-----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, GjAS4yO/detHrGJ9YDJHD7ghQ3P9nStIarNu+j82fnwZ+XBDjOScFk+WdiejZhiw Qll67ZmHHxWRrVcoXPSeBA== 0000939057-03-000340.txt : 20031112 0000939057-03-000340.hdr.sgml : 20031112 20031112163146 ACCESSION NUMBER: 0000939057-03-000340 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031112 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: SC FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16120 FILM NUMBER: 03994317 BUSINESS ADDRESS: STREET 1: 1705 WHISKEY RD.S. CITY: AIKEN STATE: SC ZIP: 29803 BUSINESS PHONE: 8036413070 MAIL ADDRESS: STREET 1: PO BOX 810 CITY: AIKEN STATE: SC ZIP: 29802 10-Q 1 q203.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, 2003 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 No.) 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 ------ ------ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES NO X ------ ------ 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 October 31, 2003 2,531,744 INDEX - ------------------------------------------------------------------------------ PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO. Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets at September 30, 2003 and March 31, 2003 1 Consolidated Statements of Income for the Three and Six Months Ended September 30, 2003 and 2002 2 Consolidated Statements of Shareholders' Equity at September 30, 2002 and 2003 4 Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2003 and 2002 5 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis - of Results of Operations and Financial Condition 11 Item 3. Quantitative and Qualitative Disclosure about Market Risk 19 Item 4. Controls and Procedures 19 - ------------------------------------------------------------------------------ PART II. OTHER INFORMATION Other Information 20 Signatures 21 Certifications 22 - ------------------------------------------------------------------------------ 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. Part I. Financial Information Item 1. Financial Statements (Unaudited) Security Federal Corporation and Subsidiaries Consolidated Balance Sheets September 30, 2003 March 31, 2003 ------------------ -------------- Assets: (Unaudited) (Audited) Cash And Cash Equivalents $ 7,876,785 $ 8,238,690 Investment And Mortgage-Backed Securities: Available For Sale: (Amortized cost of $168,233,219 at September 30, 2003 and $157,821,789 at Mar ch 31, 2003) 168,497,564 160,150,262 Held To Maturity: (Fair value of $61,912,230 at September 30, 2003 and $22,040,207 at March 31, 2003) 62,446,673 21,966,533 ------------ ------------ Total Investment And Mortgage-Backed Securities 230,944,237 182,116,795 ------------ ------------ Loans Receivable, Net: Held For Sale 1,149,366 3,670,498 Held For Investment: (Net of allowance of $5,376,962 at September 30, 2003 and $4,911,224 at March 31, 2003) 236,632,395 239,485,158 ------------ ------------ Total Loans Receivable, Net 237,781,761 243,155,656 ------------ ------------ Accrued Interest Receivable: Loans 906,851 976,134 Mortgage-Backed Securities 520,366 441,900 Investments 694,286 667,735 Premises And Equipment, Net 6,478,000 5,219,947 Federal Home Loan Bank Stock, At Cost 3,789,000 2,858,600 Repossessed Assets Acquired In Settlement Of Loans 73,000 151,450 Other Assets 3,580,797 1,077,078 ------------ ------------ Total Assets $492,645,083 $444,903,985 ============ ============ Liabilities And Shareholders' Equity Liabilities: Deposit Accounts $383,925,430 $358,473,601 Advances From Federal Home Loan Bank 69,329,000 49,772,000 Other Borrowed Money 5,937,600 4,193,480 Advance Payments By Borrowers For Taxes And Insurance 565,515 279,425 Other Liabilities 2,298,934 2,145,526 ------------ ------------ Total Liabilities $462,056,479 $414,864,032 ------------ ------------ 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 - 2,531,744 And Outstanding Shares - 2,514,488 At September 30, 2003 And 2,529,824 And 2,507,717 At March 31, 2003 25,317 25,298 Additional Paid-In Capital 4,005,444 3,995,230 Indirect Guarantee Of Employee Stock Ownership Trust Debt (336,972) (444,685) Accumulated Other Comprehensive Gain 164,001 1,444,585 Retained Earnings, Substantially Restricted 26,730,814 25,019,525 ------------ ------------ Total Shareholders' Equity $ 30,588,604 $ 30,039,953 ------------ ------------ Total Liabilities And Shareholders' Equity $492,645,083 $444,903,985 ============ ============ See accompanying notes to consolidated financial statements. 1 Security Federal Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) Three Months Ended September 30, -------------------------------- 2003 2002 -------------- ------------- Interest Income: Loans $3,860,169 $4,325,173 Mortgage-Backed Securities 961,039 848,410 Investment Securities 677,782 813,864 Other 4,813 13,810 ---------- ---------- Total Interest Income 5,503,803 6,001,257 ---------- ---------- Interest Expense: NOW And Money Market Accounts 709,868 635,061 Passbook Accounts 43,322 64,332 Certificate Accounts 916,115 1,281,974 Advances And Other Borrowed Money 628,088 557,218 ---------- ---------- Total Interest Expense 2,297,393 2,538,585 ---------- ---------- Net Interest Income 3,206,410 3,462,672 Provision For Loan Losses 300,000 450,000 ---------- ---------- Net Interest Income After Provision For Loan Losses 2,906,410 3,012,672 ---------- ---------- Other Income: Net Gain On Sale Of Investments - 4,245 Gain On Sale Of Loans 413,685 336,149 Loan Servicing Fees 52,424 50,260 Service Fees On Deposit Accounts 339,684 319,960 Other 253,011 171,812 ---------- ---------- Total Other Income 1,058,804 882,426 ---------- ---------- General And Administrative Expenses: Salaries And Employee Benefits 1,428,376 1,457,204 Occupancy 237,859 204,909 Advertising 77,648 41,677 Depreciation And Maintenance Of Equipment 273,885 249,584 FDIC Insurance Premiums 14,072 13,084 Amortization Of Intangibles - 68,900 Other 545,601 543,768 ---------- ---------- Total General And Administrative Expenses 2,577,441 2,579,126 ---------- ---------- Income Before Income Taxes 1,387,773 1,315,972 Provision For Income Taxes 497,912 502,181 ---------- ---------- Net Income $ 889,861 $ 813,791 ========== ========== Basic Net Income Per Common Share $ 0.35 $ 0.32 ========== ========== Diluted Net Income Per Common Share $ 0.35 $ 0.32 ========== ========== Cash Dividend Per Share On Common Stock $ 0.02 $ 0.0133 ========== ========== Basic Weighted Average Shares Outstanding 2,512,600 2,509,707 ========== ========== Diluted Weighted Average Shares Outstanding 2,568,601 2,565,969 ========== ========== See accompanying notes to consolidated financial statements. 2 Security Federal Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) Six Months Ended September 30, ----------------------------- 2003 2002 ------------ ------------ Interest Income: Loans $ 7,815,674 $ 8,685,901 Mortgage-Backed Securities 1,883,118 1,647,036 Investment Securities 1,409,165 1,649,041 Other 9,581 20,960 ---------- ---------- Total Interest Income 11,117,538 12,002,938 ---------- ---------- Interest Expense: NOW And Money Market Accounts 1,374,260 1,258,309 Passbook Accounts 88,978 133,616 Certificate Accounts 1,973,215 2,543,768 Advances And Other Borrowed Money 1,249,071 1,114,586 ---------- ---------- Total Interest Expense 4,685,524 5,050,279 ---------- ---------- Net Interest Income 6,432,014 6,952,659 Provision For Loan Losses 600,000 900,000 ---------- ---------- Net Interest Income After Provision For Loan Losses 5,832,014 6,052,659 ---------- ---------- Other Income: Net Gain On Sale Of Investments - 4,245 Gain On Sale Of Loans 1,056,236 626,000 Loan Servicing Fees 101,611 101,052 Service Fees On Deposit Accounts 691,296 601,562 Other 410,225 348,698 ---------- ---------- Total Other Income 2,259,368 1,681,557 ---------- ---------- General And Administrative Expenses: Salaries And Employee Benefits 3,041,032 2,947,748 Occupancy 456,919 400,223 Advertising 104,180 118,067 Depreciation And Maintenance Of Equipment 537,716 518,589 FDIC Insurance Premiums 27,667 25,850 Amortization Of Intangibles - 185,210 Other 1,059,315 1,067,407 ---------- ---------- Total General And Administrative Expenses 5,226,829 5,263,094 ---------- ---------- Income Before Income Taxes 2,864,553 2,471,122 Provision For Income Taxes 1,052,033 940,181 ---------- ---------- Net Income $1,812,520 $1,530,941 ========== ========== Basic Net Income Per Common Share $ 0.72 $ 0.61 ========== ========== Diluted Net Income Per Common Share $ 0.71 $ 0.60 ========== ========== Cash Dividend Per Share On Common Stock $ 0.04 $ 0.0266 ========== ========== Basic Weighted Average Shares Outstanding 2,511,563 2,508,647 ========== ========== Diluted Weighted Average Shares Outstanding 2,563,450 2,565,383 ========== ========== 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, 2002 $ 16,842 $3,985,312 $(358,297) $(183,335) $21,940,041 $25,400,563 Net Income - - - - 1,530,941 1,530,941 Other Comprehensive Income, Net Of Tax: Unrealized Holding Gains On Securities Available For Sale - - - 1,819,475 - 1,819,475 ----------- Comprehensive Income 3,350,416 Decrease In Indirect Guarantee of ESOP Debt - - 33,714 - - 33,714 Cash Dividends ($.0133 per share) - - - - (67,369) (67,369) -------- ---------- --------- ---------- ----------- ----------- Balance at September 30, 2002 $ 16,842 $3,985,312 $(324,583) $1,636,140 $23,403,613 $28,717,324 ======== ========== ========= ========== =========== =========== Beginning Balance At March 31, 2003 $ 25,298 $3,995,230 $(444,685) $1,444,585 $25,019,525 $30,039,953 Net Income - - - - 1,812,520 1,812,520 Other Comprehensive Income, Net Of Tax: Unrealized Holding Losses On Securities Available For Sale - - - (1,280,584) - (1,280,584) ----------- Comprehensive Income 531,936 Decrease In Indirect Guarantee of ESOP Debt - - 107,713 - - 107,713 Exercise Of Stock Options 19 10,214 - - - 10,233 Cash Dividends ($.02 per share) - - - - (101,231) (101,231) -------- ---------- --------- ---------- ----------- ----------- Balance at September 30, 2003 $ 25,317 $4,005,444 $(336,972) $ 164,001 $26,730,814 $30,588,604 ======== ========== ========= ========== =========== =========== See accompanying notes to consolidated financial statements. 4
Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Six Months Ended September 30, ----------------------------- 2003 2002 ----------- ------------ Cash Flows From Operating Activities: Net Income $1,812,520 $1,530,941 Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation Expense 404,527 401,276 Amortization Of Intangibles - 185,210 Discount Accretion And Premium Amortization 371,748 (72,787) Provisions For Losses On Loans And Real Estate 600,000 900,000 Gain On Sale Of Investment Securities Available For Sale - (4,425) Gain On Sale Of Loans (1,056,236) (626,000) Gain On Sale Of Real Estate (41,496) (44,467) Amortization Of Deferred Fees On Loans (105,060) (100,052) Proceeds From Sale Of Loans Held For Sale 49,676,277 34,438,586 Origination Of Loans For Sale (46,098,909) (36,182,793) (Increase) Decrease In Accrued Interest Receivable: Loans 69,283 118,735 Mortgage-Backed Securities (78,466) (83,174) Investments (26,551) (102,085) Increase In Advance Payments By Borrowers 286,090 222,434 (Gain) Loss on Disposition of Premises and Equipment (150) - Other, Net (1,459,054) (638,624) ----------- ----------- Net Cash Provided (Used) By Operating Activities 4,354,523 (57,225) ----------- ----------- Cash Flows From Investing Activities: Principal Repayments On Mortgage-Backed Securities Available For Sale 34,006,208 10,199,004 Principal Repayments On Mortgage-Backed Securities Held To Maturity 491,582 37,644 Purchase Of Investment Securities Available For Sale - (35,020,625) Purchase Of Investment Securities Held To Maturity (62,945,138) - Purchase Of Mortgage-Backed Securities Available For Sale (71,060,405) (33,542,209) Maturities Of Investment Securities Available For Sale 26,214,104 22,503,614 Maturities of Investment Securities Held To Maturity 22,030,331 52,437 Proceeds From Sale of Securities Available For Sale - 985,938 Purchase Of FHLB Stock (2,281,700) - Redemption Of FHLB Stock 1,351,300 291,900 (Increase) Decrease In Loans To Customers 2,014,023 (2,600,823) Proceeds From Sale Of Repossessed Assets 463,746 541,867 Purchase And Improvement Of Premises And Equipment (1,662,580) (518,183) Proceeds from Sale of Premises And Equipment 150 - ----------- ----------- Net Cash Used By Investing Activities (51,378,379) (37,069,436) ----------- ----------- Cash Flows From Financing Activities: Increase In Deposit Accounts 25,451,829 23,562,788 Proceeds From FHLB Advances 89,875,000 46,125,000 Repayment Of FHLB Advances (70,318,000) (34,168,000) Net Proceeds (Repayment) Of Other Borrowings 1,744,120 (419,928) Dividends To Shareholders (101,231) (67,370) Proceeds From Exercise of Stock Options 10,233 - ----------- ----------- Net Cash Provided By Financing Activities 46,661,951 35,032,490 ----------- ----------- (Continued) 5 Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Six Months Ended September 30, ----------------------------- 2003 2002 ----------- ------------ Net Increase (Decrease) In Cash And Cash Equivalents (361,905) (2,094,171) Cash And Cash Equivalents At Beginning Of Period 8,238,690 11,528,411 ----------- ----------- Cash And Cash Equivalents At End Of Period $ 7,876,785 $ 9,434,240 =========== =========== Supplemental Disclosure Of Cash Flows Information: Cash Paid During The Period For Interest $ 4,824,535 $ 5,181,206 Cash Paid During The Period For Income Taxes $ 935,888 $ 1,362,575 Additions To Repossessed Acquired Through Foreclosure $ 343,800 $ 484,400 Increase (Decrease) In Unrealized Net Gain On Securities Available For Sale, Net Of Taxes $(1,280,584) $ 1,819,475 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 for Form 10-Q and accounting principles generally accepted in the United States of America; 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, 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 our 2003 Annual Report to Shareholders when reviewing interim financial statements. The results of operations for the six month period ended September 30, 2003 are not necessarily indicative of the results 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 of Security Federal Corporation. 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, and changes in the securities market. Management cautions readers of this Form 10-Q not to place undue reliance on the 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 subsidiaries, Security Federal Insurance, Inc. ("SFINS"), Security Federal Investments, Inc. ("SFINV"), Security Federal Trust, Inc. ("SFT"), and Security Financial Services Corporation ("SFSC"). The Bank is primarily engaged in the business of accepting savings and demand deposits and originating mortgage and other loans to individuals and small businesses for various personal and commercial purposes. SFINS, SFINV, and SFT were formed during fiscal 2002 and began operation during the December 2001 quarter. SFINS is an insurance agency offering business, health, home and life insurance. SFINV engages primarily in investment brokerage services. SFT offers trust, financial planning and financial management services. SFSC is currently inactive. 3. Loans Receivable, Net Loans receivable, net, at September 30, 2003 and March 31, 2003 consisted of the following: Loans held for sale were $1,149,366 and $3,670,498 at September 30, 2003 and March 31, 2003, respectively. Loans Held For Investment: September 30, 2003 March 31, 2003 ------------------ -------------- Residential Real Estate $100,539,858 $ 99,948,293 Consumer 46,162,390 46,594,413 Commercial Business & Real Estate 106,887,418 106,996,940 ------------ ------------ 253,589,666 253,539,646 ------------ ------------ Less: Allowance For Possible Loan Loss 5,376,962 4,911,224 Loans In Process 11,423,076 8,990,687 Deferred Loan Fees 157,233 152,577 ------------ ------------ 16,957,271 14,054,488 ------------ ------------ $236,632,395 $239,485,158 ============ ============ The following is a reconciliation of the allowance for loan losses for the six months ending: September 30, 2003 September 30, 2002 ------------------ ------------------ Beginning Balance $ 4,911,224 $ 3,689,079 Provision 600,000 900,000 Charge-offs (238,893) (314,383) Recoveries 104,631 148,205 ------------ ------------ Ending Balance $ 5,376,962 $ 4,422,901 ============ ============ 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 Amortized Unrealized Unrealized September 30, 2003 Cost Gains Losses Fair Value - ------------------ ----------- ---------- ----------- ---------- US Government and Agency Obligations $61,996,971 $172,507 $736,264 $61,433,214 Mortgage-Backed Securities 449,702 29,314 - 479,016 ----------- -------- -------- ----------- Total $62,446,673 $201,821 $736,264 $61,912,230 =========== ======== ======== =========== March 31, 2003 - -------------- US Government and Agency Obligations $21,025,603 $ 36,153 $ 14,071 $21,047,685 Mortgage-Backed Securities 940,930 51,592 - 992,522 ----------- -------- -------- ----------- Total $21,966,533 $ 87,745 $ 14,071 $22,040,207 =========== ======== ======== =========== 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 Amortized Unrealized Unrealized September 30, 2003 Cost Gains Losses Fair Value - ------------------ ----------- ---------- ----------- ---------- US Government and Agency Obligations $ 26,670,638 $ 537,806 $ - $ 27,208,444 Mortgage-Backed Securities 141,562,581 994,987 1,268,448 141,289,120 ------------ ---------- ---------- ------------ Total $168,233,219 $1,532,793 $1,268,448 $168,497,564 ============ ========== ========== ============ March 31, 2003 - -------------- US Government and Agency Obligations $ 52,929,442 $ 822,283 $ 13,094 $ 53,738,631 Mortgage-Backed Securities 104,892,347 1,637,286 118,002 106,411,631 ------------ ---------- ---------- ------------ Total $157,821,789 $2,459,569 $ 131,096 $160,150,262 ============ ========== ========== ============ 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, 2003 March 31, 2003 -------------------- ------------------- Demand Accounts: Balance Rate Balance Rate ------------------- ------------------- Checking $ 80,897,746 0.41% $ 82,521,610 0.50% Money Market 140,105,831 1.96% 102,396,950 2.21% Regular Savings 18,054,791 0.99% 16,455,391 1.23% ------------ ------------ Total Demand Accounts 239,058,368 1.36% 201,373,951 1.43% ------------ ------------ Certificate Accounts: 0 - 4.99% 133,663,605 144,633,770 5.00 - 6.99% 11,203,457 12,437,463 7.00 - 8.99% - 28,417 ------------ ------------ Total Certificate Accounts 144,867,062 2.34% 157,099,650 2.92% ------------ ------------ Total Deposit Accounts $383,925,430 1.73% $358,473,601 2.08% ============ ============ 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, 2003 March 31, 2003 ------------------- ------------------ Fiscal Year Due: Balance Rate Balance Rate ------------------ ------------------ 2004 $11,275,000 1.21% $ 1,700,000 1.48% 2005 10,054,000 6.14% 10,072,000 6.14% 2006 23,000,000 4.93% 23,000,000 4.93% 2007 5,000,000 2.64% - - Thereafter 20,000,000 3.23% 15,000,000 3.09% ----------- ----------- Total Advances $69,329,000 3.85% $49,772,000 4.50% =========== =========== These advances are secured by a blanket collateral agreement with the FHLB by pledging the Bank's portfolio of residential first mortgage loans and approximately $39.2 million in investment securities at September 30, 2003. Advances are subject to prepayment penalties. The following table shows callable FHLB advances as of the dates indicated. These advances are also included in the above table. All callable advances are callable at the option of the FHLB. If an advance is called, the Bank has the option to payoff the advance without penalty, re-borrow funds on different terms, or convert the advance to a three-month floating rate advance tied to LIBOR. As of September 30, 2003 - -------------------------------------------------------------------------- Borrow Date Maturity Date Amount Int. Rate Type Call Dates - ----------- ------------- ---------- --------- ---------- ----------- 11/10/00 11/10/05 $5,000,000 5.85% Multi-Call 5/10/03 and quarterly thereafter 09/04/02 09/04/07 5,000,000 2.82% 1 Time Call 09/04/05 11/07/02 11/07/12 5,000,000 3.35% 1 Time Call 11/07/07 03/10/03 03/10/06 5,000,000 1.15% Multi-Call 03/10/04 and quarterly thereafter As of March 31, 2003 - -------------------------------------------------------------------------- Borrow Date Maturity Date Amount Int. Rate Type Call Dates - ----------- ------------- ---------- --------- ---------- ----------- 11/10/00 11/10/05 5,000,000 5.85% Multi-Call 08/10/02 and quarterly thereafter 09/04/02 09/04/07 5,000,000 2.82% 1 Time Call 09/04/05 11/07/02 11/07/12 5,000,000 3.35% 1 Time Call 11/07/07 03/10/03 03/10/06 5,000,000 1.15% Multi-Call 03/10/04 and quarterly thereafter 9 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 7. Regulatory Matters The following table reconciles the Bank's shareholders' equity to its various regulatory capital positions: September 30, 2003 March 31, 2003 (Dollars in Thousands) ----------------------------------- Bank's Shareholders' Equity $30,851 $30,324 Unrealized Gain On Available For Sale Of Securities, Net Of Tax (164) (1,445) Reduction For Goodwill And Other Intangibles - - ------- ------- Tangible Capital 30,687 28,879 Qualifying Core Deposits And Intangible Assets - - ------- ------- Core Capital 30,687 28,879 Supplemental Capital 3,162 3,064 Assets Required To Be Deducted (102) (152) ======= ======= Risk-Based Capital $33,747 $31,791 ======= ======= The following table compares the Bank's capital levels relative to the applicable regulatory requirements at September 30, 2003: (Dollars in Thousands) ---------------------------------------------------------------------- Amt. Required % Required Actual Amt. Actual % Excess Amt. Excess % ---------------------------------------------------------------------- Tangible Capital $ 9,856 2.0% $30,687 6.23% $20,831 4.23% Tier 1 Leverage (Core) Capital 19,706 4.0% 30,687 6.23% 10,981 2.23% Total Risk- Based Capital 20,234 8.0% 33,747 13.34% 13,513 5.34% Tier 1 Risk- Based (Core) Capital 10,117 4.0% 30,687 12.13% 20,570 8.13% 8. Earnings Per Share The Company calculates earnings per share in accordance with Statement of Financial Accounting Standards ("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 EPS is computed by dividing net income by the weighted average number of common shares outstanding. Diluted EPS is similar to the computation of basic EPS 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. The following table provides a reconciliation of the numerators and denominators of the Basic and Diluted EPS computations: For the Quarter Ended ------------------------------------------------------------ September 30, 2003 ------------------------------------------------------------ Income (Numerator) Amount Shares (Denominator) Per Share ------------------------- -------------------- --------- Basic EPS $889,861 2,512,600 $ 0.35 Effect of Diluted Securities: Stock Options - 38,090 - ESOP - 17,911 - Diluted EPS $889,861 2,568,601 $ 0.35 10 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued For the Quarter Ended ------------------------------------------------------------ September 30, 2002 ------------------------------------------------------------ Income (Numerator) Amount Shares (Denominator) Per Share ------------------------- -------------------- --------- Basic EPS $813,791 2,509,707 $ 0.32 Effect of Diluted Securities: Stock Options - 35,458 - ESOP - 20,804 - -------- --------- ------ Diluted EPS 813,791 2,565,969 $ 0.32 For the Six Months Ended ------------------------------------------------------------ September 30, 2003 ------------------------------------------------------------ Income (Numerator) Amount Shares (Denominator) Per Share ------------------------- -------------------- --------- Basic EPS $1,812,520 2,511,563 $ 0.72 Effect of Diluted Securities: Stock Options - 33,238 (0.01) ESOP - 18,649 - ---------- --------- ------ Diluted EPS 1,812,520 2,563,450 $ 0.71 For the Six Months Ended ------------------------------------------------------------ September 30, 2002 ------------------------------------------------------------ Income (Numerator) Amount Shares (Denominator) Per Share ------------------------- -------------------- --------- Basic EPS $1,530,941 2,508,647 $ 0.61 Effect of Diluted Securities: Stock Options - 37,554 (0.01) ESOP - 19,182 - ---------- --------- ------ Diluted EPS $1,530,941 2,565,383 $ 0.60 9. Stock-Based Compensation The Company has a stock-based employee compensation plan which is accounted for under the recognition and measurement principles of Accounting Principles Board ("APB" Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations). No stock-based employee compensation cost is reflected in net income, as all stock options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if we had applied the fair value recognition provisions of Financial Accounting Standards Board ("FASB") SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation for the six months and the three months ended September 30, 2003 and 2002. 11 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued Three Months Ended Six Months Ended September 30, September 30, 2003 2002 2003 2002 --------- -------- ---------- ---------- Net income, as reported $889,861 $813,791 $1,812,520 $1,530,941 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect $(65,114) $(51,451) $ (130,228) $ (102,902) Net Income, Pro Forma $824,747 $762,340 $1,682,292 $1,428,039 Basic earnings share: As Reported $ .36 $ .33 $ .73 $ .61 Pro Forma $ .33 $ .31 $ .67 $ .57 Diluted earnings share: As reported $ .35 $ .32 $ .71 $ .60 Pro forma $ .33 $ .30 $ .66 $ .56 10. Subsequent Events On October 24, 2003, the Company announced it had reached a verbal agreement to sell its Denmark, SC branch office to South Carolina Bank and Trust of Columbia, SC. The branch has deposits of approximately $15 million and loans of approximately $7 million. The written agreement is expected to be signed in November 2003 and the transaction completed during the March 2004 quarter. 12 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 $47.7 million or 10.7% during the six months ended September 30, 2003 primarily as a result of an increase of $48.8 million or 26.8% in total investment securities offset partially by a $5.4 million or 2.2% decrease in net loans receivable. Residential real estate loans, net of loans in process, decreased $1.8 million or 2.0% during the six months ended September 30, 2003, while consumer loans decreased $432,000 or 0.9% and commercial loans decreased $110,000 or 0.1%. Loans held for sale decreased $2.5 million to $1.1 million during the same period. Repossessed assets decreased $79,000 to $73,000 during the six months ended September 30, 2003. Non-accrual loans totaled $1.9 million at September 30, 2003 compared to $1.0 million at March 31, 2003. The Bank classifies all loans as non-accrual when they become 90 days or more delinquent. At September 30, 2003, the Bank held $1.3 million in impaired loans compared to $1.2 million at March 31, 2003. The Bank includes troubled debt restructuring ("TDR") within the meaning of SFAS No. 114 in impaired loans. At September 30, 2003, the Bank had seven loans totaling $660,000 in TDR's compared to seven loans totaling $665,000 at March 31, 2003. At September 30, 2003 one commercial loan TDR of $201,000 was more than 90 days delinquent and on non-accrual status. That loan is secured by commercial real estate. An unsecured commercial loan TDR of $25,000 secured by a residential dwelling was more than 60 days delinquent. Two consumer loans secured by residential mortgages totaling $75,000 were more than 30 days delinquent. The other three TDR's, a $215,000 commercial loan secured by equipment, an $85,000 consumer loan secured by a residential dwelling and a $59,000 commercial loan secured by two rental properties were current as of September 30, 2003. Deposits increased $25.5 million or 7.1% during the six months ended September 30, 2003 as a result of competitive rates offered by the Bank. Federal Home Loan Bank ("FHLB") advances increased $19.6 million or 39.3% during the same period due to investment leverage strategies employed to increase net interest income. Other borrowings, consisting of commercial repurchase sweep accounts, increased $1.7 million or 41.6% to $5.9 million during the six-month period. The Board of Directors of the Company declared the 50th and 51st consecutive quarterly dividends of $.02 per share per quarter, in April and July 2003, which totaled $102,000. The employee stock ownership trust of the Company paid $108,000 of principal on the employee stock ownership plan loan during the six-month period. Unrealized net gains on securities available for sale, net of tax, decreased $1.3 million during the six months ended September 30, 2003. The Company's net income for the six month period was $1.8 million. These items combined to increase shareholders' equity by $549,000 or 1.8% during the six months ended September 30, 2003. Book value per share was $12.17 at September 30, 2003 compared to $11.98 at March 31, 2003. Liquidity and Capital Resources In accordance with Office of Thrift Supervision ("OTS") regulations, the Company is required to maintain sufficient liquidity to operate in a safe and sound manner. 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 and the purchase of investments are a primary use of the Company's funds. During the six months ended September 30, 2003, loan repayments exceeded loan disbursements resulting in a $5.4 million or 2.2% decrease 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, 2003, deposits increased $25.5 million while FHLB advances increased $19.6 million. The Bank had $59.0 million in additional borrowing capacity at the FHLB at the end of the period. At September 30, 2003, the Bank had $104.3 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. 13 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition Liquidity and Capital Resources, Continued Through its operations the Bank, has made contractual commitments to extend credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At September 30, 2003, the Bank had $25.8 million in unused consumer lines of credit, including home equity lines and unsecured lines. The Bank also had $9.0 million in unused commercial lines of credit committed to customers. The majority of the $34.8 million will not be drawn at the same time. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, by the Bank upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. The Bank manages the credit risk on these commitments by subjecting them to normal underwriting and risk management processes. The Company completed construction of a full service branch office in Lexington, South Carolina, which opened in August 2003. The total cost of the two-story building, which was built on land on which the Company has a long-term lease, was $1.4 million. The Company plans to lease the second floor for rental income. Historically, the Company's cash flow from operating activities has been relatively stable. The cash flow from investing activities have had a trend of increasing outflows due to increases in purchases of mortgage-backed and investment securities. The cash flows from financing activities have had a trend of increased inflows as a result of increases in FHLB advances. Management believes that the Company's liquidity will continue to be supported by the Company's deposit base and borrowing capacity during the next year. Critical Accounting Policies We have adopted various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the consolidated financial statements at March 31, 2003 as filed on our annual report on Form 10-K. Certain accounting policies involve significant judgements and assumptions by us which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgements and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgements and assumptions we make, actual results could differ from these judgements and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations. We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgements and estimates used in preparation of our consolidated financial statements. Refer to the portion of this discussion that addresses our allowance for the loan losses for a description of our processes and methodology for determining our allowance for loan losses. Accounting and Reporting Changes In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-based Compensation Transition and Disclosure", an amendment of FASB Statement No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and Accounting Pronouncement Board ("APB") Opinion No. 28, "Interim Financial Reporting", to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB Opinion No. 25. The provisions of SFAS No. 148 are effective for annual financial statements for fiscal years ending after December 15, 2002, and for financial reports containing condensed financial statements for interim period beginning after December 15, 2002. The Company has adopted the disclosure provisions of SFAS No. 148 which had no impact on the financial condition or operating results of the Company. 14 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition Accounting and Reporting Changes, Continued In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and loan commitments that relate to the origination of mortgage loans held for sale, and for hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 will not have a material impact on the financial condition or operating results of the Company. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances.) Many of those instruments were previously classified as equity. SFAS No. 150 is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the financial condition or operating results of the Company. In June 2003, the American Institute of Certified Public Accountants issued an exposure draft of a proposed Statement of Position ("SOP"), "Allowance for Credit Losses". The proposed SOP addresses the recognition and measurement by creditors of the allowance for credit losses related to all loans, as that term is defined in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." The proposed SOP provides that the allowance for credit losses reported on a creditor's balance sheet should consist only of (1) a component for individual loan impairment recognized and measured pursuant to FASB Statement No. 114 and (2) one or more components of collective loan impairment recognized pursuant to FASB Statement No. 5, "Accounting for Contingencies", and measured in accordance with the guidance in the proposed SOP. The provisions of the proposed SOP would be effective for financial statements for fiscal years beginning after December 15, 2003, with earlier application permitted. The effect of initially applying the provisions of the proposed SOP would be reported as a change in accounting estimate. Comments on the exposure draft were by September 19, 2003. The effect on the financial condition or operating results of the Company related to the adoption of this proposed SOP has not been determined, but would most likely be material. 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. See "Item 3. Quantitative and Qualitative Disclosures about Market Risk" for additional discussions of changes in interest rates. 15 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, 2003 - ------------------------------------------------------------------- Net Income Net income was $890,000 for the three months ended September 30, 2003, representing an increase in earnings of $76,000 or 9.4% from $814,000 for the same period in 2002. Net Interest Income Net interest income decreased $256,000 or 7.4% to $3.2 million during the three months ended September 30, 2003 as a result of a decrease in total interest income offset in part by a decrease in interest expense. Interest earning assets increased an average of $70.5 million while average interest-bearing liabilities increased $58.5 million. The interest rate spread decreased 72 basis points to 2.63% during the three months ended September 30, 2003 compared to the same period in 2002. Interest income on loans decreased $465,000 or 10.8% to $3.9 million during the three months ended September 30, 2003 as a result of the yield in the loan portfolio decreasing 92 basis points despite the average loan portfolio balance increasing by $4.5 million. Interest income from investment, mortgage-backed, and other securities decreased $33,000 or 1.9% due to a decrease of 141 basis points in the average yield in the portfolio although the average balance of the portfolio increased $65.9 million. Total interest income decreased $498,000 or 8.3% to $5.5 million for the three months ended September 30, 2003 from $6.0 million for the same period in 2002. Total interest expense decreased $241,000 or 9.5% to $2.3 million during the three months ended September 30, 2003 compared to $2.5 million for the same period one-year earlier. Interest expense on deposits decreased $312,000 or 15.8% during the period as average interest bearing deposits grew $43.6 million compared to the average balance in 2002 while the cost of deposits decreased 68 basis points. Interest expense on advances and other borrowings increased $71,000 or 12.7% as the cost of debt outstanding decreased 131 basis points during the 2003 period compared to 2002 while average total borrowings outstanding increased approximately $20.9 million. Provision for Loan Losses The Bank's provision for loan losses was $300,000 during the three months ended September 30, 2003 compared to $450,000 for the quarter ended September 30, 2002. 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 $1.9 million at September 30, 2003 compared to $1.0 million at March 31, 2003. The ratio of allowance for loan losses to the Company's total loans was 2.21% at September 30, 2003 compared to 1.98% at March 31, 2003. Net charge-offs were $46,000 during the three months ended September 30, 2003 compared to $68,000 during the same period in 2002. Other Income Total other income increased $176,000 or 20.0% to $1.1 million during the three months ended September 30, 2003 compared to the same period a year ago. Gain on sale of loans increased $78,000 or 23.1% to $414,000 during the period as the origination and sale of fixed rate mortgages increased due to the low rates offered on fixed rate loans industry wide. Loan servicing fees increased $2,000 to $52,000 while service fees on deposit accounts increased $20,000 or 6.2% due to a concerted effort to reduce waived service charges. Other miscellaneous income including credit life insurance commissions, net gain on sale of repossessed assets, safe deposit rental income, annuity and stock brokerage commissions, trust fees, and other miscellaneous fees increased $81,000 or 47.3% during the three months ended September 30, 2003. 16 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, 2003, CONTINUED - ------------------------------------------------------------------------------ General and Administrative Expenses General and administrative expenses decreased $2,000 or 0.1% to $2.6 million during the three months ended September 30, 2003 compared to the same period in 2002. Salaries and employee benefits expense decreased $29,000 or 2.0%. Occupancy expense increased $33,000 due primarily to the land lease for the Lexington branch, which opened in August 2003. Advertising expense increased $36,000 to $78,000 primarily to promote the new branch office. Depreciation and maintenance of equipment expense increased $24,000 or 9.7% during the quarterly period. FDIC insurance premiums increased slightly by $1,000 during the quarter ended September 30, 2003. The amortization of intangibles expense decreased $69,000 to zero during the quarter. At September 30, 2003, the Company had no further intangibles on the balance sheet. Other miscellaneous expense, consisting of legal, professional, and consulting expenses, stationery and office supplies, and other sundry expenses, increased $2,000 or 0.3% for the three months ended September 30, 2003 compared to the three months ended September 30, 2002. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2003 - ----------------------------------------------------------------- Net Income Net income was $1.8 million for the six months ended September 30, 2003, representing an increase in earnings of $282,000 or 18.4% from $1.5 million for the same period in 2002. Net Interest Income Net interest income decreased $521,000 or 7.5% to $6.4 million during the six months ended September 30, 2003 as a result of a decrease in total interest income offset in part by a decrease in interest expense. Average interest earning assets increased $67.8 million while average interest-bearing liabilities increased $61.5 million. The interest rate spread decreased 74 basis points to 2.69% during the six months ending September 30, 2003 compared to the same period in 2002. Interest income on loans decreased $870,000 or 10.0% to $7.8 million during the six months ended September 30, 2003 as a result of the yield in the loan portfolio decreasing 92 basis points despite the average loan portfolio balance increasing $6.3 million. Interest income from investment, mortgage-backed, and other securities decreased $15,000 or 0.5% due to a 144 basis points decrease in the average yield in the portfolio although the average balance of the portfolio increased $61.5 million. Total interest income decreased $885,000 or 7.4% to $11.1 million for the six months ended September 30, 2003 from $12.0 million for the same period in 2002. Total interest expense decreased $365,000 or 7.2% to $4.7 million during the six months ended September 30, 2003 compared to $5.1 million for the same period one-year earlier. Interest expense on deposits decreased $499,000 or 12.7% during the period as average interest bearing deposits grew $43.6 million compared to the average balance in 2002 while the cost of deposits decreased 63 basis points. Interest expense on advances and other borrowings increased $135,000 or 12.1% as the cost of debt outstanding decreased 109 basis points during the 2003 period compared to 2002 while average total borrowings outstanding increased approximately $17.9 million. Provision for Loan Losses The Bank's provision for loan losses was $600,000 during the six months ended September 30, 2003 compared to $900,000 for the same period ending September 30, 2002. Net charge-offs were $134,000 during the six months ended September 30, 2003 compared to $166,000 for the six months ended September 30, 2002. 17 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, 2003, CONTINUED - ---------------------------------------------------------------------------- Other Income Total other income increased $578,000 or 34.4% to $2.3 million during the six months ended September 30, 2003 compared to the same period a year ago. Gain on sale of loans increased $430,000 or 68.7% to $1.1 million during the period as the origination and sale of fixed rate mortgages increased due to the low rates offered on fixed rate loans industry wide. Loan servicing fees increased $1,000 to $102,000 while service fees on deposit accounts increased $90,000 or 14.9% due to a concerted effort to reduce waived service charges. Other miscellaneous income including credit life insurance commissions, net gain on sale of repossessed assets, safe deposit rental income, annuity and stock brokerage commissions, and trust fees, and other miscellaneous fees increased $62,000 or 17.6% during the six months ended September 30, 2003. General and Administrative Expenses General and administrative expenses decreased $36,000 or 0.7% to $5.2 million during the six months ended September 30, 2003 compared to the same period in 2002. Salaries and employee benefits expense increased $93,000 due to an increase in full time equivalents in order to prepare for the opening of the Lexington branch during quarter ended September 30, 2003 and as a result of normal annual salary increases. Occupancy expense increased $57,000 due primarily to the land lease for the Lexington branch office, which opened in August 2003. Advertising expense decreased $14,000 or 11.8% while the depreciation and maintenance of equipment expense increased $19,000 or 3.7% during the six-month period. FDIC insurance premiums increased minimally by $2,000 during the 2003 period. The amortization of intangibles expense decreased $185,000 to zero during the period. At September 30, 2003, the Company had no further intangibles on the balance sheet. Other miscellaneous expense, consisting of legal, professional, and consulting expenses, stationery and office supplies, and other sundry expenses, decreased $8,000 or 0.8% for the six months ended September 30, 2003 compared to the six months ended September 30, 2002. 18 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 OTS 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 three and six month periods ended September 30, 2003, 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 2.63% and 2.69%, respectively. As of the year ended March 31, 2003, the interest rate spread was 3.00%. The interest rate spread has decreased due to investment securities growing faster than loan receivables. Loan receivables earn a higher yield than investment securities. Also, loan yields are falling due to refinancing of residential and commercial loans. If interest rates were to increase suddenly and significantly, the Bank's net interest income and net interest spread would be compressed. Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company's disclosure controls and procedures (as defined in Sections 13a - 15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Act")) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management as of the end of the period covered by this quarterly report. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms. (b) Changes in Internal Controls: In the quarter and six-months ended September 30, 2003, the Company did not make any significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could significantly affect these controls. 19 Security Federal Corporation and Subsidiaries Part II: 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 the shareholders at the Annual Meeting held on July 17, 2003. Votes for T. Clifton Weeks were as follows: 2,036,100 votes for, 3,538 votes withheld. Votes for Timothy W. Simmons were as follows: 2,036,100 votes for, 3,538 votes withheld. Votes for Thomas C. Clark were as follows: 2,036,100 votes for, 3,538 votes withheld. Directors continuing in office are Gasper L. Toole, III, Thomas L. Moore, J. Chris Verenes, Harry O. Weeks, Jr., Robert E. Alexander and William Clyburn. Item 5 Other Information ----------------- None Item 6 Exhibits And Reports On Form 8-K -------------------------------- Exhibits: 3.1 Articles Of Incorporation (1) 3.2 Articles Of Amendment, Dated August 28, 1998, To Articles Of Incorporation 3.3 Bylaws (2) 10 Executive Compensation Plans And Arrangements: Salary Continuation Agreements (3) Amendment One To Salary Continuation Agreements (4) Stock Option Plan (3) 1999 Stock Option Plan (5) 2002 Stock Option Plan (6) Incentive Compensation Plan (3) 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. 31.1 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. 32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act. (1) Filed as an exhibit to the Company's June 23, 1998 proxy statement and incorporated herein by reference. (2) Filed as an exhibit to the Company's Form 8-K filed September 1, 1998 and incorporated herein by reference. (3) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended March 31, 1993 and incorporated herein by reference. 20 Security Federal Corporation and Subsidiaries Exhibits And Reports on Form 8-K, Continued (4) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended December 30, 1993 and incorporated herein by reference. (5) Filed as an exhibit to the Company's Registration Statement on Form S-8 filed March 2, 2002 and incorporated herein by reference. (6) Filed as an exhibit to the Company's June 19, 2002 proxy statement and incorporated herein by reference. 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 7, 2003 By:/s/Timothy W. Simmons ---------------------------- Timothy W. Simmons President Duly Authorized Representative Date: November 7, 2003 By:/s/Roy G. Lindburg ---------------------------- Roy G. Lindburg Treasurer/CFO Duly Authorized Representative 21 EXHIBIT 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Certification I, Timothy W. Simmons, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 7, 2003 /s/Timothy W. Simmons ---------------------------- Timothy W. Simmons President and Chief Executive Officer 23 EXHIBIT 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Certification I, Roy G. Lindburg, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 7, 2003 /s/Roy G. Lindburg ---------------------------- Roy G. Lindburg Chief Financial Officer 24 EXHIBIT 32 Certification Pursuant to Section 906 of the Sarbanes Oxley Act CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF SECURITY FEDERAL CORPORATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on Form 10-Q that: 1. the report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and 2. the information contained in the report fairly presents, in all material respects, the company's financial condition and results of operations. /s/Timothy W. Simmons /s/Roy G. Lindburg - ------------------------------- --------------------------------- Timothy W. Simmons Roy G. Lindburg Chief Executive Officer Chief Financial Officer Dated: November 7, 2003 -----END PRIVACY-ENHANCED MESSAGE-----