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 JUNE 30, 2000 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 June 30, 2000 837,429 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 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis Results of Operations and Financial Condition 10 ============================================================================== PART II. OTHER INFORMATION Other Information 13 Signatures 14 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. Security Federal Corporation and Subsidiaries Consolidated Balance Sheets June 30, 2000 March 31, 2000 ----------------- -------------- Assets: (Unaudited) (Audited) Cash and Cash Equivalents $ 11,284,932 $ 7,416,702 Investment And Mortgage-Backed Securities: Available For Sale: (Amortized cost of $88,857,586 at June 30, 2000 and $91,446,235 at March 31, 2000) 86,227,968 88,820,651 Held To Maturity: (Fair value of $2,585,091 at June 30, 2000 and $2,634,400 at March 31, 2000) $ 2,655,616 $ 2,710,103 ----------------- -------------- Total Investment And Mortgage-Backed Securities 88,883,584 91,530,754 ----------------- -------------- Loans Receivable Net: Held For Sale 817,491 1,295,676 Held For Investment: (Net of allowance of $2,190,913 at June 30, 2000 and $2,120,767 at March 31, 2000) 202,276,456 191,704,890 ----------------- -------------- Total Loans Receivable, Net $ 203,093,947 $ 193,000,566 ----------------- -------------- Accrued Interest Receivable: Loans 1,009,104 963,219 Mortgage-Backed Securities 209,697 204,003 Investments 639,574 761,428 Premises And Equipment, Net 4,425,904 4,284,693 Federal Home Loan Bank Stock, At Cost 3,019,700 2,605,600 Real Estate Acquired In Settlement Of Loans 570,799 332,000 Real Estate Held For Development And Sale 413,401 535,878 Other Assets 2,989,865 3,167,115 ----------------- -------------- Total Assets $ 316,540,507 $ 304,801,958 ================= ============== Liabilities And Shareholders' Equity Liabilities: Deposit Accounts $ 229,955,708 $ 228,823,331 Advances From Federal Home Loan Bank 60,393,000 50,611,000 Other Borrowed Money 2,433,517 2,210,500 Advance Payments By Borrowers For Taxes and Insurance 512,141 373,660 Other Liabilities 3,073,961 3,024,766 ----------------- -------------- Total Liabilities $ 296,368,327 $ 285,043,257 ----------------- -------------- Shareholders' Equity: Serial Preferred Stock, $.01 Par Value; Authorized Shares - 200,000; Issued And Outstanding Shares - None Common Stock, $.01 Par Value; Authorized Shares - 5,000,000; Issued And Outstanding Shares - 837,429 At June 30, 2000 And 838,524 At March 31, 2000 $ 8,421 $ 8,421 Additional Paid-In Capital 3,993,733 3,993,733 Indirect Guarantee of Employee Stock Ownership Trust Debt (246,380) (186,803) Accumulated Other Comprehensive Loss (1,631,416) (1,629,150) Retained Earnings, Substantially Restricted 18,047,822 17,572,500 ----------------- -------------- Total Shareholders' Equity $ 20,172,180 $ 19,758,701 ----------------- -------------- Total Liabilities And Shareholders' Equity $ 316,540,507 $ 304,801,958 ================= ============== See accompanying notes to consolidated financial statements. 1 Security Federal Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) Three Months Ended June 30, 2000 ------------------------------------ 2000 1999 ----------------- -------------- Interest Income: Loans $ 4,160,332 $ 3,219,375 Mortgage-Backed Securities 585,060 482,799 Investment Securities 869,159 837,659 Other 17,302 25,566 ----------------- -------------- Total Interest Income $ 5,631,853 $ 4,565,399 ----------------- -------------- Interest Expense: NOW And Money Market Accounts 673,646 695,721 Passbook Accounts 81,827 77,575 Certificate Accounts 1,499,327 1,302,007 Advances And Other Borrowed Money 876,913 258,860 ----------------- -------------- Total Interest Expense $ 3,131,713 $ 2,334,163 ----------------- -------------- Net Interest Income 2,500,140 2,231,236 Provision For Loan Losses 175,000 150,000 Net Interest Income After Provision ----------------- -------------- For Loan Losses $ 2,325,140 $ 2,081,236 ----------------- -------------- Other Income: Gain On Sale Of Loans 50,917 113,504 Loan Servicing Fees 67,675 73,016 Service Fees On Deposit Accounts 260,170 238,446 Income From Real Estate Operations 31,659 34,843 Other 178,339 108,248 ----------------- -------------- Total Other Income $ 588,760 $ 568,057 ----------------- -------------- General And Administrative Expenses: Salaries And Employee Benefits 1,134,780 1,027,302 Occupancy 133,930 125,340 Advertising 60,057 32,460 Depreciation And Maintenance Of Equipment 242,040 209,750 FDIC Insurance Premiums 11,520 21,171 Amortization Of Intangibles 116,310 116,310 Other 405,807 395,990 ----------------- -------------- Total General And Administrative Expenses $ 2,104,444 $ 1,928,323 ----------------- -------------- Income Before Income Taxes 809,456 720,970 Provision For Income Taxes 300,450 245,629 ----------------- -------------- Net Income $ 509,006 $ 475,341 ================= ============== Basic Net Income Per Common Share $ 0.61 $ 0.56 ================= ============== Diluted Net Income Per Common Share $ 0.60 $ 0.56 ================= ============== Cash Dividend Per Share On Common Stock $ 0.04 $ 0.04 ================= ============== Basic Weighted Average Shares Outstanding 838,247 842,120 ================= ============== Diluted Weighted Average Shares Outstanding 846,836 846,052 ================= ============== See accompanying notes to consolidated financial statements. 2 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, 1999 $ 8,421 $3,993,733 $ - (127,738) $ 15,686,026 $ 19,560,442 Net Income - - - - 475,341 475,341 Other Comprehensive Income, Net Of Tax: Unrealized Holding Losses On Securities Available For Sale - - - (823,316) - (823,316) ------------ Comprehensive Income (347,975) Cash Dividends - - - - (33,685) (33,685) -------- ---------- ---------- ---------- ------------ ------------ Balance At June 30, 1999 $ 8,421 $3,993,733 $ 0 $ (951,054) $ 16,127,682 $ 19,178,782 ======== ========== ========== ========== ============ ============ Beginning Balance At March 31, 2000 $ 8,421 $3,993,733 $ (186,803) (1,629,150) $ 17,572,500 $ 19,758,701 Net Income - - - - 509,006 509,006 Other Comprehensive Income, Net Of Tax: Unrealized Holding Losses On Securities Available For Sale - - - (2,266) - (2,266) ------------ Comprehensive Income 506,740 Increase in Indirect Guarantee of ESOP Debt (59,577) (59,577) Cash Dividends - - - - (33,684) (33,684) -------- ---------- ---------- ---------- ------------ ------------ Balance at June 30, 2000 $ 8,421 $3,993,733 $ (246,380) (1,631,416) $ 18,047,822 $ 20,172,180 ======== ========== ========== ========== ============ ============ See accompanying notes to consolidated financial statements. 3 Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Three Months Ended June 30, 2000 ------------------------------------ 2000 1999 ----------------- -------------- Cash Flows From Operating Activities: Net Income $ 509,006 $ 475,341 Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation Expense $ 211,436 $ 186,582 Amortization Of Intangibles 116,310 116,310 Discount Accretion And Premium Amortization 9,227 28,329 Provisions For Losses On Loans And Real Estate 175,000 150,000 Gain On Sale Of Loans (50,917) (113,504) Gain On Sale Of Real Estate (43,477) (34,843) Amortization Of Deferred Fees On Loans (31,038) (38,159) Proceeds From Sale Of Loans Held For Sale 2,834,675 6,688,586 Origination Of Loans For Sale (2,305,573) (6,492,592) (Increase) Decrease In Accrued Interest Receivable: Loans (45,885) (62,831) Mortgage-Backed Securities (5,694) (39,125) Investments 121,854 103,370 Increase In Advance Payments By Borrowers 138,481 99,354 Loss On Disposition Of Premises And Equipment 195 7,131 Other, Net 52,327 529,379 ----------------- -------------- Net Cash Provided By Operating Activities $ 1,685,927 $ 1,603,328 ----------------- -------------- Cash Flows From Investing Activities: Principal Repayments On Mortgage- Backed Securities Held To Maturity $ 54,492 $ 334,749 Principal Repayments On Mortgage- Backed Securities Available For Sale 1,483,937 2,069,903 Purchase Of Investment Securities Available For Sale - (7,998,438) Purchase Of Mortgage-Backed Securities Available For Sale (943,380) (8,650,117) Maturities Of Investment Securities Available For Sale 2,038,860 5,210,003 Maturities Of Investment Securities Held To Maturity - 56,149 Purchase Of FHLB Stock (414,100) (475,900) Redemption Of FHLB Stock - 599,300 Increase In Loans To Customers (11,016,731) (5,585,092) Investment In Real Estate Held For Development (152,714) (129,637) Proceeds From Sale Of Real Estate Held For Development 306,850 169,800 Proceeds From Sale Of Real Estate Acquired Through Foreclosure 74,222 - Purchase And Improvement Of Premises And Equipment (352,842) (107,655) Proceeds From Sale Of Premises And Equipment - 9,975 ----------------- -------------- Net Cash Used By Investing Activities $ (8,921,406) $ (14,496,960) ----------------- -------------- Cash Flows From Financing Activities: Increase In Deposit Accounts $ 1,132,377 $ 4,567,115 Proceeds From FHLB Advances 30,800,000 27,675,000 Repayment Of FHLB Advances (21,018,000) (20,493,000) Proceeds Of Other Borrowings 223,017 473,529 Repayment Of Other Borrowings - (13,804) Dividends To Shareholders (33,685) (33,685) ----------------- -------------- Net Cash Provided By Financing Activities $ 11,103,709 $ 12,175,155 ----------------- -------------- (Continued) 4 Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Three Months Ended June 30, 2000 ------------------------------------ 2000 1999 ----------------- -------------- Net Increase (Decrease) In Cash And Cash Equivalents $ 3,868,230 $ (718,477) Cash And Cash Equivalents At Beginning Of Period 7,416,702 6,951,347 ----------------- -------------- Cash And Cash Equivalents At End Of Period $ 11,284,932 $ 6,232,870 ================= ============== Supplemental Disclosure Of Cash Flows Information: Cash Paid During The Period For Interest $ 3,239,696 $ 2,253,561 Cash Paid During The Period For Income Taxes $ 135,000 $ 350 Additions To Real Estate Acquired Through Foreclosure $ 301,203 $ 21,000 Increase In Unrealized Net Loss On Securities Available For Sale, Net Of Taxes $ 2,266 $ 823,316 See accompanying notes to consolidated financial statements. 5 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-month period ended June 30, 2000 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, and changes in the securities market. Management cautions readers of this Form 10-QSB not to place undue reliance on forward-looking statements contained herein. 2. Basis of Consolidation and Nature of Operations 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"). The Bank is primarily engaged in the business of accepting savings and demand deposits and originating mortgage loans and other loans to individuals and small businesses for various personal and commercial purposes. SFSC consists primarily of investment brokerage services. Also included in the consolidation is a real estate partnership. 3. Loans Receivable, Net Loans Receivable, Net, at June 30, 2000 and March 31, 2000 consisted of the following: Loans held for sale were $817,491 and $1,295,676 at June 30, 2000 and March 31, 2000, respectively. Loans Held For Investment: June 30, 2000 March 31, 2000 ----------------- -------------- Residential Real Estate $ 108,018,306 $ 98,151,348 Consumer 41,529,302 41,719,221 Commercial Business And Real Estate 67,947,162 62,062,134 ----------------- -------------- $ 217,494,770 $ 201,932,703 ----------------- -------------- Less: Allowance For Possible Loan Loss 2,190,913 2,120,767 Loans In Process 12,700,787 7,832,280 Deferred Loan Fees 326,614 274,766 ----------------- -------------- $ 15,218,314 $ 10,227,813 ----------------- -------------- $ 202,276,456 $ 191,704,890 ================= ============== The following is a reconciliation of the allowance for loan losses for the nine months ending: June 30, 2000 June 30, 1999 ----------------- -------------- Beginning Balance $ 2,120,767 $ 1,715,068 Provision 175,000 150,000 Charge-offs (110,332) (64,261) Recoveries 5,478 8,628 ----------------- -------------- Ending Balance $ 2,190,913 $ 1,809,435 ================= ============== 6 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 June 30, 2000 Amortized Unrealized Unrealized - ------------- Cost Gains Losses Fair Value ---------- ---------- ---------- ---------- U.S. Government and Agency Obligations $ 265,707 $ 2,787 $ - $ 268,494 Mortgage-Backed Securities 2,389,909 2,186 75,498 2,316,597 ---------- ---------- ---------- ---------- Total $2,655,616 $ 4,973 $ 75,498 $2,585,091 ========== ========== ========== ========== March 31, 2000 - -------------- U.S. Government and Agency Obligations $ 265,707 $ 3,034 $ - $ 268,741 Mortgage-Backed Securities 2,444,396 2,966 81,703 2,365,659 ---------- ---------- ---------- ---------- Total $2,710,103 $ 6,000 $ 81,703 $2,634,400 ========== ========== ========== ========== 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 June 30, 2000 Amortized Unrealized Unrealized - ------------- Cost Gains Losses Fair Value ----------- ---------- ---------- ----------- U.S. Government and Agency Obligations $53,752,326 $ - $1,653,623 $52,098,703 Mortgage-Backed Securities 35,105,260 3,429 979,424 34,129,265 ----------- ---------- ---------- ----------- Total $88,857,586 $ 3,429 $2,633,047 $86,227,968 =========== ========== ========== =========== March 31, 2000 - -------------- U.S. Government and Agency Obligations $55,783,474 $ 1,017 $1,618,734 $54,165,757 Mortgage-Backed Securities 35,662,761 1,293 1,009,160 34,654,894 ----------- ---------- ---------- ----------- Total $91,446,235 $ 2,310 $2,627,894 $88,820,651 =========== ========== ========== =========== 7 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: June 30, 2000 March 31, 2000 -------------------- -------------------- Demand Accounts: Balance Rate Balance Rate -------------------- -------------------- Checking $ 58,698,849 0.78% $ 58,304,679 0.89% Money Market 47,898,458 4.58% 51,636,465 4.60% Regular Savings 12,927,373 2.46% 13,203,395 2.50% ------------ ------------ Total Demand Accounts $119,524,680 2.48% $123,144,539 2.62% ============ ============ Certificate Accounts: 0 - 4.99% $ 7,942,212 $ 15,575,152 5.00 - 6.99% 99,308,406 90,103,640 7.00 - 8.99% 3,180,410 - ------------ ------------ Total Certificate Accounts $110,431,028 5.79% $105,678,792 5.41% ============ ============ Total Deposit Accounts $229,955,708 4.06% $228,823,331 3.90% ============ ============ 6. Federal Home Loan Bank Advances FHLB Advances are summarized by year of maturity and weighted average interest rate in the table below: June 30, 2000 March 31, 2000 -------------------- -------------------- Balance Rate Balance Rate -------------------- -------------------- Checking $ 58,698,849 0.78% $ 58,304,679 0.89% Fiscal Year Due: 2001 $ 50,231,000 6.53% $ 35,431,000 5.88% 2002 5,000,000 5.71% 5,000,000 5.71% 2003 - -% 5,000,000 6.36% 2004 - - - -% Thereafter 5,162,000 6.59% 5,180,000 6.60% ------------ ------------ Total Advances $ 60,393,000 6.47% $ 50,611,000 5.99% ============ ============ 7. Regulatory Matters The following table reconciles the Bank's shareholders' equity to its various regulatory capital positions: June 30, 2000 March 31, 2000 -------------------- -------------------- (Dollars in Thousands) ------------------------------------------- Bank's Shareholders' Equity $ 19,920 $ 19,414 Unrealized Loss On Available For Sale Of Securities, Net Of Tax 1,631 1,629 Reduction For Goodwill And Other Intangibles (999) (1,116) -------------------- -------------------- Tangible Capital 20,552 19,927 Qualifying Core Deposits And Intangible Assets 537 559 -------------------- -------------------- Core Capital 21,089 20,486 Supplementary Capital 2,191 2,121 Assets Required To Be Deducted (125) (103) -------------------- -------------------- Risk-Based Capital $ 23,155 $ 22,504 ==================== ==================== The following table compares the Bank's capital levels relative to the applicable regulatory requirements at June 30, 2000: (Dollars in Thousands) ------------------------------------------------------- Amt. % Actual Actual Excess Excess Required Required Amt. % Amt. % ------------------------------------------------------- Tangible Capital $ 6,335 2.0% $20,552 6.49% $14,217 4.49% Tier 1 Leverage (Core) Capital 12,692 4.0% 21,089 6.65% 8,397 2.65% Total Risk-Based Capital 15,045 8.0% 23,155 12.31% 8,110 4.31% Tier 1 Risk-Based (Core) Capital 7,523 4.0% 21,089 11.21% 13,566 7.21% 8 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 June 30, 2000 are as follows: To Be Well Capitalized For Under Prompt (Dollars in Thousands) Capital Adequacy Corrective Action Actual Purposes Provisions ------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------- Tier I Risk-Based Core Capital $21,089 11.2% $ 7,523 4.0% $11,284 6.0% Risk-Based Capital (To Risk Weighted Assets) 23,155 12.3% 15,045 8.0% 18,807 10.0% Core Capital (To Adjusted Tangible Assets) 21,089 6.7% 12,692 4.0% 15,865 5.0% Tangible Capital (To Tangible Assets) 20,552 6.5% 6,335 2.0% 15,838 5.0% 9 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 $11.7 million or 3.9% during the three months ended June 30, 2000, due primarily to increases of $10.1 million or 5.2% in total net loans receivable, and an increase of $3.9 million in cash and cash equivalents, offset in part by a $2.6 million decrease in total investment securities. Residential real estate loans, net of loans in process, increased $5.0 million or 5.5% during the period while other loans increased $5.8 million or 5.5%. Real estate acquired in settlement of loans (REO) increased $239,000 due to foreclosures. Real estate acquired for development decreased $122,000 during the three-month period due to sales of lots in Willow Woods. Non-accrual loans totaled $580,000 at June 30, 2000 compared to $890,000 at March 31, 2000. The Bank classifies all loans as non-accrual when they become 90 days or more delinquent. The Bank had 2 loans totaling $493,000 at June 30, 2000 that where troubled debt restructurings compared to $784,000 at March 31, 2000. One loan of $54,000 is a commercial loan secured by two single-family rental properties. The other troubled debt restructuring was a $439,000 commercial loan secured by commercial real estate. Both loans were current as of June 30, 2000. All troubled debt restructurings are also considered impaired. At June 30, 2000, the Bank held $523,000 in impaired loans compared to $ 897,000 compared to March 31, 2000. Deposits increased $1.1 million during the three months ended June 30, 2000. Federal Home Loan Bank (FHLB) advances grew $9.8 million or 19.3% to fund the Company's 3.9% growth in assets. The Board of Directors declared the 38th consecutive quarterly dividend of $.04 per share per quarter in May 2000, which totaled $34,000. The employee stock ownership plan of the Company borrowed an additional $60,000 to purchase stock for the plan during the three-month period. Unrealized losses on securities available for sale increased $2,000 during the three months ended June 30, 2000. The Company's net income for the three months was $509,000. These items combined to increase shareholders' equity by $413,000 or 2.1% during the three months ended June 30, 2000. Book value per share was $24.09 at June 30, 2000 compared to $23.56 at March 31, 2000. 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 three months ended June 30, 2000 was approximately 30%. 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 June 30, 2000, 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 three months ended June 30, 2000, loan disbursements exceeded loan repayments resulting in a $10.1 million or 5.2% increase in total net loans receivable. Deposits and other borrowings are also an important source of funds for the Company. During the three months ended June 30, 2000, deposits increased $1.1 million while FHLB advances increased $9.8 million. At June 30, 2000, the Bank had $73.2 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 June 30, 2000 are sufficient to meet outstanding mortgage loan commitments of $1.0 million and unused lines of credit of $22.7 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. 10 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. 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. 11 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 JUNE 30, 2000 - -------------------------------------------------------------- Net Income Net income was $509,000 for the three months ended June 30, 2000, representing an increase in earnings of $34,000 or 7.2% compared to the same period in 1999. Net Interest Income Net interest income increased $269,000 or 12.1% during the three months ended June 30, 2000 due to an increase in total interest income offset in part by an increase in interest expense. Interest income on loans increased $941,000 or 29.2% during the quarter as a result of total net loans significantly increasing in the portfolio. Investment, mortgage-backed, and other securities interest income increased $125,000 or 9.3% due to an increase in the average balance in the investment portfolio and a 20 basis points increase in the average yield in the portfolio. Total interest income rose $1.1 million or 23.4% compared to the same period in 1999. Total interest expense increased $798,000 or 34.3% during the three months ended June 30, 2000 compared to the same period a year ago. Interest expense on deposits increased $179,000 or 8.7% during the period as deposits grew compared to the average balance in 1999 and the cost of deposits increased approximately 18 basis points. Interest expense on advances and other borrowings increased $618,000 as the average amount of debt outstanding increased during the 2000 period compared to 1999 and as the average cost of the borrowings increased in the 2000 period. Provision for Loan Losses The Company's provision for loan losses increased $25,000 to $175,000 during the three months ended June 30, 2000 compared to the same quarter in 1999. 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 $580,000 at June 30, 2000 compared to $890,000 at March 31, 2000. The ratio of allowance for loan losses to the Company's total loans was 1.07% at June 30, 2000 compared to 1.09% at March 31, 2000. Other Income Total other income increased $21,000 or 3.6% during the three months ended June 30, 2000 compared to the same period a year ago. Gain on sale of loans decreased $63,000 during the period due to more mortgage customers opting for adjustable rate loans which are retained in the Bank's portfolio as opposed to fixed rate mortgages which are sold to investors. Loan servicing fees decreased $5,000 as the portfolio of loans serviced for others decreased. Service fees on deposit accounts grew $22,000 as the number of commercial and personal demand deposit accounts increased. Income from real estate operations stemming from the Willow Woods partnership decreased $3,000 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 increased $70,000 during the three months ended June 30, 2000. General and Administrative Expenses General and administrative expenses increased $176,000 or 9.1% during the three months ended June 30, 2000 compared to the same period in 1999. Salaries and employee benefits expense grew $107,000 or 10.5% due to normal annual salary increases and an increase in customer service positions. Occupancy expense increased $9,000 or 6.9% during the period. Advertising expense increased $28,000 while the depreciation and maintenance of equipment expense increased $32,000 during the quarterly period. FDIC insurance premiums decreased $10,000 while the amortization of intangible expense was $116,000 during the three months ended June 30, 2000 and June 30, 1999. Other miscellaneous expense, consisting of legal, professional, and consulting expenses, stationery and office supplies, and other sundry expenses, increased $10,000 or 2.5% for the three months ended June 30, 2000 compared to the three months ended June 30, 1999. 12 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. 13 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: August 8, 2000 By: /s/ Roy G. Lindburg --------------------------------- Roy G. Lindburg Treasurer/Chief Financial Officer Duly Authorized Representative 14