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, 1999
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)
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: $0.01 PAR VALUE:
------ ---------------------- ----------------
Common Stock December 31, 1999 837,120
INDEX
Security Federal Corporation and Subsidiaries
==============================================================================
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statement of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis Results of Operations
and Financial Condition 11
==============================================================================
PART II. OTHER INFORMATION
Other Information 16
Signatures 17
Exhibit 27
==============================================================================
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.
i
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 1999 March 31, 1999
----------------- --------------
Assets: (Unaudited) (Audited)
Cash and Cash Equivalents $ 10,100,464 $ 6,951,347
Investment And Mortgage-Backed
Securities:
Available For Sale: (Amortized cost
of $89,062,912
at December 31,
1999 and $82,240,153
at March 31, 1999) 86,763,559 82,035,772
Held To Maturity: (Fair value of
$2,694,346 at
December 31, 1999
and $3,579,500 at
March 31, 1999) 2,751,292 3,532,863
Loans Receivable Net:
Held For Sale 1,094,637 1,604,300
Held For Investment:(Net of allowance of
$1,993,132 at
December 31, 1999 and
$1,715,068 at March
31, 1999) 182,837,156 150,381,301
----------------- --------------
$ 183,931,793 $ 151,985,601
----------------- --------------
Accrued Interest Receivable:
Loans 783,214 657,153
Mortgage-Backed Securities 197,878 146,739
Investments 641,086 803,696
Premises And Equipment, Net 4,103,374 4,198,774
Federal Home Loan Bank Stock, At Cost 2,425,700 1,245,000
Real Estate Acquired In Settlement
Of Loans 144,143 154,143
Real Estate Held For Development And Sale 408,958 552,111
Other Assets 3,248,112 2,454,724
----------------- --------------
Total Assets $ 295,499,573 $ 254,717,923
================= ==============
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $ 223,830,690 $ 216,532,683
Advances From Federal Home Loan Bank 47,314,000 14,600,000
Other Borrowed Money 1,411,852 869,270
Advance Payments By Borrowers For
Taxes and Insurance 234,600 274,067
Other Liabilities 3,252,261 2,881,461
----------------- --------------
Total Liabilities $ 276,043,403 $ 235,157,481
----------------- --------------
Shareholders' Equity:
Serial Preferred Stock, $.01 Par
Value; Authorized Shares - 200,000
Issued; Outstanding Shares - None
Common Stock, $.01 Par Value;
Authorized Shares - 5,000,000 Issued;
Outstanding Shares - 837,120 At
December 31, 1999 And 842,120 At
March 31, 1999 $ 8,421 $ 8,421
Additional Paid-In Capital 3,993,733 3,993,733
Indirect Guarantee of Employee Stock
Ownership Trust Debt (186,803) 0
Accumulated Other Comprehensive Loss (1,426,519) (127,738)
Retained Earnings, Substantially
Restricted 17,067,338 15,686,026
----------------- --------------
Total Shareholders' Equity $ 19,456,170 $ 19,560,442
----------------- --------------
Total Liabilities And Shareholders'
Equity $ 295,499,573 $ 254,717,923
================= ==============
See accompanying notes to consolidated financial statements.
1
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended December 31,
--------------------------------
1999 1998
--------------- ---------------
Interest Income:
Loans $ 3,647,245 $ 3,190,024
Mortgage-Backed Securities 576,026 213,763
Investment Securities 824,813 840,174
Other 12,814 62,063
--------------- ---------------
Total Interest Income $ 5,060,898 $ 4,306,024
--------------- ---------------
Interest Expense:
NOW And Money Market Accounts 726,512 563,850
Passbook Accounts 79,391 71,150
Certificate Accounts 1,356,829 1,329,693
Advances And Other Borrowed Money 542,384 242,526
--------------- ---------------
Total Interest Expense $ 2,705,116 $ 2,207,219
--------------- ---------------
Net Interest Income 2,355,782 2,098,805
Provision For Loan Losses 175,000 150,000
Net Interest Income After --------------- ---------------
Provision For Loan Losses $ 2,180,782 $ 1,948,805
Other Income: --------------- ---------------
Net Gain On Sale Of Investments 0 0
Gain On Sale Of Loans 71,302 227,160
Loan Servicing Fees 70,438 80,446
Service Fees On Deposit Accounts 305,332 227,174
Income From Real Estate Operations 6,063 13,421
Other 129,396 145,577
--------------- ---------------
Total Other Income $ 582,531 $ 693,778
--------------- ---------------
General And Administrative Expenses:
Salaries And Employee Benefits 1,027,533 1,001,818
Occupancy 133,876 128,068
Advertising 50,301 62,423
Depreciation And Maintenance Of
Equipment 230,560 210,290
FDIC Insurance Premiums 23,406 19,133
Amortization Of Intangibles 116,310 116,310
Other 402,824 377,320
--------------- ---------------
Total General And Administrative
Expenses $ 1,984,810 $ 1,915,362
--------------- ---------------
Income Before Income Taxes 778,503 727,221
Provision For Income Taxes 280,499 247,816
--------------- ---------------
Net Income $ 498,004 $ 479,405
=============== ===============
Basic Net Income Per Common Share $ 0.59 $ 0.57
=============== ===============
Diluted Net Income Per Common Share $ 0.59 $ 0.57
=============== ===============
Cash Dividend Per Share On Common Stock $ 0.04 $ 0.04
=============== ===============
Basic Weighted Average Shares
Outstanding 837,120 842,120
Diluted Weighted Average Shares =============== ===============
Outstanding 845,917 847,268
=============== ===============
See accompanying notes to consolidated financial statements.
2
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Nine Months Ended December 31,
--------------------------------
1999 1998
--------------- ---------------
Interest Income:
Loans $ 10,236,015 $ 9,500,091
Mortgage-Backed Securities 1,514,499 459,768
Investment Securities 2,576,080 2,766,655
Other 51,560 107,825
--------------- ---------------
Total Interest Income $ 14,378,154 $ 12,834,339
--------------- ---------------
Interest Expense:
NOW And Money Market Accounts 2,129,046 1,511,292
Passbook Accounts 239,429 219,515
Certificate Accounts 3,968,501 3,889,835
Advances And Other Borrowed Money 1,171,592 787,485
--------------- ---------------
Total Interest Expense $ 7,508,568 $ 6,408,127
--------------- ---------------
Net Interest Income 6,869,586 6,426,212
Provision For Loan Losses 475,000 450,000
Net Interest Income After Provision --------------- ---------------
For Loan Losses $ 6,394,586 $ 5,976,212
--------------- ---------------
Other Income:
Net Gain On Sale Of Investments 3,022 0
Gain On Sale Of Loans 256,238 515,144
Loan Servicing Fees 215,506 242,363
Service Fees On Deposit Accounts 809,938 640,022
Income From Real Estate Operations 110,762 85,589
Other 393,285 430,536
--------------- ---------------
Total Other Income $ 1,788,751 $ 1,913,654
--------------- ---------------
General And Administrative Expenses:
Salaries And Employee Benefits 3,130,931 2,995,134
Occupancy 390,974 373,164
Advertising 118,407 302,400
Depreciation And Maintenance Of
Equipment 673,359 605,636
FDIC Insurance Premiums 67,019 58,674
Amortization Of Intangibles 348,930 348,930
Other 1,174,254 1,214,286
--------------- ---------------
Total General And Administrative
Expenses $ 5,903,874 $ 5,898,224
--------------- ---------------
Income Before Income Taxes 2,279,463 1,991,642
Provision For Income Taxes 797,097 681,550
--------------- ---------------
Net Income $ 1,482,366 $ 1,310,092
=============== ===============
Basic Net Income Per Common Share $ 1.77 $ 1.56
=============== ===============
Diluted Net Income Per Common Share $ 1.76 $ 1.55
=============== ===============
Cash Dividend Per Share On Common Stock $ 0.12 $ 0.10
=============== ===============
Basic Weighted Average Shares
Outstanding 838,775 842,120
=============== ===============
Diluted Weighted Average Shares
Outstanding 842,883 847,268
=============== ===============
See accompanying notes to consolidated financial statements.
3
Security Federal Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity (Unaudited)
Accumu-
lated
Other
Indirect Compre-
Additional Guarantee hensive
Common Paid-In of Income Retained
Stock Capital ESOP Debt (Loss) Earnings Total
-------- ---------- ---------- ---------- ------------ ------------
Beginning Balance At
March 31, 1998 $ 4,211 $3,997,943 $ 0 75,713 $ 13,998,174 $ 18,076,041
Net Income 0 0 0 0 1,310,092 1,310,092
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Losses On Securities
Available For Sale 0 0 0 59,660 0 59,660
------------
Comprehensive Income 1,369,752
Effect of Stock Split 4,210 (4,210)
Cash Dividends 0 0 0 0 (84,212) (84,212)
-------- ---------- ---------- ---------- ------------ ------------
Balance At
December 31, 1998 $ 8,421 $3,993,733 $ 0 $ 135,373 $ 15,224,054 $ 19,361,581
======== ========== ========== ========== ============ ============
Beginning Balance At
March 31, 1999 $ 8,421 $3,993,733 $ 0 (127,738) $ 15,686,026 $ 19,560,442
Net Income 0 0 0 0 1,482,366 1,482,366
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Losses On Securities
Available For Sale 0 0 0 (1,298,781) 0 (1,298,781)
------------
Comprehensive Income 183,585
Increase in Indirect
Guarantee of ESOP Debt (186,803) (186,803)
Cash Dividends 0 0 0 0 (101,054) (101,054)
-------- ---------- ---------- ---------- ------------ ------------
Balance at
December 31, 1999 $ 8,421 $3,993,733 $ (186,803) (1,426,519) $ 17,067,338 $ 19,456,170
======== ========== ========== ========== ============ ============
See accompanying notes to consolidated financial statements.
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended December 31,
-------------------------------
1999 1998
--------------- ---------------
Cash Flows From Operating Activities:
Net Income $ 1,482,366 $ 1,310,092
Adjustments To Reconcile Net Income
To Net Cash Provided By Operating
Activities:
Depreciation Expense $ 583,431 $ 487,950
Amortization Of Intangibles 348,930 348,930
Discount Accretion And Premium
Amortization 132,338 7,918
Provisions For Losses On Loans And
Real Estate 475,000 450,000
Gain On Sale Of Securities Available
For Sale (3,022) 0
Gain On Sale Of Loans (256,238) (515,144)
Gain On Sale Of Real Estate (110,762) (174,740)
Amortization Of Deferred Fees On Loans (38,016) (161,746)
Proceeds From Sale Of Loans Held For Sale 13,643,214 19,874,230
Origination Of Loans For Sale (12,877,313) (20,420,854)
(Increase) Decrease In Accrued Interest
Receivable:
Loans (126,061) 6,114
Mortgage-Backed Securities (51,139) (43,406)
Investments 162,610 20,705
Increase In Advance Payments By Borrowers (39,467) (70,387)
Loss On Disposition Of Premises And
Equipment 6,538 0
Other, Net (162,130) 994,013
--------------- ---------------
Net Cash Provided By Operating
Activities $ 3,170,279 $ 2,113,675
--------------- ---------------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-
Backed Securities Held To Maturity 708,897 $ 625,586
Principal Repayments On Mortgage-
Backed Securities Available For Sale 5,468,357 1,326,457
Purchase Of Investment Securities
Available For Sale (10,953,938) (26,984,906)
Purchase Of Mortgage-Backed Securities
Available For Sale (14,796,335) (20,607,698)
Maturities Of Investment Securities
Available For Sale 11,828,978 25,592,610
Maturities Of Investment Securities
Held To Maturity 71,115 2,965,660
Proceeds From Sale of Securities
Available For Sale 1,502,422 0
Purchase Of FHLB Stock (2,593,500) 0
Redemption Of FHLB Stock 1,412,800 94,100
Increase In Loans To Customers (32,913,839) (9,165,867)
Investment In Real Estate Held For
Development (482,703) (353,179)
Proceeds From Sale Of Real Estate Held
For Development 736,618 432,550
Proceeds From Sale Of Real Estate
Acquired Through Foreclosure 31,000 568,305
Purchase And Improvement Of Premises
And Equipment (504,744) (782,708)
Proceeds From Sale Of Premises And
Equipment 10,175 7,000
--------------- ---------------
Net Cash Used By Investing Activities $ (40,474,697) $ (26,282,090)
--------------- ---------------
Cash Flows From Financing Activities:
Increase In Deposit Accounts $ 7,298,007 $ 18,994,333
Proceeds From FHLB Advances 122,825,000 66,000,000
Repayment Of FHLB Advances (90,111,000) (59,061,000)
Proceeds Of Other Borrowings 577,347 662,568
Repayment Of Other Borrowings (34,765) (59,585)
Dividends To Shareholders (101,054) (84,212)
--------------- ---------------
Net Cash Provided By Financing
Activities $ 40,453,535 $ 26,452,104
--------------- ---------------
(Continued)
5
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended December 31,
-------------------------------
1999 1998
--------------- ---------------
Net Increase (Decrease) In Cash And
Cash Equivalents $ 3,149,117 $ 2,283,689
Cash And Cash Equivalents At
Beginning Of Period 6,951,347 4,658,681
Cash And Cash Equivalents At End Of --------------- ---------------
Period $ 10,100,464 $ 6,942,370
=============== ===============
Supplemental Disclosure Of Cash Flows
Information:
Cash Paid During The Period For
Interest $ 7,432,649 $ 6,202,349
Cash Paid During The Period For
Income Taxes $ 951,350 $ 557,806
Additions To Real Estate Acquired
Through Foreclosure $ 21,000 $ 672,104
Increase (Decrease) In Unrealized
Net Loss On Securities Available
For Sale, Net Of Taxes $ 1,298,781 $ (59,660)
See accompanying notes to consolidated financial statements.
6
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions from Form 10-QSB and generally accepted
accounting principles; therefore, they do not include all disclosures
necessary for a complete presentation of financial condition, results of
operations, and cash flows. Such statements are unaudited but, in the opinion
of Management, reflect all adjustments, all of which are of a normal recurring
nature and necessary for a fair presentation of results for the selected
interim periods. Users of financial information produced for interim periods
are encouraged to refer to the footnotes contained in the Annual Report to
Shareholders when reviewing interim financial statements. The results of
operations for the three and nine-month periods ended December 31, 1999 are
not necessarily indicative of the results that 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. Management cautions readers of Form 10-QSB not to place undue
reliance on forward-looking statements contained herein.
2. Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Security Federal Corporation (the "Company") and its wholly owned
subsidiary, Security Federal Bank (the "Bank"), and the Bank's wholly owned
subsidiary, Security Financial Services Corporation ("SFSC"). SFSC engages
primarily in investment brokerage services. Also included in the
consolidation is a real estate partnership.
3. Loans Receivable, Net
Loans Receivable, Net, at December 31, 1999 and March 31, 1999 consisted of
the following: Loans held for sale were $1,094,637 and $1,604,300 at December
31, 1999 and March 31, 1999 respectively.
Loans Held For Investment: December 31, 1999 March 31, 1999
----------------- ----------------
Residential Real Estate $ 93,237,326 $ 65,489,233
Consumer 41,325,793 41,631,602
----------------- ----------------
Commercial Business & Real Estate 60,106,361 52,325,690
----------------- ----------------
$ 194,669,480 $ 159,446,525
----------------- ----------------
Less:
Allowance For Possible Loan Loss 1,993,132 1,715,068
Loans In Process 9,563,647 7,150,607
Deferred Loan Fees 275,545 199,549
----------------- ----------------
$ 11,832,324 $ 9,065,224
----------------- ----------------
$ 182,837,156 $ 150,381,301
================= ================
The following is a reconciliation of the allowance for loan losses for the
nine months ending:
December 31, 1999 December 31, 1998
----------------- -----------------
Beginning Balance $ 1,715,068 $ 1,512,038
Provision 475,000 450,000
Charge-offs (228,306) (291,537)
Recoveries 31,370 25,773
----------------- -----------------
Ending Balance $ 1,993,132 $ 1,696,274
================= =================
7
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
4. Securities
Investment and Mortgage-Backed Securities, Held to Maturity The amortized
cost, gross unrealized gains, gross unrealized losses, and fair values of
investment and mortgage-backed securities held to maturity are as follows:
Gross Gross
December 31, 1999 Amortized Unrealized Unrealized
- ------------------ Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
U.S. Government and
Agency Obligations $ 265,707 $ 3,499 $ 0 $ 269,206
Mortgage-Backed Securities 2,485,585 4,167 64,612 2,425,140
---------- ---------- ---------- ----------
Total $2,751,292 $ 7,666 $ 64,612 $2,694,346
========== ========== ========== ==========
March 31, 1999
- --------------
U.S. Government and
Agency Obligations $ 336,822 $ 542 $ 0 $ 337,364
Mortgage-Backed Securities 3,196,041 46,652 557 3,242,136
---------- ---------- ---------- ----------
Total $3,532,863 $ 47,194 $ 557 $3,579,500
========== ========== ========== ==========
Investment And Mortgage-Backed Securities, Available For Sale
- -------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities available for sale are as
follows:
Gross Gross
December 31, 1999 Amortized Unrealized Unrealized
- ------------------ Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
U.S. Government and
Agency Obligations $54,883,039 $ 4,849 $1,479,193 $53,408,695
Mortgage-Backed
Securities 34,179,873 10,659 835,668 33,354,864
----------- ---------- ---------- -----------
Total $89,062,912 $ 15,508 $2,314,861 $86,763,559
=========== ========== ========== ===========
March 31, 1999
- --------------
U.S. Government and
Agency Obligations $57,459,009 $ 165,373 $ 264,488 $57,359,894
Mortgage-Backed
Securities 24,781,144 23,850 129,116 24,675,878
----------- ---------- ---------- -----------
Total $82,240,153 $ 189,223 $ 393,604 $82,035,772
=========== ========== ========== ===========
8
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
5. Deposits
A summary of deposit accounts by type with weighted average rates is as
follows:
December 31, 1999 March 31, 1999
-------------------- --------------------
Demand Accounts: Balance Rate Balance Rate
-------------------- --------------------
Checking $ 53,964,898 0.82% $ 53,435,702 0.84%
Money Market 51,936,987 4.59% 49,369,915 4.70%
Regular Savings 12,417,801 2.50% 11,847,962 2.47%
------------ ------------
Total Demand Accounts $118,319,686 2.65% $114,653,579 2.67%
============ ============
Certificate Accounts:
0 - 4.99% $ 28,476,543 $ 31,100,943
5.00 - 6.99% 76,894,023 70,640,349
7.00 - 8.99% 140,438 137,812
------------ ------------
Total Certificate Accounts $105,511,004 5.20% $101,879,104 5.18%
============ ============
Total Deposit Accounts $223,830,690 3.85% $216,532,683 3.85%
============ ============
6. Federal Home Loan Bank Advances
FHLB Advances are summarized by year of maturity and weighted average interest
rate in the table below:
December 31, 1999 March 31, 1999
-------------------- --------------------
Balance Rate Balance Rate
Fiscal Year Due: -------------------- --------------------
2000 $ 528,000 8.70% $ 528,000 8.70%
2001 41,606,000 5.51% 856,000 8.75%
2002 5,000,000 5.71% 0 0%
2003 0 0 5,000,000 5.69%
Thereafter 180,000 7.97% 8,216,000 5.42%
------------ ------------
Total Advances $ 47,314,000 5.58% $ 14,600,000 5.82%
============ ============
7. Regulatory Matters
The following table reconciles the Bank's Shareholders' equity to its various
regulatory capital positions:
December 31, 1999 March 31, 1999
------------------ --------------
(Dollars in Thousands)
------------------------------------
Bank's Shareholders' Equity $ 19,048 $ 18,879
Unrealized Loss On Available For
Sale Of Securities, Net Of Tax 1,427 128
Reduction For Goodwill And Other
Intangibles (1,232) (1,581)
------------------ --------------
Tangible Capital 19,243 17,426
Qualifying Core Deposits And
Intangible Assets 585 664
------------------ --------------
Core Capital 19,828 18,090
Supplementary Capital 1,992 1,715
Assets Required To Be Deducted (53) 0
------------------ --------------
Risk-Based Capital $ 21,767 $ 19,805
================== ==============
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at December 31, 1999:
(Dollars in Thousands)
-------------------------------------------------------
Amt. % Actual Actual Excess Excess
Required Required Amt. % Amt. %
-------------------------------------------------------
Tangible Capital $ 5,908 2.0% $19,243 6.51% $13,335 4.51%
Tier 1 Leverage
(Core) Capital 11,839 4.0% 19,828 6.70% 7,989 2.70%
Total Risk-Based
Capital 13,681 8.0% 21,767 12.73% 8,086 4.73%
Tier 1 Risk-Based
(Core) Capital 6,840 4.0% 19,828 11.59% 12,988 7.59%
9
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
7. Regulatory Matters, Continued
The Company's regulatory capital amounts and ratios at December 31, 1999 are
as follows:
To Be
Well Capitalized
For Under Prompt
Capital Adequacy Corrective Action
Actual Purposes Provisions
-------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------
Tier I Risk-Based
Core Capital $19,828 11.6% $ 6,840 4.0% $10,260 6.0%
Risk-Based Capital
(To Risk Weighted
Assets) 21,767 12.7% 13,681 8.0% 17,101 10.0%
Core Capital (To
Adjusted Tangible
Assets) 19,828 6.7% 11,839 4.0% 14,799 5.0%
Tangible Capital
(To Tangible Assets) 19,243 6.5% 5,908 2.0% 14,770 5.0%
10
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Changes in Financial Condition
Total assets of the Company increased $40.8 million during the nine months
ended December 31, 1999, due primarily to increases of $31.9 million or 21.0%
in total net loans receivable, $3.9 million or 4.6% in total investment
securities, and an increase of $3.1 million in cash and cash equivalents.
The increase in cash and cash equivalents at December 31, 1999, was in
accordance with the Company's Y2K plan to have a reserve of cash for customer
demands during the century date rollover. Cash demands were actually modest
and excess cash has subsequently been reduced.
Residential real estate loans, net of loans in process, increased $25.3
million or 43.4% during the period while other loans increased $7.5 million or
8.0%. Combined with higher coupon loans prepaying, this led to a decrease in
the overall yield of the loan portfolio.
Real estate acquired in settlement of loans (REO) decreased $10,000 while real
estate acquired for development decreased $143,000 during the nine-month
period due to sales of lots in Willow Woods.
Deposits increased $7.3 million or 3.4% during the nine months ended December
31, 1999. Federal Home Loan Bank (FHLB) advances grew $32.7 million to fund
the Company's 16.0% growth in assets.
The Board of Directors declared the 34th, 35th, and 36th consecutive quarterly
dividend of $.04 per share per quarter in May, August, and November 1999,
which totaled $101,000. The employee stock ownership plan of the Company
borrowed $187,000 to purchase stock for the plan during the nine-month period.
Unrealized losses on securities available for sale increased $1.3 million
during the nine months ended December 31, 1999, due to the recent rise in U.S.
Treasury and agency yields. Net income for the nine months was $1.5 million
for the Company. These items combined to decrease shareholders' equity by
$104,000 or 0.5% during the nine months ended December 31, 1999. Book value
per share was $23.24 at December 31, 1999 compared to $23.23 at March 31,
1999.
At its October 1998 Board of Directors meeting, the Board declared a 2-for-1
stock split of the Company's common stock. The stock split was accomplished
through a 100% 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 (OTS) regulations, the Company
is required to maintain a liquidity ratio at specified levels that 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 Company's average liquidity during the nine months ended
December 31, 1999 was approximately 36%. The Company's current liquidity
level is deemed adequate to meet the requirements of normal operations,
potential deposit outflows, and loan demand while still allowing for optimal
investment of funds and return on assets. Although the Company's available for
sale investment portfolio had an unrealized net loss at December 31, 1999, the
Company plans to hold the majority of those investments until called or
maturity.
Loan repayments and maturities of investments are a significant source of
funds, whereas loan disbursements are a primary use of the Company's funds.
During the nine months ended December 31, 1999, loan disbursements exceeded
loan repayments resulting in a $31.9 million or 21.0% increase in total net
loans receivable.
Deposits and other borrowings are also an important source of funds for the
Company. During the nine months ended December 31, 1999, deposits increased
$7.3 million while FHLB advances increased $32.7 million. At December 31,
1999, the Bank had $84.2 million of certificates of deposit maturing within
one year. Based on previous experience, the Bank anticipates a major portion
of these certificates will be renewed.
Liquidity resources at December 31, 1999 are sufficient to meet outstanding
mortgage loan commitments of $838,000 and unused lines of credit of $23.2
million. Management believes that the Company's liquidity needs will continue
to be supported by the Company's deposit base and borrowing capacity during
the next year.
11
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Accounting and Reporting Changes
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) 133, Accounting for Derivative
Instrument and Hedging Activities. All derivatives are to be measured at fair
value and recognized in the balance sheet as assets or liabilities. This
statement's effective date is delayed by the issuance of SFAS 137 (Accounting
for Derivative Instruments and Hedging Activities-Deferral of the Effective
Date of FASB Statement No. 133-an amendment of the FASB Statement No. 133) and
is effective for fiscal years and quarters beginning after June 15, 2000.
Because the Company has limited use of derivative transactions at this time,
Management does not expect this standard to have a significant effect on the
Company.
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 has no effect on the financial statements of
the Company.
In February 1999, the FASB issued SFAS 135, Rescission of FASB Statement No.
75 and Technical Corrections. The SFAS provides technical corrections for
previously issued statements and rescinds SFAS 75, which provides guidance
related to pension plans of state and local governmental units. SFAS 135 is
effective for fiscal years ending after February 15, 1999. This statement
will not have a material effect on the financial statements of the Company.
In June 1999, the FASB issued SFAS 136, Transfers of Assets to a
Not-for-Profit Organization or Charitable Trust that Raises or Holds
Contributions for Others. This statement establishes standards for
transactions in which an entity makes a contribution by transferring assets to
a not-for-profit organization or a charitable trust and then requires these
contributions to be used in a specified manner. This statement is not
expected to have a material impact on the financial statements of the Company.
Impact of Inflation and Changing Prices
The consolidated financial statements, related notes, and other financial
information presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in relative purchasing power over time due to inflation.
Unlike industrial companies, substantially all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest
rates generally have a more significant impact on a financial institution's
performance than does inflation.
12
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Year 2000 Considerations
The Company experienced no problems with the century date rollover to January
1, 2000. All computer and related systems were monitored and are operating
normally for the year 2000.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
- ------------------------------------------------------------------
Net Income
Net income was $498,000 for the three months ended December 31, 1999,
representing an increase in earnings of $19,000 or 3.9% compared to the same
period in 1998.
Net Interest Income
Net interest income increased $257,000 or 12.2% during the three months ended
December 31, 1999 due to an increase in total interest income offset in part
by an increase in interest expense.
Interest income on loans increased $457,000 or 14.3% during the quarter as a
result of total net loans increasing as the average yield in the loan
portfolio decreased. Investment, mortgage-backed, and other securities
interest income increased $298,000 or 26.7% due to an increase in the average
balance in the investment portfolio despite a 10 basis points decline in the
average yield in the portfolio. Total interest income rose $755,000 or 17.5%
compared to the same period in 1998.
Total interest expense increased $498,000 or 22.6% during the three months
ended December 31, 1999 compared to the same period one-year earlier.
Interest expense on deposits increased $198,000 or 10.1% during the period as
deposits grew significantly compared to the average balance in 1998. Interest
expense on advances and other borrowings increased $300,000 as the average
amount of debt outstanding increased during the 1999 period compared to 1998
although the average cost of the borrowings decreased in the 1999 period.
Provision for Loan Losses
The Company's provision for loan losses increased $25,000 to $175,000 during
the three months ended December 31, 1999 compared to the same quarter in 1998.
The amount of the provision is determined by Management's on-going monthly
analysis of the loan portfolio. Non-accrual loans, which are loans delinquent
90 days or more, were $1.3 million at December 31, 1999 compared to $1.2
million at March 31, 1999. The ratio of allowance for loan losses to the
Company's total loans was 1.07% at December 31, 1999 compared to 1.12% at
March 31, 1999.
13
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999, Continued
- -----------------------------------------------------------------------------
Other Income
Total other income decreased $111,000 or 16.0% during the three months ended
December 31, 1999 compared to the same period one-year earlier. Gain on sale
of loans decreased $156,000 during the period due to more mortgage customers
opting for adjustable rate loans as fixed mortgage loan rates increased. Loan
servicing fees decreased $10,000 as the portfolio of loans serviced for others
decreased. Service fees on deposit accounts grew $78,000 as the number of
commercial and personal demand deposit accounts increased. Income from real
estate operations stemming from the Willow Woods partnership decreased $7,000
during the period. Other miscellaneous income including credit life insurance
commissions, net gain on sale of repossessed assets, safe deposit rental
income, annuity and stock brokerage commissions through SFSC, and other
miscellaneous fees decreased $16,000 during the three months ended December
31, 1999.
General and Administrative Expenses
General and administrative expenses increased $69,000 or 3.6% during the three
months ended December 31, 1999 compared to the same period in 1998.
Salaries and employee benefits expense grew $26,000 or 2.6% due to normal
annual salary increases. Occupancy expense increased $6,000 or 4.5% during
the period. Advertising expense decreased $12,000 while the depreciation and
maintenance of equipment expense increased $20,000 during the quarterly
period. FDIC insurance premiums rose $4,000 as deposit account balances
increased. Amortization of intangible expense was $116,000 during the three
months ended December 31 in fiscal 1999 and 1998. Other miscellaneous
expense, consisting of legal, professional, and consulting expenses,
stationery and office supplies, and other sundry expenses, increased $26,000
or 6.8% for the three months ended December 31, 1999 compared to the three
months ended December 31, 1998.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1999
- -----------------------------------------------------------------
Net Income
Net income was $1.5 million for the nine months ended December 31, 1999,
representing an increase in earnings of $172,000 or 13.2% compared to the same
period in 1998.
Net Interest Income
Net interest income increased $443,000 or 6.9% during the nine months ended
December 31, 1999 due to an increase in total interest income offset in part
by an increase in interest expense.
Interest income on loans increased $736,000 or 7.8% during the nine months in
1999 as a result of total net loans increasing although the average yield in
the loan portfolio decreased. Investment, mortgage-backed, and other
securities interest income increased $808,000 or 24.2% due to an increase in
the average balance in the investment portfolio despite a 17 basis points
decline in the average yield in the portfolio. Total interest income rose
$1.5 million or 12.0% during the nine months compared to the same period in
1998.
Total interest expense increased $1.1 million or 17.2% during the nine months
ended December 31, 1999 compared to the same period one-year earlier.
Interest expense on deposits increased $716,000 or 12.7% during the period as
deposits grew significantly compared to the average balance in 1998 despite a
decline in the cost of deposits during the 1999 nine-month period. Interest
expense on advances and other borrowings increased $384,000 as the average
amount of debt outstanding increased during the 1999 period compared to 1998.
14
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1999, Continued
- ----------------------------------------------------------------------------
Provision for Loan Losses
The Company's provision for loan losses increased $25,000 to $475,000 during
the nine months ended December 31, 1999 compared to the same period one year
earlier. The amount of the provision is determined by Management's on-going
monthly analysis of the loan portfolio. Non-accrual loans, which are loans
delinquent 90 days or more, were $1.3 million at December 31, 1999 compared to
$1.2 million at March 31, 1999. The ratio of allowance for loan losses to the
Company's total loans was 1.07% at December 31, 1999 compared to 1.12% at
March 31, 1999. Net charge-offs were $197,000 during the nine months ended
December 31, 1999 compared to $266,000 during the same period in 1998.
Other Income
Total other income decreased $125,000 or 6.5% during the nine months ended
December 31, 1999 compared to the same period one-year earlier. Gain on sale
of loans decreased $259,000 as more mortgage loan customers chose an
adjustable rate loan as opposed to a fixed rate loan which are generally sold,
due to the rise in mortgage rates. Loan-servicing fees decreased $27,000 as
the portfolio of loans serviced for others decreased. Service fees on deposit
accounts grew $170,000 as the number of commercial and personal demand deposit
accounts increased. Income from real estate operations originating from the
Willow Woods partnership increased $25,000 during the period. Other
miscellaneous income including credit life insurance commissions, net gain on
sale of repossessed assets, safe deposit rental income, annuity and stock
brokerage commissions through SFSC, and other miscellaneous fees decreased
$37,000 during the nine months ended December 31, 1999.
General and Administrative Expenses
General and administrative expenses increased $6,000 or 0.1% during the nine
months ended December 31, 1999 compared to the same period in 1998.
Salaries and employee benefits expense increased $136,000 or 4.5% due to an
increase in staff in customer service positions to handle increased business
and due to normal annual salary increases. Occupancy expense grew by $18,000
or 4.8% during the period. Advertising expense decreased $184,000 while the
depreciation and maintenance of equipment expense increased $68,000 during the
nine-month period. FDIC insurance premiums rose $8,000 as total deposits
increased. Amortization of intangible expense was $349,000 during the nine
months ended December 31 in fiscal 1999 and 1998. Other miscellaneous
expense, consisting of legal, professional, and consulting expenses,
stationery and office supplies, and other sundry expenses, decreased $40,000
or 3.3% for the nine months ended December 31, 1999 compared to the nine
months ended December 31, 1998.
15
Security Federal Corporation and Subsidiaries
Other Information
Item 1 Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Company is a
party to legal proceedings in the ordinary course of business wherein
it enforces its security interest in mortgage loans it has made.
Item 2 Changes In Securities And Use Of Proceeds
-----------------------------------------
Not applicable.
Item 3 Defaults Upon Senior Securities
-------------------------------
None
Item 4 Submission Of Matters To A Vote Of Security Holders
---------------------------------------------------
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 December 31, 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.
16
Security Federal Corporation and Subsidiaries
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: February 10, 2000 By: /s/ Roy O. Lindburg
-----------------------------------
Roy G. Lindburg
Treasurer/Chief Financial Officer
Duly Authorized Representative
17