-----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, CWQZvAY/+FWDmxyTysuT8tseCCNWFi0Mw897jfllHq2R6gbsRgy+AY1VpBuMcPOm kDc9aBrzvWZQ+esedQYJkg== 0000939057-98-000035.txt : 19980218 0000939057-98-000035.hdr.sgml : 19980218 ACCESSION NUMBER: 0000939057-98-000035 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980213 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURITY FEDERAL CORPORATION CENTRAL INDEX KEY: 0000818677 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 570858504 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-16120 FILM NUMBER: 98537053 BUSINESS ADDRESS: STREET 1: P O BOX 810 CITY: AIKEN STATE: SC ZIP: 29802 BUSINESS PHONE: 8036413000 MAIL ADDRESS: STREET 1: P O BOX 810 CITY: AIKEN STATE: SC ZIP: 29802 10QSB 1 SECURITY FEDERAL CORPORATION 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10 - QSB (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1997 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number: 0-16120 SECURITY FEDERAL CORPORATION Delaware 57-0858504 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 1705 Whiskey Road, Aiken, South Carolina 29801 (Address of Principal Executive Office) (Zip code) (803) 641-3000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Class Outstanding Shares at Common Stock December 31, 1997 $0.01 Par Value 421,060 INDEX SECURITY FEDERAL CORPORATION PART I - FINANCIAL INFORMATION (UNAUDITED) PAGE Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets at December 31, 1997 and March 31, 1997 2 Consolidated Statements of Income for the Three months ended December 31, 1997 and 1996 3-4 Nine months ended December 31, 1997 and 1996 5-6 Consolidated Statement of Shareholders' Equity 7 Consolidated Statements of Cash Flows 8-9 Notes to Consolidated Financial Statements 10-13 Item 2. Management's Discussion and Analysis Financial Condition and Results of Operations 14-19 PART II. OTHER INFORMATION Other Information 20 Signatures 21 SCHEDULES OMITTED All schedules other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information is included in the consolidated financial statements and related notes. Security Federal Corporation and Subsidiary Consolidated Balance Sheets (Unaudited) December 31, 1997 March 31, 1997 Assets ----------------- -------------- Cash and cash equivalents $ 6,816,956 $ 7,903,637 Investment and mortgage- backed securities: Available for sale: (Amortized cost of $57,401,209 57,471,500 24,215,667 at December 31, 1997 and $24,484,644 at March 31, 1997) Held to maturity: (Fair value 9,484,274 12,754,769 of $9,562,841 at December 31, 1997 and $12,598,186 at March 31, 1997) Loans receivable net: Held for sale 639,616 211,212 Held for investment: (Net of allowance of $1,921,942 at December 31, 1997 and $1,767,483 at March 31, 1997) 139,833,763 146,558,261 ------------ ------------ 140,473,379 146,769,473 ------------ ------------ Accrued interest receivable: Loans 822,031 820,730 Mortgage-backed securities 26,873 38,909 Investments 867,569 363,109 Premises and equipment, net 3,901,278 3,952,149 Federal Home Loan Bank stock, at cost 1,480,900 785,700 Real estate acquired in settlement of loans 62,535 52,009 Real estate held for development and sale 779,191 840,813 Other assets 2,918,169 3,148,980 ------------ ------------ Total Assets 225,104,655 201,645,945 ============ ============ Liabilities and Stockholders' Equity Liabilities: Deposit accounts $176,528,779 $168,060,858 Advances from Federal Home Loan Bank 28,268,000 14,114,000 Other borrowed money 154,583 204,397 Advance payments by borrowers for taxes and insurance 167,908 244,449 Other liabilities 2,300,862 2,840,212 ------------ ------------ Total liabilities 207,420,132 185,463,916 ------------ ------------ Stockholders' Equity: Serial preferred stock, $.01 par value; authorized shares - 200,000 issued and outstanding, none Common stock, $.01 par value; authorized shares 1,000,000 issued and outstanding shares, 421,060 at December 31, 1997 and 417,122 at March 31, 1997 4,211 4,171 Additional paid-in capital 3,997,943 3,958,603 Unrealized net gain (loss) on securities available for sale, net of income taxes 47,612 (166,872) Retained earnings, substantially restricted 13,634,757 12,386,127 ------------ ------------ Total stockholders' equity 17,684,523 16,182,029 Total liabilities and stockholders' ------------ ------------ equity $225,104,655 $201,645,945 ============ ============ See accompanying notes to consolidated financial statements. 2 Security Federal Corporation and Subsidiary Consolidated Statements of Income (Unaudited) Three Months Ended December 31, ------------ 1997 1996 ---- ---- Interest income: Loans $ 3,345,475 $ 3,417,262 Mortgage-backed securities 81,655 82,907 Investment securities 911,362 460,793 Other 16,645 19,558 -------------- ------------- Total interest income 4,355,137 3,980,520 -------------- ------------- Interest expense: NOW and money market accounts 375,940 232,417 Passbook accounts 74,850 80,150 Certificate accounts 1,342,215 1,319,242 Advances and other borrowed money 393,073 276,129 -------------- ------------- Total interest expense 2,186,078 1,907,938 -------------- ------------- Net interest income 2,169,059 2,072,582 Provision for loan losses 240,000 75,000 Net interest income after provision for -------------- ------------- Loan losses 1,929,059 1,997,582 -------------- ------------- Other income: Net gain on sale of investments 15,423 0 Gain on sale of loans 47,203 86,711 Loan servicing fees 86,139 83,275 Service fees on deposit accounts 224,681 218,299 Income (loss) from real estate operations 6,741 29,344 Other 93,347 71,516 -------------- ------------- Total other income 473,534 489,145 -------------- ------------- General and administrative expenses: Salaries and employee benefits 866,318 790,850 Occupancy 116,832 102,467 Advertising 86,488 56,644 Depreciation and maintenance of equipment 171,781 154,727 FDIC insurance premiums 18,848 65,558 Amortization of intangibles 116,310 116,310 Other 316,510 489,366 -------------- ------------- Total general and administrative expenses 1,693,087 1,775,922 -------------- ------------- (Continued) 3 Security Federal Corporation and Subsidiary Consolidated Statements of Income (Unaudited) Three Months Ended December 31, ------------ 1997 1996 ---- ---- Income before income taxes 709,506 710,805 Provision for income taxes 240,622 253,907 -------------- ------------- Net income $ 468,884 $ 456,898 ============== ============= Basic net income per common share $ 1.12 $ 1.10 ============== ============= Diluted net income per common share $ 1.11 $ 1.09 ============== ============= Cash dividend per share on common stock $ 0.06 $ 0.05 ============== ============= Basic weighted average shares outstanding 419,861 415,910 ============== ============= Diluted weighted average shares outstanding 421,086 418,502 ============== ============= See accompanying notes to consolidated financial statements. 4 Security Federal Corporation and Subsidiary Consolidated Statements of Income (Unaudited) Nine Months Ended December 31, ------------ 1997 1996 ---- ---- Interest income: Loans $ 10,008,676 $ 10,198,326 Mortgage-backed securities 249,661 261,804 Investment securities 2,108,669 1,501,907 Other 54,722 56,530 -------------- ------------- Total interest income 12,421,728 12,018,567 -------------- ------------- Interest expense: NOW and money market accounts 869,519 701,856 Passbook accounts 226,673 255,961 Certificate accounts 3,873,926 4,096,186 Advances and other borrowed money 922,953 941,985 -------------- ------------- Total interest expense 5,893,071 5,995,988 -------------- ------------- Net interest income 6,528,657 6,022,579 Provision for loan losses 630,000 225,000 Net interest income after provision for -------------- ------------- Loan losses 5,898,657 5,797,579 -------------- ------------- Other income: Net gain on sale of investments 15,423 0 Gain on sale of loans 149,288 161,923 Loan servicing fees 259,539 251,348 Service fees on deposit accounts 659,452 608,547 Income (loss) from real estate operations 53,656 (14,296) Other 338,267 135,353 -------------- ------------- Total other income 1,475,625 1,142,875 -------------- ------------- General and administrative expenses: Salaries and employee benefits 2,597,105 2,421,701 Occupancy 353,904 302,071 Advertising 272,486 147,163 Depreciation and maintenance of equipment 548,246 482,426 FDIC insurance premiums 57,440 223,902 FDIC SAIF Assessment 0 705,489 Amortization of intangibles 348,930 348,930 Other 1,163,618 1,476,231 -------------- ------------- Total general and administrative expenses 5,341,729 6,107,913 -------------- ------------- (Continued) 5 Security Federal Corporation and Subsidiary Consolidated Statements of Income (Unaudited) Nine Months Ended December 31, ------------ 1997 1996 ---- ---- Income before income taxes 2,032,553 832,541 Provision for income taxes 708,605 274,278 -------------- ------------- Net income $ 1,323,948 $ 558,263 ============== ============= Basic net income per common share $ 3.17 $ 1.35 ============== ============= Diluted net income per common share $ 3.16 $ 1.34 ============== ============= Cash dividend per share on common stock $ 0.18 $ 0.15 ============== ============= Basic weighted average shares outstanding 418,038 414,099 ============== ============= Diluted weighted average shares outstanding 419,263 416,662 ============== ============= See accompanying notes to consolidated financial statements. 6 Security Federal Corporation and Subsidiary Consolidated Statement of Shareholders' Equity For the nine months ended December 31, 1997 (Unaudited) Unrealized Net Gain (Loss) Additional on Securities Common Paid-In Available Retained Stock Capital For Sale Earnings Total ---------------------------------------------------------- Beginning balance March 31, 1997 $4,171 $3,958,603 $(166,872) $12,386,127 $16,182,029 Net income -- -- -- 1,323,948 1,323,948 Cash dividend -- -- -- (75,318) (75,318) Exercise of stock options 40 39,340 -- -- 39,380 Decrease in unrealized net loss/increase in unrealized net gain on securities available for sale, net of tax -- -- 214,484 -- 214,484 -------------------------------------------------------- Ending balance December 31, 1997 $4,211 $3,997,943 $ 47,612 $13,634,757 $17,684,523 ======================================================== See accompanying notes to consolidated financial statements. 7 Security Federal Corporation and Subsidiary Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended December 31, ------------ 1997 1996 ---- ---- Cash flows from operating activities: Net Income $ 1,323,948 $ 558,263 Adjustments to reconcile net income to net Cash provided by operating activities: Depreciation expense 475,259 448,337 Amortization of purchase accounting adjustments 348,930 348,930 Discount accretion and premium amortization (21,808) 130,043 Provisions for losses on loans and real estate 630,000 325,000 Gain on sale of investments (15,423) 0 Gain on sale of loans (149,288) (161,923) Gain on sale of real estate (99,418) (36,497) Amortization of deferred fees on loans (79,042) (87,512) Proceeds from sale of loans held for sale 8,042,373 10,657,313 Origination of loans for sale (8,321,489) (10,186,397) (Increase) decrease in accrued interest receivable: Loans (1,301) (41,346) Mortgage-backed securities 12,036 (16,678) Investments (504,460) 36,721 Decrease in advance payments by borrowers (76,541) (267,804) Other, net (774,163) (858,110) -------------- ------------- Net cash provided by operating activities $ 789,613 $ 848,340 Cash flows from investing activities -------------- ------------- Principal repayments on mortgage-backed securities 275,692 394,006 Proceeds from sale of investment securities available for sale 2,982,969 0 Purchase of investment securities available for sale (45,367,500) (2,973,203) Maturities of investment securities available for sale 9,500,000 15,500,000 Purchase of investment securities held to maturity 0 (6,471,992) Maturities of investment securities held to maturity 3,000,000 3,000,000 Purchase of FHLB Stock (695,200) (11,500) Redemption of FHLB Stock 0 72,000 Decrease in loans to customers 6,012,303 113,423 Investment in real estate held for development (159,442) (478,018) Proceeds from sale of real estate held for development 274,720 811,972 Proceeds from sale of real estate acquired through foreclosure 218,184 616,619 Purchase of premises and equipment (454,189) (740,584) Net cash used (provided) by investing -------------- ------------- activities $ (24,412,463) $ 9,832,723 -------------- ------------- (Continued) 8 Security Federal Corporation and Subsidiary Consolidated Statements of Cash Flows (Unaudited) (Continued) Nine Months Ended December 31, ------------ 1997 1996 ---- ---- Cash flows from financing activities: Increase (decrease) in deposit accounts $ 8,467,921 $ (5,681,980) Proceeds from FHLB advances 97,940,000 72,650,000 Repayment of FHLB advances (83,786,000) (79,586,000) Repayment of other borrowings $ (49,814) (350,000) Dividends to share holders (75,318) (62,173) Exercise of stock options $ 39,380 39,380 Net cash provided (used) by financing -------------- ------------- activities $ 22,536,169 $ (12,990,773) -------------- ------------- Net decrease in cash and cash equivalents (1,086,681) (2,309,710) Cash and cash equivalents at beginning of period 7,903,637 9,823,664 -------------- ------------- Cash and cash equivalents at end of period $ 6,816,956 $ 7,513,954 ============== ============= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 5,893,071 $ 6,268,267 Income taxes $ 816,500 $ 306,000 Additions to real estate acquired through foreclosure $ 182,948 $ 246,126 Increase in unrealized net gain/ decrease in unrealized net loss on securities available for sale, net of taxes $ 214,484 $ 89,489 Securitization of loans receivable $ 0 $ 2,796,062 See accompanying notes to consolidated financial statements. 9 Security Federal Corporation and Subsidiary Notes to Consolidated Financial Statements (Unaudited) 1. Basis of presentation The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-QSB and therefore do not include all disclosures necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with general accepted accounting principles. Such statements are unaudited but, in the opinion of management, reflect all adjustments, all of which are of a normal recurring nature, necessary for a fair presentation of results for the selected interim periods. Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the Annual Report to Stockholders when reviewing interim financial statements. The results of operations for the three and nine month periods ended December 31, 1997 are not necessarily indicative of the results, which may be expected for the entire fiscal year. 2. Principles of Consolidation The accompanying unaudited consolidated financial statements include the accounts of Security Federal Corporation (the "Company") and its wholly owned subsidiary, Security Federal Bank (the "Bank"), and its wholly owned subsidiary Security Financial Services Corporation ("SFSC"). SFSC engages primarily in investment brokerage services. Also included in consolidation are two real estate partnerships, which the Company purchased from SFSC in December 1995 at fair market value. 3. Loans Receivable, Net Loans receivable, net, at December 31, 1997 and March 31, 1997, consisted of the following: Loans held for sale were $639,616 and $211,212 at December 31, 1997 and March 31, 1997 respectively. Loans held for investment: December 31, 1997 March 31, 1997 ----------------- -------------- Residential real estate $ 45,703,979 $ 50,534,682 Consumer 46,874,036 46,894,063 Commercial real estate 4,174,488 6,527,692 Commercial business 47,892,034 46,047,825 ----------------- -------------- $ 144,644,537 $ 150,004,262 ================= ============== Less: Allowance for possible loan loss $ 1,921,942 $ 1,767,483 Loans in process 2,627,315 1,375,319 Deferred loan fees 261,517 303,199 ----------------- -------------- 4,810,774 3,446,001 ----------------- -------------- $ 139,833,763 $ 146,558,261 ================= ============== The following is a reconciliation of the allowance for possible loan losses: December 31, 1997 December 31, 1996 ----------------- ----------------- Beginning balance $ 1,767,483 $ 1,758,688 Provision 630,000 225,000 Charge-offs (571,558) (258,404) Recoveries 96,017 19,078 ----------------- -------------- Ending balance $ 1,921,942 $ 1,744,362 ================= ============== 10 Security Federal Corporation and Subsidiary Notes to Consolidated Financial Statements (continued) 4. Securities Investment and Mortgage-backed Securities, Available for Sale - ------------------------------------------------------------- The amortized cost, gross unrealized gains gross unrealized losses and market values of investment and mortgage-backed securities available for sale are as follows: December 31, 1997 - ----------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------ US Government and agency Obligations $ 57,401,209 $ 166,283 $ 95,992 $ 57,471,500 Mortgage-backed securities 0 0 0 0 ------------ ------------ ------------ ------------- Total $ 57,401,209 $ 166,283 $ 95,992 $ 57,471,500 ============ ============ ============ ============= March 31, 1997 - -------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------ US Government and agency Obligations $ 24,484,644 $ 0 $ 268,977 $ 24,215,667 Mortgage-backed securities 0 0 0 0 ------------ ------------ ------------ ------------- Total $ 24,484,644 $ 0 $ 268,977 $ 24,215,667 ============ ============ ============ ============= Investment and Mortgage-backed Securities, Held to Maturity - ----------------------------------------------------------- The amortized cost, gross unrealized gains, gross unrealized losses and market values of investment and mortgage-backed securities held to maturity are as follows: December 31, 1997 - ----------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------ US Government and agency Obligations $ 4,983,829 $ 25,992 $ 15,320 $ 4,994,501 Mortgage-backed securities 4,500,445 72,993 5,098 4,568,340 ------------ ------------ ------------ ------------- Total $ 9,484,274 $ 98,985 $ 20,418 $ 9,562,841 ============ ============ ============ ============= 11 Security Federal Corporation and Subsidiary Investment and Mortgage-backed Securities, Held to Maturity (continued) - ----------------------------------------------------------- March 31, 1997 - -------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------ US Government and agency obligations $ 7,978,201 $ 14,797 $ 163,799 $ 7,829,199 Mortgage-backed securities 4,776,568 15,976 23,557 4,768,987 ------------ ------------ ------------ ------------- Total $ 12,754,769 $ 30,773 $ 187,356 $ 12,598,186 ============ ============ ============ ============= 5. Deposits A summary of deposit accounts by type with weighted average rates are as follows: December 31, 1997 March 31, 1997 ----------------- -------------- Demand Accounts: Balance Rate Balance Rate ------- ---- ------- ---- Checking $ 44,290,908 1.31% $ 43,601,652 1.36% Money Market 21,079,468 4.51% 11,640,884 2.80% Regular Savings 11,875,337 2.48% 13,451,308 2.49% ------------- ---- ------------- ---- Total demand accounts $ 77,245,713 2.36% $ 68,693,844 1.83% ------------- ---- ------------- ---- Certificate Accounts: 0 - 4.99% $ 787,658 $ 3,935,588 5.00 - 6.99% 98,360,366 95,234,017 7.00 - 8.99% 135,042 197,409 ------------- ------------- Total certificate accounts 99,283,066 5.50% 99,367,014 5.40% ------------- ---- ------------- ---- Total deposit accounts $ 176,528,779 4.13% $ 168,060,858 3.94% ============= ==== ============= ==== 6. Federal Home Loan Bank Advances Federal Home Loan Bank Advances are summarized by year of maturity and weighted average interest rate in the table below: Fiscal Year Due December 31, 1997 March 31, 1997 - --------------- ----------------- -------------- Balance Rate Balance Rate ------- ---- ------- ---- 1998 $ 452,000 8.60% $ 11,952,000 5.88% 1999 21,180,000 5.82% 490,000 8.65% 2000 5,528,000 5.98% 528,000 8.70% 2001 856,000 8.75% 856,000 8.75% thereafter 252,000 7.97% 288,000 7.97% ------------- ---- ------------- ---- $ 28,268,000 6.00% $ 14,114,000 6.30% ============= ---- ============== ---- 12 Security Federal Corporation and Subsidiary Notes to Consolidated Financial Statements (continued) 7. Regulatory Matters The following table reconciles the Bank's stockholders' equity to its various regulatory capital positions: (Dollars in thousands) December 31, 1997 March 31, 1997 ----------------- -------------- Bank's Stockholders' Equity $ 16,886 $ 15,362 Unrealized loss (gain) on available for sale securities, net of tax (48) 167 Reduction for goodwill and other intangibles (2,162) (2,511) ----------- --------- Tangible capital 14,676 13,018 Qualifying core deposits and intangible assets 826 938 Core capital 15,502 13,956 Supplemental capital 1,727 1,627 ----------- --------- Risk-based capital $ 17,229 $ 15,583 =========== ========= The following table compares the Bank's capital levels relative to the applicable regulatory requirements at December 31, 1997. (Dollars in thousands) Amount Percent Actual Excess Required Required Amount Percent Excess Percent -------- -------- ------ ------- ------ ------- Tangible capital $ 3,339 1.5% $ 14,676 6.59% $11,337 5.09% Core capital 6,702 3.0% 15,502 6.94% 8,800 3.94% Risk-based capital 11,054 8.0% 17,229 12.47% 6,175 4.47% The Bank's regulatory capital amounts and ratios are as follow as of the date indicated: To Be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes Action Provisions ------ -------- ----------------- Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------ (Dollars in thousands) December 31, 1997 Risk-based Capital $17,229 12.5% $11,054 8.0% $13,818 10.0% (to risk weighted assets) Core Capital 15,502 6.9 6,702 3.0 13,404 6.0 (to adjusted tangible assets) Tangible Capital 14,676 6.6 3,339 1.5 11,129 5.0 (to tangible assets) 8. Earnings Per Share In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 128, Earnings per Share, which is effective for both interim and annual periods ending after December 15, 1997. This statement supersedes Accounting Principles Board Opinion No. 15, Earnings per Share. The purpose of this statement is to simplify current reporting and make U.S. reporting comparable to international standards. The statement requires dual presentation of basic and diluted EPS by entities with complex capital structures (as defined by the statement). The adoption of this standard occurred with the filing of this 10-QSB. 13 Security Federal Corporation and Subsidiary Management's Discussion and Analysis of Results of Operations and Financial Condition Changes in Financial Condition Total assets of the Company increased $23.5 million or 11.6% during the nine months ended December 31, 1997, primarily due to an increase of $30.0 million in investment securities offset partially by a $6.3 million decrease in total net loans receivable. Commercial business loans increased $1.8 million since the beginning of the fiscal year, while residential real estate loans decreased $4.8 million. The decrease in residential loans is due to the relatively low interest rate environment, where most borrowers elect a fixed rate loan, which the Bank immediately sells on the secondary market, as opposed to an adjustable rate loan, which the Bank retains in its portfolio. The increase in commercial business loans is part of management's strategy of increasing small business loans, which now count as qualified investments for the Qualified Thrift Lender test. Commercial business loans generally improve the Bank's yield in its portfolio and reprice typically in one year or less, but also inherently carry more credit risk than typical residential real estate loans. The increase in investments during the period is part of the Bank's asset liability strategy to utilize leverage and earn a spread on investment yields over cost of borrowings and deposits. During the fiscal year, both deposits and Federal Home Loan Bank (FHLB) advances increased to fund the Bank's growth. Deposits increased $8.5 million or 5.0% during the nine months ended of December 31, 1997, while FHLB advances increased $14.2 million. The Board of Directors declared the twenty-sixth, twenty-seventh and twenty- eighth consecutive quarterly dividend of $.06 per share in May, August and November 1997, which totaled $75,000. This represents a 20% increase in dividends over last year. Unrealized net losses on securities available for sale decreased $214,000 to a net gain of $48,000 during the nine months ended December 31, 1997. Net income for the nine-month period was $1.3 million for the Company. These items combined to increase the stockholders' equity by $1.5 million or 9.3% during the nine months ended December 31, 1997. Book value per share stood at $42.00 compared to $38.79 at March 31, 1997. Liquidity and Capital Resources In accordance with Office of Thrift Supervision regulations, the Bank is required to maintain a liquidity ratio at specified levels, which are subject to change. Currently, a minimum of 4.0%, which was recently lowered from 5.0%, of the combined total of deposits and certain borrowings must be maintained in the form of cash or eligible investments. A short-term liquidity requirement was recently eliminated and the types of assets eligible to be counted as liquid assets were also liberalized. The Bank's current liquidity level is deemed adequate to meet the requirements of normal operations, potential deposit outflows, and loan demand while still allowing for optimal investment of funds and return on assets. Loan repayments and maturities of investments are a significant source of funds, whereas loan disbursements are a primary use of the Bank's funds. During the nine months ended December 31, 1997, loan repayments exceeded loan disbursements resulting in a $6.3 million or 4.3% decrease in total net loan receivable. Deposits and other borrowings are also an important source of funds for the Bank. During the nine months ended December 31, 1997, deposits increased $8.5 million while FHLB advances increased $14.2 million. At December 31, 1997, Security Federal had $75.2 million of certificates of deposit maturing within one year. Based on previous experience, a major portion of these certificates will be renewed. Capital resources at December 31, 1997 are sufficient to meet outstanding mortgage loan commitments of $195,000 and unused lines of credit of $20.7 million. Management believes that the Bank's liquidity needs will continue to be supported by the Bank's deposit base and borrowing capacity. 14 Security Federal Corporation and Subsidiary Management's Discussion and Analysis of Results of Operations and Financial Condition Accounting and Reporting Changes In February 1997, the FASB issued SFAS No. 129, Disclosure of Information about Capital Structure, which is effective for financial statements for periods ending after December 15, 1997. This statement applies to both public and nonpublic entities. The new statement requires no change for entities subject to the existing requirements. The adoption of this standard did not have a material effect on the Company. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Enterprises are required to classify items of "other comprehensive income" by their nature in the financial statement and display the balance of other comprehensive income separately in the equity section of a statement of financial position. Statement 130 is effective for both interim and annual periods beginning after December 15, 1997. Earlier application is permitted. Comparative financial statements provided for earlier periods are required to be reclassified to reflect the provisions of this statement. The Company will adopt Statement 130 effective March 31, 1998, and will provide the required disclosures in the Company's Form 10-QSB and Annual Report. In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. This statement establishes standards for the way public business companies are to report information about operating segments in annual financial statements and requires those companies to report selected information about operating segments in interim financial reports issued to shareholders. Statement 131 is effective for financial statements for periods beginning after December 15, 1997. Earlier application is encouraged. In the initial year of application, comparative information for earlier years is to be restated, unless it is impractical to do so. Statement 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application shall be reported in financial statements for interim periods in the second year of application. It is not anticipated that this standard will materially effect the Company's current method of financial reporting. In June of 1996 the FASB issued an exposure draft of a proposed statement, Accounting for Derivatives and Similar Financial Instruments and for Hedging Activities. In August 1997 the FASB distributed a draft of the standards section of the final statement, together with related implementation guidance and examples to members of the Financial Instruments Task Force and other identified parties for comment on the draft's clarity and operationality. Under the proposed standard, all derivatives would be measured at fair value and recognized in the statement of financial position as assets or liabilities. Although the final standard has not been issued, the FASB has expressed publicly that a final statement would be effective for fiscal years beginning after December 15, 1998. Because the Company has limited use of derivative transactions at this time, management does not expect that this standard, if adopted in its present proposed form, would have a significant effect on the Company. Impact of Inflation and Changing Prices The consolidated financial statements, related notes, and other financial information presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than does the effect of inflation. 15 Security Federal Corporation and Subsidiary Management's Discussion and Analysis of Results of Operations and Financial Condition Year 2000 Considerations The Bank has begun to take steps to ensure that its core operating software and hardware along with ancillary software packages are year 2000 compliant. Letters have been sent to several vendors to ensure they are ready for the year 2000. The Bank's main processing software and hardware vendors have replied that they are year 2000 compliant in all material respects. Other vendors are either compliant or say they will be complaint by the year 2000. The Bank will continue to study this issue to ensure that all software will be complaint in a timely manner. The Bank plans on testing its systems in the latter part of calendar year 1998. The Bank does not anticipate that any expenditures on year 2000 compliance or testing will be material. RESULTS OF OPERATIONS - --------------------- COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, - ----------------------------------------------------------------------- 1997 AND DECEMBER 31, 1996 - -------------------------- NET INCOME Security Federal Corporation's net income increased $12,000 or 3%, to $469,000 for the three months ended December 31, 1997, compared to the same period in 1996 primarily due to an increase in net interest income and a decrease in general and administrative expenses, offset almost entirely by an increase in the provision for loan losses and a minor decrease in other income. Net Interest Income Net interest income increased $96,000 or 4.7% during the three months ended December 31, 1997, compared to the same period in 1996 due primarily to an increase in interest income on investments offset in part by a decrease in interest income on loans receivable and an increase in interest expense. Interest income on loans decreased $72,000 or 2.1% during the quarter due to lower average total outstanding loan balances. Investment, mortgage-backed, and other securities interest income increased $446,000 during the three months ended December 31, 1997 compared to the same period one year ago due to higher average investment balances and a higher yield on the overall investment portfolio. Total interest income increased $375,000 or 9.4% during the quarter. Total interest expense increased $278,000 or 14.6% during the three month. Interest expense on deposits increased $161,000 or 9.9% due to a higher cost of funds on deposits due to the promotion of money market accounts and a higher overall deposit balance during the quarter ended December 31, 1997. Advances and other borrowings' interest expense increased $117,000 during the three months ended December 31, 1997 compared to the same period in 1996 due to a higher average outstanding borrowings total. The cost of advances and other borrowings has been relatively stable during the past twelve months. Provision for Loan Losses Security Federal's provision for loan losses increased $165,000 to $240,000 for the three months ended December 31, 1997, compared to the 1996 period. The increase in the provision expense is a result of management's analysis of the loan portfolio and the increasing percentage of commercial loans, which are inherently riskier than single family mortgage loans, in the Bank's portfolio. Non-accrual loans at December 31, 1997 were $3.8 million compared to $1.4 million at March 31, 1997. The growth in non-accrual loans occurred due to two commercial loans totaling $1.1 million and several smaller loans becoming 60 days or more past due. The Bank designates all loans 60 or more days past due as non-accrual, while most institutions only consider loans 90 days or more 16 Security Federal Corporation and Subsidiary Management's Discussion and Analysis of Results of Operations and Financial Condition delinquent as non-accrual. The allowance for loan losses as a percentage of total loans was 1.36% at December 31, 1997 and 1.19% at March 31, 1997. Future additions to the Bank's allowance for loan losses are dependent on, among other things, the performance of the Bank's loan portfolio, changes in real estate values, interest rates, and the economy. A major employer in the Aiken area, the Savannah River Site, has experienced major downsizings of personnel the past few years. More layoffs at the site are expected in the coming year, which could have some impact on the local economy. Bridgestone- Firestone has begun construction of a tire manufacturing plant in the Aiken area, which is projected to generate approximately 800 jobs in the next few years. Management continues to monitor its loan portfolio for the impact of local economic changes. Other Income Total other income increased $16,000 or 3.2% during the three ended December 31, 1997 compared to the same period one year earlier. The net gain on sale of investments was $15,000 in the 1997 quarter, while there were no securities sold in the 1996 quarter. Gain on sale of loans decreased $ 40,000 during the 1997 quarter. Loan servicing fees had a slight increase of $3,000 or 3.4%. Service fees on deposit accounts increased $6,000 or 2.9% during the three months ended December 31, 1997 compared to the three months ended December 31, 1996. Income from real estate operations decreased $23,000. Other income, which consists of credit life insurance commissions, safe deposit rental income, annuity and stock brokerage commissions through Security Financial Services and other miscellaneous fees, increased $22,000 or 30.5% due to increased activity in Security Financial during the December 1997 three month period. General and Administrative Expenses General and administrative expenses decreased $83,000 or 4.7% due mainly to decreases in FDIC insurance premiums and other expenses offset in part by increases in compensation and benefits and advertising expense. Compensation and employee benefits increased $75,000 or 9.5% due to normal annual salary increases and the addition of two additional employees to operate the Bank's in-house computer system, which was installed in late January 1997. The computer conversion also changed the Bank from an outsourcing of data processing services arrangement to an in-house processing system which has the effect of increasing compensation and equipment expenses slightly, but is more than offset by a decrease in other expenses. Occupancy increased $14,000 during the December 1997 quarter due to an increase in building maintenance and repairs expense. Advertising increased $30,000 to $86,000 during the three months ended December 31, 1997 in order to market money market accounts and increase consumer awareness of the Bank. Depreciation and maintenance of equipment expense increased $17,000 during the quarter due to the above mentioned computer conversion adding fixed assets in the form of computer software and hardware. FDIC insurance premiums dropped $47,000 due to the decrease in premium rates, which occurred in September 1996 due to congressional legislation to recapitalize the SAIF fund. Amortization of intangibles arising due to branch acquisitions in October 1993, were $116,000 in both the December 1996 and 1997 quarters. Other expenses, encompassing legal, professional and consulting expense, stationary and office supplies, and in the December 1996 quarter only, data processing outsourcing expense, decreased $173,000 or 35.3% during the three months ended December 31, 1997. The primary reason for the decrease, is the above mentioned data processing conversion which brought the Bank's data servicing back in-house for which the Bank was paying approximately $30,000 per month to an outside provider. 17 Security Federal Corporation and Subsidiary Management's Discussion and Analysis of Results of Operations and Financial Condition COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED DECEMBER 31, 1997 - --------------------------------------------------------------------------- COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 1996 - --------------------------------------------------- NET INCOME Net income for the nine months ended December 31, 1997 increased $766,000 to $1.3 million compared to one year ago, due primarily to a one-time charge taken in the September 1996 quarter of $705,000 pre-tax, as a result of legislation enacting a special assessment to capitalize the Federal Deposit Insurance Corporation's Savings Association Insurance Fund (SAIF). Without the one-time charge, net income would have risen by $328,000 or 33% for the nine months ending December 31, 1997. This increase in operating earnings is attributable to increases in net interest income and other income along with a decrease in general and administrative expenses, offset in part by an increase in the provision for loan losses. Net Interest Income Net interest income increased $506,000 or 8.4% for the nine months ended December 31, 1997 compared to the same period in 1996 due mainly to increases in investment interest income along with decreases in interest expense on both deposits and borrowings offset partially by a decrease in interest income on loans receivable. Interest income on loans decreased $190,000 or 1.9% during the nine-month period due to a decrease in loans outstanding. Investment, mortgage-backed, and other securities interest income increased $593,000 or 32.6% during the nine months ended December 31, 1997 compared to one year ago, due to an increase in investment balances and an increase in the overall yield in the investment portfolio. Total interest income increased $403,000 or 3.4% during the period. Total interest expense decreased $103,000 or 1.7% during the nine month period ended December 31, 1997 in contrast to that same period in 1996. Interest expense on deposits decreased $84,000 or 1.7% while interest expense on advances and other borrowings decreased $19,000 or 2.0% during this period. Provision for Loan Losses The provision expense during the nine months ended December 31, 1997 increased $405,000 due to an increase in non-accrual loans and net charge-offs. During the nine months ended December 31, 1997, net charge-offs were $476,000 compared to $239,000 for the nine months ended December 31, 1996. Management continues to analyze its loan portfolio for trends and considers the effect of the local and national economy in estimating its allowance for loan loss adequacy. Other income Total other income increased $333,000 or 29% for the nine months ended December 31, 1997 compared to the same period in 1996. The net gain on sale of investments was $15,000 in 1997, while there were no investment sales in the 1996 period. Gain on sale of loans decreased $13,000 or 7.8% while loan servicing fees increased $8,000 or 3.3% during the nine months ending December 31, 1997. Service fees on deposit accounts increased $51,000 or 8.4% due to an increase in the number of demand deposits. Income from real estate operations increased $68,000 due to a $100,000 provision expense on the value of real estate acquired for development recognized in the September 1996 quarter. Other income, which encompasses credit life insurance, safe deposit box rental, gain on sale of repossessed assets, annuity and stock brokerage commissions through Security Financial Services and other miscellaneous fees, increased $203,000 during the nine months ended December 31, 1997. This increase is 18 Security Federal Corporation and Subsidiary Management's Discussion and Analysis of Results of Operations and Financial Condition attributable to an increase in customers' usage of Security Financial Services and an increase in the gain on sale of repossessed real estate. General and Administrative Expenses General and administrative expenses decreased $766,000 during the nine months December 31, 1997 due to the one-time pre-tax charge of $705,000 for the FDIC SAIF special assessment recognized in September 1996. Without this charge, general and administrative expenses would have decreased $61,000 or 11.2% during the nine month period. Compensation and employee benefits increased $175,000 or 7.2% during the period due to normal annual salary increases and increased head count due to bringing data processing in-house. The Bank, previous to February 1997, out-sourced data processing and paid approximately $30,000 per month for that service. Data processing expense was categorized in other expenses, which decreased $313,000 during the nine months ending December 31, 1997. This decrease was due to the elimination of the outsourcing contract and a decrease in repossessed assets expense. Occupancy expense increased $52,000 or 17.0% during the period due to office remodeling, which occurred in October 1996. Advertising expense increased $125,000 due to increased media advertising and the utilization of billboard advertising. Depreciation and maintenance of equipment increased $66,000 or 13.6% during the nine months ended December 31, 1997 due to the previously mentioned computer conversion, which added equipment and software to the Bank's fixed assets. FDIC insurance premiums dropped $166,000 during the period due to the FDIC SAIF recapitalization. Amortization of intangible expense remained constant at $349,000 for both nine month periods. 19 Security Federal Corporation and Subsidiary Other Information Item 1 Legal Proceedings ----------------- The Company is not engaged in any legal proceedings of a material nature at the present time. From time to time, the Bank is a party to legal proceedings in the ordinary course of business wherein it enforces its security interest in mortgage loans it has made. Item 2 Changes in Securities --------------------- Not applicable. Item 3 Defaults upon Senior Securities ------------------------------- None Item 4 Submission of Matters to a Vote of Security Holders --------------------------------------------------- None Item 5 Other Information ----------------- None Item 6 Exhibits and Reports on Form 8-K -------------------------------- Exhibit 27 Financial Data Schedule No reports on Form 8-K were filed during the period under report. 20 Security Federal Corporation and Subsidiary Signatures Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to the signed on its behalf by the undersigned thereunto duly authorized. Security Federal Corporation Date: February 13, 1998 By: /s/ Roy G. Lindburg ---------------------------------- Roy G. Lindburg Treasurer/CFO Duly Authorized Representative 21 EX-27 2
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