10-Q 1 q-1201.txt SECURITY FEDERAL CORPORATION FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10 - Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 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 South Carolina 57-0858504 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification) 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 3 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: $0.01 PAR VALUE: ------------ ---------------------- ---------------- Common Stock September 30, 2001 1,671,459 INDEX ============================================================================== PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO. Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets 1 Consolidated Statements of Income 2 Consolidated Statement of Shareholders' Equity 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis Results of Operations and Financial Condition 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 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. 1 Part I. Financial Information Item 1. Financial Statements (Unaudited) Security Federal Corporation and Subsidiaries Consolidated Balance Sheets September 30, 2001 March 31, 2001 ------------- ------------- Assets: (Unaudited) (Audited) Cash And Cash Equivalents $ 6,967,516 $ 12,616,129 Investment And Mortgage-Backed Securities: Available For Sale: (Amortized cost of $90,575,895 at September 30, 2001 and $71,574,673 at March 31, 2001) 92,227,355 72,111,240 Held To Maturity: (Fair value of $1,898,897 at September 30, 2001 and $2,334,809 at March 31, 2001) 1,840,180 2,293,922 ------------- ------------- Total Investment and Mortgage-Backed Securities 94,067,535 74,405,162 ------------- ------------- Loans Receivable Net: Held For Sale 1,713,732 2,245,951 Held For Investment: (Net of allowance of $2,980,284 at September 30, 2001 and $2,784,117 at March 31, 2001) 245,247,221 228,751,063 ------------- ------------- Total Loans Receivable Net 246,960,953 230,997,014 ------------- ------------- Accrued Interest Receivable: Loans 1,421,910 1,348,178 Mortgage-Backed Securities 271,687 179,977 Investments 389,536 572,074 Premises And Equipment, Net 4,964,754 5,262,957 Federal Home Loan Bank Stock, At Cost 2,669,300 3,431,000 Real Estate Acquired In Settlement Of Loans 94,657 130,157 Other Assets 1,242,050 1,698,995 ------------- ------------- Total Assets $ 359,049,898 $ 330,641,643 ============= ============= Liabilities And Shareholders' Equity Liabilities: Deposit Accounts 288,512,998 257,410,417 Advances From Federal Home Loan Bank 37,576,000 42,704,000 Other Borrowed Money 3,898,953 3,409,362 Advance Payments By Borrowers For Taxes and Insurance 585,111 382,478 Other Liabilities 3,204,533 3,235,022 ------------- ------------- Total Liabilities 333,777,595 307,141,279 ------------- ------------- Shareholders' Equity: Serial Preferred Stock, $.01 Par Value; Authorized Shares - 200,000; Issued And Outstanding Shares - None Common Stock, $.01 Par Value; Authorized Shares - 5,000,000; Issued And Outstanding Shares - 1,671,459 At September 30, 2001 And 1,669,901 At March 31, 2001 16,842 16,842 Additional Paid-In Capital 3,985,312 3,985,312 Indirect Guarantee of Employee Stock Ownership Trust Debt (358,297) (415,000) Accumulated Other Comprehensive Gain 1,024,566 348,015 Retained Earnings, Substantially Restricted 20,603,880 19,565,195 ------------- ------------- Total Shareholders' Equity 25,272,303 23,500,364 ------------- ------------- Total Liabilities And Shareholders' Equity $ 359,049,898 $ 330,641,643 ============= ============= See accompanying notes to consolidated financial statements. 1 Security Federal Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) Three Months Ended September 30, -------------------------------- 2001 2000 ----------- ----------- Interest Income: Loans $ 5,096,914 $ 4,524,913 Mortgage-Backed Securities 751,300 582,417 Investment Securities 480,170 844,771 Other 10,302 19,458 ----------- ----------- Total Interest Income 6,338,686 5,971,559 ----------- ----------- Interest Expense: NOW And Money Market Accounts 579,296 630,056 Passbook Accounts 81,274 79,841 Certificate Accounts 2,117,664 1,697,815 Advances And Other Borrowed Money 570,778 1,026,973 ----------- ----------- Total Interest Expense 3,349,012 3,434,685 ----------- ----------- Net Interest Income 2,989,674 2,536,874 Provision For Loan Losses 250,000 150,000 ----------- ----------- Net Interest Income After Provision For Loan Losses 2,739,674 2,386,874 ----------- ----------- Other Income: Net Gain On Sale Of Investments 1,125 - Gain On Sale Of Loans 321,019 91,390 Loan Servicing Fees 43,922 69,487 Service Fees On Deposit Accounts 267,576 252,879 Income From Real Estate Operations - 29,330 Other 84,356 156,750 ----------- ----------- Total Other Income 717,998 599,836 ----------- ----------- General And Administrative Expenses: Salaries And Employee Benefits 1,425,439 1,148,799 Occupancy 207,699 168,649 Advertising 36,484 37,869 Depreciation And Maintenance Of Equipment 291,393 253,034 FDIC Insurance Premiums 11,957 11,636 Amortization Of Intangibles 116,310 116,310 Other 461,900 428,478 ----------- ----------- Total General And Administrative Expenses 2,551,182 2,164,775 ----------- ----------- Income Before Income Taxes 906,490 821,935 Provision For Income Taxes 337,692 303,022 ----------- ----------- Net Income $ 568,798 $ 518,913 =========== =========== Basic Net Income Per Common Share $ 0.34 $ 0.31 =========== =========== Diluted Net Income Per Common Share $ 0.33 $ 0.30 =========== =========== Cash Dividend Per Share On Common Stock $ 0.02 $ 0.02 =========== =========== Basic Weighted Average Shares Outstanding 1,671,459 1,673,718 =========== =========== Diluted Weighted Average Shares Outstanding 1,707,680 1,697,072 =========== =========== See accompanying notes to consolidated financial statements. 2 Security Federal Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) Six Months Ended September 30, ------------------------------ 2001 2000 ----------- ----------- Interest Income: Loans $10,054,433 $ 8,685,245 Mortgage-Backed Securities 1,421,451 1,167,477 Investment Securities 981,644 1,713,930 Other 66,132 36,760 ----------- ----------- Total Interest Income 12,523,660 11,603,412 ----------- ----------- Interest Expense: NOW And Money Market Accounts 1,289,661 1,303,702 Passbook Accounts 159,359 161,668 Certificate Accounts 4,174,839 3,197,142 Advances And Other Borrowed Money 1,131,712 1,903,886 ----------- ----------- Total Interest Expense 6,755,571 6,566,398 ----------- ----------- Net Interest Income 5,768,089 5,037,014 Provision For Loan Losses 425,000 325,000 ----------- ----------- Net Interest Income After Provision For Loan Losses 5,343,089 4,712,014 ----------- ----------- Other Income: Net Gain On Sale Of Investments 1,125 - Gain On Sale Of Loans 615,572 142,307 Loan Servicing Fees 101,479 137,162 Service Fees On Deposit Accounts 565,038 513,049 Income From Real Estate Operations - 60,989 Other 256,500 335,089 ----------- ----------- Total Other Income 1,539,714 1,188,596 ----------- ----------- General And Administrative Expenses: Salaries And Employee Benefits 2,908,577 2,283,579 Occupancy 397,842 302,579 Advertising 67,876 97,926 Depreciation And Maintenance Of Equipment 569,676 495,074 FDIC Insurance Premiums 23,068 23,156 Amortization Of Intangibles 232,620 232,620 Other 920,245 834,285 ----------- ----------- Total General And Administrative Expenses 5,119,904 4,269,219 ----------- ----------- Income Before Income Taxes 1,762,899 1,631,391 Provision For Income Taxes 656,843 603,472 ----------- ----------- Net Income $ 1,106,056 $ 1,027,919 =========== =========== Basic Net Income Per Common Share $ 0.66 $ 0.61 =========== =========== Diluted Net Income Per Common Share $ 0.65 $ 0.61 =========== =========== Cash Dividend Per Share On Common Stock $ 0.04 $ 0.04 =========== =========== Basic Weighted Average Shares Outstanding 1,670,820 1,675,106 =========== =========== Diluted Weighted Average Shares Outstanding 1,705,688 1,697,072 =========== =========== See accompanying notes to consolidated financial statements. 3 Security Federal Corporation and Subsidiaries Consolidated Statements of Shareholders' Equity (Unaudited) Accumulated Additional Indirect Other Common Paid-In Guarantee of Comprehensive Retained Stock Capital ESOP Debt Income (Loss) Earnings Total ---------- ----------- ---------- ------------ ------------ ------------ Beginning Balance At March 31, 2000 $ 8,421 $ 3,993,733 $ (186,803) $ (1,629,150) $ 17,572,500 $ 19,758,701 Net Income - - - - 1,027,919 1,027,919 Other Comprehensive Income, Net Of Tax: Unrealized Holding Gains On Securities Available For Sale - - - 514,130 - 514,130 ------------ Comprehensive Income 1,542,049 Increase in Indirect Guarantee of ESOP Debt - - (120,602) - - (120,602) Cash Dividends - - - - (67,369) (67,369) ---------- ----------- ---------- ------------ ------------ ------------ Balance at September 30, 2000 $ 8,421 $ 3,993,733 $ (307,405) $ (1,115,020) $ 18,533,050 $ 21,112,779 ========== =========== ========== ============ ============ ============ Beginning Balance At March 31, 2001 $ 16,842 $ 3,985,312 $ (415,000) $ 348,015 $ 19,565,195 $ 23,500,364 Net Income - - - - 1,106,056 1,106,056 Other Comprehensive Income, Net Of Tax: Unrealized Holding Gains On Securities Available For Sale - - - 676,551 - 676,551 Comprehensive Income 1,782,607 Increase in Indirect Guarantee of ESOP Debt - - 56,703 - - 56,703 Cash Dividends (67,371) (67,371) ---------- ----------- ---------- ------------ ------------ ------------ Balance at September 30, 2001 $ 16,842 $ 3,985,312 $ (358,297) $ 1,024,566 $ 20,603,880 $ 25,272,303 ========== =========== ========== ============ ============ ============ See accompanying notes to consolidated financial statements.
4 Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Six Months Ended September 30, ------------------------------ 2001 2000 ------------ ------------ Cash Flows From Operating Activities: Net Income $ 1,106,056 $ 1,027,919 Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation Expense 498,202 431,994 Amortization Of Intangibles 232,620 232,620 Discount Accretion And Premium Amortization (72,501) 15,276 Provisions For Losses On Loans And Real Estate 425,000 325,000 Gain On Sale Of Mortgage-Backed Securities Available For Sale (1,125) - Gain (Loss) On Sale Of Loans (431,083) (142,307) Gain On Sale Of Real Estate 1,681 (93,387) Amortization Of Deferred Fees On Loans (94,486) (71,241) Proceeds From Sale Of Loans Held For Sale 35,048,559 7,030,954 Origination Of Loans For Sale (34,085,257) (7,108,338) (Increase) Decrease In Accrued Interest Receivable: Loans (73,732) (171,994) Mortgage-Backed Securities (91,710) 7,484 Investments 182,538 59,504 Increase In Advance Payments By Borrowers 202,633 294,632 (Gain) Loss On Disposition Of Premises And Equipment (1,367) 195 Other, Net (187,804) (20,838) ------------ ------------ Net Cash Provided By Operating Activities 2,658,224 1,817,473 ------------ ------------ Cash Flows From Investing Activities: Principal Repayments On Mortgage-Backed Securities Held To Maturity 453,883 103,082 Principal Repayments On Mortgage-Backed Securities Available For Sale 8,362,447 3,191,144 Purchase Of Investment Securities Available For Sale (26,434,157) - Purchase Of Mortgage-Backed Securities Available For Sale (24,825,040) (943,380) Maturities Of Investment Securities Available For Sale 22,098,169 3,614,416 Proceeds From Sale of Securities Available For Sale 1,870,844 - Purchase Of FHLB Stock - (635,300) Redemption Of FHLB Stock 761,700 - Increase In Loans To Customers (16,868,653) (25,124,573) Investment In Real Estate Held For Development - (330,162) Proceeds From Sale Of Real Estate Held For Development - 672,350 Proceeds From Sale Of Real Estate Acquired Through Foreclosure 75,800 380,998 Purchase And Improvement Of Premises And Equipment (198,632) (649,086) ------------ ------------ Net Cash Used By Investing Activities (34,703,639) (19,720,511) ------------ ------------ Cash Flows From Financing Activities: Increase In Deposit Accounts 31,102,582 4,579,802 Proceeds From FHLB Advances 37,250,000 59,445,000 Repayment Of FHLB Advances (42,378,000) (47,218,000) Proceeds Of Other Borrowings 489,591 1,083,846 Dividends To Shareholders (67,371) (67,370) ------------ ------------ Net Cash Provided By Financing Activities 26,396,802 17,823,278 ------------ ------------ (Continued) 5 Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Six Months Ended September 30, ------------------------------ 2001 2000 ------------ ------------ Net Decrease In Cash And Cash Equivalents (5,648,613) (79,760) Cash And Cash Equivalents At Beginning Of Period 12,616,129 7,416,702 ------------ ------------ Cash And Cash Equivalents At End Of Period $ 6,967,516 $ 7,336,942 ============ ============ Supplemental Disclosure Of Cash Flows Information: Cash Paid During The Period For Interest $ 6,984,816 $ 6,585,024 Cash Paid During The Period For Income Taxes $ 891,253 $ 833,183 Additions To Real Estate Acquired Through Foreclosure $ 40,981 $ 301,203 (Increase) Decrease In Unrealized Net Loss On Securities Available For Sale, Net Of Taxes $ (676,551) $ 514,130 See accompanying notes to consolidated financial statements. 6 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements were prepared in accordance with instructions from Form 10-Q and generally accepted accounting principles; therefore, they do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows. Such statements are unaudited but, in the opinion of Management, reflect all adjustments, all of which are of a normal recurring nature and 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 Shareholders when reviewing interim financial statements. The results of operations for the three and six-month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the entire fiscal year. This Form 10-Q contains certain forward-looking statements with respect to the financial condition, results of operations, and business. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those anticipated by such forward-looking statements include, but are not limited to, changes in interest rates, changes in the regulatory environment, changes in general economic conditions and inflation, changes in the securities market. Management cautions readers of Form 10-Q not to place undue reliance on forward-looking statements contained herein. 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 the Bank's wholly owned subsidiary Security Financial Services Corporation ("SFSC"). The Bank is primarily engaged in the business of accepting savings and demand deposits and originating mortgage loans and other loans to individuals and small businesses for various personal and commercial purposes. SFSC engages primarily in investment brokerage services. Also included in the consolidation is a real estate partnership, Willow Woods. Willow Woods sold its remaining property in fiscal 2001. Thus, at March 31, 2001, the real estate partnership was liquidated. 3. Loans Receivable, Net Loans Receivable, Net, at September 30, 2001 and March 31, 2001 consisted of the following: Loans held for sale were $1,713,732 and $2,245,951 at September 30, 2001 and March 31, 2001, respectively. Loans Held For Investment: September 30, 2001 March 31, 2001 ------------------ -------------- Residential Real Estate $ 118,712,067 $ 121,736,566 Consumer 49,880,135 46,277,098 Commercial Business & Real Estate 90,321,220 74,520,017 ------------- ------------- 258,913,422 242,533,681 ------------- ------------- Less: Allowance For Possible Loan Loss 2,980,284 2,784,117 Loans In Process 10,460,465 10,738,528 Deferred Loan Fees 225,452 259,973 ------------- ------------- 13,666,201 13,782,618 ------------- ------------- $ 245,247,221 $ 228,751,063 ============= ============= The following is a reconciliation of the allowance for loan losses for the six months ending: September 30, 2001 March 31, 2001 ------------------ -------------- Beginning Balance $ 2,784,117 $ 2,120,767 Provision 425,000 325,000 Charge-offs (299,300) (159,659) Recoveries 70,467 21,269 ------------- ------------- Ending Balance $ 2,980,284 $ 2,307,377 ============= ============= 7 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), 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: Gross Gross September 30, 2001 Amortized Unrealized Unrealized ------------------ Cost Gains Losses Fair Value ---------- ---------- ---------- ---------- US Government and Agency Obligations $ 249,668 $ 3,521 $ - $ 253,189 Mortgage-Backed Securities 1,590,512 55,196 - 1,645,708 ---------- ---------- ---------- ---------- Total $1,840,180 $ 58,717 $ - $1,898,897 ========== ========== ========== ========== March 31, 2001 -------------- US Government and Agency Obligations $ 265,707 $ 1,733 $ - $ 267,440 Mortgage-Backed Securities 2,028,215 39,154 - 2,067,369 ---------- ---------- ---------- ---------- Total $2,293,922 $ 40,887 $ - $2,334,809 ========== ========== ========== ========== 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: Gross Gross September 30, 2001 Amortized Unrealized Unrealized ------------------ Cost Gains Losses Fair Value ---------- ---------- ---------- ---------- US Government and Agency Obligations $39,467,934 $ 631,108 $ 14,391 $40,084,651 Mortgage-Backed Securities 51,107,961 1,046,224 11,481 52,142,704 ----------- ---------- ---------- ----------- Total $90,575,895 $1,677,332 $ 25,872 $92,227,355 =========== ========== ========== =========== March 31, 2001 -------------- US Government and Agency Obligations $35,101,611 $ 218,542 $ 30,713 $35,289,440 Mortgage-Backed Securities 36,473,062 380,794 32,056 36,821,800 ----------- ---------- ---------- ----------- Total $71,574,673 $ 599,336 $ 62,769 $72,111,240 =========== ========== ========== =========== 8 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 5. Deposit Accounts A summary of deposit accounts by type with weighted average rates is as follows: September 30, 2001 March 31, 2001 -------------------- -------------------- Demand Accounts: Balance Rate Balance Rate -------------------- -------------------- Checking $ 66,670,351 0.55% $ 61,453,344 0.86% Money Market 55,138,887 3.16% 49,855,497 4.66% Regular Savings 13,399,497 1.97% 12,911,410 2.44% ------------ ------------ Total Demand Accounts $135,208,735 1.75% $124,220,251 2.55% ============ ============ Certificate Accounts: 0 - 4.99% $ 71,675,091 $ 10,021,153 5.00 - 6.99% 71,972,744 112,040,419 7.00 - 8.99% 9,656,428 11,128,594 ------------ ------------ Total Certificate Accounts $153,304,263 5.28% $133,190,166 6.15% ============ ============ Total Deposit Accounts $288,512,998 3.63% $257,410,417 4.41% ============ ============ 6. Advances From Federal Home Loan Bank Federal Home Loan Bank Advances are summarized by year of maturity and weighted average interest rate in the table below: September 30, 2001 March 31, 2001 -------------------- -------------------- Fiscal Year Due: Balance Rate Balance Rate -------------------- -------------------- 2002 $ 4,450,000 3.16% $ 9,560,000 5.63% 2003 5,000,000 6.40% 5,000,000 6.40% 2004 - 0% - - 2005 10,126,000 6.15% 10,144,000 6.16% Thereafter 18,000,000 5.98% 18,000,000 5.98% ------------ ------------ Total Advances $ 37,576,000 5.75% $ 42,704,000 5.99% ============ ============ 7. Regulatory Matters The following table reconciles the Bank's Shareholders' equity to its various regulatory capital positions: September 30, 2001 March 31, 2001 (Dollars in Thousands) ----------------------------------- Bank's Shareholders' Equity $ 25,267 $ 23,484 Unrealized Loss On Available For Sale Of Securities, Net Of Tax (1,025) (348) Reduction For Goodwill And Other Intangibles (418) (650) ---------- ---------- Tangible Capital 23,824 22,486 Qualifying Core Deposits And Intangible Assets 418 470 ---------- ---------- Core Capital 24,242 22,956 Supplemental Capital 2,773 2,582 Assets Required To Be Deducted (235) (227) ---------- ---------- Risk-Based Capital $ 26,780 $ 25,311 ========== ========== The following table compares the Bank's capital levels relative to the applicable regulatory requirements at September 30, 2001. (Dollars in Thousands) ------------------------------------------------------- Amt. % Actual Actual Excess Excess Required Required Amt. % Amt. % ------------------------------------------------------- Tangible Capital $ 7,154 2.0% $ 23,824 6.66% $ 16,670 4.66% Tier 1 Leverage (Core) Capital 14,323 4.0% 24,242 6.77% 9,919 2.77% Total Risk-Based Capital 17,765 8.0% 26,780 12.06% 9,015 4.06% Tier 1 Risk-Based (Core) Capital 8,791 4.0% 24,242 11.03% 15,451 7.03% 9 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 7. Regulatory Matters, Continued The Company's regulatory capital amounts and ratios at September 30, 2001 are as follows: (Dollars in Thousands) To Be Well Capitalized For Capital Under Prompt Adequacy Corrective Action Actual Purposes Provisions ----------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ----------------------------------------------------- Tier I Risk-Based Core Capital $ 24,242 11.0% $ 8,791 4.0% $ 13,187 6.0% Risk-Based Capital (To Risk Weighted Assets) 26,780 12.1% 17,765 8.0% 22,206 10.0% Core Capital (To Adjusted Tangible Assets) 24,242 6.8% 14,323 4.0% 17,904 5.0% Tangible Capital (To Tangible Assets) 23,824 6.7% 7,154 2.0% 17,886 5.0% 8. Earnings Per Share The Company calculates earnings per share in accordance with SFAS No. 128, "Earnings Per Share." SFAS 128 specifies the computation, presentation and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market. This standard specifies computation and presentation requirements for both basic EPS and, for entities with complex capital structures, diluted EPS. Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is similar to the computation of basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. The dilutive effect of options outstanding under the Company's stock option plan is reflected in diluted earnings per share by application of the treasury stock method. RECONCILIATION OF THE NUMERATOR AND DENOMINATORS OF THE BASIC AND DILUTED EPS COMPUTATIONS: For the Quarter Ended ----------------------------------------------------- September 30, 2001 ----------------------------------------------------- Income (Numerator) Shares Amount (Denominator) Per Share ------------------ ------------- --------------- Basic EPS $568,798 1,671,459 $0.34 Effect of Diluted Securities: Stock Options - 23,480 ESOP - 12,741 ------------------ ------------- --------------- Diluted EPS $568,798 1,707,680 $0.33 For the Quarter Ended ----------------------------------------------------- September 30, 2000 ----------------------------------------------------- Income (Numerator) Shares Amount (Denominator) Per Share ------------------ ------------- --------------- Basic EPS $518,913 1,673,718 $0.31 Effect of Diluted Securities: Stock Options - 12,872 ESOP - 10,482 ------------------ ------------- --------------- Diluted EPS $518,913 1,697,072 $0.30 10 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 8. Earnings Per Share, Continued For the Six Months Ended ----------------------------------------------------- September 30, 2001 ----------------------------------------------------- Income (Numerator) Shares Amount (Denominator) Per Share ------------------ ------------- --------------- Basic EPS $1,106,056 1,670,820 $0.66 Effect of Diluted Securities: Stock Options - 21,488 ESOP - 13,380 ------------------ ------------- --------------- Diluted EPS $1,106,056 1,705,688 $0.65 For the Six Months Ended ----------------------------------------------------- September 30, 2000 ----------------------------------------------------- Income (Numerator) Shares Amount (Denominator) Per Share ------------------ ------------- --------------- Basic EPS $1,027,919 1,675,106 $0.61 Effect of Diluted Securities: Stock Options - 12,872 ESOP - 9,094 ------------------ ------------- --------------- Diluted EPS $1,027,919 1,697,072 $0.61 11 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Changes in Financial Condition Total assets of the Company increased $28.4 million or 8.6% during the six months ended September 30, 2001 due primarily to increases of $19.7 million or 26.4% in total investment securities, and an increase of $16.0 million, or 6.9% in total net loans receivable offset partially by a $5.6 million or 44.8% decrease in cash and cash equivalents. Residential real estate loans, net of loans in process, decreased $2.5 million or 2.2% during the period while other loans increased $19.4 million or 13.8%. Real estate acquired in settlement of loans decreased $36,000 to $95,000 during the six months ended September 30, 2001. Non-accrual loans totaled $1.4 million at September 30, 2001 compared to $183,000 at March 31, 2001. The Bank classifies all loans as non-accrual when they become 90 days or more delinquent. The Bank had three loans totaling $549,000 at September 30, 2001 that were troubled debt restructurings compared to $587,000 at March 31, 2001. The three loans, a $4,000 unsecured consumer loan, a $58,000 commercial loan secured by two single-family rental properties, and a $487,000 commercial loan secured by commercial real estate were current as of September 30, 2001. All troubled debt restructurings are also considered impaired. At September 30, 2001, the Bank held $726,000 in impaired loans compared to $789,000 at March 31, 2001. Deposits increased $31.1 million or 12.1% during the six months ended September 30, 2001. Federal Home Loan Bank (FHLB) advances decreased $5.1 million or 12.0% due to the increase in deposits. The Board of Directors declared the 42nd and 43rd consecutive quarterly dividend of $.02 per share per quarter in May and August 2001, which totaled $67,000. The employee stock ownership trust of the Company paid $57,000 in principal on the employee stock ownership plan loan during the six-month period. Unrealized net gains on securities available for sale, net of tax, increased $677,000 during the six months ended September 30, 2001. The Company's net income for the six months was $1.1 million. These items combined to increase shareholders' equity by $1.8 million or 7.5% during the six months ended September 30, 2001. Book value per share was $15.12 at September 30, 2001 compared to $14.07 at March 31, 2001. Liquidity and Capital Resources In accordance with Office of Thrift Supervision (OTS) regulations, the Company is required to maintain a liquidity ratio at specified levels that are subject to change. Currently, a minimum of 4.0% of the combined total of deposits and certain borrowings must be maintained in the form of cash or eligible investments. The Company's average liquidity during the six months ended September 30, 2001 was approximately 20%. The Company'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 Company's funds. During the six months ended September 30, 2001, loan disbursements exceeded loan repayments resulting in a $16.0 million or 6.9% increase in total net loans receivable. Deposits and other borrowings are also an important source of funds for the Company. During the six months ended September 30, 2001, deposits increased $31.1 million while FHLB advances decreased $5.1 million. The Bank had $47.4 million in additional borrowing capacity at the FHLB at the end of the period. At September 30, 2001, the Bank had $135.2 million of certificates of deposit maturing within one year. Based on previous experience, the Bank anticipates a major portion of these certificates will be renewed. Liquidity resources at September 30, 2001 are sufficient to meet outstanding mortgage loan commitments of $1.2 million and unused lines of credit of $30.2 million. Management believes that the Company's liquidity needs will continue to be supported by the Company's deposit base and borrowing capacity during the next year. 12 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition Accounting and Reporting Changes. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) 133, "Accounting for Derivative Instrument and Hedging Activities." All derivatives are to be measured at fair value and recognized in the balance sheet as assets or liabilities. SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities" was issued in June 2000 and amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and hedging activities. The two statements are to be adopted concurrently and are effective for fiscal years and quarters beginning after June 15, 2000. Adoption of SFAS No. 133 and SFAS No. 138 did not have a material impact on the presentation of the Company's financial results or financial position. On July 2, 2001, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 102 "Selected Loan Loss Allowance Methodology and Documentation Issues." SAB No. 102 expresses the SEC's views on development, documentation, and application of a systematic methodology for determining allowance for loan and lease losses in accordance with Generally Accepted Accounting Principles. The Company believes that it is currently in compliance with the requirements of SAB No. 102. In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This SFAS addresses accounting and reporting for all business combinations and defines the purchase method as the only acceptable method. This statement is effective for all business combinations initiated after June 30, 2001. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." This SFAS addresses how goodwill and other intangible assets should be accounted for at their acquisition (except for those acquired in a business combination) and after they have been initially recognized in the financial statements. The statement is effective for all fiscal years beginning after December 15, 2001. The impact of this SFAS will not be material to the Company's financial statements. In August 2001, the FASB issued SFAS No. 144, " Accounting for the Impairment or Disposal of Long-Lived Assets." This SFAS supercedes prior pronouncements associated with impairment or disposal of long-lived assets. The SFAS establishes methodologies for assessing impairment of long-lived assets, including assets to be disposed of by sale or by other means. This statement is effective for all fiscal years beginning after December 15, 2001. This SFAS is not expected to have a material impact on the Company's financial position. Additional accounting standards that have been issued or proposed by the FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. Impact of Inflation and Changing Prices The consolidated financial statements, related notes, and other financial information presented herein have been prepared in accordance with generally accepted accounting principles, 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 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 inflation. 13 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 ------------------------------------------------------------------- Net Income Net income was $569,000 for the three months ended September 30, 2001, representing an increase in earnings of $50,000 or 9.6% compared to the same period in 2000. Net Interest Income Net interest income increased $453,000 or 17.9% during the three months ended September 30, 2001 as a result of an increase in total interest income offset in part by an increase in interest expense. Interest income on loans increased $572,000 or 12.6% during the period as a result of total net loans significantly increasing in the portfolio. Investment, mortgage-backed, and other securities interest income decreased $205,000 or 14.2% as a result of a decrease in the average yield in the investment portfolio of 33 basis points. Total interest income increased $367,000 or 6.2% compared to the same period in 2000. Total interest expense decreased $86,000 or 2.5% during the three months ended September 30, 2001 compared to the same period one-year earlier. Interest expense on deposits increased $371,000 or 13.3% during the period as the average balance and the average cost of deposits increased during the quarter ended September 30, 2001. Interest expense on advances and other borrowings decreased $456,000 or 44.4% as the average amount of debt outstanding decreased and the cost of those borrowings decreased during the 2001 period compared to same period in 2000. Provision for Loan Losses The Bank's provision for loan losses was $250,000 and $150,000 during the three months ended September 30, 2001 and 2000, respectively. The amount of the provision is determined by Management's on-going monthly analysis of the loan portfolio. Non-accrual loans, which are loans delinquent 90 days or more, were $1.4 million at September 30, 2001 compared to $183,000 at March 31, 2001. The ratio of allowance for loan losses to the Company's total loans was 1.19% at both September 30, 2001 and March 31, 2001. Net charge-offs were $109,000 for the three months ended September 30, 2001 compared to $34,000 during the same period in 2000. 14 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001, Continued ------------------------------------------------------------------------------ Other Income Total other income increased $118,000 or 19.7% during the three months ended September 30, 2001 as a result of the increase in the gain on sale of loans. Gain on sale of loans increased $230,000 during the period. Loan servicing fees decreased $26,000 as the portfolio of loans serviced for others decreased. Service fees on deposit accounts increased $15,000. The Company sold its remaining lots in its real estate development partnership in March 2001. Therefore, there was no income from real estate operations in the 2001 quarter, while during the 2000 quarter, income from real estate operations was $29,000. The Company has no plans to further invest in real estate for development at this time. Other miscellaneous income including credit life insurance commissions, net gain on sale of repossessed assets, safe deposit rental income, annuity and stock brokerage commissions through SFSC, and other miscellaneous fees decreased $72,000 during the three months ended September 30, 2001. General and Administrative Expenses General and administrative expenses increased $386,000 or 17.9% during the three months ended September 30, 2001 compared to the same period in 2000. Salaries and employee benefits expense grew $277,000 or 24.1% due to the opening and staffing of a new full-service branch office in West Columbia, South Carolina, normal salary increases, and an increase in business development officers. Occupancy expense increased $39,000 or 23.2% during the period due to the opening of the new branch office. Advertising expense decreased $1,000 while the depreciation and maintenance of equipment expense increased $38,000 during the quarterly period. FDIC insurance premiums remained stable at $12,000 during both periods while the amortization of intangibles expense was $116,000 during the three months ended September 30 in 2001 and 2000. Other miscellaneous expense, consisting of legal, professional, and consulting expenses, stationery and office supplies, and other sundry expenses, increased $33,000 or 7.8% for the three months ended September 30, 2001 compared to the three months ended September 30, 2000. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2001 ----------------------------------------------------------------- Net Income Net income was $1.1 million for the six months ended September 30, 2001, representing an increase in earnings of $78,000 or 7.6% compared to the same period in 2000. Net Interest Income Net interest income increased $731,000 or 14.5% during the six months ended September 30, 2001 as a result of an increase in total interest income offset in part by an increase in interest expense. Interest income on loans increased $1.4 million or 15.8% during the six months in 2001 as a result of total net loans increasing during the period. Investment, mortgage-backed, and other securities interest income decreased $449,000 or 18.2% due to a decrease of 22 basis points in the average yield of the investment portfolio. Total interest income increased $920,000 or 7.9% during the six months compared to the same period in 2000. Total interest expense increased $189,000 or 2.9% during the six months ended September 30, 2001 compared to the same period one-year earlier. Interest expense on deposits increased $961,000 or 20.6% during the period as deposits grew compared to the average balance in 2000 and the cost of deposits also increased. Interest expense on advances and other borrowings decreased $772,000 as the average amount of debt outstanding decreased during the 2001 period compared to 2000. 15 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2001, Continued ---------------------------------------------------------------------------- Provision for Loan Losses The Bank's provision for loan losses was $425,000 during the six months ended September 30, 2001 compared to $325,000 during the six months ended September 30, 2000. The amount of the provision is determined by Management's on-going monthly analysis of the loan portfolio. Non-accrual loans, which are loans delinquent 90 days or more, were $1.4 million at September 30, 2001 compared to $183,000 at March 31, 2001. The ratio of allowance for loan losses to the Company's total loans was 1.19% at September 30, 2001 and 1.19% at March 31, 2001. Net charge-offs were $229,000 during the six months ended September 30, 2001 compared to $138,000 during the same period in 2000. Other Income Total other income increased $351,000 or 29.5% during the six months ended September 30, 2001 compared to the same period one-year earlier. Gain on sale of loans increased $473,000 as the volume of fixed rate mortgage loans sold during the period increased due to mortgage loan rates falling. Loan-servicing fees decreased $36,000 while service fees on deposit accounts grew $52,000 as the number of commercial and personal demand deposit accounts increased. The Company sold its remaining lots in its real estate development partnership in March 2001. Therefore, there was no income from real estate operations in the 2001 quarter, while during the 2000 quarter, income from real estate operations was $61,000. The Company has no plans to further invest in real estate for development at this time. Other miscellaneous income including credit life insurance commissions, net gain on sale of repossessed assets, safe deposit rental income, annuity and stock brokerage commissions through SFSC, and other miscellaneous fees decreased $79,000 during the six months ended September 30, 2001. General and Administrative Expenses General and administrative expenses increased $851,000 or 19.9% during the six months ended September 30, 2001 compared to the same period in 2000. Salaries and employee benefits expense increased $625,000 or 27.4% due to the opening and staffing of a new full-service branch office in West Columbia, South Carolina, normal annual salary increases, and an increase in business development officers. Occupancy expense increased by $95,000 or 31.5% during the period due to the opening of the new branch office. Advertising expense decreased $30,000 while the depreciation and maintenance of equipment expense increased $75,000 during the six-month period. FDIC insurance premiums remained stable at $23,000 during both quarters while amortization of intangibles expense was $233,000 during the six months ended September 30 in 2001 and 2000, respectively. Other miscellaneous expense, consisting of legal, professional, and consulting expenses, stationery and office supplies, and other sundry expenses, increased $86,000 or 10.3% for the six months ended September 30, 2001 compared to the six months ended September 30, 2000. 16 Security Federal Corporation and Subsidiaries Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises principally from interest rate risk inherent in its lending, investment, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Company manages other risks such as credit quality and liquidity risk in the normal course of business, management considers interest rate risk to be its most significant market risk that could potentially have the largest material effect on the Company's financial condition and results of operations. Other types of market risks such as foreign currency exchange rate risk and commodity price do not arise in the normal course of the Company's business activities. The Company's profitability is affected by fluctuations in the market interest rate. Management's goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. A sudden and substantial increase or decrease in interest rates may adversely impact the Company's earnings to the extent that the interest rates on interest-earning assets and interest-bearing liabilities do not change at the same rate, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using a test that measures the impact on net interest income and net portfolio value of an immediate change in interest rates in 100 basis point increments and by measuring the Bank's interest sensitivity gap ("Gap"). Net Portfolio value is defined as the net present value of assets, liabilities, and off-balance sheet contracts. Gap is the amount of interest sensitive assets repricing or maturing over the next twelve months compared to the amount of interest sensitive liabilities maturing or repricing in the same time period. Recent net portfolio value reports furnished by the Office of Thrift Supervision indicate that the Bank's interest sensitivity has improved in recent quarters over the past year. The Bank has rated favorably compared to Thrift peers concerning interest rate sensitivity. For the six month period ended September 30, 2001, the Bank's interest rate spread, defined as the average yield on interest bearing assets less the average rate paid on interest bearing liabilities was 3.13%. As of the year ended March 31, 2001, the interest rate spread was 3.11%. The Company's management believes that the interest rate spread has improved slightly as market interest rates have decreased and liabilities have matured or repriced. The Bank's interest bearing liabilities are currently repricing or maturing at a slightly faster rate than their interest earning assets, and are repricing at lower interest rates, thereby improving the Bank's interest rate spread modestly. 17 Security Federal Corporation and Subsidiaries 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 Company 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 --------------------------------------------------- The election of directors was presented for vote to shareholders at the Annual Meeting on July 17, 2001. Votes for Gasper L. Toole III were as follows: 1,381,876 votes for, 5,200 votes withheld. Votes for Thomas L Moore were as follows: 1,381,876 votes for, 5,200 votes withheld. Item 5 Other Information ----------------- None Item 6 Exhibits And Reports On Form 8-K -------------------------------- Exhibits: 2.1 Articles Of Incorporation* 2.2 Articles Of Amendment, Dated August 28, 1998, To Articles Of Incorporation 2.3 Bylaws** 10.1 Executive Compensation Plans And Arrangements: 10.2 Salary Continuation Agreements*** 10.3 Amendment One To Salary Continuation Agreements**** 10.4 Stock Option Plan*** 10.5 Incentive Compensation Plan*** * Filed as an exhibit to the Company's June 23, 1998 proxy statement and incorporated herein by reference. ** Filed as an exhibit to the Company's Form 8-K dated August 31, 1998 and incorporated herein by reference. *** 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-K. **** Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended December 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-K. 18 Security Federal Corporation and Subsidiaries 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 6, 2001 By: /s/Roy G. Lindburg ---------------------------------- Roy G. Lindburg Treasurer/CFO Duly Authorized Representative 19