-----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, GsDn5aUpLVHcoTU9uiT5J24xVq1sEfMrYLEXG81GYFGM6SVIyymOhB2DLqcWJK9q UqIseVdRGapN50bjTww+uA== 0000939057-99-000007.txt : 19990212 0000939057-99-000007.hdr.sgml : 19990212 ACCESSION NUMBER: 0000939057-99-000007 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990211 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: 99532116 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 FORM 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, 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 December 31, 1998 $0.01 Par Value 842,120 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 14-18 PART II. OTHER INFORMATION Other Information 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) December 31, 1998 March 31, 1998 ----------------- -------------- Assets Cash and cash equivalents $ 6,942,370 $ 4,658,681 Investment and mortgage-backed securities: Available for sale: (Amortized cost of $75,133,825 at December 31, 1998 and $54,475,231 at March 31, 1998) 75,352,090 54,597,270 Held to maturity: (Fair value of $4,711,497 at December 31, 1998 and $8,297,204 at March 31, 1998) 4,631,549 8,215,833 Loans receivable net: Held for sale 2,293,949 1,232,181 Held for investment: (Net of allowance of $1,696,274 at December 31, 1998 and $1,512,038 at March 31, 1998) 144,697,761 136,492,252 --------------- -------------- 146,991,710 137,724,433 --------------- -------------- Accrued interest receivable: Loans 730,087 736,201 Mortgage-backed securities 79,100 35,694 Investments 740,700 761,405 Premises and equipment, net 4,115,518 3,827,760 Federal Home Loan Bank stock, at cost 1,254,500 1,348,600 Real estate acquired in settlement of loans 358,120 165,170 Real estate held for development and sale 629,997 623,779 Other assets 2,656,767 2,817,090 --------------- -------------- Total Assets $ 244,482,508 $ 215,511,916 =============== ============== Liabilities and Stockholders' Equity Liabilities: Deposit accounts $ 200,780,281 $ 181,785,948 Advances from Federal Home Loan Bank 19,065,000 12,126,000 Other borrowed money 731,916 128,933 Advance payments by borrowers for taxes and insurance 195,741 266,128 Other liabilities 4,347,989 3,128,866 --------------- -------------- Total liabilities 225,120,927 197,435,875 --------------- -------------- 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, 842,100 at December 31, 1998 and 1,000,000 authorized and issued, 421,060 at March 31, 1998 8,421 4,211 Additional paid-in capital 3,993,733 3,997,943 Unrealized net gain on securities available for sale, net of income taxes 135,373 75,713 Retained earnings, substantially restricted 15,224,054 13,998,174 --------------- -------------- Total stockholders' equity 19,361,581 18,076,041 --------------- -------------- Total liabilities and stockholders' equity $ 244,482,508 $ 215,511,916 =============== ============== See accompanying notes to consolidated financial statements. 2 Security Federal Corporation and Subsidiary Consolidated Statements of Income (Unaudited) Three Months Ended December 31, ------------ 1998 1997 ---- ---- Interest income: Loans $ 3,190,024 $ 3,345,475 Mortgage-backed securities 213,763 81,655 Investment securities 840,174 911,362 Other 62,063 16,645 ------------ ------------- Total interest income 4,306,024 4,355,137 ------------ ------------- Interest expense: NOW and money market accounts 563,850 375,940 Passbook accounts 71,150 74,850 Certificate accounts 1,329,693 1,342,215 Advances and other borrowed money 242,526 393,073 ------------ ------------- Total interest expense 2,207,219 2,186,078 ------------ ------------- Net interest income 2,098,805 2,169,059 Provision for loan losses 150,000 240,000 ------------ ------------- Net interest income after provision for loan losses 1,948,805 1,929,059 Other income: ------------ ------------- Net gain on sale of investments 0 15,423 Gain on sale of loans 227,160 47,203 Loan servicing fees 80,446 86,139 Service fees on deposit accounts 227,174 224,681 Income from real estate operations 13,421 6,741 Other 145,577 93,347 ------------ ------------- Total other income 693,778 473,534 ------------ ------------- General and administrative expenses: Salaries and employee benefits 1,001,818 866,318 Occupancy 128,068 116,832 Advertising 62,423 86,488 Depreciation and maintenance of equipment 210,290 171,781 FDIC insurance premiums 19,133 18,848 Amortization of intangibles 116,310 116,310 Other 377,320 316,510 ------------ ------------- Total general and administrative expenses 1,915,362 1,693,087 ------------ ------------- (Continued) 3 Security Federal Corporation and Subsidiary Consolidated Statements of Income (Unaudited) Three Months Ended December 31, ------------ 1998 1997 ---- ---- Income before income taxes 727,221 709,506 Provision for income taxes 247,816 240,622 ------------ ------------- Net income $ 479,405 $ 468,884 ============ ============= Basic net income per common share $ 0.57 $ 0.56 ============ ============= Diluted net income per common share $ 0.57 $ 0.56 ============ ============= Cash dividend per share on common stock $ 0.04 $ 0.03 ============ ============= Basic weighted average shares outstanding 842,120 839,722 ============ ============= Diluted weighted average shares outstanding 847,268 842,172 ============ ============= Security Federal Corporation and Subsidiary Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended December 31, ------------ 1998 1997 ---- ---- Net Income $ 479,405 $ 468,884 Other comprehensive Income, net of tax Unrealized gains (losses) on securities: Unrealized holding gains (losses) During the period (153,051) 15,241 ----------- ------------- Comprehensive Income $ 326,354 $ 484,125 ============ ============= See accompanying notes to consolidated financial statements. 4 Security Federal Corporation and Subsidiary Consolidated Statements of Income (Unaudited) Nine Months Ended December 31, ------------ 1998 1997 ---- ---- Interest income: Loans $ 9,500,091 $ 10,008,676 Mortgage-backed securities 459,768 249,661 Investment securities 2,766,655 2,108,669 Other 107,825 54,722 ------------ ------------- Total interest income 12,834,339 12,421,728 ------------ ------------- Interest expense: NOW and money market accounts 1,511,292 869,519 Passbook accounts 219,515 226,673 Certificate accounts 3,889,835 3,873,926 Advances and other borrowed money 787,485 922,953 ------------ ------------- Total interest expense 6,408,127 5,893,071 ------------ ------------- Net interest income 6,426,212 6,528,657 Provision for loan losses 450,000 630,000 ------------ ------------- Net interest income after provision for Loan losses 5,976,212 5,898,657 Other income: ------------ ------------- Net gain on sale of investments 0 15,423 Gain on sale of loans 515,144 149,288 Loan servicing fees 242,363 259,539 Service fees on deposit accounts 640,022 659,452 Income from real estate operations 85,589 53,656 Other 430,536 338,267 ------------ ------------- Total other income 1,913,654 1,475,625 ------------ ------------- General and administrative expenses: Salaries and employee benefits 2,995,134 2,597,105 Occupancy 373,164 353,904 Advertising 302,400 272,486 Depreciation and maintenance of equipment 605,636 548,246 FDIC insurance premiums 58,674 57,440 Amortization of intangibles 348,930 348,930 Other 1,214,286 1,163,618 ------------ ------------- Total general and administrative expenses 5,898,224 5,341,729 ------------ ------------- (Continued) 5 Security Federal Corporation and Subsidiary Consolidated Statements of Income (Unaudited) Nine Months Ended December 31, ------------ 1998 1997 ---- ---- Income before income taxes 1,991,642 2,032,553 Provision for income taxes 681,550 708,605 ------------ ------------- Net income $ 1,310,092 $ 1,323,948 ============ ============= Basic net income per common share $ 1.56 $ 1.58 ============ ============= Diluted net income per common share $ 1.55 $ 1.58 ============ ============= Cash dividends per share on common stock $ 0.10 $ 0.09 ============ ============= Basic weighted average shares outstanding 842,120 836,076 ============ ============= Diluted weighted average shares outstanding 847,268 838,526 ============ ============= Security Federal Corporation and Subsidiary Consolidated Statements of Comprehensive Income (Unaudited) Nine Months Ended December 31, ------------ 1998 1997 ---- ---- Net Income $ 1,310,092 $ 1,323,948 Other comprehensive Income, net of tax Unrealized gains (losses) on securities: Unrealized holding gains (losses) during the period 59,660 214,484 ------------ ------------- Comprehensive Income $ 1,369,752 $ 1,538,432 ============ ============= 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, 1998 (Unaudited) Unrealized Net Gain On Additional Securities Common Paid-In Available Retained Stock Capital For Sale Earnings Total --------------------------------------------------------- Beginning Balance at March 31, 1997 $ 4,171 $ 3,958,603 $ (166,872) $ 12,386,127 $ 16,182,029 Net income ---- ---- ---- 1,712,629 1,712,629 Cash dividend ---- ---- ---- (100,582) (100,582) Exercise of stock options 40 39,340 ---- ---- 39,380 Decrease in unrealized net loss on securities available for sale, net of tax ---- ---- 242,585 ---- 242,585 --------------------------------------------------------- Beginning Balance at March 31, 1998 $ 4,211 $ 3,997,943 $ 75,713 $ 13,998,174 $ 18,076,041 Net income ---- ---- ---- 1,310,092 1,310,092 Cash dividend ---- ---- ---- (84,212) (84,212) Effect of stock split 4,210 (4,210) ---- ---- ---- Increase in unrealized net gain on securities available for sale, net of tax ---- ---- 59,660 ---- 59,660 --------------------------------------------------------- Ending balance December 31, 1998 $ 8,421 $ 3,993,733 $ 135,373 $ 15,224,054 $ 19,361,581 ========================================================= See accompanying notes to consolidated financial statements. 7 Security Federal Corporation and Subsidiary Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended December 31, ------------ 1998 1997 ---- ---- Cash flows from operating activities: Net Income $ 1,310,092 $ 1,323,948 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense 487,950 475,259 Amortization of purchase accounting adjustments 348,930 348,930 Discount accretion and premium amortization 7,918 (21,808) Provisions for losses on loans and real estate 450,000 630,000 Gain on sale of investments 0 (15,423) Gain on sale of loans (515,144) (149,288) Gain on sale of real estate (174,740) (99,418) Amortization of deferred fees on loans (161,746) (79,042) Proceeds from sale of loans held for sale 19,874,230 8,042,373 Origination of loans for sale (20,420,854) (8,321,489) (Increase) decrease in accrued interest Receivable: Loans 6,114 (1,301) Mortgage-backed securities (43,406) 12,036 Investments 20,705 (504,460) Decrease in advance payments by borrowers (70,387) (76,541) Other, net 994,013 (774,163) ------------ ------------- Net cash provided by operating activities $ 2,113,675 $ 789,613 ------------ ------------- Cash flows from investing activities Principal repayments on mortgage-backed securities held to maturity 625,586 275,692 Principal repayments on mortgage-backed securities available for sale 1,326,457 0 Proceeds from sale of investment securities available for sale 0 2,982,969 Purchase of investment securities available for sale (26,984,906) (45,367,500) Purchase of mortgage-backed securities available for sale (20,607,698) 0 Maturities of investment securities available for sale 25,592,610 9,500,000 Maturities of investment securities held to maturity 2,965,660 3,000,000 Purchase of FHLB Stock 0 (695,200) Redemption of FHLB Stock 94,100 0 (Increase) decrease in loans to customers (9,165,867) 6,012,303 Investment in real estate held for development (353,179) (159,442) Proceeds from sale of real estate held for development 432,550 274,720 Proceeds from sale of real estate acquired through foreclosure 568,305 218,184 Purchase of premises and equipment (782,708) (454,189) Proceeds from sales of premises and equipment 7,000 0 ------------ ------------- Net cash used by investing activities $(26,282,090) $ (24,412,463) ------------ ------------- (Continued) 8 Security Federal Corporation and Subsidiary Consolidated Statements of Cash Flows (Unaudited) (Continued) Nine Months Ended December 31, ------------ 1998 1997 ---- ---- Cash flows from financing activities: Increase (decrease) in deposit accounts $ 18,994,333 $ 8,467,921 Proceeds from FHLB advances 66,000,000 97,940,000 Repayment of FHLB advances (59,061,000) (83,786,000) Proceeds of other borrowings 662,568 0 Repayment of other borrowings (59,585) (49,814) Exercise of stock options 0 39,380 Dividends to shareholders (84,212) (75,318) ------------ ------------- Net cash provided by financing activities $ 26,452,104 $ 22,536,169 ------------ ------------- Net increase (decrease) in cash and cash equivalents 2,283,689 (1,086,681) Cash and cash equivalents at beginning of period 4,658,681 7,903,637 ------------ ------------- Cash and cash equivalents at end of period $ 6,942,370 $ 6,816,956 ============ ============= Supplemental disclosure of cash flow information: Cash paid during the period for : Interest $ 6,202,346 $ 5,893,071 Income taxes $ 557,806 $ 816,500 Additions to real estate acquired through foreclosure $ 672,104 $ 182,948 Increase in unrealized net gain on securities available for sale, net of taxes $ 59,660 $ 214,484 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, 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 December 31, 1998 and March 31, 1998, consisted of the following: Loans held for sale were $2,293,949 and $1,232,181 at December 31, 1998 and March 31, 1998 respectively. Loans held for investment: December 31, 1998 March 31, 1998 ----------------- -------------- Residential real estate $ 57,719,510 $ 46,450,206 Consumer 43,952,317 46,499,200 Commercial real estate 3,220,201 3,955,462 Commercial business 48,387,202 44,500,079 ----------------- ------------- $ 153,279,230 $ 141,404,947 ----------------- ------------- Less: Allowance for possible loan loss $ 1,696,274 $ 1,512,038 Loans in process 6,711,213 3,175,684 Deferred loan fees 173,982 224,973 ----------------- ------------- 8,581,469 4,912,695 ----------------- ------------- $ 144,697,761 $ 136,492,252 ================= ============= The following is a reconciliation of the allowance for loan losses for the nine months ending: December 31, 1998 December 31, 1997 ----------------- ----------------- Beginning balance $ 1,512,038 $ 1,767,483 Provision 450,000 630,000 Charge-offs (291,537) (571,558) Recoveries 25,773 96,017 ----------------- ------------- Ending balance $ 1,696,274 $ 1,921,942 ================= ============= 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: December 31, 1998 - ----------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- US Government and Agency Obligations $ 905,579 $ 11,802 $ 0 $ 917,381 Mortgage-backed securities 3,725,970 68,146 0 3,794,116 ----------- -------- --------- ---------- Total $ 4,631,549 $ 79,948 $ 0 $4,711,497 =========== ======== ========= ========== 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: December 31, 1998 - ----------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- US Government and Agency Obligations $55,889,518 $381,723 $ 117,259 $56,153,982 Mortgage-backed securities 19,244,307 12,971 59,170 19,198,108 ----------- -------- --------- ----------- Total $75,133,825 $394,694 $ 176,429 $75,352,090 =========== ======== ========= =========== 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: December 31, 1998 March 31, 1998 ----------------- -------------- Demand Accounts: Balance Rate Balance Rate ------- ---- ------- ---- Checking $ 51,121,529 0.84% $ 47,414,160 1.09% Money Market 38,811,601 4.85% 27,902,091 4.67% Regular Savings 11,141,369 2.46% 12,328,146 2.44% ------------- ---- ------------- ---- Total demand accounts $ 101,074,499 2.56% $ 87,644,397 2.42% ------------- ---- ------------- ---- Certificate Accounts: 0 - 4.99% $ 15,928,013 $ 3,086,511 5.00 - 6.99% 83,639,957 90,919,998 7.00 - 8.99% 137,812 135,042 ------------- ------------- Total certificate accounts 99,705,782 5.38% 94,141,551 5.50% ------------- ---- ------------- ---- Total deposit accounts $ 200,780,281 3.96% $ 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: Fiscal Year Due December 31, 1998 March 31, 1998 - --------------- ----------------- -------------- Balance Rate Balance Rate ------- ---- ------- ---- 1999 $ 490,000 8.65% $ 5,490,000 6.06% 2000 4,503,000 5.36% 528,000 8.70% 2001 856,000 8.75% 856,000 8.75% 2002 0 0% 0 0% thereafter 13,216,000 5.52% 5,252,000 5.80% ------------- ---- ------------- ---- $ 19,065,000 5.71% $ 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) December 31, 1998 March 31, 1998 ----------------- -------------- Bank's Stockholders' Equity $ 18,650 $ 17,294 Unrealized loss (gain) on available for sale securities, net of tax (135) (76) Reduction for goodwill and other intangibles (1,697) (2,046) -------------- -------------- Tangible capital 16,818 15,172 Qualifying core deposits and intangible assets 695 789 -------------- -------------- Core capital 17,513 15,961 Supplemental capital 1,513 1,512 -------------- -------------- Risk-based capital $ 19,026 $ 17,473 ============== ============== The following table compares the Bank's capital levels relative to the applicable regulatory requirements at December 31, 1998. (Dollars in thousands) Amount Percent Actual Excess Required Required Amount Percent Excess Percent -------- -------- ------ ------- ------ ------- Tangible capital $ 4,855 2.0% $16,818 6.93% $11,963 4.93% Tier 1 Leverage (Core) capital 9,738 4.0% 17,513 7.19% 7,775 3.19% Total Risk-based capital 12,242 8.0% 19,026 12.43% 6,784 4.43% Tier 1 Risk-based (Core) capital 6,121 4.0% 17,513 11.44% 11,392 7.44% 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, 1998 Tier 1 Risk- based Core Capital $17,513 11.4% $6,121 4.0% $9,182 6.0% Risk-based Capital 19,026 12.4 12,242 8.0 15,303 10.0 (to risk weighted assets) Core Capital 17,513 7.2 9,738 4.0 12,172 5.0 (to adjusted tangible assets) Tangible Capital 16,818 6.9 4,855 2.0 12,138 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 $29.0 million during the nine months ended December 31, 1998, primarily due to increases of $9.3 million in total net loans receivable, $17.2 million in investment securities, and $2.3 million in cash and cash equivalents. Funded residential real estate loans increased $8.8 million during the period while other loans increased only $600,000. Combined with higher coupon loans prepaying, this led to a decrease in the overall yield in the loan portfolio. Real estate acquired in settlement of loans (REO) increased $193,000 while real estate acquired for development increased $6,000 during the nine-month period. Deposits increased $19.0 million or 10.5% during the nine months ended December 31, 1998 as Federal Home Loan Bank (FHLB) advances grew $6.9 million to fund the Company's 13.4% growth in assets. The Board of Directors declared the thirtieth, thirty-first, and thirty-second consecutive quarterly dividend of $.03, $.03, and $.04 per share in May, August, and November 1998, respectively, which totaled $84,000. Unrealized net gains on securities available for sale increased $60,000 during the nine months ended December 31, 1998. Net income for the nine months was $1.3 million for the Company. These items combined to increase the stockholders' equity by $1.3 million or 7.1% during the nine months ended December 31, 1998 and raised book value per share to $22.99 compared to $21.46 at March 31, 1998. 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 was accomplished through a 100 percent stock dividend that was issued on or about December 15, 1998 to shareholders of record as of November 30, 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 nine months ended December 31, 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 nine months ended December 31, 1998, loan disbursements exceeded loan repayments resulting in a $9.3 million or 6.7% increase 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, 1998, deposits increased $19.0 million while FHLB advances increased $6.9 million. At December 31, 1998, Security Federal had $74.0 million of certificates of deposit maturing within one year. Based on previous experience, a major portion of these certificates is anticipated to be renewed. Liquidity resources at December 31, 1998 are sufficient to meet outstanding mortgage loan commitments of $875,000 and unused lines of credit of $22.2 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 occurred in December 1998. The test is currently being evaluated but is thought to have been successful. The Bank's contingency plan has been completed and is in the process of being tested and evaluated. 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. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 - ------------------------------------------------------------------ NET INCOME Net income was $479,000 for the three months ended December 31, 1998, which represents an increase in earnings of $11,000 or 2.2% compared to the same period in 1997. Net Interest Income Net interest income decreased $70,000 or 3.2% during the three months ended December 31, 1998 due to a decrease in total interest income and a slight increase in interest expense. Interest income on loans decreased $155,000 or 4.7% during the quarter as the overall yield in the loan portfolio decreased from the previous year's quarter. Investment, mortgage-backed, and other securities interest income increased $106,000 or 10.5% during the three months ended December 31, 1998 due to an increase in the average balance in the investment portfolio despite a nine basis points decline in the average yield in the portfolio. Total interest income fell $49,000 or 1.1% during the three months ended December 31, 1998 compared to the same period in 1997. Total interest expense increased $21,000 or 13.0% during the three months ended December 31, 1998 compared to the same period one-year earlier. Interest expense on deposits increased $172,000 or 9.6% during the period as deposits grew significantly compared to the average balance in 1997 despite the overall cost of deposits declining nine basis points in the 1998 quarter. Interest expense on advances and other borrowings decreased $151,000 during the three-months ended December 31, 1998 as the average amount of debt outstanding decreased in the 1998 period compared to 1997 as the overall cost of debt also decreased during the period. 16 Security Federal Corporation and Subsidiary Management's Discussion and Analysis of Results of Operations and Financial Condition Provision for Loan Losses Security Federal's provision for loan losses decreased $90,000 during the three months ended December 31, 1998 compared to the three months ended December 31,1997 due to management's continual analysis of the loan portfolio. Non-accrual loans, which are loans delinquent 90 days or more, were $1.2 million at December 31, 1998 compared to $2.0 million at March 31, 1998. The ratio of allowance for loan losses to the Bank's total loans was 1.14% at December 31, 1998 compared to 1.09% at March 31, 1998. Other Income Total other income increased $220,000 during the three months ended December 31, 1998 compared to the same period one year earlier. Gain on sale of loans increased $180,000 during the period as the origination and sale of fixed rate mortgages increased dramatically due to the relatively low interest rate environment and an increase in the emphasis on the origination of mortgage loans. The net gain on sale of investments decreased $15,000 during the period while loan-servicing fees decreased $6,000 or 6.6% as the portfolio of loans serviced for others decreased. Service fees on deposit accounts grew $2,000 and income from real estate operations stemming from the Willow Woods partnership increased $7,000. Other miscellaneous income including 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 increased $52,000 during the three months ended December 31, 1998. General and Administrative Expenses General and administrative expenses increased $222,000 or 13.1% during the three months ended December 31, 1998 compared to the same period in 1997 due mainly to an increase in salaries and employee benefits. Salaries and employee benefits expense grew $136,000 or 15.6% due to an increase in staff in customer service positions and an increase in staffing to handle the increase in volume of mortgage loans. Occupancy expense increased $11,000 or 9.6% during the period. Advertising decreased $24,000 while the depreciation and maintenance of equipment expense increased $38,000 during the quarterly period. FDIC insurance premiums were virtually constant at $19,000 during both years as were the amortization of intangible expense of $116,000 during the three months December 31 in both 1998 and 1997. Other miscellaneous expense, consisting of legal, professional, and consulting expense, stationery and office supplies, and other sundry expenses, increased $61,000 during the period due mainly to an increase in repossessed assets expense. RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 - ----------------------------------------------------------------- Net Income Net income was $1,310,000 for the nine months ended December 31, 1998 that was a $14,000 or 1.1% decrease in earnings compared to the same period in 1997. The decrease was due to an increase in general and administrative expenses and a decrease in net interest income, offset in part by an increase in other income and a decrease in the provision for loan losses. 17 Security Federal Corporation and Subsidiary Management's Discussion and Analysis of Results of Operations and Financial Condition Net Interest Income Net interest income decreased $102,000 or 1.6% during the nine months ended December 31, 1998 due primarily to a decrease in interest income on loans and an increase in interest expense offset partially by an increase in interest income on investments, mortgage-backed, and other securities during the period. Interest income on loans decreased $509,000 or 5.1% as the average balance and the average yield of the loan portfolio both decreased. Investment, mortgage-backed, and other investment securities interest income increased $921,000 as the size of the investment portfolio increased as the average overall yield in the portfolio was practically identical in both periods. Total interest expense increased $515,000 or 8.7% during the nine months ended December 31, 1998 compared to the same nine months in 1997. Interest expense on deposits increased $651,000 or 13.1% due to significant deposit growth. Interest expense on advances and other borrowings decreased $135,000 during the period due to a decrease in borrowings and a slight decrease in the cost of debt. Provision for Loan Losses The provision for loan losses decreased $180,000 during the nine months ended December 31, 1998 due to management's analysis of the Bank's total loan portfolio. Net charge-offs were $266,000 for the nine months ended December 31, 1998 compared to $476,000 for the same period in the prior fiscal year. 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. Other Income Total other income increased $438,000 or 29.7% during the nine months ended December 31, 1998 due primarily to an increase in the gain on sale of loans. Gain on sale of loans increased $366,000 during the period due to an increase in the origination and sale of fixed rate mortgage loans. The net gain on sale of investments decreased $15,000 while loan servicing fees decreased $17,000 due to the shrinkage in loans serviced for others. The majority of fixed rate loans sold during the period were sold with servicing released. Service fees on deposit accounts dropped $19,000 or 3.0% while income from real estate operations in the Willow Woods partnership increased $32,000 as the number of lots sold increased during the period. Other miscellaneous income increased $51,000 or 4.4% during the nine months ended December 31, 1998 compared to the nine months ended December 31, 1997. General and Administrative Expenses General and administrative expenses increased $556,000 or 10.4% primarily due to an increase in salaries and employee benefits expense during the nine months ended December 31, 1998. Salaries and employee benefits expense increased $398,000 or 15.3% over the same period in the previous fiscal year due to normal annual increases and an increase in the number of customer contact associates and an increase in staff in mortgage loans to handle the increase in loan volume. Occupancy expense increased $19,000 or 5.4% while advertising expense increased $30,000 or 11.0%. Depreciation and maintenance of equipment increased $57,000 or 10.5% during the period. FDIC insurance premiums increased $1,000 or 2.2% while the amortization of intangibles expense was the same in both periods at $349,000. Other miscellaneous expense increased $51,000 or 4.4% during the nine months ended December 31, 1998 compared to the same period in 1997. 18 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 --------------------------------------------------- None Item 5 Other Information ----------------- None Item 6 Exhibits and Reports on Form 8-K -------------------------------- 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 * 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: February 11, 1999 By: /s/ Roy G. Lindburg ----------------- ------------------------------ Roy G. Lindburg Treasurer/CFO Duly Authorized Representative 20 EX-27 2
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