ 90,323 $ 2,217 $ 8,138,302 =========== ========= ========= =========== MARCH 31, 1998 - -------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- --------- --------- ----------- US Government and agency Obligations $ 3,863,910 $ 20,664 $ 10,320 $ 3,874,254 Mortgage-backed securities 4,351,923 71,492 465 4,422,950 ----------- --------- --------- ----------- Total $ 8,215,833 $ 92,156 $ 10,785 $ 8,297,204 =========== ========= ========= =========== INVESTMENT AND MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE - ------------------------------------------------------------- The amortized cost, gross unrealized gains, gross unrealized losses and fair values of investment and mortgage-backed securities available for sale are as follows: JUNE 30, 1998 - ------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- --------- --------- ----------- US Government and agency Obligations $56,824,710 $ 204,748 $ 84,691 $56,944,767 Mortgage-backed securities 4,132,340 0 9,419 4,122,921 ----------- --------- --------- ----------- Total $60,957,050 $ 204,748 $ 94,110 $61,067,688 =========== ========= ========= =========== 9 PAGE SECURITY FEDERAL CORPORATION AND SUBSIDIARY INVESTMENT AND MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE (CONTINUED) - ------------------------------------------------------------------------- MARCH 31, 1998 - -------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- --------- --------- ----------- US Government and agency Obligations $54,475,231 $ 189,603 $ 67,564 $54,597,270 Mortgage-backed securities 0 0 0 0 ----------- --------- ---------- ----------- Total $54,475,231 $ 189,603 $ 67,564 $54,597,270 =========== ========= ========== =========== 5. DEPOSITS A summary of deposit accounts by type with weighted average rates are as follows: June 30, 1998 March 31, 1998 ------------------- ------------------- Demand Accounts: Balance Rate Balance Rate ------- ---- ------- ---- Checking $ 48,687,955 1.17% $ 47,414,160 1.09% Money Market 28,622,649 4.62% 27,902,091 4.67% Regular Savings 11,976,665 2.46% 12,328,146 2.44% ------------ ---- ------------ ---- Total demand accounts $ 89,287,269 2.74% $ 87,644,397 2.42% ------------ ---- ------------ ---- Certificate Accounts: 0 - 4.99% $ 2,996,711 $ 3,086,511 5.00 - 6.99% 90,824,060 90,919,998 7.00 - 8.99% 82,728 135,042 ------------ ------------ Total certificate accounts 93,903,499 5.50% 94,141,551 5.50% ------------ ---- ------------ ---- Total deposit accounts $183,190,768 4.15% $181,785,948 4.02% ============ ---- ============ ---- 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 June 30, 1998 March 31, 1998 - --------------- ------------------- ------------------- Balance Rate Balance Rate ------- ---- ------- ---- 1999 $ 5,925,000 6.04% $ 5,490,000 6.06% 2000 528,000 8.70% 528,000 8.70% 2001 5,856,000 5.99% 856,000 8.75% 2002 0 0% 0 0% thereafter 5,234,000 5.79% 5,252,000 5.80% ------------ ---- ------------ ---- $ 17,543,000 6.03% $ 12,126,000 6.25% ============ ---- ============ ---- 10 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) June 30, 1998 March 31, 1998 ------------- --------------- Bank's Stockholders' Equity $ 17,712 $ 17,294 Unrealized loss (gain) on available for sale securities, net of tax (53) (76) Reduction for goodwill and other intangibles (1,930) (2,046) ---------- ----------- Tangible capital 15,729 15,172 Qualifying core deposits and intangible assets 757 789 ---------- ----------- Core capital 16,486 15,961 Supplemental capital 1,556 1,512 ---------- ----------- Risk-based capital $ 18,042 $ 17,473 ========== =========== The following table compares the Bank's capital levels relative to the applicable regulatory requirements at June 30, 1998. (Dollars in thousands) Amount Percent Actual Excess Required Required Amount Percent Excess Percent -------- -------- ------ ------- ------ ------- Tangible capital $ 4,412 2.0% $15,729 7.13% $11,317 5.13% Tier 1 Leverage 8,854 4.0% 16,486 7.45% 7,632 3.45% (Core) capital Total Risk-based 11,134 8.0% 18,042 12.96% 6,908 4.96% capital Tier 1 Risk-based 5,567 4.0% 16,486 11.85% 10,919 7.85% (Core) capital The Bank's regulatory capital amounts and ratios are as follow as of the date indicated: To Be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes Action Provisions ------ -------- ----------------- Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------ (Dollars in thousands) June 30, 1998 Tier 1 Risk-based Core Capital $16,486 11.9% $5,567 4.0% $8,351 6.0% Risk-based Capital 18,042 13.0 11,134 8.0 13,918 10.0 (to risk weighted assets) Core Capital 16,486 7.5 8,854 4.0 11,068 5.0 (to adjusted tangible assets) Tangible Capital 15,729 7.1 4,412 2.0 11,030 5.0 (to tangible assets) 11 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 $7.6 million or 3.5% during the three months ended June 30, 1998, primarily due to an increase of $6.3 million in investment securities and a $1.4 million increase in cash and cash equivalents offset partially by a $458,000 decrease in total net loans receivable. Real estate acquired in settlement of loans (REO) increased slightly by $15,000 while real estate acquired for development decreased $121,000 during the three-month period due to sales of real estate. Deposits increased $1.4 million or 0.8% during the three months ended of June 1998 as Federal Home Loan Bank (FHLB) advances grew $5.4 million to fund the Company's 3.5% growth in assets. The Board of Directors declared the thirtieth consecutive quarterly dividend of $.06 per share in May 1998, which totaled $25,000. Unrealized net gains on securities available for sale decreased $23,000 during the three months ended June 30, 1998. Net income for the quarter was $455,000 for the Company. These items combined to increase the stockholders' equity by $408,000 or 2.3% during the three months ended June 30, 1998 and raised book value per share to $43.90 compared to $42.93 at March 31, 1998. 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 4.0%, which was recently lowered from 5.0%, of the combined total of deposits and certain borrowings must be maintained in the form of cash or eligible investments. A short-term liquidity requirement was recently eliminated and the types of assets eligible to be counted as liquid assets were also liberalized. The Bank's current liquidity level is deemed adequate to meet the requirements of normal operations, potential deposit outflows, and loan demand while still allowing for optimal investment of funds and return on assets. Loan repayments and maturities of investments are a significant source of funds, whereas loan disbursements are a primary use of the Bank's funds. During the three months ended June 30, 1998, loan repayments exceeded loan disbursements resulting in a $ 458,000 or 0.3% decrease in total net loan receivable. Deposits and other borrowings are also an important source of funds for the Bank. During the three months ended June 30, 1998, deposits increased $1.4 million while FHLB advances increased $5.4 million. At June 30, 1998, Security Federal had $66.4 million of certificates of deposit maturing within one year. Based on previous experience, a major portion of these certificates are expected to be renewed. Liquidity resources at June 30, 1998 are sufficient to meet outstanding mortgage loan commitments of $1.2 million and unused lines of credit of $20.9 million. Management believes that the Bank's liquidity needs will continue to be supported by the Bank's deposit base and borrowing capacity. ACCOUNTING AND REPORTING CHANGES 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 adoption of this standard did not have a material effect 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 adopted Statement 130 effective June 30, 1998 in the Company's Form 10-QSB. 12 SECURITY FEDERAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 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. In April 1998, the FASB issued SFAS 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. The new Statement revises the required disclosures for employee benefit plans, but it does not change the measurement or recognition of such plans. While the new standard requires some additional information about benefit plans, it helps preparers of financial statements by eliminating certain disclosures and by standardizing the disclosures for pensions and other postretirement benefits to the extent practicable.SFAS 132 supercedes the disclosure requirements in SFAS 87, Employers' Accounting for Pensions, SFAS 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS 106, Employers' Accounting for Postretirement Benefits Other than Pensions. The new disclosures are effective for fiscal years beginning after December 15, 1997. The adoption of SFAS 132 will not have an impact on the financial statements of the Company due to the disclosure only requirements. In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instrument and Hedging Activities. All derivatives are to be measured at fair value and recognized in the statement of financial position as assets or liabilities. The statement is effective for fiscal years and quarters beginning after June 15, 1999. Because the Company has limited use of derivative transactions at this time, management does not expect that this standard would have a significant effect on the Company. In March 1998, the Accounting Standards Executive Committee of the AICPA issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1), which provided guidance as to when it is or is not appropriate to capitalize the cost of software developed or obtained for internal uses. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998 with early adoption encouraged. The Company does not anticipate that adoption of SOP 98-1 will have a material effect on its financial statements. 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. 13 SECURITY FEDERAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION YEAR 2000 CONSIDERATIONS The Bank recognizes that there is a business risk in computerized systems as the calendar rolls over into the next century. If the computer systems misinterpret the date, items such as interest calculations on loans and deposits will be incorrect. This problem is commonly called the "Year 2000 Problem." A number of computer systems used by the Company in its day-to-day operations will be affected by this problem. Management has established a committee (the "Y2K Project Team") which has identified all affected systems and is currently working to ensure that this event will not disrupt operations. The Y2K Project Team reports regularly to the Bank's Board of Directors. The Bank is also working closely with outside computer vendors to ensure that all software corrections and warranty commitments are obtained and to arrange mock conversion testing to be completed in the latter part of calendar year 1998. The Bank's Year 2000 project costs are not expected to have a material impact on its results of operations, liquidity or capital resources. The impact of Year 2000 noncompliance by all outside parties with whom the corporation may transact business cannot be gauged fully at this time. RESULTS OF OPERATIONS - --------------------- NET INCOME Security Federal Corporation's net income increased $34,000 or 8.1%, to $455,000 for the three months ended June 30, 1998, compared to the same period in 1997 primarily due to an increase in gain on sale of loans and other income, offset partially by an increase in general and administrative expenses. NET INTEREST INCOME Net interest income decreased $15,000 or 0.8% during the three months ended June 30, 1998, compared to the same period in 1997 due primarily to an increase in total interest expense offset partially by an increase in interest income on investments. Interest income on loans decreased $193,000 or 6.0% during the quarter due to lower average total outstanding loan balances. Investment, mortgage-backed, and other securities interest income increased $472,000 during the three months ended June 30, 1998, compared to the same period one year ago due to higher average investment balances and a higher yield on the overall investment portfolio. Total interest income increased $280,000 or 7.1% during the quarter. Total interest expense increased $295,000 or 16.6% during the three month period. Interest expense on deposits increased $271,000 or 17.8% due to a higher cost of funds on deposits and a higher overall average deposit balance during the quarter ended June 30, 1998. Advances and other borrowings' interest expense increased $24,000 during the three months ended June 30, 1998, compared to the same period in 1997 due to a slightly higher total average outstanding borrowings. The cost of advances and other borrowings has been relatively stable during the past twelve months. PROVISION FOR LOAN LOSSES Security Federal's provision for loan losses remained the same at $150,000 for both three month periods ended June 30 in 1998 and 1997. During the three months ended June 30, 1998, net charge-offs were $106,000 compared to $29,000 for the three months ended June 30, 1997. The Bank ceases to accrue interest on any loan 90 days or more delinquent. Non-accrual loans at June 30, 1998 were $2.0 million and also $2.0 million at March 31, 1998. The allowance for loan losses as a percentage of total loans was 1.12% at June 30, 1998 and 1.09% at March 31, 1998. Future 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. 14 SECURITY FEDERAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OTHER INCOME Total other income increased $174,000 or 41.4% during the three ended June 30, 1998 compared to the same period one year earlier. Gain on sale of loans increased $68,000 while loan servicing fees decreased $1,000 during the period. Service fees on deposit accounts increased $6,000 or 3.2%. Income from real estate operations increased $37,000due to increased sales of real estate during the three months ended June 30, 1998 compared to the 1997 period. Other miscellaneous income, which consists of credit life insurance commissions, gain on sale of repossessed assets, safe deposit rental income, annuity and stock brokerage commissions through Security Financial Services and other miscellaneous fees, increased $64,000 due to increased activity in Security Financial during the June 1998 three month period. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased $123,000 or 6.9% due mainly to increases in compensation and benefits, advertising, and depreciation and maintenance of equipment expenses. Compensation and employee benefits increased $78,000 or 8.7% due to normal annual salary increases and the addition of four new positions created by the Bank to handle increased retail activity, assist with marketing, and to improve operating efficiencies, add technical expertise, and provide Year 2000 compliance. Occupancy expense increased $5,000 during the June 1998 quarter. Advertising increased $22,000 during the three months ended June 30,1998 due to increased media advertising to promote the Bank's money market account. Depreciation and maintenance of equipment expense increased $36,000 during the quarter as a result of bringing data processing back in-house. FDIC insurance premiums remained nearly the same at $20,000 in 1998 and $19,000 in 1997 period. Amortization of intangibles arising due to branch acquisitions in October 1993, were $116,000 in both the December 1996 and 1997 quarters. Other expenses, encompassing legal, professional and consulting expense, stationary and office supplies, and other miscellaneous expenses decreased $18,000 during the three months ended June 30, 1998 compared to the same period one year ago. 15 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 and Use of Proceeds ----------------------------------------- Not applicable. Item 3 Defaults upon Senior Securities ------------------------------- None Item 4 Submission of Matters to a Vote of Security Holders --------------------------------------------------- None Item 5 Other Information ----------------- None Item 6 Exhibits and Reports on Form 8-K -------------------------------- No reports on Form 8-K were filed during the period under report. Exhibits: 3.1 Articles of Incorporation and amendments thereto ** 3.2 Bylaws ** 4 Instruments defining the rights of security holders, including indentures * 10 Executive Compensation Plans and Arrangements: Salary Continuation Agreements ** Amendment One to Salary Continuation Agreements *** Stock Option Plan ** Incentive Compensation Plan ** 27 Financial Data Schedule * Filed on August 12, 1987, as an exhibit to the Company's Form 8-A registration statement pursuant to Section 12(g) of the Securities Exchange Act of 1934 or as a part of reports filed pursuant to Section 13 of such Act ** Filed on June 28, 1993, as an exhibit to the Company's Annual Report on Form 10-KSB pursuant to Section 12(g) of the Securities Exchange Act of 1934. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. *** Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1993 pursuant to Section 12(g) of the Securities Exchange Act of 1934. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. 16 PAGE 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: August 10, 1998 By: /s/ Roy G. Lindburg ---------------------- -------------------------------- Roy G. Lindburg Treasurer/CFO Duly Authorized Representative 17 EX-27 2
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