-----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, IDcINyZboPColq6Z6cv64w3QCjweGxdgPDoCs287QZTsrvsXy+Dunrb96R/dcdD4 LEHm022pkXU+AZs7W8K0Ag== 0000939057-05-000037.txt : 20050210 0000939057-05-000037.hdr.sgml : 20050210 20050210150110 ACCESSION NUMBER: 0000939057-05-000037 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050210 DATE AS OF CHANGE: 20050210 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: 05592530 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 q305.txt SECURITY FEDERAL CORPORATION FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark one) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004 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 ---- ---- 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: SHARES: ------------------- ---------------------- ----------- Common Stock, par January 31, 2005 2,543,838 value $0.01 per share INDEX - ------------------------------------------------------------------------------ PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO. Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets at December 31, 2004 and March 31, 2004 1 Consolidated Statement of Income for the Three and Nine Months Ended December 31, 2004 and 2003 2 Consolidated Statements of Shareholders' Equity and Comprehensive Income at December 31, 2003 and 2004 4 Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2004 and 2003 5 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk 21 Item 4. Controls and Procedures 21 - ------------------------------------------------------------------------------ PART II. OTHER INFORMATION Other Information 22 Signatures 23 - ------------------------------------------------------------------------------ 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 December 31, 2004 March 31, 2004 ----------------- -------------- Assets: (Unaudited) (Audited) Cash And Cash Equivalents $ 7,036,530 $ 6,749,211 Investment And Mortgage-Backed Securities: Available For Sale: (Amortized cost of $174,288,404 at December 31, 2004 and $173,300,028 at March 31, 2004) 173,925,479 174,411,819 Held To Maturity: (Fair value of $73,792,272 at December 31, 2004 and $71,686,256 at March 31, 2004) 74,272,590 71,303,507 ------------ ------------ Total Investment And Mortgage-Backed Securities 248,198,069 245,715,326 ------------ ------------ Loans Receivable, Net: Held For Sale 1,423,111 1,703,869 Held For Investment: (Net of allowance of $6,252,695 at December 31, 2004 and $5,763,935 at March 31, 2004) 293,949,326 258,190,791 ------------ ------------ Total Loans Receivable, Net 295,372,437 259,894,660 ------------ ------------ Accrued Interest Receivable: Loans 878,776 902,589 Mortgage-Backed Securities 574,445 549,541 Investments 633,552 778,725 Premises And Equipment, Net 7,877,246 6,562,734 Federal Home Loan Bank Stock, At Cost 6,024,800 4,816,800 Repossessed Assets Acquired In Settlement Of Loans 127,500 50,869 Other Assets 3,359,747 1,984,598 ------------ ------------ Total Assets $570,083,102 $528,005,053 ============ ============ Liabilities And Shareholders' Equity Liabilities: Deposit Accounts $416,165,386 $389,592,645 Advances From Federal Home Loan Bank 110,413,000 96,336,000 Other Borrowed Money 5,287,565 5,477,023 Advance Payments By Borrowers For Taxes And Insurance 239,801 317,421 Other Liabilities 2,880,388 2,810,049 ------------ ------------ Total Liabilities $534,986,140 $494,533,138 ------------ ------------ 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 - 2,543,838 And Outstanding Shares - 2,530,109 At December 31, 2004 And 2,533,291 And 2,516,191 At March 31, 2004 25,438 25,333 Additional Paid-In Capital 4,181,804 4,013,674 Indirect Guarantee Of Employee Stock Ownership Trust Debt (276,217) (336,972) Accumulated Other Comprehensive Income (Loss) (225,158) 689,755 Retained Earnings, Substantially Restricted 31,391,095 29,080,125 ------------ ------------ Total Shareholders' Equity $ 35,096,962 $ 33,471,915 ------------ ------------ Total Liabilities And Shareholders' Equity $570,083,102 $528,005,053 ============ ============ See accompanying notes to consolidated financial statements. 1 Security Federal Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) Three Months Ended December 31, ------------------------------- 2004 2003 -------------- ------------- Interest Income: Loans $ 4,306,895 $ 3,794,651 Mortgage-Backed Securities 1,401,716 1,274,626 Investment Securities 756,877 812,525 Other 5,851 1,703 ----------- ----------- Total Interest Income 6,471,339 5,883,505 ----------- ----------- Interest Expense: NOW And Money Market Accounts 1,032,212 827,316 Passbook Accounts 42,547 44,357 Certificate Accounts 937,371 787,075 Advances And Other Borrowed Money 913,355 754,555 ----------- ----------- Total Interest Expense 2,925,485 2,413,303 ----------- ----------- Net Interest Income 3,545,854 3,470,202 Provision For Loan Losses 195,000 300,000 ----------- ----------- Net Interest Income After Provision For Loan Losses 3,350,854 3,170,202 ----------- ----------- Other Income: Gain On Sale Of Loans 88,265 199,880 Loan Servicing Fees 47,997 58,556 Service Fees On Deposit Accounts 327,062 338,147 Other 242,996 199,266 ----------- ----------- Total Other Income 706,320 795,849 ----------- ----------- General And Administrative Expenses: Salaries And Employee Benefits 1,444,615 1,443,495 Occupancy 268,749 239,619 Advertising 53,785 73,418 Depreciation And Maintenance Of Equipment 244,000 270,464 FDIC Insurance Premiums 14,444 13,507 Other 686,852 519,497 ----------- ----------- Total General And Administrative Expenses 2,712,445 2,560,000 ----------- ----------- Income Before Income Taxes 1,344,729 1,406,051 Provision For Income Taxes 432,878 502,979 ----------- ----------- Net Income $ 911,851 $ 903,072 =========== =========== Basic Net Income Per Common Share $ 0.36 $ 0.36 =========== =========== Diluted Net Income Per Common Share $ 0.36 $ 0.35 =========== =========== Cash Dividend Per Share On Common Stock $ 0.03 $ 0.02 =========== =========== Basic Weighted Average Shares Outstanding 2,527,661 2,513,958 =========== =========== Diluted Weighted Average Shares Outstanding 2,556,839 2,561,891 =========== =========== See accompanying notes to consolidated financial statements. 2 Security Federal Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) Nine Months Ended December 31, ------------------------------- 2004 2003 -------------- ------------- Interest Income: Loans $12,158,605 $11,610,325 Mortgage-Backed Securities 4,170,928 3,157,744 Investment Securities 2,408,801 2,221,690 Other 18,580 11,284 ----------- ----------- Total Interest Income 18,756,914 17,001,043 ----------- ----------- Interest Expense: NOW And Money Market Accounts 2,895,348 2,201,576 Passbook Accounts 129,515 133,335 Certificate Accounts 2,559,988 2,760,290 Advances And Other Borrowed Money 2,816,492 2,003,626 ----------- ----------- Total Interest Expense 8,401,343 7,098,827 ----------- ----------- Net Interest Income 10,355,571 9,902,216 Provision For Loan Losses 585,000 900,000 ----------- ----------- Net Interest Income After Provision For Loan Losses 9,770,571 9,002,216 ----------- ----------- Other Income: Gain On Sale Of Loans 327,088 1,256,116 Loan Servicing Fees 135,103 160,167 Service Fees On Deposit Accounts 952,426 1,029,443 Other 675,066 609,491 ----------- ----------- Total Other Income 2,089,683 3,055,217 ----------- ----------- General And Administrative Expenses: Salaries And Employee Benefits 4,629,528 4,484,527 Occupancy 792,457 696,538 Advertising 128,310 177,598 Depreciation And Maintenance Of Equipment 781,022 808,180 FDIC Insurance Premiums 43,341 41,174 Other 1,742,929 1,578,812 ----------- ----------- Total General And Administrative Expenses 8,117,587 7,786,829 ----------- ----------- Income Before Income Taxes 3,742,667 4,270,604 Provision For Income Taxes 1,228,783 1,555,012 ----------- ----------- Net Income $ 2,513,884 $ 2,715,592 =========== =========== Basic Net Income Per Common Share $ 1.00 $ 1.08 =========== =========== Diluted Net Income Per Common Share $ 0.98 $ 1.06 =========== =========== Cash Dividend Per Share On Common Stock $ 0.08 $ 0.06 =========== =========== Basic Weighted Average Shares Outstanding 2,523,296 2,512,361 =========== =========== Diluted Weighted Average Shares Outstanding 2,558,502 2,562,930 =========== =========== See accompanying notes to consolidated financial statements. 2 Security Federal Corporation and Subsidiaries Consolidated Statements of Shareholders' Equity and Comprehensive Income (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, 2003 $25,298 $3,995,230 $(444,685) $ 1,444,585 $25,019,525 $30,039,953 Net Income - - - - 2,715,592 2,715,592 Other Comprehensive Income, Net Of Tax: Unrealized Holding Losses On Securities Available For Sale - - - (1,165,376) - (1,165,376) ----------- Comprehensive Income 1,550,216 Decrease In Indirect Guarantee of ESOP Debt 107,713 - - 107,713 Exercise of Stock Options 35 18,444 18,479 Cash Dividends ($.06 per share) - - - - (151,887) (151,887) ------- ---------- --------- ----------- ----------- ----------- Balance at December 31, 2003 $25,333 $4,013,674 $(336,972) $ 279,209 $27,583,230 $31,564,474 ======= ========== ========= =========== =========== =========== Beginning Balance At March 31, 2004 $25,333 $4,013,674 $(336,972) $ 689,755 $29,080,125 $33,471,915 Net Income - - - - 2,513,884 2,513,884 Other Comprehensive Income, Net Of Tax: Unrealized Holding Losses On Securities Available For Sale - - - (914,913) - (914,913) ----------- Comprehensive Income 1,598,971 Decrease In Indirect Guarantee of ESOP Debt - - 60,755 - - 60,755 Exercise Of Stock Options 105 168,130 168,235 Cash Dividends ($.08 per share) - - - - (202,914) (202,914) ------- ---------- --------- ----------- ----------- ----------- Balance at December 31, 2004 $25,438 $4,181,804 $(276,217) $ (225,158) $31,391,095 $35,096,962 ======= ========== ========= =========== =========== =========== See accompanying notes to consolidated financial statements. 4
Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended December 31, ------------------------------- 2004 2003 -------------- -------------- Cash Flows From Operating Activities: Net Income $ 2,513,884 $ 2,715,592 Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation Expense 630,742 625,502 Discount Accretion And Premium Amortization 929,109 709,295 Provisions For Losses On Loans And Real Estate 585,000 900,000 Gain On Sale Of Loans (327,088) (1,256,116) Gain On Sale Of Real Estate (53,661) (58,201) Amortization Of Deferred Fees On Loans (143,244) (149,489) Proceeds From Sale Of Loans Held For Sale 19,590,174 59,591,842 Origination Of Loans For Sale (18,982,328) (55,352,760) (Increase) Decrease In Accrued Interest Receivable: Loans 23,813 51,680 Mortgage-Backed Securities (24,904) (115,954) Investments 145,173 (184,036) Increase In Advance Payments By Borrowers (77,620) (109,709) Gain on Disposition of Premises and Equipment (3,525) (1,170) Other, Net (684,252) (338,539) ------------- ------------- Net Cash Provided By Operating Activities 4,121,273 7,027,937 ------------- ------------- Cash Flows From Investing Activities: Principal Repayments On Mortgage-Backed Securities Available For Sale 37,602,571 45,511,172 Principal Repayments On Mortgage-Backed Securities Held To Maturity 79,558 529,398 Purchase Of Investment Securities Held To Maturity (22,042,025) (79,886,945) Purchase Of Mortgage-Backed Securities Available For Sale (49,526,672) (97,688,197) Maturities Of Investment Securities Available For Sale 10,000,000 31,156,545 Maturities of Investment Securities Held To Maturity 19,000,000 30,030,331 Purchase Of FHLB Stock (3,910,900) (4,104,300) Redemption Of FHLB Stock 2,702,900 2,037,300 Increase In Loans To Customers (36,558,688) (14,840,622) Proceeds From Sale Of Repossessed Assets 335,427 560,451 Purchase And Improvement Of Premises And Equipment (1,945,254) (2,042,042) Proceeds from Sale of Premises And Equipment 3,525 1,170 ------------- ------------- Net Cash Used By Investing Activities (44,259,558) (88,735,739) ------------- ------------- Cash Flows From Financing Activities: Increase In Deposit Accounts 26,572,741 30,568,759 Proceeds From FHLB Advances 100,943,000 168,550,000 Repayment Of FHLB Advances (86,866,000) (119,411,000) Net (Repayments) Proceeds Of Other Borrowings (189,458) 1,778,879 Dividends To Shareholders (202,914) (151,887) Proceeds From Exercise of Stock Options 168,235 18,479 ------------- ------------- Net Cash Provided By Financing Activities 40,425,604 81,353,230 ------------- ------------- (Continued) 5 Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended December 31, ------------------------------- 2004 2003 -------------- -------------- Net Increase (Decrease) In Cash And Cash Equivalents 287,319 (354,572) Cash And Cash Equivalents At Beginning Of Period 6,749,211 8,238,690 ------------- ------------- Cash And Cash Equivalents At End Of Period $ 7,036,530 $ 7,884,118 ============= ============= Supplemental Disclosure Of Cash Flows Information: Cash Paid During The Period For Interest $ 8,322,953 $ 7,206,265 Cash Paid During The Period For Income Taxes $ 1,699,012 $ 1,514,888 Additions To Repossessed Acquired Through Foreclosure $ 358,397 $ 528,049 Increase (Decrease) In Unrealized Net Gain On Securities Available For Sale, Net Of Taxes $ (914,913) $ (1,165,376) See accompanying notes to consolidated financial statements. 6 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The unaudited interim condensed consolidated financial statements included herein reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the results of operations for the interim periods presented. All such adjustments are of a normal, recurring nature. The balance sheet data at December 31, 2004 is derived from the audited consolidated financial statements of Security Federal Corporation (the "Company"). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") with respect to interim financial reporting. It is recommended that these unaudited interim condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 2004 (SEC File No. 0-16120). Certain amounts in the prior periods' financial statements have been reclassified to conform to the current period's presentation. The results of operations for the quarter ended December 31, 2004 are not necessarily indicative of results for the fiscal year ending March 31, 2005. 2. Principles of Consolidation The accompanying unaudited consolidated financial statements include the accounts of 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 operations 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 December 31, 2004 and March 31, 2004 consisted of the following: Loans held for sale were $1,423,111 and $1,703,869 at December 31, 2004 and March 31, 2004, respectively. December 31, 2004 March 31, 2004 Loans Held For Investment: ----------------- -------------- Residential Real Estate $118,741,172 $109,722,301 Consumer 50,102,209 45,641,450 Commercial Business & Real Estate 145,306,816 121,111,848 ------------ ------------ 314,150,197 276,475,599 ------------ ------------ Less: Allowance For Possible Loan Loss 6,252,695 5,763,935 Loans In Process 13,789,555 12,356,346 Deferred Loan Fees 158,621 164,527 ------------ ------------ 20,200,871 18,284,808 ------------ ------------ $293,949,326 $258,190,791 ============ ============ The following is a reconciliation of the allowance for loan losses for the nine months ending: December 31, 2004 December 31, 2003 ----------------- ----------------- Beginning Balance $ 5,763,935 $ 4,911,224 Provision 585,000 900,000 Charge-offs (229,538) (374,341) Recoveries 133,298 136,533 ----------- ----------- Ending Balance $ 6,252,695 $ 5,573,416 =========== =========== 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 December 31, 2004 Amortized Unrealized Unrealized - ------------------ Cost Gains Losses Fair Value --------- ---------- ---------- ----------- US Government and Agency Obligations $74,002,324 $ 68,195 $566,027 $73,504,492 Mortgage-Backed Securities 270,266 17,514 - 287,780 ----------- -------- -------- ----------- Total $74,272,590 $ 85,709 $566,027 $73,792,272 =========== ======== ======== =========== March 31, 2004 - -------------- US Government and Agency Obligations $70,953,710 $448,405 $ 88,542 $71,313,573 Mortgage-Backed Securities 349,797 22,886 - 372,683 ----------- -------- -------- ----------- Total $71,303,507 $471,291 $ 88,542 $71,686,256 =========== ======== ======== =========== 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 December 31, 2004 Amortized Unrealized Unrealized - ------------------ Cost Gains Losses Fair Value --------- ---------- ---------- ----------- US Government and Agency Obligations $ 6,568,945 $ 19,972 $ - $ 6,588,917 Mortgage-Backed Securities 167,719,459 739,620 1,122,517 167,336,562 ------------ ---------- ---------- ------------ Total $174,288,404 $ 759,592 $1,122,517 $173,925,479 ============ ========== ========== ============ March 31, 2004 - -------------- US Government and Agency Obligations $ 16,603,568 $ 296,338 $ - $ 16,899,906 Mortgage-Backed Securities 156,696,460 1,437,219 621,766 157,511,913 ------------ ---------- ---------- ------------ Total $173,300,028 $1,733,557 $ 621,766 $174,411,819 ============ ========== ========== ============ 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: December 31, 2004 March 31, 2004 ------------------- ------------------- Demand Accounts: Balance Rate Balance Rate ------------ ---- ------------ ---- Checking $ 84,825,419 0.54% $ 80,738,298 0.47% Money Market 171,164,079 2.14% 158,587,076 1.97% Regular Savings 16,850,470 0.98% 17,367,047 0.98% ------------ ------------ Total Demand Accounts 272,839,968 1.57% 256,692,421 1.43% ------------ ------------ Certificate Accounts: 0 - 4.99% 133,242,497 122,599,195 5.00 - 6.99% 10,082,921 10,301,029 ------------ ------------ Total Certificate Accounts 143,325,418 2.68% 132,900,224 2.26% ------------ ------------ Total Deposit Accounts $416,165,386 1.95% $389,592,645 1.71% ============ ============ 6. Advances From Federal Home Loan Bank ("FHLB") FHLB advances are summarized by year of maturity and weighted average interest rate in the table below: December 31, 2004 March 31, 2004 ------------------- ------------------- Fiscal Year Due: Balance Rate Balance Rate ------------ ---- ------------ ---- 2005 $ 16,050,000 3.73% $ 13,336,000 4.92% 2006 33,000,000 4.19% 33,000,000 4.09% 2007 13,000,000 2.61% 10,000,000 2.66% 2008 10,000,000 2.96% 10,000,000 2.96% 2009 20,000,000 2.80% 20,000,000 2.80% Thereafter 18,363,000 3.18% 10,000,000 3.29% ------------ ---- ------------ ---- Total Advances $110,413,000 3.41% $ 96,336,000 3.59% ============ ==== ============ ==== 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 $45.3 million in investment securities at December 31, 2004. 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 December 31, 2004 - ----------------------------------------------------------------------------------------------------------- Borrow Date Maturity Date Amount Int. Rate Type Call Dates - ----------- ------------- ---------- --------- ----------- --------------------------------- 11/10/00 11/10/05 $ 5,000,000 5.85% Multi-Call 02/10/05 and quarterly thereafter 09/04/02 09/04/07 5,000,000 2.82% 1 Time Call 09/06/05 11/07/02 11/07/12 5,000,000 3.354% 1 Time Call 11/07/07 10/24/03 10/24/08 10,000,000 2.705% Multi-call 10/24/06 and quarterly thereafter 12/10/03 12/10/08 5,000,000 2.16% Multi-call 12/12/05 and quarterly thereafter 02/20/04 02/20/14 5,000,000 3.225% 1 Time Call 02/20/09 04/16/04 04/16/14 3,000,000 3.33% 1 Time Call 04/16/08 09/16/04 09/16/09 5,000,000 3.09% 1 Time Call 09/17/07 9
Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued As of March 31, 2004 - ----------------------------------------------------------------------------------------------------------- Borrow Date Maturity Date Amount Int. Rate Type Call Dates - ----------- ------------- ---------- --------- ----------- --------------------------------- 11/10/00 11/10/05 5,000,000 5.85% Multi-Call 05/10/04 and quarterly thereafter 09/04/02 09/04/07 5,000,000 2.82% 1 Time Call 09/06/05 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 06/10/04 and quarterly thereafter 10/24/03 10/24/08 10,000,000 2.705% Multi-Call 10/24/06 and quarterly thereafter 12/10/03 12/10/08 5,000,000 2.16% Multi-Call 12/12/05 and quarterly thereafter 02/20/04 02/20/14 5,000,000 2.14 1 Time Call 02/20/09
7. Regulatory Matters The following table reconciles the Bank's shareholders' equity to its various regulatory capital positions: December 31, 2004 March 31, 2004 (In Thousands) ----------------------------------- Bank's Shareholders' Equity $ 34,432 $ 32,830 Unrealized Loss (Gain) On Available For Sale Of Securities, Net Of Tax 225 (690) Reduction For Goodwill And Other Intangibles - - -------- -------- Tangible Capital 34,657 32,140 Qualifying Core Deposits And Intangible Assets - - -------- -------- Core Capital 34,657 32,140 Supplemental Capital 3,965 3,412 Assets Required To Be Deducted (35) (54) -------- -------- Risk-Based Capital $ 38,587 $ 35,498 ======== ======== The following table compares the Bank's capital levels relative to the applicable regulatory requirements at December 31, 2004: (Dollars in Thousands) ---------------------------------------------------------------------------------- Amt. Required % Required Actual Amt. Actual % Excess Amt. Excess % ---------------------------------------------------------------------------------- Tangible Capital $ 11,400 2.0% $ 34,657 6.08% $ 23,257 4.08% Tier 1 Leverage (Core) Capital 22,800 4.0% 34,657 6.08% 11,857 2.08% Total Risk-Based Capital 25,386 8.0% 38,587 12.16% 13,201 4.16% Tier 1 Risk-Based (Core) Capital 12,683 4.0% 34,657 10.93% 21,974 6.93%
8. Earnings Per Share The Company calculates earnings per share ("EPS") in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 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. 10 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued The following table provides a reconciliation of the numerators and denominators of the basic and diluted EPS computations: For the Quarter Ended -------------------------------------------------------- December 31, 2004 -------------------------------------------------------- Income (Numerator) Amount Shares (Denominator) Per Share ------------------ -------------------- ----------- Basic EPS $ 911,851 2,527,661 $ 0.36 Effect of Diluted Securities: Stock Options - 15,449 - ESOP - 13,729 - ----------- --------- ------- Diluted EPS $ 911,851 2,556,839 $ 0.36 =========== ========= ======= For the Quarter Ended -------------------------------------------------------- December 31, 2003 -------------------------------------------------------- Income (Numerator) Amount Shares (Denominator) Per Share ------------------ -------------------- ----------- Basic EPS $ 903,072 2,513,958 $ 0.36 Effect of Diluted Securities: Stock Options - 29,542 (0.006) ESOP - 18,391 (0.004) ----------- --------- ------- Diluted EPS $ 903,072 2,561,891 $ 0.35 =========== ========= ======= For the Nine Months Ended -------------------------------------------------------- December 31, 2004 -------------------------------------------------------- Income (Numerator) Amount Shares (Denominator) Per Share ------------------ -------------------- ----------- Basic EPS $ 2,513,884 2,523,296 $ 1.00 Effect of Diluted Securities: Stock Options - 22,490 (0.013) ESOP - 12,716 (0.007) ----------- --------- ------- Diluted EPS $ 2,513,884 2,558,502 $ 0.98 =========== ========= ======= For the Nine Months Ended -------------------------------------------------------- December 31, 2003 -------------------------------------------------------- Income (Numerator) Amount Shares (Denominator) Per Share ------------------ -------------------- ----------- Basic EPS $ 2,715,592 2,512,361 $ 1.08 Effect of Diluted Securities: Stock Options - 32,006 (0.013) ESOP - 18,563 (0.007) ----------- --------- ------- Diluted EPS $ 2,715,592 2,562,930 $ 1.06 =========== ========= ======= 11 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 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 SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation for the three months and nine months ended December 31, 2004 and 2003, respectively. Three Months Ended Nine Months Ended December 31, December 31, 2004 2003 2004 2003 -------- --------- --------- -------- Net income, as reported $911,851 $903,072 $2,513,884 $2,715,592 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect $(57,124) $(65,114) $ (171,372) $ (195,342) Net Income, Pro Forma $854,727 $837,958 $2,342,512 $2,520,250 Basic earnings share: As Reported $ .36 $ .36 $ 1.00 $ 1.08 Pro Forma $ .34 $ .33 $ .93 $ 1.00 Diluted earnings share: As reported $ .36 $ .35 $ .98 $ 1.06 Pro forma $ .33 $ .33 $ .92 $ .98 12 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Highlights Total assets of the Company increased $42.1 million or 8.0% from $528.0 million to $570.1 million during the nine months ended December 31, 2004 primarily as a result of an increase of $2.5 million or 1.0% in total investment securities and an increase of $35.5 million or 13.7% in net loans receivable. Residential real estate loans, net of loans in process, increased $7.6 million or 7.8% during the nine months ended December 31, 2004, commercial loans increased $24.2 million or 20.0%, while consumer loans increased $4.5 million or 9.8%. Loans held for sale decreased $281,000 or 16.5% during the same period. Repossessed assets increased $77,000 to $128,000 during the nine months ended December 31, 2004. Non-accrual loans totaled $2.3 million at December 31, 2004 compared to $2.0 million at March 31, 2004. The Bank classifies all loans as non-accrual when they become 90 days or more delinquent. At December 31, 2004, the Bank held $1.2 million in impaired loans compared to $1.4 million at March 31, 2004. The Bank includes troubled debt restructuring ("TDR") within the meaning of SFAS No. 114, in impaired loans. At December 31, 2004, the Bank had six loans totaling $440,000 in TDR's compared to seven loans totaling $646,000 at March 31, 2004. A commercial loan TDR of $211,000 secured by equipment, and a $13,000 consumer loan TDR secured by a second mortgage on a residential dwelling, were 30 days delinquent. The other four TDR's consisted of two consumer loans totaling $139,000 secured by residential dwellings, a $21,000 unsecured commercial loan, and a $56,000 commercial loan secured by two rental properties, all of which were current as of December 31, 2004. Deposits increased $26.6 million or 6.8% to $416.2 million during the nine months ended December 31, 2004 as a result of competitive rates offered by the Bank. FHLB advances increased $14.1 million or 14.6% to $110.4 million during the same period. Other borrowings, consisting of commercial repurchase sweep accounts, decreased $189,000 or 3.5% to $5.3 million during the nine-month period. The Board of Directors of the Company declared the 54th, 55th, and 56th consecutive quarterly dividend of $0.02, $0.03, $0.03 per share, in April, July, and October 2004, respectively, which totaled $203,000. The employee stock ownership trust of the Company paid $61,000 of principal on the employee stock ownership plan loan during the nine-month period. Unrealized net gains on securities available for sale, net of tax, decreased $915,000 during the nine months ended December 31, 2004 due to an increase in interest rates. The Company's net income for the nine-month period ended December 31, 2004 was $2.5 million. These items, in total, increased shareholders' equity by $1.6 million or 4.9% during the nine months ended December 31, 2004. Book value per share was $13.87 at December 31, 2004 compared to $13.30 at March 31, 2004. Forward-Looking Statements Certain matters in this Quarterly Report on Form 10-Q for the quarter ended December 31, 2004 constitute forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. These forward-looking statements relate to, among others, expectations of the business environment in which the Company operates, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding the Company's mission and vision. These forward-looking statements are based upon current management expectations, and may, therefore, involve risks and uncertainties. The Company's actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide range of factors including, but not limited to, the general business environment, interest rates, the demand for loans, competitive conditions between banks and non-bank financial services providers, regulatory changes, and other risks detailed in the Company's reports filed with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended March 31, 2004. Forward-looking statements are effective only as of the date that they are made and the Company assumes no obligation to update this information. 13 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations 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 nine months ended December 31, 2004, loan disbursements exceeded loan repayments resulting in a $35.5 million or 13.7% increase in total net loans receivable. Deposits and other borrowings are also an important source of funds for the Company. During the nine months ended December 31, 2004, deposits increased $26.6 million and FHLB advances increased $14.1 million. The Bank had $60.6 million in additional borrowing capacity at the FHLB at the end of the period. At December 31, 2004, the Bank had $87.6 million of certificates of deposit maturing within one year. Based on previous experience, the Bank anticipates a significant portion of these certificates will be renewed. 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 December 31, 2004, the Bank had $27.2 million in unused consumer lines of credit, including home equity lines and unsecured lines. The Bank also had $30.3 million in unused commercial lines of credit and $813,000 in letters of credit committed to customers. The majority of the $58.3 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. Historically, the Company's cash flows from operating activities have 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 audited consolidated financial statements at March 31, 2004 as filed in our annual report on Form 10-K. Certain accounting policies involve significant judgments 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 judgments 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 judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations. 14 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies, Continued We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our consolidated financial statements. The Company provides for loan losses using the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to the allowance for loan losses. Additions to the allowance for loan losses are provided by charges to operations based on various factors, which, in Management's judgment, deserve current recognition in estimating possible losses. Such factors considered by Management include the fair value of the underlying collateral, stated guarantees by the borrower, if applicable, the borrower's ability to repay from other economic resources, growth and composition of the loan portfolios, the relationship of the allowance for loan losses to the outstanding loans, loss experience, delinquency trends, and general economic conditions. Management evaluates the carrying value of the loans periodically and the allowance is adjusted accordingly. While management uses the best information available to make evaluations, future adjustments may be necessary if economic conditions differ substantially from the assumptions used in making these evaluations. Allowance for loan losses are subject to periodic evaluations by various authorities and may be subject to adjustments based upon the information that is available at the time of their examination. The Company values impaired loans at the loan's fair value if it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement at the present value of expected cash flows, the market price of the loan, if available, or the value of the underlying collateral. Expected cash flows are required to be discounted at the loan's effective interest rate. When the ultimate collectibility of an impaired loan's principal is in doubt, wholly or partially, all cash receipts are applied to principal. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first to interest then to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off. Accounting and Reporting Changes The following is a summary of recent authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by the Company. In April 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," which amends and clarifies accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and loan commitments that relate to the origination of mortgage loans held for sale, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying to conform it to a language used in FASB Interpretation ("FIN") No. 45, and amends certain other existing pronouncements. The pronouncement was generally effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have any 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," which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires an issuer to classify certain financial instruments that include certain obligations, such as mandatory redemption, repurchase of the issuer's equity, or settlement by issuing equity, previously classified as equity, as liabilities or assets in some circumstances. SFAS No. 150 was generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities which are subject to the provisions of SFAS No. 150 for the first fiscal period beginning after December 15, 2003. The adoption of SFAS No. 150 did not have any impact on the financial condition or operating results of the Company. 15 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Accounting and Reporting Changes, Continued In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary Assets, an amendment of APB Opinion Mo. 29, Accounting for Nonmonetary Transactions." The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured on the fair value of the assets exchanges. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Accounting Principles Board ("APB") Opinion No. 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same productive asset should be based on the recorded amount of the asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. APB Opinion No. 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. SFAS No. 153 is effective for nonmonetary assets exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this statement shall be applied prospectively. The adoption of this statement is not expected to have a material impact on the financial condition or operating results of the Company. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123 (R)"). SFAS No. 123(R) will require companies to measure all employee stock-based compensation awards using a fair value method and record such expense in its financial statements. In addition, the adoption of SFAS No. 123(R) requires additional accounting and disclosure related to the income tax and cash flow effects resulting from share based payment arrangements. SFAS No. 123(R) is effective beginning as of the first interim or annual reporting period beginning after June 15, 2005. The Company is currently evaluating the impact that the adoption of SFAS No. 123(R) will have on its financial position, results of operations and cash flows. The cumulative effect of adoption, if any, will be measured and recognized in the statement of operations on the date of adoption. In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees and warranties that it has issued. FIN 45 requires a company, at the time it issues a guarantee to recognize an initial liability for the fair value of obligations assumed under the guarantee. The initial recognition requirement of FIN No. 45 were effective for guarantees issued or modified after December 31, 2002. The disclosure requirements were effective for financial statements for periods ending after December 15, 2002. The adoption of FIN No. 45 did not have a material impact on the Company's financial position or results of operations. In December 2003, the FASB Issued Fin No. 46 (revised), "Consolidation of Variable Interest Entities" ("FIN No. 46(R)"), which addresses consolidation by business enterprises of variable interest entities. FIN No. 46(R) requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. FIN No. 46(R) also requires disclosure about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. FIN No. 46(R) provides guidance for determining whether an entity qualifies as a variable interest entity by considering, among other considerations, whether the entity lacks sufficient equity or its equity holders lack adequate decision-making ability. The consolidation requirements of FIN No. 46(R) applied immediately to variable interest entities created after January 31, 2003. The consolidation requirements applied to the Company's existing variable interest entities in the first reporting period ending March 31, 2004. Certain of the disclosure requirements applied to all financial statements issued after December 31, 2003, regardless of when the variable interest entity was established. The adoption of FIN No. 46(R) did not have any impact on the Company's financial position or results of operations. 16 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Accounting and Reporting Changes, Continued In November 2003, the Emerging Issues Task Force ("EITF") reached a consensus that certain quantitative and qualitative disclosures should be required for debt and marketable equity securities classified as available for sale or held to maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balance sheet date but which other-than-temporary impairments has not been recognized. Accordingly EITF issued EITF No. 03-1, "The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments." This issue addresses the meaning of other-than-temporary impairments and its application to investments classified as either available for sale or held to maturity under SFAS No. 115 and provides guidance on quantitative and qualitative disclosures. The disclosure requirement of EITF No. 03-1 are effective for annual financial statements for fiscal years ending after June 15, 2004. The effective date for the measurement and recognition of EITF No. 03-1 had been delayed. The FASB staff has issued a proposed Board-directed FASB Staff Position ("FSP"), FSP EITF 03-1-a, "Implementation Guidance for the Application of Paragraph 16 of Issue No. 03-1." The proposed FSP would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairments under the measurement and recognition requirements of EITF No. 03-1. The delay of the effective date for the measurement and recognition requirements of EITF No. 03-1 will be superseded with the final issuance of FSP EITF 03-1-a. Adopting the disclosure provisions of EITF No. 03-1 did not have any impact on the Company's financial position or results of operations. In March 2004, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 105, "Application of Accounting Principles to Loan Commitments," to inform registrants of the Staff's view that the fair value of the recorded loan commitments should not consider the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB No. 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The Staff will not object to the application of existing accounting practices to loan commitments accounted for as derivatives that are entered into on or before March 31, 2004, with appropriate disclosures. The Company adopted the provision of SAB No. 105 on April 1, 2004. The adoption of SAB No. 105 did not have a material impact on the Company's financial condition or results of operations. Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies 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. See "Item 3. Quantitative and Qualitative Disclosures about Market Risk" for additional discussions of changes in interest rates. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2004 - ------------------------------------------------------------------ Net Income Net income was $912,000 for the three months ended December 31, 2004, representing an increase in earnings of $9,000 or 1.0% from $903,000 for the same period in 2003. The primary reasons for the increased earnings were an increase in net interest income and a decrease in the provision for loan losses offset partially by a decrease in the gain on sale of mortgage loans and an increase in general and administrative expenses. 17 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2004, CONTINUED - ----------------------------------------------------------------------------- Net Interest Income Net interest income increased $76,000 or 2.2% to $3.5 million during the three months ended December 31, 2004 as a result of an increase in interest income offset in part by an increase in interest expense. Average interest earning assets increased $50.0 million while average interest-bearing liabilities increased $45.6 million. The interest rate spread decreased 22 basis points to 2.42% during the three months ended December 31, 2004 compared to the same period in 2003. Interest income on loans increased $512,000 or 13.5% to $4.3 million during the three months ended December 31, 2004 as a result of the average loan portfolio balance increasing by $39.8 million despite the yield in the loan portfolio decreasing 14 basis points. Interest income from investment, mortgage-backed, and other securities increased $76,000 or 3.6% as a result of an increase in the average balance of the portfolio of $10.2 million while the yield in the portfolio decreased slightly by 2 basis points. Total interest income increased $588,000 or 10.0% to $6.5 million for the three months ended December 31, 2004 from $5.9 million for the same period in 2003. Total interest expense increased $512,000 or 21.2% to $2.9 million during the three months ended December 31, 2004 compared to $2.4 million for the same period one-year earlier. Interest expense on deposits increased $353,000 or 21.3% during the period as average interest bearing deposits grew $25.1 million compared to the average balance in the three months ended December 31, 2003 while the cost of deposits increased 54 basis points. Interest expense on advances and other borrowings increased $159,000 or 21.1% as the cost of debt outstanding decreased 7 basis points during the 2004 period compared to 2003 while average total borrowings outstanding increased approximately $20.4 million. Provision for Loan Losses The Bank's provision for loan losses was $195,000 during the three months ended December 31, 2004 compared to $300,000 for the quarter ended December 31, 2003. 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 $2.3 million at December 31, 2004 compared to $2.0 million at March 31, 2004. The ratio of allowance for loan losses to the Company's total loans was 2.07% at December 31, 2004 compared to 2.17% at March 31, 2004. Net charge-offs were $25,000 during the three months ended December 31, 2004 compared to $104,000 during the same period in 2003. Other Income Total other income decreased $90,000 or 11.3% to $706,000 during the three months ended December 31, 2004 compared to the same period a year ago, primarily as a result of a decrease in the gain on sale of loans. Gain on sale of loans decreased $112,000 or 55.8% to $88,000 during the period as the origination and sale of fixed rate mortgages decreased. Loan servicing fees decreased $11,000 to $48,000 while service fees on deposit accounts decreased $11,000 or 3.3% to $327,000. 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 $44,000 or 22.0% during the three months ended December 31, 2004 compared to the same period last year. General and Administrative Expenses General and administrative expenses increased $152,000 or 6.0% to $2.7 million during the three months ended December 31, 2004 compared to the same period in 2003. Salaries and employee benefits expense increased only $1,000 or 0.1%, while occupancy expense increased $29,000 or 12.2%. Advertising expense decreased $20,000 to $54,000. Depreciation and maintenance of equipment expense decreased $26,000 or 9.8% during the quarterly period. FDIC insurance premiums remained the same at $14,000 during the quarters ending December 2004 and 2003. Other miscellaneous expense, consisting of legal, professional, and consulting expenses, stationery and office supplies, and other sundry expenses, increased $167,000 or 32.2% for the three months ended December 31, 2004 compared to the three months ended December 31, 2003 due primarily to an accrual of legal and contingency expenses related to the actions of a former employee. 18 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2004 - ----------------------------------------------------------------- Net Income Net income was $2.5 million for the nine months ended December 31, 2004, representing a decrease in earnings of $202,000 or 7.4% from $2.7 million for the same period in 2003. The primary reason for the decreased earnings was a decrease in the gain on sale of mortgage loans and an increase in general and administrative expenses offset partially by an increase in net interest income and a decrease in the provision for loan losses. Net Interest Income Net interest income increased $453,000 or 4.6% to $10.4 million during the nine months ended December 31, 2004 as a result of an increase in interest income offset in part by an increase in interest expense. Average interest earning assets increased $84.7 million while average interest-bearing liabilities increased $71.4 million. The interest rate spread decreased 36 basis points to 2.31% during the nine months ended December 31, 2004 compared to the same period in 2003. Interest income on loans increased $548,000 to $12.2 million during the nine months ended December 31, 2004 as a result of the average loan portfolio balance increasing by $42.1 million despite the yield in the loan portfolio decreasing 69 basis points. Interest income from investment, mortgage-backed, and other securities increased $1.2 million or 22.4% as a result of an increase in the average balance of the portfolio of $14.4 million while the yield in the portfolio increased 7 basis points. Total interest income increased $1.8 million or 10.3% to $18.8 million for the nine months ended December 31, 2004 from $17.0 million for the same period in 2003. Total interest expense increased $1.3 million or 18.4% to $8.4 million during the nine months ended December 31, 2004 compared to $7.1 million for the same period one-year earlier. Interest expense on deposits increased $490,000 or 9.6% during the period as average interest bearing deposits grew $32.1 million compared to the average balance in the nine months ended December 31, 2003 while the cost of deposits remained at 1.95%. Interest expense on advances and other borrowings increased $813,000 or 40.6% as the average total borrowings outstanding increased approximately $39.3 million while the cost of debt outstanding decreased 39 basis points during the nine months ended December 31, 2004. Provision for Loan Losses The Bank's provision for loan losses was $585,000 during the nine months ended December 31, 2004 compared to $900,000 for the nine months ended December 31, 2003. 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 $2.3 million at December 31, 2004 compared to $2.0 million at March 31, 2004. The ratio of allowance for loan losses to the Company's total loans was 2.07% at December 31, 2004 compared to 2.17% at March 31, 2004. Net charge-offs were $96,000 during the nine months ended December 31, 2004 compared to $238,000 during the same period in 2003. Other Income Total other income decreased $966,000 or 31.6% to $2.1 million during the nine months ended December 31, 2004 compared to the same period a year ago, primarily as a result of a decrease in the gain on sale of loans. Gain on sale of loans decreased $929,000 or 74.0% to $327,000 during the period as the origination and sale of fixed rate mortgages decreased. Loan servicing fees decreased $25,000 to $135,000 while service fees on deposit accounts decreased $77,000 or 7.5% to $952,000. 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 $66,000 or 10.8% to $675,000 during the nine months ended December 31, 2004. 19 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2004, CONTINUED - ---------------------------------------------------------------------------- General and Administrative Expenses General and administrative expenses increased $331,000 or 4.3% to $8.1 million during the nine months ended December 31, 2004 compared to the same period in 2003. Salaries and employee benefits expense increased $145,000 or 3.2%. Occupancy expense increased $96,000 or 13.8% primarily attributable to the new Lexington branch office, which opened in August 2003. Advertising expense decreased $49,000 or 27.8% to $128,000. Depreciation and maintenance of equipment expense decreased $27,000 during the nine month period compared to the same period last year. FDIC insurance premiums increased $2,000 or 5.3% to $43,000. Other miscellaneous expense, consisting of legal, professional, and consulting expenses, stationery and office supplies, and other sundry expenses, increased $164,000 or 10.4% for the nine months ended December 31, 2004 compared to the nine months ended December 31, 2003 due to the accruing of legal and contingency expense related to the actions of a former employee. 20 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 rate risk sensitivity has increased slightly over the past year. The Bank has rated favorably compared to thrift peers concerning interest rate sensitivity. For the three and nine month periods ended December 31, 2004, 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 2.42% and 2.31%, respectively. As of the year ended March 31, 2004, the interest rate spread was 2.59%. The interest rate spread decreased due to interest bearing liabilities, specifically certificates of deposits, re-pricing faster than interest earning assets. If interest rates were to increase suddenly and significantly, the Bank's net interest income and net interest spread would be compressed significantly. 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) 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 Securities and Exchange Commission's rules and forms. (b) Changes in Internal Controls: In the quarter ended December 31, 2004, the Company did not make any significant changes in, nor take any corrective actions regarding, its internal controls or other factors that could materially affect these controls. 21 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 Unregistered Sales of Equity Securities and Use Of Proceeds ----------------------------------------------------------- Stock Repurchases. The Company did not repurchase any shares of its outstanding Common Stock during the three months ended December 31, 2004. In May 2004, the Company announced the authorization to purchase up to 50% of its outstanding shares, or approximately 126,000 shares, subject to market conditions. Item 3 Defaults Upon Senior Securities ------------------------------- None Item 4 Submission Of Matters To A Vote Of Security Holders --------------------------------------------------- None Item 5 Other Information ----------------- None Item 6 Exhibits -------- 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. 31.2 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. 22 Security Federal Corporation and Subsidiaries Exhibits, Continued (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. (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: February 10, 2005 By: /s/ Timothy W. Simmons ------------------- -------------------------------------- Timothy W. Simmons President and Chief Executive Officer Principal Executive Officer Date: February 10, 2005 By: /s/ Roy G. Lindburg ------------------- -------------------------------------- Roy G. Lindburg Treasurer/CFO Principal Financial and Accounting Officer 23 EXHIBIT 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 24 Certification I, Timothy W. Simmons, President and Chief Executive Officer of Security Federal Corporation, 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: February 10, 2005 /s/ Timothy W. Simmons ------------------------------------- Timothy W. Simmons President and Chief Executive Officer 25 EXHIBIT 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 26 Certification I, Roy G. Lindburg, Chief Financial Officer of Security Federal Corporation, 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: February 10, 2005 /s/ Roy G. Lindburg ------------------------------------- Roy G. Lindburg Chief Financial Officer 27 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: February 10, 2005 -----END PRIVACY-ENHANCED MESSAGE-----