-----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, GbuHkYwZP735n7Y6Wb/K/b7KYqtf6lMG6eQG9pjfAmkGd3t/JVhrABkWQhmpsQgZ Vw+a96Bkl1W2FC9ZyTEh8g== 0000939057-98-000201.txt : 19981118 0000939057-98-000201.hdr.sgml : 19981118 ACCESSION NUMBER: 0000939057-98-000201 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 10QSB SEC ACT: SEC FILE NUMBER: 000-16120 FILM NUMBER: 98750814 BUSINESS ADDRESS: STREET 1: 1705 WHISKEY RD SOUTH CITY: AIKEN STATE: SC ZIP: 29803 BUSINESS PHONE: 8036413000 MAIL ADDRESS: STREET 1: 1705 WHISKEY RD SOUTH CITY: AIKEN STATE: SC ZIP: 29803 10QSB 1 SECURITY FEDERAL CORPORATION 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 September 30, 1998 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number: 0-16120 SECURITY FEDERAL CORPORATION South Carolina 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 September 30, 1998 $0.01 Par Value 421,060 INDEX SECURITY FEDERAL CORPORATION PART I - FINANCIAL INFORMATION (UNAUDITED) PAGE Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets 2 Consolidated Statements of Income 3-6 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 14-17 PART II. OTHER INFORMATION Other Information 18-19 Signatures 20 SCHEDULES OMITTED All schedules other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information is included in the consolidated financial statements and related notes. 1 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (UNAUDITED) SEPTEMBER 30, 1998 MARCH 31, 1998 ------------------ -------------- ASSETS Cash and cash equivalents $ 5,511,899 $ 4,658,681 Investment and mortgage-backed securities: Available for sale: (Amortized cost of $62,305,640 at September 30, 62,770,540 54,597,270 1998 and $54,475,231 at March 31, 1998) Held to maturity: (Fair value of $5,965,899 at September 30, 1998 and 5,870,290 8,215,833 $8,297,204 at March 31, 1998) Loans receivable net: Held for sale 1,734,103 1,232,181 Held for investment: (Net of allowance of $1,577,561 at September 30, 1998 141,498,982 136,492,252 and $1,512,038 at March 31, 1998) ------------- ------------- $ 143,233,085 $ 137,724,433 ------------- ------------- Accrued interest receivable: Loans 698,012 736,201 Mortgage-backed securities 56,471 35,694 Investments 779,166 761,405 Premises and equipment, net 4,015,028 3,827,760 Federal Home Loan Bank stock, at cost 1,259,200 1,348,600 Real estate acquired in settlement of loans 347,335 165,170 Real estate held for development and sale 590,541 623,779 Other assets 3,176,832 2,817,090 ------------- ------------- TOTAL ASSETS 228,308,399 215,511,916 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposit accounts $ 188,613,657 $ 181,785,948 Advances from Federal Home Loan Bank 15,958,000 12,126,000 Other borrowed money 224,939 128,933 Advance payments by borrowers for taxes and insurance 388,168 266,128 Other liabilities 4,054,723 3,128,866 ------------- ------------- TOTAL LIABILITIES 209,239,487 197,435,875 ------------- ------------- STOCKHOLDERS' EQUITY: Serial preferred stock, $.01 par value; authorized shares - 200,000 issued and outstanding, none Common stock, $.01 par value; authorized shares 5,000,000 issued and outstanding shares, 421,060 at September 30, 1998 and $1,000,000 authorized and issued, 4,211 4,211 421,060 at March 31, 1998 Additional paid-in capital 3,997,943 3,997,943 Unrealized net gain on securities available for sale, net of income 288,424 75,713 taxes Retained earnings, substantially restricted 14,778,334 13,998,174 ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 19,068,912 18,076,041 ============= ============= TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 228,308,399 $ 215,511,916 ============= ============= See accompanying notes to consolidated financial statements. 2 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30, ------------- 1998 1997 ---- ---- Interest income: Loans $ 3,278,212 $ 3,354,200 Mortgage-backed securities 143,162 83,509 Investment securities 845,295 645,433 Other 17,910 19,534 ------------- ------------ Total interest income 4,284,579 4,102,676 ------------- ------------ Interest expense: NOW and money market accounts 504,877 288,254 Passbook accounts 73,749 75,831 Certificate accounts 1,280,175 1,287,136 Advances and other borrowed money 266,103 275,015 ------------- ------------ Total interest expense 2,124,904 1,926,236 ------------- ------------ Net interest income 2,159,675 2,176,440 Provision for loan losses 150,000 240,000 ------------- ------------ Net interest income after provision for loan losses 2,009,675 1,936,440 ------------- ------------ Other income: Gain on sale of loans 189,521 71,955 Loan servicing fees 79,475 90,053 Service fees on deposit accounts 210,373 238,475 Income from real estate operations 5,090 16,875 Other 140,681 164,203 ------------- ------------ Total other income 625,140 581,561 ------------- ------------ General and administrative expenses: Salaries and employee benefits 1,018,180 833,961 Occupancy 127,735 124,686 Advertising 139,483 107,227 Depreciation and maintenance of equipment 201,836 218,885 FDIC insurance premiums 19,879 19,158 Amortization of intangibles 116,310 116,310 Other 443,255 435,702 ------------- ------------ Total general and administrative expenses 2,066,678 1,855,929 ------------- ------------ (Continued) 3 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30, ------------- 1998 1997 ---- ---- Income before income taxes 568,137 662,072 Provision for income taxes 192,848 228,436 ------------- ------------- Net income $ 375,289 $ 433,636 ============= ============= Basic net income per common share $ .89 $ 1.04 ============= ============= Diluted net income per common share $ .89 $ 1.03 ============= ============= Cash dividend per share on common stock $ 0.06 $ 0.06 ============= ============= Basic weighted average shares outstanding 421,060 417,122 ============= ============= Diluted weighted average shares outstanding 422,677 420,187 ============= ============= SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) THREE MONTHS ENDED SEPTEMBER 30, ------------- 1998 1997 ---- ---- Net Income $ 375,289 $ 433,636 Other comprehensive Income, net of tax Unrealized gains (losses) on securities: Unrealized holding gains (losses) during the period 235,249 79,407 ------------- ------------ Comprehensive Income $ 610,538 $ 513,043 ============= ============ See accompanying notes to consolidated financial statements. 4 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) SIX MONTHS ENDED SEPTEMBER 30, ------------- 1998 1997 ---- ---- Interest income: Loans $ 6,310,067 $ 6,663,201 Mortgage-backed securities 246,005 168,006 Investment securities 1,926,481 1,197,307 Other 45,762 38,077 ------------- ------------ Total interest income 8,528,315 8,066,591 ------------- ------------ Interest expense: NOW and money market accounts 947,442 493,579 Passbook accounts 148,365 151,823 Certificate accounts 2,560,142 2,531,711 Advances and other borrowed money 544,959 529,880 ------------- ------------ Total interest expense 4,200,908 3,706,993 ------------- ------------ Net interest income 4,327,407 4,359,598 Provision for loan losses 300,000 390,000 ------------- ------------ Net interest income after provision for Loan losses 4,027,407 3,969,598 ------------- ------------ Other income: Gain on sale of loans 287,984 102,085 Loan servicing fees 161,917 173,400 Service fees on deposit accounts 412,848 434,771 Income from real estate operations 72,168 46,915 Other 284,959 244,920 ------------- ------------ Total other income 1,219,876 1,002,091 ------------- ------------ General and administrative expenses: Salaries and employee benefits 1,993,316 1,730,787 Occupancy 245,096 237,072 Advertising 239,977 185,998 Depreciation and maintenance of equipment 395,346 376,465 FDIC insurance premiums 39,541 38,592 Amortization of intangibles 232,620 232,620 Other 836,966 847,108 ------------- ------------ Total general and administrative expenses 3,982,862 3,648,642 ------------- ------------ (Continued) 5 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) SIX MONTHS ENDED SEPTEMBER 30, ------------- 1998 1997 ---- ---- Income before income taxes 1,264,421 1,323,047 Provision for income taxes 433,734 467,983 ------------- ------------- Net income $ 830,687 $ 855,064 ============= ============= Basic net income per common share $ 1.97 $ 2.05 ============= ============= Diluted net income per common share $ 1.97 $ 2.03 ============= ============= Cash dividend per share on common stock $ 0.12 $ 0.12 ============= ============= Basic weighted average shares outstanding 421,060 417,122 ============= ============= Diluted weighted average shares outstanding 422,677 420,658 ============= ============= SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) SIX MONTHS ENDED SEPTEMBER 30, ------------- 1998 1997 ---- ---- Net Income $ 830,687 $ 855,064 Other comprehensive Income, net of tax Unrealized gains (losses) on securities: Unrealized holding gains (losses) during the period 212,711 199,243 ------------- ------------ Comprehensive Income $ 1,043,398 $ 1,054,307 ============= ============ 6 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) UNREALIZED NET GAIN ADDITIONAL (LOSS) ON ADDITIONAL SECURITIES COMMON PAID-IN AVAILABLE RETAINED STOCK CAPITAL FOR SALE EARNINGS TOTAL ----------------------------------------------------------- Beginning balance March 31, 1998 $ 4,211 $ 3,997,943 $ 75,713 $ 13,998,174 $ 18,076,041 Net income ----- ----- ----- 830,687 830,687 Cash dividend ----- ----- ----- (50,527) (50,527) Exercise of stock ----- ----- ----- ----- ----- options Increase in ----- ----- 212,711 ----- 212,711 unrealized net gain on securities available for sale, net of tax ----------------------------------------------------------- Ending balance September 30, 1998 $ 4,211 $ 3,997,943 $288,424 $ 14,778,334 $ 19,068,912 =========================================================== See accompanying notes to consolidated financial statements. 7 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED SEPTEMBER 30, ------------- 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 830,687 $ 855,064 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 311,722 322,415 Amortization of purchase accounting adjustments 232,620 232,620 Discount accretion and premium amortization (13,175) (15,084) Provisions for losses on loans and real estate 300,000 390,000 Gain on sale of investments 0 0 Gain on sale of loans (287,984) (102,085) Gain on sale of real estate (126,543) (89,677) Amortization of deferred fees on loans (123,502) (45,307) Proceeds from sale of loans held for sale 13,455,549 5,176,055 Origination of loans for sale (13,669,487) (5,730,000) (Increase) decrease in accrued interest Receivable: Loans 38,189 (30,052) Mortgage-backed securities (20,777) 1,116 Investments (17,761) (162,892) Increase (decrease) in advance payments by 122,040 165,249 borrowers Other, net 203,345 580,155 ------------- ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,234,923 $ 1,547,577 ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES Principal repayments on mortgage-backed securities held to maturity 473,623 148,436 Principal repayments on mortgage-backed securities 274,926 0 available for sale Purchase of investment securities available for sale (14,999,375) (26,862,547) Purchase of mortgage-backed securities available for sale (7,261,743) 0 Maturities of investment securities available for sale 14,162,829 5,500,000 Maturities of investment securities held to maturity 1,878,049 2,500,000 Purchase of FHLBB Stock 0 (424,600) Redemption of FHLBB Stock 89,400 0 (Increase) decrease in loans to customers (5,640,563) 2,462,377 Investment in real estate held for development (272,214) (105,939) Proceeds from sale of real estate held for development 377,620 253,920 Proceeds from sale of real estate acquired through foreclosure 329,545 218,184 Purchase of premises and equipment (505,990) (269,137) Proceeds from sales of premises and equipment 7,000 0 ------------- ------------ NET CASH USED BY INVESTING ACTIVITIES $ (11,086,893) $ (16,579,306) ------------- ------------ (Continued) 8 SECURITY FEDERAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued) SIX MONTHS ENDED SEPTEMBER 30, ------------- 1998 1997 ---- ---- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in deposit accounts $ 6,827,709 $ 5,437,944 Proceeds from FHLBB advances 56,725,000 59,900,000 Repayment of FHLBB advances (52,893,000) (51,436,000) Proceeds of other borrowings 135,436 0 Repayment of other borrowings (39,430) (37,055) Dividends to shareholders (50,527) (50,054) ------------- ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES $ 10,705,188 $ 13,814,835 ------------- ------------ Net increase (decrease) in cash and cash equivalents 853,218 (1,216,894) Cash and cash equivalents at beginning of period 4,658,681 7,903,637 ------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,511,899 $ 6,686,743 ============= ============ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 3,845,891 $ 3,321,574 Income taxes $ 16,436 $ 316,500 Additions to real estate acquired through foreclosure $ 457,335 $ 164,948 Increase in unrealized net gain on securities available for sale, net of taxes $ 212,711 $ 199,243 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 six month periods ended September 30, 1998 are not necessarily indicative of the results, which may be expected for the entire fiscal year. This Form 10-QSB contains certain forward-looking statements with respect to the financial condition, results of operations, and business. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those anticipated by such forward-looking statements include, but are not limited to changes in interest rates, changes in the regulatory environment, changes in general economic conditions and inflation, changes in the securities market and Year 2000 if not effectively corrected. Management cautions readers of Form 10-QSB not to place undue reliance on forward-looking statements contained therein. 2. PRINCIPLES OF CONSOLIDATION The accompanying unaudited consolidated financial statements include the accounts of Security Federal Corporation (the "Company") and its wholly owned subsidiary, Security Federal Bank (the "Bank"), and its wholly owned subsidiary Security Financial Services Corporation ("SFSC"). SFSC engages primarily in investment brokerage services. Also included in consolidation is a real estate partnership, which the Company purchased from SFSC in December 1995 at fair market value. 3. LOANS RECEIVABLE, NET Loans receivable, net, at September 30, 1998 and March 31, 1998, consisted of the following: Loans held for sale were $1,734,103 and $1,232,181 at September 30, 1998 and March 31, 1998 respectively. Loans held for investment: September 30, 1998 March 31, 1998 ------------------ -------------- Residential real estate $ 55,467,637 $ 46,450,206 Consumer 45,123,957 46,499,200 Commercial real estate 4,093,370 3,955,462 Commercial business 44,829,182 44,500,079 -------------- ------------- $ 149,514,146 $ 141,404,947 -------------- ------------- Less: Allowance for possible loan loss $ 1,577,561 $ 1,512,038 Loans in process 6,254,218 3,175,684 Deferred loan fees 183,385 224,973 -------------- ------------- 8,015,164 4,912,695 -------------- ------------- $ 141,498,982 $ 136,492,252 ============== ============= The following is a reconciliation of the allowance for loan losses for the six months ending: September 30, 1998 September 30, 1997 ------------------ ------------------ Beginning balance $ 1,512,038 $ 1,767,483 Provision 300,000 390,000 Charge-offs (251,789) (157,189) Recoveries 17,312 33,785 -------------- ------------- Ending balance $ 1,577,561 $ 2,034,079 ============== ============= 10 SECURITY FEDERAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. SECURITIES INVESTMENT AND MORTGAGE-BACKED SECURITIES, HELD TO MATURITY The amortized cost, gross unrealized gains gross unrealized losses and fair values of investment and mortgage-backed securities held to maturity are as follows: SEPTEMBER 30, 1998 - ------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ---------- ---------- ----------- US Government and agency obligations $ 1,994,232 $ 9,061 $ 0 $ 2,003,293 Mortgage-backed securities 3,876,058 86,548 0 3,962,606 ----------- -------- -------- ----------- Total $ 5,870,290 $ 95,609 $ 0 $ 5,965,899 =========== ======== ======== =========== MARCH 31, 1998 - -------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ---------- ---------- ----------- US Government and agency obligations $ 3,863,910 $ 20,664 $ 10,320 $ 3,874,254 Mortgage-backed securities 4,351,923 71,492 465 4,422,950 ----------- -------- -------- ----------- Total $ 8,215,833 $ 92,156 $ 10,785 $ 8,297,204 =========== ======== ======== =========== INVESTMENT AND MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE - ------------------------------------------------------------- The amortized cost, gross unrealized gains, gross unrealized losses and fair values of investment and mortgage-backed securities available for sale are as follows: SEPTEMBER 30, 1998 - ------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ---------- ---------- ----------- US Government and agency obligations $55,326,390 $494,368 $ 28,991 $55,791,767 Mortgage-backed securities 6,979,250 10,767 11,244 6,978,773 ----------- -------- -------- ----------- Total $62,305,640 $505,135 $ 40,235 $62,770,540 =========== ======== ======== =========== 11 SECURITY FEDERAL CORPORATION AND SUBSIDIARY INVESTMENT AND MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE (CONTINUED) MARCH 31, 1998 - -------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ---------- ---------- ----------- US Government and agency obligations $54,475,231 $189,603 $ 67,564 $54,597,270 Mortgage-backed securities 0 0 0 0 ----------- -------- -------- ----------- Total $54,475,231 $189,603 $ 67,564 $54,597,270 =========== ======== ======== =========== 5. DEPOSITS A summary of deposit accounts by type with weighted average rates are as follows: September 30, 1998 March 31, 1998 ------------------ -------------- Balance Rate Balance Rate Demand Accounts: ------- ---- ------- ---- Checking $ 48,572,650 1.16% $ 47,414,160 1.09% Money Market 33,805,373 4.80% 27,902,091 4.67% Regular Savings 11,855,252 2.46% 12,328,146 2.44% ------------ ---- ------------ ---- Total demand accounts $ 94,233,275 2.63% $ 87,644,397 2.42% ------------ ---- ------------ ---- Certificate Accounts: 0 - 4.99% $ 3,709,430 $ 3,086,511 5.00 - 6.99% 90,544,879 90,919,998 7.00 - 8.99% 126,073 135,042 ------------ ------------ Total certificate accounts 94,380,382 5.48% 94,141,551 5.50% ------------ ----- ------------ ---- Total deposit accounts $188,613,657 4.05% $181,785,948 4.02% ============ ==== ============ ==== 6. FEDERAL HOME LOAN BANK ADVANCES Federal Home Loan Bank Advances are summarized by year of maturity and weighted average interest rate in the table below: September 30, 1998 March 31, 1998 ------------------ -------------- Fiscal Year Due Balance Rate Balance Rate - --------------- ------- ---- ------- ---- 1999 $ 1,340,000 6.76%$ $ 5,490,000 6.06% 2000 528,000 8.70% 528,000 8.70% 2001 856,000 8.75% 856,000 8.75% 2002 0 0% 0 0% thereafter 13,234,000 5.52% 5,252,000 5.80% ------------ ---- ------------ ---- $ 15,958,000 5.91% $ 12,126,000 6.25% ============ ==== ============ ==== 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) September 30, 1998 March 31, 1998 ------------------ -------------- Bank's Stockholders' Equity $ 18,323 $ 17,294 Unrealized loss (gain) on available for sale securities, net of tax (288) (76) Reduction for goodwill and other intangibles (1,815) (2,046) ---------- --------- Tangible capital 16,220 15,172 Qualifying core deposits and intangible assets 726 789 ---------- --------- Core capital 16,946 15,961 Supplemental capital 1,578 1,512 ---------- --------- Risk-based capital $ 18,524 $ 17,473 ========== ========= The following table compares the Bank's capital levels relative to the applicable regulatory requirements at September 30, 1998. (Dollars in thousands) Amount Percent Actual Excess Required Required Amount Percent Excess Percent -------- -------- ------ ------- ------ ------- Tangible capital $ 4,512 2.0% $16,220 7.19% $11,708 5.19% Tier 1 Leverage 9,503 4.0% 16,946 7.49% 7,893 3.49% (Core) capital Total Risk-based 11,602 8.0% 18,524 12.77% 6,922 4.77% capital Tier 1 Risk-based 5,801 4.0% 16,946 11.69% 11,145 7.69% (Core) capital The Bank's regulatory capital amounts and ratios are as follow as of the date indicated: To Be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------ (Dollars in thousands) September 30, 1998 Tier 1 Risk-based Core Capital $16,946 11.7% $5,801 4.0% $8,701 6.0% Risk-based Capital 18,524 12.8 11,602 8.0 14,502 10.0 (to risk weighted assets) Core Capital 16,946 7.5 9,053 4.0 11,317 5.0 (to adjusted tangible assets) Tangible Capital 16,220 7.2 4,512 2.0 11,280 5.0 (to tangible assets) 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 $12.8 million or 5.9% during the six months ended September 30, 1998, primarily due to increases of $5.5 million in total net loans receivable, $5.8 million in investment securities, and $853,000 in cash and cash equivalents. Real estate acquired in settlement of loans (REO) increased $182,000 while real estate acquired for development decreased $33,000 during the six-month period due to sales of real estate. Deposits increased $6.8 million or 3.8% during the six months ended of September 1998 as Federal Home Loan Bank (FHLBB) advances grew $3.8 million to fund the Company's 5.9% growth in assets. The Board of Directors declared the thirtieth and thirty-first consecutive quarterly dividend of $.06 per share each in May and August 1998, which totaled $51,000. Unrealized net gains on securities available for sale increased $213,000 during the six months ended September 30, 1998. Net income for the six months was $831,000 for the Company. These items combined to increase the stockholders' equity by $993,000 or 5.5% during the six months ended September 30, 1998 and raised book value per share to $45.29 compared to $42.93 at March 31, 1998. LIQUIDITY AND CAPITAL RESOURCES In accordance with Office of Thrift Supervision regulations, the Bank is required to maintain a liquidity ratio at specified levels, which are subject to change. Currently, a minimum of 4.0% of the combined total of deposits and certain borrowings must be maintained in the form of cash or eligible investments. The Bank's average liquidity during the six months ended September 30,1998 was approximately 34%. 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 six months ended September 30, 1998, loan disbursements exceeded loan repayments resulting in a $5.5 million or 4.0% increase in total net loan receivable. Deposits and other borrowings are also an important source of funds for the Bank. During the six months ended September 30, 1998, deposits increased $6.8 million while FHLBB advances increased $3.8 million. At September 30, 1998, Security Federal had $75.1 million of certificates of deposit maturing within one year. Based on previous experience, a major portion of these certificates is expected to be renewed. Liquidity resources at September 30, 1998 are sufficient to meet outstanding mortgage loan commitments of $1.3 million and unused lines of credit of $21.1 million. Management believes that the Bank's liquidity needs will continue to be supported by the Bank's deposit base and borrowing capacity. ACCOUNTING AND REPORTING CHANGES In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Enterprises are required to classify items of "other comprehensive income" by their nature in the financial statement and display the balance of other comprehensive income separately in the equity section of a statement of financial position. Statement 130 is effective for both interim and annual periods beginning after December 15, 1997. Earlier application is permitted. Comparative financial statements provided for earlier periods are required to be reclassified to reflect the provisions of this statement. The Company adopted Statement 130 effective June 30, 1998. 14 SECURITY FEDERAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. This statement establishes standards for the way public business companies are to report information about operating segments in annual financial statements and requires those companies to report selected information about operating segments in interim financial reports issued to shareholders. Statement 131 is effective for financial statements for periods beginning after December 15, 1997. Earlier application is encouraged. In the initial year of application, comparative information for earlier years is to be restated, unless it is impractical to do so. Statement 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application shall be reported in financial statements for interim periods in the second year of application. This standard does not materially effect the Company's current method of financial reporting. In April 1998, the FASB issued SFAS 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. The new Statement revises the required disclosures for employee benefit plans, but it does not change the measurement or recognition of such plans. While the new standard requires some additional information about benefit plans, it helps preparers of financial statements by eliminating certain disclosures and by standardizing the disclosures for pensions and other postretirement benefits to the extent practicable. SFAS 132 supercedes the disclosure requirements in SFAS 87, Employers' Accounting for Pensions, SFAS 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS 106, Employers' Accounting for Postretirement Benefits Other than Pensions. The new disclosures are effective for fiscal years beginning after December 15, 1997. The adoption of SFAS 132 did not have an impact on the financial statements of the Company due to the disclosure only requirements. In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instrument and Hedging Activities. All derivatives are to be measured at fair value and recognized in the statement of financial position as assets or liabilities. The statement is effective for fiscal years and quarters beginning after June 15,1999. Because the Company has limited use of derivative transactions at this time, management does not expect that this standard would have a significant effect on the Company. In March 1998, the Accounting Standards Executive Committee of the AICPA issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1), which provided guidance as to when it is or is not appropriate to capitalize the cost of software developed or obtained for internal uses. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998 with early adoption encouraged. The Company does not anticipate that adoption of SOP 98-1 will have a material effect on its financial statements. In October 1998, the FASB issued SFAS 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. The new statement establishes accounting and reporting standards for certain activities of mortgage banking enterprises. The statement is effective for the first quarter beginning after December 15, 1998. The statement will have no effect on the financial statements of the Bank. 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 recognizes that there is a business risk in computerized systems as the calendar rolls over into the next century. If the computer systems misinterpret the date, items such as interest calculations on loans and deposits will be incorrect. This problem is commonly called the "Year 2000 Problem." A number of computer systems used by the Company in its day-to-day operations will be affected by this problem. Management has established a committee (the "Y2K Project Team") which has identified all affected systems and is currently working to ensure that this event will not disrupt operations. The Y2K Project Team reports regularly to the Bank's Board of Directors. The Bank is also working closely with outside computer vendors to ensure that all software corrections and warranty commitments are obtained and to arrange mock conversion testing. Testing of the Bank's core processing systems is scheduled for December 1998. The Bank's contingency plan will be completed by calendar year end 1998. The Bank's Year 2000 project costs are not expected to have a material impact on its results of operations, liquidity or capital resources. The impact of Year 2000 noncompliance by all outside parties with whom the corporation may transact business cannot be gauged fully at this time. SUBSEQUENT EVENTS At its October 1998 Board of Directors meeting, the board of the Company declared a 2-for-1 stock split of the Company's common stock. The stock split will be accomplished through a 100 percent stock dividend to be issued on or about December 15, 1998 to shareholders on record as of November 30, 1998. RESULTS OF OPERATIONS - --------------------- NET INCOME Net income was $375,000 and $831,000 for the three and six months ended September 30, 1998, respectively. These are decreases of $58,000 for the three-month period and $24,000 for the six-month period, compared to the same periods in 1997. The reasons for the decreases are increases in general and administrative expenses and decreases in net interest income, offset partially by decreases in the provision for loan losses and increases in other income. NET INTEREST INCOME Net interest income decreased $17,000 or 0.8% and $32,000 or 0.08% for the three and six month periods ended September 30, 1998 compared to the same periods in 1997 due mainly to increases in total interest expense offset in part by increases in total interest income. Interest income on loans decreased $76,000 or 2.3% during the quarter and $353,000 or 5.3% during the six months ended September 30, 1998 due to lower average total outstanding loan balances and a lower overall yield in the loan portfolio. Investment, mortgage-backed, and other securities interest income increased $258,000 and $815,000 during the three and six month periods, respectively, due primarily to increases in the average balances in the investment portfolio and also a three basis points increase in yield during the three month period and a seven basis points increase in yield during the six months ended September 30, 1998. Total interest income increased $182,000 or 4.4% and $462,000 or 5.7% during the three and six months ended September 30, 1998, respectively. 16 SECURITY FEDERAL CORPORATION AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Total interest expense increased $199,000 or 10.3% during the three months ended September 30, 1998 while interest expense increased $494,000 or 13.3% during the six months ended September 30, 1998 compared to the same periods one year earlier. Interest expense on deposits increased $208,000 and $479,000 during the three and six months ended September 30, 1998, respectively, as average outstanding interest bearing deposits grew during the periods. Interest expense on advances and other borrowings declined $9,000 during the three-month period but grew $15,000 during the six-month period. PROVISION FOR LOAN LOSSES Security Federal's provision for loan losses decreased $90,000 for both the three and six months ended September 30, 1998 compared to the same periods ended September 30,1997 due to management's analysis of the loan portfolio. Non-accrual loans, which are loans delinquent 90 days or more, were $2.3 million at September 30, 1998 compared to $2.0 million at March 31, 1998. The ratio of allowance for loan losses to the Bank's total loans was 1.10% at September 30, 1998 compared to 1.09% at March 31, 1998. Net charge-off's for the six months ended September 30, 1998 compared to September 30, 1997 were $234.000 and $123,000 respectively. Future additions to the Bank's allowance for loan losses are dependant on, among other things, the performance of the Bank's loan portfolio, changes in real estate values, interest rates, and the economy. OTHER INCOME Total other income increased $44,000 or 7.5% and $218,000 or 21.7% during the three and six months ended September 30, 1998 compared to the same periods one year earlier. Gain on sale of loans increased $118,000 during the quarterly period and $186,000 for the six months due to increased secondary market activity. Loan servicing fees decreased $11,000 during both periods due to a decline in the balance of loans serviced for others. Service fees on deposit accounts declined $22,000 and $28,000. Income from real estate operations decreased $12,000 for the September 1998 quarter but increased $25,000 for the six months ended September 30, 1998 as real estate lot sales slowed during the September 1998 three-month period. Other miscellaneous income, which consists of credit life insurance commissions, gain on sale of repossessed assets, safe deposit rental income, annuity and stock brokerage commissions through Security Financial Services, and other miscellaneous fees decreased $24,000 during the three month period but increased $40,000 during the six months ended September 30, 1998. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses increased $211,000 or 11.4% and $334,000 or 9.2% during the three and six months ended September 30, 1998, respectively, compared to the same periods in 1997 due mainly to increases in salaries and employee benefits and advertising expenses. Salaries and employee benefits expenses increased $184,000 or 22.1% and $263,000 or 15.2% during the three and six month periods. The increases are attributable to increases in staff in the mortgage loan department as a result of the increased volume of refinancing in the current low interest rate environment, an increase in the number of customer contact associates to improve customer service and normal annual cost of living increases. Occupancy expense increased $3,000 or 2.5% and $8,000 or 3.4% during the periods. Advertising increased $32,000 and $54,000 during the three and six months ending September 30, 1998 as money market accounts and Security Federal as a local decision making community bank were promoted. Depreciation and maintenance of equipment expense decreased $17,000 during the quarterly period but increased $19,000 for the six months ended September 30, 1998. FDIC insurance premiums increased slightly, by approximately $1,000 during both periods. Amortization of intangible expense was $116,000 for the three months in 1997 and 1998 and $233,000 in both six-month periods in 1997 and 1998. Other miscellaneous expense, encompassing legal, professional, and consulting expense, stationery and office supplies, and other sundry expenses, increased $8,000 during the three months ended September 30, 1998 while decreasing $10,000 during the six months ended September 30, 1998 compared to one year earlier. 17 SECURITY FEDERAL CORPORATION AND SUBSIDIARY OTHER INFORMATION Item 1 Legal Proceedings ----------------- The Company is not engaged in any legal proceedings of a material nature at the present time. From time to time, the Bank is a party to legal proceedings in the ordinary course of business wherein it enforces its security interest in mortgage loans it has made. Item 2 Changes in Securities and Use of Proceeds ---------------------------------------- Not applicable. Item 3 Defaults upon Senior Securities ------------------------------- None Item 4 Submission of Matters to a Vote of Security Holders --------------------------------------------------- The election of directors was presented for vote to shareholders at the Annual Meeting on July 21, 1998. Votes for Gasper L. Toole III were as follows: 335,280 votes for, 14,225 votes withheld. Votes for Thomas L. Moore were as follows: 335,080 votes for, 14,425 votes withheld. Continuing as directors were Timothy W. Simmons, T. Clifton Weeks, Dr. Robert E. Alexander, William Clyburn, and Harry O. Weeks Jr. The votes for the approval of the change in the state of incorporation of the Company from Delaware to South Carolina were as follows: 334,615 votes for, 13,690 votes against, 1,200 votes abstained. The votes for the ratification of an amendment to the Company's corporate charter to increase the number of authorized shares of common stock from $1 million to $5 million were as follows: 334,515 votes for, 13,790 votes against, 1,200 votes abstained. Item 5 Other Information ----------------- None Item 6 Exhibits and Reports on Form 8-K -------------------------------- On September 1, 1998, the Company filed a current report on Form 8-K to report the consummation of its reincorporation form Delaware to South Carolina. Exhibits: 3.1 Articles of Incorporation* 3.2 Articles of Amendment, dated August 28, 1998, to Articles of Incorporation 3.3 Bylaws** 10 Executive Compensation Plans and Arrangements: Salary Continuation Agreements *** Amendment One to Salary Continuation Agreements **** Stock Option Plan *** Incentive Compensation Plan *** 27 Financial Data Schedule (Continued) 18 SECURITY FEDERAL CORPORATION AND SUBSIDIARY OTHER INFORMATION (Continued) * Filed as an exhibit to the Company's June 23, 1998 proxy statement and incorporated herein by reference. ** Filed as an exhibit to the Company's Form 8-K dated August 31, 1998 and incorporated herein by reference. *** Filed on June 28, 1993, as an exhibit to the Company's Annual Report on Form 10-KSB pursuant to Section 12(g) of the Securities Exchange Act of 1934. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. **** Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1993 pursuant to Section 12(g) of the Securities Exchange Act of 1934. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. 19 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: November 13, 1998 By: /s/ Roy G. Lindburg ---------------------- ------------------------------------ Roy G. Lindburg Treasurer/CFO Duly Authorized Representative 20 Exhibit 3.2 STATE OF SOUTH CAROLINA SECRETARY OF STATE ARTICLES OF AMENDMENT Pursuant to Section 3-10-106 of the 1976 South Carolina Code, as amended, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: 1. The name of the corporation is Security Federal Corporation. 2. On July 21, 1998, the corporation adopted the following Amendment(s) to the first sentence of the first paragraph of Article VI of the Articles of Incorporation. The text of the amendment is as follows (the remainder of Article VI of the Articles of Incorporation is unchanged): "The aggregate number of shares of all classes of capital stock which the Corporation has authority to issue is five million two hundred thousand (5,200,000), of which five million (5,000,000) shall be common stock, par value $.01 per share, amounting in the aggregate to fifty thousand dollars ($50,000), and of which two hundred thousand (200,000) shall be serial preferred stock, par value $.01 per share, amounting in the aggregate to two thousand dollars ($2,000)." 3. The manner, if not set forth in the amendment, in which any exchange, reclassification, or cancellation of issued shares provided for in the Amendment shall be effected, is as follows: Not applicable. 4. Complete either a or b, whichever is applicable. a. [X] Amendment(s) adopted by shareholder action At the date of adoption of the Amendment(s), the number of outstanding shares of each voting group entitled to vote separately on the Amendment, and the vote of such shares was: Voting group: Holders of Common Stock, $0.01 par value per share Number of shares outstanding: 421,060 Number of votes entitled to be cast: 421,060 Number of votes represented at meeting: 349,505 Number of undisputed shares voted: FOR - 334,515 AGAINST - 13,790 b. [ ] The amendment was duly adopted by the incorporators or board of directors without shareholder approval pursuant to Section 33-6-102(d) and 33-10-105 of the 1976 South Carolina Code, as amended, and shareholder action was not required. 5. Unless a delayed date is specified, the effective date of these Articles of Amendment shall be the date of acceptance for filing by the Secretary of State (see Section 33-1-230(b)): Not applicable. * * * 1 IN WITNESS WHEREOF, the undersigned, duly authorized, has executed this instrument on this 28th day of August 1998. SECURITY FEDERAL CORPORATION /s/Timothy W. Simmons ------------------------------------------ Timothy W. Simmons President 2 EX-27 2
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