SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2001 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-16120
SECURITY FEDERAL CORPORATION
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(Exact name of registrant as specified in its charter)
South Carolina 57-08580504
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1705 Whiskey Road South, Aiken, South Carolina 29801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 641-3000
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.01 per share
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(Title of Class)
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 [ ]
Indicate by check mark whether disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this Form
10-K or any amendments to this Form 10-K. [X]
As of June 18, 2001, there were issued and outstanding 1,669,901 shares
of the registrant's Common Stock. The aggregate market value of the voting stock
held by non-affiliates of the registrant, computed by reference to the average
of the bid and asked price of such stock as of June 18, 2001, was $27.7 million.
(The exclusion from such amount of the market value of the shares owned by any
person shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the
Fiscal Year Ended March 31, 2001. (Parts I and II)
2. Portions of the Registrant's Proxy Statement for the 2001 Annual
Meeting of Stockholders. (Part III)
PART I
ITEM 1. BUSINESS
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Security Federal Corporation
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Security Federal Corporation (the "Company") was incorporated under the
laws of the State of Delaware in July 1987 by authorization of the Board of
Directors of Security Federal Savings Bank of South Carolina ("Security Federal"
or the "Bank") for the purpose of becoming a savings and loan holding company
that acquired all of the outstanding stock of Security Federal issued upon the
conversion of Security Federal from the mutual to the stock form (the
"Conversion"). Effective August 17, 1998, the Company changed its state of
incorporation from Delaware to South Carolina.
As a South Carolina corporation, the Company is authorized to engage in
any activity permitted by South Carolina General Corporation Law. The Company is
a unitary savings and loan holding company. Through the unitary holding company
structure, it is possible to expand the size and scope of the financial services
offered beyond those currently offered by the Bank. The holding company
structure also provides the Company with greater flexibility than the Bank would
have to diversify its business activities, through existing or newly formed
subsidiaries, or through acquisitions or mergers of stock thrift institutions as
well as other companies. There are no current arrangements, understandings or
agreements regarding any such acquisition. Future activities of the Company,
other than the continuing operations of Security Federal, will be funded through
dividends from Security Federal and through borrowings from third parties. See
"Regulation -- Savings and Loan Holding Company Regulation" and "Taxation."
Activities of the Company may also be funded through sales of additional
securities or income generated by other activities of the Company. At this time,
there are no plans regarding such sales of additional securities or such
activities.
At March 31, 2001, the Company had assets of approximately $330.6
million, deposits of approximately $257.4 million and shareholders' equity of
approximately $23.5 million.
The executive office of the Company is located at 1705 Whiskey Road
South, Aiken, South Carolina 29803, telephone (803) 641-3000.
Security Federal Bank
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General. Security Federal, a federally chartered stock savings bank, is
headquartered in Aiken, South Carolina. Security Federal, which has ten branch
offices in Aiken and Bamberg Counties, was originally chartered under the name
Aiken Building and Loan Association on March 27, 1922. The association received
its federal charter and changed its name to Security Federal Savings and Loan
Association of Aiken on March 7, 1962, and later changed its name to Security
Federal Savings Bank of South Carolina, on November 11, 1986. Effective April 8,
1996, the Bank changed its name to Security Federal Bank. The Bank converted
from the mutual to the stock form of organization on October 30, 1987. Security
Federal increased its branch network to nine in October 1993 with the completion
of its acquisition of four former NationsBank of South Carolina, N.A. branches
located in Aiken County. In February 1996, Security Federal opened a new branch
office in the Aiken Walmart Superstore, which became the Bank's tenth location.
The Bank opened a branch in West Columbia in December 2001, which provides the
Bank with the opportunity to expand its market area.
The principal business of Security Federal is the acceptance of savings
deposits from the general public and the origination of mortgage loans to enable
borrowers to purchase or refinance one- to four-family residential real estate.
The Bank also makes loans secured by multi-family residential and commercial
real estate and consumer and commercial loans. In addition, the Bank originates
construction loans on single family residences, multi-family dwellings and
projects, commercial real estate, and loans for the acquisition, development and
construction of residential subdivisions and commercial projects.
1
Security Federal's income is derived primarily from interest and fees
earned in connection with its lending activities, and its principal expenses are
interest paid on savings deposits and borrowings and operating expenses.
Through a real estate partnership and Willow Woods Associates, the
Company was involved in real estate development. The partnership sold its
remaining lots in March, 2001, and was completely liquidated by March 31, 2001.
Selected Consolidated Financial Information
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This information is incorporated by reference to page 3 of the 2001
Annual Report to Stockholders ("Annual Report").
Yields Earned and Rates Paid
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This information is incorporated by reference to page 10 of the Annual
Report.
Rate/Volume Analysis
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This information is incorporated by reference to page 9 of the Annual
Report.
Lending Activities
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General. The primary source of revenue for the Bank is interest and fee
income from lending activities. The principal lending activity of the Bank is
making conventional first mortgage real estate loans to enable borrowers to
purchase or refinance one- to four-family residential real property. The Bank
also makes loans secured by multi-family residential and commercial real estate
and consumer and commercial loans. The Bank continues to emphasize the
origination of adjustable rate residential mortgage loans, subject to market
conditions, for retention in its portfolio. In addition, the Bank originates
construction loans on single family residences, multi-family dwellings and
projects, commercial real estate, and loans for the acquisition, development and
construction of residential subdivisions and commercial projects.
Adjustable rate mortgage loans ("ARMs") constituted approximately 36.7%
of the Bank's total outstanding loan portfolio at March 31, 2001.
The loan-to-value ratio, maturity and other provisions of loans made by
the Bank reflect its policy of making the maximum loan permissible consistent
with applicable regulations, established lending policies and market conditions.
The Bank requires title insurance (or acceptable legal opinions on smaller loans
secured by real estate) and fire insurance, and flood insurance where
applicable, on loans secured by improved real estate.
2
Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts in
percentages, by type of loan and by type of security, and presents a
reconciliation of total loans receivable before net items.
At March 31,
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2001 2000 1999 1998 1997
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
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(Dollars in Thousands)
TYPE OF LOAN:
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Fixed Rate Loans
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Residential real estate(1) $34,070 13.9% $13,408 6.6% $7,586 4.7% $9,981 7.0% $14,835 9.9%
Commercial business and
commercial real estate 42,877 17.5 39,756 19.6 27,812 17.3 21,863 15.3 22,886 15.2
Consumer 32,447 13.3 28,984 14.2 28,492 17.7 29,257 20.5 24,180 16.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total fixed rate loans 109,394 44.7 82,148 40.4 63,890 39.7 61,101 42.8 61,901 41.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Adjustable rate loans
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Residential real estate(1) 89,913 36.7 86,040 42.3 59,507 36.9 37,701 26.4 35,910 23.9
Commercial business and
commercial real estate 31,643 12.9 22,306 11.0 24,514 15.3 26,593 18.7 29,690 19.8
Consumer 13,830 5.7 12,735 6.3 13,140 8.1 17,242 12.1 22,714 15.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total adjustable rate loans 135,386 55.3 121,081 59.6 97,161 60.3 81,536 57.2 88,314 58.8
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans 244,780 100.0% 203,229 100.0% 161,051 100.0% 142,637 100.0% 150,215 100.0%
===== ===== ===== ===== ======
Less
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Loans in process 10,739 7,832 7,151 3,176 1,375
Deferred fees and discounts 260 275 199 225 303
Allowance for loan losses 2,784 2,121 1,715 1,512 1,768
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Total loans receivable $230,997 $193,001 $151,986 $137,724 $146,769
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(1) Includes $1.8 million, $2.2 million, $1.6 million, $1.8 million and
$1.6 million in multi-family dwellings for fiscal years ended March 31,
2001, 2000, 1999, 1998 and 1997, respectively. Includes residential
construction loans.
3
At March 31,
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2001 2000 1999 1998 1997
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Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
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(Dollars in Thousands)
TYPE OF SECURITY:
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Real Estate Loans:
Residential real estate(1) $104,819 42.8% $82,754 40.7% $52,860 32.8% $44,232 31.0% $46,782 31.1%
Construction 19,164 7.8 16,694 8.2 14,233 8.8 3,450 2.4 3,963 2.6
-------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans 123,983 50.6 99,448 48.9 67,093 41.6 47,682 33.4 50,745 33.8
-------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Commercial business and
commercial real estate 74,520 30.5 62,062 30.6 52,326 32.5 48,456 34.0 52,576 35.0
Consumer loans:
Deposit account 2,516 1.0 1,304 0.6 1,213 0.8 1,275 0.9 1,299 0.9
Home equity 13,758 5.6 13,849 6.8 15,818 9.8 20,202 14.1 21,446 14.3
Home improvement 17,424 7.1 14,730 7.3 14,903 9.3 16,088 11.3 13,299 8.8
Other 12,579 5.2 11,836 5.8 9,698 6.0 8,934 6.3 10,850 7.2
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Total consumer loans 46,277 18.9 41,719 20.5 41,632 25.9 46,499 32.6 46,894 31.2
-------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans 244,780 100.0% 203,229 100.0% 161,051 100.0% 142,637 100.0% 150,215 100.0%
===== ===== ===== ===== ======
Less:
Loans in process 10,739 7,832 7,151 3,176 1,375
Deferred fees and discounts 260 275 199 225 303
Allowance for loan losses 2,784 2,121 1,715 1,512 1,768
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Total loans receivable $230,997 $193,001 $151,986 $137,724 $146,769
======== ======== ======== ======== ========
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(1) Includes $1.8 million, $2.2 million, $1.6 million, $1.8
million and $1.6 million in multi-family dwellings at March 31,
2001, 2000, 1999, 1998 and 1997, respectively.
4
The following schedule illustrates the interest rate sensitivity of
Security Federal's loan portfolio at March 31, 2001. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
when the contract is due. This schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
At March 31, 2001
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Commercial
Business and
Residential Commercial
Real Estate(1) Consumer(2) Real Estate Total
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(In Thousands)
Six months or less(3) $9,543 $5,847 $8,669 $24,059
Over six months to one year 9,829 5,213 6,695 21,737
Over one year to three years 6,886 12,352 21,820 41,058
Three to five years 5,276 7,711 17,533 30,520
Over five to ten years 17,949 9,519 10,373 37,841
Over ten to twenty years 35,829 5,635 9,430 50,894
More than twenty years 27,932 -- -- 27,932
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Total(4) $113,244 $46,277 $74,520 $234,041
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(1) Includes multi-family dwellings.
(2) Includes home improvement loans and equity line of credit loans.
(3) Includes demand loans, loans having no stated maturity and overdraft
loans.
(4) Loan amounts are net of undisbursed funds for loans in process of
$10.7 million.
The total amount of loans due after March 31, 2002, which have
predetermined or fixed interest rates is $66.5 million, while the total amount
of loans due after such date which have floating or adjustable interest rates is
$121.8 million.
Loan Originations, Purchases and Sales. The following table shows the
loan origination, purchase, sale and repayment activities of the Bank for the
periods indicated.
Year Ended March 31,
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2001 2000 1999 1998 1997
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(In Thousands)
Originated(1):
Adjustable rate - residential
real estate $36,998 $44,382 $36,906 $12,080 $8,046
Fixed rate - residential
real estate 6,316 6,193 6,020 3,444 5,636
Consumer 20,297 17,080 19,564 20,103 18,574
Commercial business and
commercial real estate 31,623 34,847 25,249 13,698 20,590
------- ------- ------- ------- -------
Total consumer/commercial
business real estate 51,920 51,927 44,813 33,801 39,164
------- ------- ------- ------- -------
Total loans originated $95,234 $102,502 $87,739 $49,325 $52,846
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(table continued on following page)
5
Year Ended March 31,
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2001 2000 1999 1998 1997
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(In Thousands)
Purchased -- -- -- -- --
Sold(1):
Fixed rate - residential
real estate $ -- $ 631 $5,644 $3,396 $5,810
Adjustable rate- residential
real estate -- -- -- -- --
Principal repayments(2) 53,683 59,693 63,680 53,507 51,589
(Increase) decrease in other
items, net (3,555) (1,163) (4,153) (1,467) (818)
Net increase (decrease) $37,996 $41,015 $14,262 $(9,045) $(5,371)
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(1) Does not include loans in the amount of $29.5 million, $16.0 million,
$28.1 million, $7.9 million and $6.4 million that were originated with
prior commitments to be purchased by institutional investors and sold
during the fiscal years ended March 31, 2001, 2000, 1999, 1998 and
1997, respectively.
(2) Includes securitizations of fixed rate residential loans in the amount
of $2.8 million for the fiscal year ended 1997.
In addition to interest earned on loans, the Bank receives loan
origination fees or "points" for originating loans. Loan points are a percentage
of the principal amount of the mortgage loan which are charged to the borrower
for the creation of the loan.
The Bank's loan origination fees generally range from 1% to 2% on
conventional residential mortgages, commercial real estate loans and commercial
business loans. The total fee income (including amounts amortized to income as
yield adjustments) for the fiscal year ended March 31, 2001 was $579,000.
Loan origination and commitment fees are volatile sources of income.
Such fees vary with the volume and type of loans and commitments made and
purchased and with competitive conditions in mortgage markets, which in turn are
governed by the demand for and availability of money.
The following table shows deferred loan origination fees recognized as
income by the Bank expressed as a percentage of the dollar amount of total
mortgage loans originated (and retained in the Bank's portfolio) and purchased
during the periods indicated and the dollar amount of deferred loan origination
fees at the end of each respective period.
At or for the Year Ended March 31,
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2001 2000 1999
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(Dollars In Thousands)
Net deferred loan origination fees earned
during the period(1) $149 $65 $198
Mortgage loan origination fees earned as a
percentage of total loans originated
during the period 0.2% 0.1% 0.5%
Net deferred loan origination fees in loan
portfolio at end of period $260 $275 $200
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(1) Includes amounts amortized to interest income as yield adjustments.
Does not include fees earned on loans sold.
6
The Bank also receives other fees and charges related to existing
loans, conversion fees, assumption fees, late charges, and other fees collected
in connection with a change in borrower or other loan modifications.
Security Federal currently sells substantially all conforming
fixed-rate loans with terms of 15 years or greater in the secondary mortgage
market. These loans are sold in order to provide a source of funds and as one of
the strategies available to close the gap between the maturities of its
interest-earning assets and interest-bearing liabilities. Currently, most
fixed-rate, long-term mortgage loans are being originated based on Fannie Mae
("FNMA") and Freddie Mac ("FHLMC") underwriting standards.
Secondary market sales have been made primarily to Freddie Mac, or
other banks or investors. Freddie Mac is a quasi-governmental agency that
purchases residential mortgage loans from federally insured financial
institutions and certain other lenders. All loans sold to Freddie Mac are
without recourse to Security Federal and essentially all other loans sold to
other investors are without recourse. For the past few years, substantially all
loans have been sold on a service released basis. Previous to that, some loans
sold to Freddie Mac, Fannie Mae, and one other investor, had been sold service
retained, whereby Security Federal would collect a .25% to .375% servicing fee
on the principal balance of the loan serviced. However, the pricing on loans
sold service released is more favorable to the borrower. Because of that,
Security Federal's loan serviced for others portfolio was ever shrinking. Due to
the fixed costs of servicing that portfolio, Security Federal sold its loan
serviced for others portfolio for a before tax, net gain of approximately
$400,000 in the last quarter of fiscal 2001. At March 31, 2001, Security Federal
was sub-servicing this portfolio of approximately $47.0 million for the buyer,
with the transfer to take place in April 2001. In fiscal 2001, Security Federal
sold $29.5 million on a service released basis on the secondary market. Loans
closed but not yet settled with Freddie Mac or other investors, are carried in
the Bank's "loans held for sale" portfolio. At March 31, 2001, the Bank held
$2.3 million of loans held for sale. All of such loans were originated for
investors based upon prior commitments to purchase the loans at a set price. As
a result, these loans present no market risk to Security Federal. These loans
are normally delivered and paid for within 30 days after the date of closing.
The Bank also originates and holds fixed rate construction loans or
fixed rate lot loans. The construction loans are for one year terms. Lot loans
are financed on a two, three, or five year balloon term. At March 31, 2001, the
Bank held $34.1 million or 13.9% of the total loan portfolio in these fixed rate
loans in its residential portfolio.
Loan Solicitation and Processing. The Bank actively solicits mortgage
loan applications from existing customers, real estate agents, builders, real
estate developers and others. The Bank also receives mortgage loan applications
as a result of customer referrals and from walk-in customers.
Detailed loan applications are obtained to determine the borrower's
creditworthiness and ability to repay, and the more significant items on these
applications are verified through the use of credit reports, financial
statements and confirmations. After analysis of the loan application and
property or collateral involved, including an appraisal of the property
(residential appraisals are obtained through independent fee appraisers), the
lending decision is made in accordance with the underwriting guidelines of the
Bank. These guidelines are generally consistent with FHLMC and FNMA guidelines
for residential real estate loans. With respect to commercial real estate loans,
the Bank also reviews the capital adequacy of the business, the income potential
of the property, the ability of the borrower to repay the loan and honor its
other obligations, and general economic and industry conditions.
Upon receipt of a loan application and all required related information
from a prospective borrower, the loan application is submitted for approval or
rejection. The residential mortgage loan underwriters approve loans which meet
FHLMC and FNMA underwriting requirements, not to exceed $275,000 per loan, and
the government loan direct endorser approves Federal Housing Administration
("FHA") loans not to exceed $132,000 and Veterans' Administration ("VA") loans
not to exceed $203,000. The Chairman, Chief Executive Officer, Senior Mortgage
Officer, Senior Consumer/Commercial Loan Officer or Regional President approve
loans of $250,000 or less, except as set forth above. Loans in excess of
$250,000 require approval of any two of the above and any loan in an amount in
excess of $350,000
7
must be approved by the Bank's Executive Committee, which operates as the Bank's
Loan Committee. The loan approval limits shown are the aggregate of all loans to
any one borrower or entity.
The general policy of Security Federal is to issue loan commitments to
qualified borrowers for a specified time period. These commitments are generally
for a period of 45 days or less. With management approval, commitments may be
extended for a longer period. The total outstanding amount of mortgage loan
commitments issued by Security Federal as of March 31, 2001, was approximately
$422,000 (excluding undisbursed portions of construction loans in process).
Security Federal also had outstanding commitments available on retail lines of
credit (including home equity and other consumer loans) totaling $21.5 million
as of March 31, 2001. See Note 13 of Notes to Consolidated Financial Statements
contained in the Annual Report.
Permanent Residential Mortgage Lending. Residential real estate
mortgage loans constituted approximately 50.6% of the Bank's total outstanding
loan portfolio at March 31, 2001.
Security Federal offers a variety of ARMs which offer adjustable rates
of interest, payments, loan balances or terms to maturity which vary according
to specified indices. The Bank's ARMs generally have a loan term of 15 to 30
years with rate adjustments every one to three years during the term of the
loan. Most of the Bank's ARMs contain a 100 or 200 basis point limit as to the
maximum amount of change in the interest rate at any adjustment period and a 500
or 600 basis point limit over the life of the loan. The Bank generally
originates ARMs to hold in its portfolio. Such loans are generally made
consistent with FHLMC and FNMA guidelines. At March 31, 2001, residential ARMs
totaled $89.9 million, or 36.7% of the Bank's loan portfolio. For the year ended
March 31, 2001, the Bank originated $43.3 million in residential real estate
loans, 85.4% of which had adjustable rates of interest.
There are unquantifiable risks resulting from possible increased costs
to the borrower as a result of periodic repricing. Despite the benefits of ARMs
to the Bank's asset/liability management program, such loans also pose potential
additional risks, primarily because as interest rates rise, the underlying
payment by the borrower rises, increasing the potential for default. At the same
time, marketability of the underlying property may be adversely affected by
higher interest rates.
When making a one- to four-family residential mortgage loan, the Bank
evaluates both the borrower's creditworthiness and his or her general ability to
make principal and interest payments and the value of the property that will
secure the loan. The Bank generally makes loans on one- to four-family
residential properties in amounts of 95% or less of the appraised value thereof.
Where loans are made in amounts which exceed 80% of the appraised value of the
underlying real estate, the Bank's general policy is to require private mortgage
insurance on a portion of the loan. In general, the Bank restricts its
residential lending to South Carolina and the nearby Augusta, Georgia market.
The Bank also provides construction financing for single family
dwellings both to owner-occupants and to builders for resale. Construction loans
are generally made for periods of six months to one year. Typically, interest
rates on interim construction loans are made on a fixed-rate basis. At March 31,
2001, residential construction loans on one- to four-family dwellings totaled
$19.2 million, or 7.8% of the Bank's loan portfolio. In addition to the factors
mentioned above concerning the creditworthiness of the borrower, on loans of
this type the Bank seeks to evaluate the financial condition and prior
performance of the builder.
Commercial Business and Commercial Real Estate Loans. The commercial
business and commercial real estate loans originated by the Bank are primarily
secured by business properties, churches, income property developments,
undeveloped land, business equipment, furniture and fixtures, inventory, and
receivables. At March 31, 2001, the Bank had approximately $74.5 million or
30.5% of the Bank's total loan portfolio, in commercial business and commercial
real estate loans. Approximately $46.5 million or 62.4% of commercial business
and commercial real estate loans were secured primarily by real estate at March
31, 2001. Loans secured by commercial real estate are typically written for
terms of 10 to 20 years. Commercial loans not secured by real estate are
typically based on terms
8
of three to 60 months. Fixed rate loans typically balloon at the end of three to
seven years. Adjustable rate loans are usually tied to the prime interest rate
as quoted in the Wall Street Journal and adjust monthly or annually.
Commercial business and commercial real estate lending entails
significant additional credit risk when compared to residential lending.
Commercial loans typically involve large loan balances to single borrowers or
groups of related borrowers. The payment experience of such loans is typically
dependent upon the successful operation of the business or real estate project.
These risks can be significantly affected by supply and demand conditions in the
market for office and retail space and for condominiums and apartments and to
adverse conditions in the local economy. Although commercial loans generally
involve more risk than residential loans, they also typically earn more yield
and are more sensitive to changes in interest rates.
The underwriting standards employed by the Bank for commercial business
and commercial real estate lending include a determination of the borrower's
current financial condition, ability to pay, past earnings and payment history.
In addition, the current financial condition and payment history of all
principals are reviewed. Normally, the Bank requires the principal or owners of
a business to guarantee all loans made to their business by the Bank. Although
the creditworthiness of the business and its principals is of primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Properties securing commercial loans originated by the Bank are
appraised at the time of the loan by appraisers designated by the Bank. Although
the Bank is permitted to invest in loans up to 100% of the appraised value of a
property on a commercial loan, the Bank currently seeks to invest in loans with
a loan to value ratio of 75% to 80%.
At March 31, 2001, the Bank did not have any commercial business or
commercial real estate loans to one borrower in excess of $3.5 million. Federal
law restricts the Bank's permissible lending limits to one borrower to the
greater of $500,000 or 15% of unimpaired capital and surplus. The Bank has only
infrequently made loans to one borrower equal to the amount federal law allows
or approximately $3.8 million as calculated at March 31, 2001.
Consumer Loans. The Bank originates consumer loans for any personal,
family or household purpose, including but not limited to the financing of home
improvements, automobiles, boats, mobile homes, recreational vehicles and
education. In addition, the Bank has expanded its home equity lending program.
Home equity loans are secured by mortgage lines on the borrower's principal or
second residence. At March 31, 2001, the Bank had $10.7 million of home equity
lines of credit outstanding and $17.3 million of additional commitments of such
lines of credit. The Bank also makes secured and unsecured lines of credit
available. Although consumer loans involve a higher level of risk than one- to
four-family residential mortgage loans, they generally carry higher yields and
have shorter terms to maturity than one- to four-family residential mortgage
loans. The Bank has increased its origination of consumer loans during the past
several years and at March 31, 2001, the Bank had total consumer loans of $46.3
million, or 18.9% of the Bank's loan portfolio.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income is determined by
verification of gross monthly income from primary employment, and additionally
from any verifiable secondary income. Although credit- worthiness of the
applicant is of primary consideration, the underwriting process also includes a
comparison of the value of the security, if any, in relation to the proposed
loan amount.
The Bank also has a credit card program. As of March 31, 2001, 2,534
Visa credit cards had been issued by the Bank with total approved credit lines
of $2.7 million, of which $707,000 was outstanding.
9
Loan Delinquencies and Defaults
General. The Bank's collection procedures provide that when a real
estate loan is approximately 20 days past due, the borrower is contacted by mail
and payment is requested. If the delinquency continues, subsequent efforts are
made to contact the delinquent borrower and establish a program to bring the
loan current. In certain instances, the Bank may modify the loan or grant a
limited moratorium on loan payments to enable the borrower to reorganize his
financial affairs. If the loan continues in a delinquent status for 60 days or
more, the Bank generally initiates foreclosure proceedings after the customer
has been notified by certified mail. At March 31, 2001, the Bank had property
acquired as the result of foreclosures, in-substance foreclosure or by deed in
lieu of foreclosure and classified as real estate acquired in settlement of
loans ("REO") valued at $94,000.
Delinquent Loans. The following table sets forth information concerning
delinquent mortgage and other loans at March 31, 2001. The amounts presented
represent the total remaining principal balances of the related loans (before
specific reserves for losses), rather than the actual payment amounts which are
overdue.
Real Estate Non-Real Estate
------------------------------ -----------------------------
Commercial
Residential Commercial Consumer Business
------------------------------ -----------------------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
Loans delinquent for:
30 - 59 days 10 $583 6 $521 87 $1,848 10 $ 95
60 - 89 days -- -- 4 158 26 319 8 117
90 days and over -- -- 1 11 16 172 -- --
------ ------ ----- ------ ----- ------ ---- -----
Total delinquent
loans 10 $583 11 $690 129 $2,339 18 $212
====== ====== ===== ====== ===== ======= ==== =====
Classified Assets. Federal regulations provide for the classification
of loans and other assets such as debt and equity securities considered to be of
lesser quality as "substandard," "doubtful" or "loss" assets. The regulation
requires savings associations to classify their own assets and to establish
prudent general allowances for loan losses for assets classified "substandard"
or "doubtful." For the portion of assets classified as "loss", an institution is
required to either establish specific allowances of 100% of the amount
classified or charge off such amount. In addition, the Office of Thrift
Supervision ("OTS") may require the establishment of a general allowance for
losses based on assets classified as "substandard" and "doubtful" or based on
the general quality of the asset portfolio of an association. Assets which do
not currently expose the savings association to sufficient risk to warrant
classification in one of the aforementioned categories but possess potential
weaknesses are designated "special mention" by management.
At March 31, 2001, approximately $1.7 million of the Bank's assets were
classified "substandard". The Bank had no loans classified as "special mention,"
"doubtful" or "loss" at March 31, 2001. As of March 31, 2001, there were loans
totaling $587,000 which were troubled debt restructurings within the meaning of
Statement of Financial Accounting Standard ("SFAS") No. 15 of which $587,000 was
classified substandard. The Bank's policy is to classify all troubled debt
restructurings as substandard. The Bank's classification of assets is consistent
with OTS regulatory classifications.
For additional information regarding the treatment of impaired loans,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Accounting and Reporting Changes" contained in the Annual Report.
Non-performing Assets. Loans are placed on non-accrual status when the
collection of principal and/or interest becomes doubtful. In addition, all loans
are placed on non-accrual status when the loan becomes 90 days or more
contractually delinquent. All consumer loans more than 90 days delinquent are
charged against the consumer loan allowance for loan losses unless there is
adequate collateral which is in the process of being repossessed or foreclosed
on. The Bank has had no troubled debt restructurings which involve forgiving a
portion of interest or principal on any
10
loans or making loans at a rate materially less than that of market rates. Other
loans of concern are those loans (not delinquent more than 60 days) that
management has determined need to be closely monitored as the potential exists
for increased risk on these loans in the future. Nonperforming loans are
reviewed monthly on a loan by loan basis. Specific reserves associated with
these loans will vary based on estimates of recovery for each loan.
The following table sets forth the amounts and categories of risk
elements in the Bank's loan portfolio.
March 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(Dollars in Thousands)
Loans Delinquent 60 to 89 Days:
Residential $-- $ 163 $ 226 $ 79 $ 56
Consumer 320 95 64 113 289
Commercial business and real estate 274 43 18 195 142
------ ------ ------ ------ ------
Total $ 594 $ 301 $ 308 $ 387 $ 487
====== ====== ====== ====== ======
Total as a percentage of
total assets 0.18% 0.10% 0.12% 0.18% 0.24%
Non-Accruing Loans Delinquent
90 Days or More:
Residential $ -- $ 335 $ 362 $ 570 $ 105
Consumer 172 386 307 432 446
Commercial business and real estate 11 169 513 1,032 330
------ ------ ------ ------ ------
Total $ 183 $ 890 $1,182 $2,034 $ 881
====== ====== ====== ====== ======
Total as a percentage of
total assets 0.06% 0.29% 0.46% 0.94% 0.44%
Troubled debt restructurings $ 587 $ 784 $ 706(3) $ 763(2) $829(1)
Real estate acquired in
settlement of loans $ 94 $ 332 $ 154 $ 165 $ 52
Allowance for loan losses $2,784 $2,121 $1,715 $1,512 $1,768
- ----------------
(1) $89,000 of troubled debt restructurings are included in non-accruing loans.
(2) $86,000 of troubled debt restructurings are included in non-accruing loans.
(3) $155,000 of troubled debt restructurings are included in non-accruing loans.
For the fiscal year ended March 31, 2001, the interest income which
would have been recognized with respect to non-accruing loans, had such loans
been current in accordance with their original terms and with respect to
troubled debt restructurings, had such loans been current in accordance with
their original terms, totaled $13,000, compared to $52,000 for the year ended
March 31, 2000.
At March 31, 2001, non-accrual loans totaled $183,000 compared to
$890,000 and $1.2 million at March 31, 2000 and 1999, respectively. Until March
31, 1998, the Bank had classified all loans as non-accrual when they were 60
days or more delinquent. Beginning March 31, 1998, the Bank has classified all
loans as non-accrual when they are 90 days or more delinquent as is more common
industry practice. Included in non-accruing loans at March 31, 2001 was one
commercial loan totaling $11,000 and 16 consumer loans totaling $172,000. Of the
16 consumer loans on non- accrual status at fiscal year end, no loan exceeded
$35,000 at fiscal year end.
The Bank had six loans totaling $587,000 at fiscal year end which were
troubled debt restructurings compared to three loans of $784,000 at March 31,
2000. None of the six troubled debt restructurings were 90 days or more
delinquent or on a non-accrual status. One loan, consisting of a $16,000
unsecured commercial loan, was 60 days delinquent. The other five troubled debt
restructurings consisted of a $4,000 unsecured consumer loan, a $6,000
automobile loan, a $19,000 loan secured by a certificate of deposit, a $53,000
commercial loan secured by two rental properties, and a $489,000 commercial loan
secured by commercial real estate.
11
At March 31, 2001, real estate acquired through foreclosure had an
outstanding carrying value of $94,000 and consisted of two properties.
Provision for Losses on Loans and Real Estate Owned. Security Federal
recognizes that credit losses will be experienced during the course of making
loans and that the risk of loss will vary with, among other things, the type of
loan being made, the creditworthiness of the borrower over the term of the loan
and, in the case of a secured loan, the quality of the underlying security for
the loan.
The Bank seeks to establish and maintain sufficient reserves for
estimated losses on specifically identified loans and real estate where such
losses can be estimated. Additionally, general reserves for estimated possible
losses are established on specified portions of the Bank's portfolio such as
consumer loans and higher risk residential construction mortgage loans based on
management's estimate of the potential loss for loans which normally can be
classified as higher risk. Specific and general reserves are based on, among
other criteria (1) the risk characteristics on the loan portfolio, (2) current
economic conditions on a local as well as a statewide basis, (3) actual losses
experienced historically, and (4) the level of reserves for possible losses in
the future. Additionally, a reserve is maintained for uncollected interest on
loans 90 days or more past due.
At March 31, 2001, total reserves relating to loans were $2.8 million.
In determining the adequacy of the reserve for loan losses, management reviews
past experience of loan charge-offs, the level of past due and non-accrual
loans, the size and mix of the portfolio, general economic conditions in the
market area, and individual loans to identify potential credit problems.
Commercial business, commercial real estate and consumer loans have increased to
$120.8 million, or 49.4% of the Bank's total loan portfolio at March 31, 2001,
and it is anticipated there will be a continued emphasis on this type of credit.
Although commercial business and consumer loans carry a higher level of credit
risk than conventional residential mortgage loans, the level of reserves
reflects management's continuing evaluation of this risk based on upon the
Bank's past loss experience. At fiscal year end, the Bank's ratio of loans
delinquent more than 60 days to total assets was .24%. These delinquent loans
are considered to be well secured and are in the process of collection.
Management believes that reserves for loan losses are at a level adequate to
provide for inherent loan losses. Although management believes that it has
considered all relevant factors in its estimation of future losses, future
adjustments to reserves may be necessary if conditions change substantially from
the assumptions used in making the original estimations. Regulators will from
time to time evaluate the allowance for loan losses which are subject to
adjustments based upon the information available to the regulators at the time
of their examinations.
Management believes the Bank has no undue concentration of loans in any
one particular industry. At March 31, 2001, the Bank had no allowance for losses
on real estate owned.
12
The following table sets forth an analysis of the Bank's allowance for
loan losses.
At March 31,
------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of year $2,121 $1,715 $1,512 $1,768 $1,759
Provision charged to operations 925 750 600 780 300
Charge-offs:
Residential real estate 4 -- 2 -- 64
Commercial business and commercial
real estate 86 114 193 660 59
Consumer 240 269 235 633 198
----- ----- ----- ----- -----
Total charge-offs 330 383 430 1,293 321
----- ----- ----- ----- -----
Recoveries:
Residential real estate 17 -- -- -- --
Commercial business 4 1 2 56 --
Consumer 47 38 31 201 30
----- ----- ----- ----- -----
Total recoveries 68 39 33 257 30
----- ----- ----- ----- -----
Balance at end of year $2,784 $2,121 $1,715 $1,512 $1,768
====== ====== ====== ====== ======
Ratio of net charge-offs during the
year to average loans outstanding
during the year 0.12% 0.20% 0.28% 0.72% 0.19%
==== ==== ==== ==== ====
13
The distribution of the Bank's allowance for loan losses at the dates
indicated is summarized in the following table. The entire allowance is
available to absorb losses from all loan categories.
At March 31,
----------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Residential $374 50.6% $258 48.9% $198 41.6% $140 33.4% $81 33.7%
Consumer 1,205 18.9 870 20.5 647 25.9 551 32.6 734 31.2
Commercial business and
commercial real estate 1,205 30.5 993 30.6 870 32.5 821 34.0 953 35.1
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $2,784 100.0% $2,121 100.0% $1,715 100.0% $1,512 100.0% $1,768 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
14
Service Corporation
- -------------------
As a federally chartered savings bank, Security Federal is permitted by
OTS regulations to invest up to 2% of its assets in the stock of, or loans to,
service corporation subsidiaries, and may invest an additional 1% of its assets
in service corporations where such additional funds are used for inner-city or
community development purposes. At March 31, 2001, Security Federal's net
investment in its service corporations (including loans to service corporations)
totaled $303,000. In addition to investments in service corporations, federal
institutions are permitted to invest an unlimited amount in operating
subsidiaries engaged solely in activities which a federal savings bank may
engage in directly.
Security Financial Services Corporation ("SFSC"). SFSC was
incorporated in 1975 as a wholly owned subsidiary of the Bank. Its primary
activity is investment brokerage services.
Real Estate Partnership. The Company also develops real estate through
two real estate partnerships which it purchased from SFSC at market value in
December 1995. Each project was designed primarily to develop and sell
residential lots in and around the Bank's primary lending area. One project was
completed during fiscal 1998. The Company had no investment in the remaining
project at March 31, 2001. The Company has no plans for additional real estate
ventures.
During fiscal 1990, SFSC entered into a joint venture agreement, known
as Willow Woods, to develop 97.2 acres of land in Aiken County into
approximately 150 single family residential lots. SFSC is a 50% partner in the
joint venture. The first phase of this development containing 51 lots was
completed in May of 1991, and as of March 31, 2000, all of the lots had been
sold. Construction on the second phase of Willow Woods was completed in May 1994
and contains 40 single family residential lots, and as of March 31, 2000, all of
the lots had been sold. Phase three was completed in October 1999 and consists
of 11 single family residential lots of which all had been sold as of March 31,
2001.
The Company intends to establish a trust company to be called Security
Federal Trust, Inc. to engage in asset management and trust activities.
Additionally, the Company intends to establish a subsidiary to be called
Security Federal Investments, Inc. to engage in investment activities. The
Company also intends to provide a full range of insurance services to its
customers. The Company will apply to the OTS for the requisite approvals for
Security Federal Trust, Inc. and Security Federal Investments, Inc. prior to the
time these companies engage in any business activities or operations.
Investment Activities
- ---------------------
Investment securities. The Bank has authority to invest in various
types of liquid assets, including U.S. Treasury obligations and securities of
various federal agencies, certificates of deposit at insured institutions,
bankers' acceptances and federal funds.
The Bank may also invest a portion of its assets in certain commercial
paper and corporate debt securities. The Bank is also authorized to invest in
mutual funds whose assets conform to the investments that a federal thrift
institution is authorized to make directly. There are various restrictions on
the foregoing investments. For example, the commercial paper must be
appropriately rated by at least two nationally recognized investment rating
services and the corporate debt securities must be appropriately rated by at
least one such service. In addition, the average maturity of an institution's
portfolio of corporate debt securities may not, at any one time, exceed six
years, and the commercial paper must mature within nine months of issuance.
Moreover, an institution's total investment in the commercial paper and
corporate debt securities of any one issuer may not exceed 1% of the
institution's assets except that an institution may invest 5% of its assets in
the shares of any appropriate mutual fund. See "Regulation -- Federal Regulation
of Savings Associations."
As a member of the Federal Home Loan Bank ("FHLB") System, Security
Federal must maintain minimum levels of investments that are liquid assets as
defined in Federal regulations. See "Regulation -- Federal Regulation of
15
Savings Associations -- Federal Home Loan Bank System." Liquidity may increase
or decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans.
Historically, the Bank has maintained its liquid assets above the
minimum requirements imposed by the OTS regulations and at a level believed
adequate to meet requirements of normal daily activities, repayment of maturing
debt and potential deposit outflows. Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is provided. As of March
31, 2001, the Bank's liquidity ratio (liquid assets as a percentage of net
withdrawable savings and current borrowings) was approximately 17%.
The following table sets forth the composition of the Company's
portfolio of securities and other investments, not including mortgage-backed
securities.
At March 31,
---------------------------------------------
2001 2000 1999
---------------------------------------------
(In Thousands)
Interest bearing deposit at FHLB $ 5,586 $ 1,069 $ 2,406
------- ------- -------
Total $ 5,586 $ 1,069 $ 2,406
======= ======= =======
Investment Securities:
Available for sale:
GNMA bond $ 1,975 $ -- $ --
U.S. Treasury obligations -- 1,001 5,054
FHLB securities 26,253 41,484 43,358
Federal Farm Credit Bank securities 5,022 9,716 7,985
FHLMC bonds 2,039 1,965 963
------- ------- -------
Total securities available for sale 35,289 54,166 57,360
------- ------- -------
Held to Maturity:
FHLB securities -- -- --
FNMA securities 266 266 337
FHLMC bonds -- -- --
------- ------- -------
Total securities held to maturity 266 266 337
------- ------- -------
Total securities(1) 35,555 54,432 57,697
FHLB stock 3,431 2,606 1,245
------- ------- -------
Total securities and FHLB stock(1) $38,986 $57,038 $58,942
======= ======= =======
(1) Does not include mortgage-backed securities.
At March 31, 2001, the Company did not have any investment securities
(exclusive of obligations of the U.S. Government and federal agencies) issued by
any one entity with a total book value in excess of 10% of stockholders' equity.
16
The following table sets forth the maturities or repricing of
investment securities and FHLB stock at March 31, 2001, and the weighted average
yields of such securities and FHLB stock (calculated on the basis of the cost
and effective yields weighted for the scheduled maturity of each security).
Callable securities are shown at their likely call dates based on current
interest rates.
Maturing or Repricing
----------------------------------------------------------
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
U.S. Government and
other agency
obligations $21,239 5.84% $14,316 6.16% $ -- --% $ -- --%
FHLB stock -- -- 3,431 7.25 -- -- -- -
------ ----- ------ ----- ------ ----- ------ -----
Total $21,239 5.84% $17,747 6.37% $ -- --% $ -- --%
======= ===== ======= ===== ====== === ====== ===
For information regarding the market value of the Bank's securities
portfolios, see Notes 2 and 3 of Notes to Consolidated Financial Statements
contained in the Annual Report.
The Bank has sold securities under an agreement to repurchase when it
is a cost effective method to acquire funds. The Bank did not engage in such
transactions during fiscal 2001. See "-- Borrowings."
Mortgage-backed securities. Security Federal has a portfolio of
mortgage-backed securities which it holds in both an available for sale and a
held to maturity portfolio. Such mortgage-backed securities can serve as
collateral for borrowings and, through repayments, as a source of liquidity.
Under the Bank's risk-based capital requirement, mortgage-backed securities have
a risk weight of 20% (or 0% in the case of Government National Mortgage
Association ("GNMA") securities) in contrast to the 50% risk weight carried by
residential loans. See "Regulation."
The Bank had $8.2 million, $10.7 million, $9.4 million and $4.4 million
of mortgage-backed securities issued by FHLMC at March 31, 2001, 2000 and 1999,
respectively. The Bank had $12.0 million in mortgage-backed securities issued by
FNMA and $16.6 million issued by GNMA at March 31, 2001, compared to $14.1
million in mortgage-backed securities issued by FNMA and $12.2 million issued by
GNMA at March 31, 2000, and $8.7 million in mortgage-backed securities issued by
FNMA and $9.8 million issued by GNMA at March 31, 1999.
At March 31,
--------------------------------------------------------
2001 2000 1999
-------------- ------------- ------------
(In Thousands)
Available for Sale:
FHLMC $ 8,195 $ 8,304 $ 6,185
FNMA 12,031 14,120 8,664
GNMA 16,596 12,231 9,827
------- ------- -------
Total $ 36,822 $34,655 $24,676
======== ======= =======
17
The following table sets forth the composition of the mortgage-backed
securities held to maturity portfolio at the dates indicated.
At March 31,
--------------------------------------------------
2001 2000 1999
-------------- --------------- --------------
Book Value Book Value Book Value
---------- ----------- ----------
(In Thousands)
Held to Maturity:
FHLMC $2,028 $2,444 $3,196
====== ====== ======
At March 31, 2001, the Company did not have any mortgage-backed
securities (exclusive of obligations of agencies of the U.S. Government) issued
by any one entity with a total book value in excess of 10% of stockholders
equity.
For information regarding the market values of Security Federal's
mortgage-backed securities portfolio, see Notes 2 and 3 of the Notes to
Consolidated Financial Statements contained in the Annual Report.
The following table sets forth the maturities or repricings and the
weighted average yields of the mortgage- backed securities at March 31, 2001.
Not considered in the preparation of the table below is the effect of
prepayments.
Maturing or Repricing March 31, 2001
------------------------------------------------------------- --------------
Less Than 1 to 5 5 to 10 Over Balance
1 Year Years Years Ten Years Outstanding
-------------------------------------------------------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
FNMA................. $2,659 6.40% $7,514 6.36% $1,711 6.34% $ -- --% $11,884 6.36%
FHLMC................ 488 6.25 5,187 5.80 2,194 6.15 2,278 6.87 10,147 6.14
GNMA................. 12,200 6.31 960 6.16 1,581 6.17 1,729 6.61 16,470 6.32
------- ---- -------- ---- ------- ---- ------- ---- ------- ----
Total................ $15,347 6.32% $13,661 6.13% $5,486 6.22% $4,007 6.76% $38,501 6.28%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Sources of Funds
- ----------------
Deposit accounts have traditionally been a principal source of the
Bank's funds for use in lending and for other general business purposes. In
addition to deposits, the Bank derives funds from loan repayments, cash flows
generated from operations (including interest credited to deposit accounts),
FHLB of Atlanta advances, the sale of securities under agreements to repurchase,
and loan sales. Scheduled loan payments are a relatively stable source of funds
while deposit inflows and outflows and the related cost of such funds have
varied widely. FHLB of Atlanta advances and the sale of securities under
agreements to repurchase may be used on a short-term basis to compensate for
seasonal reductions in deposits or deposit inflows at less than projected levels
and may be used on a longer term basis in support of expanded lending
activities. The availability of funds from loan sales is influenced by general
interest rates. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained in the Annual Report.
In addition, the Bank originates loans for other financial institutions
and Freddie Mac with their prior commitment to purchase the loan at a set price.
The amount of these loans originated and sold depends primarily on loan demand.
During fiscal 2001, the Bank originated $29.5 million of such loans for other
financial institutions. See "-- Loan Originations, Purchases and Sales."
Deposits. The Bank attracts both short-term and long-term deposits from
the general public by offering a wide assortment of accounts and rates. In
recent years, market conditions have required the Bank to rely increasingly on
short-term accounts and other deposit alternatives that are more responsive to
market interest rates than the passbook accounts and regulated fixed interest
rate, fixed-term certificates that were the Bank's primary source of deposits
before 1978. The Bank offers regular passbook accounts, checking accounts,
various money market accounts, fixed interest
18
rate certificates with varying maturities, negotiated rate $100,000 or above
jumbo certificates of deposit ("Jumbo CDs") and individual retirement accounts.
At March 31, 2001, the Bank had no brokered deposits. In addition, the
Bank believes that, based on its experience over the past several years, its
passbook and transaction accounts are stable sources of deposits.
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs for the periods indicated.
At March 31,
-------------------------------------------------
2001 2000 1999
-------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Interest Rate Range:
- --------------------
Passbook accounts 0%-2.50% $12,911 5.0% $13,203 5.8% $11,848 5.5%
NOW and other transaction
accounts 0%-4.89% 61,453 23.9 58,305 25.5 53,436 24.7
Money market
funds 2.20%-5.13% 49,856 19.4 51,636 22.5 49,370 22.8
------- ---- ------- ---- ------- ----
Total non-certificates $124,220 48.3% $123,144 53.8% $114,654 52.9%
======== ---- ======== ---- ======== ----
Certificates:
- -------------
0.00-4.99% $10,021 3.9 $15,575 6.8 $31,101 14.4
5.00-6.99% 112,040 43.5 90,104 39.4 70,640 32.6
7.00-8.99% 11,129 4.3 -- -- 138 0.1
------- ---- ------- ---- ------- ----
Total certificates $133,190 51.7% $105,679 46.2% $101,879 47.1%
------- ---- ------- ---- ------- ----
Total deposits $257,410 100.0% $228,823 100.0% $216,533 100.0%
======== ===== ======== ===== ======== =====
The Bank relies to a limited extent upon locally obtained Jumbo CDs to
maintain its deposit levels. At March 31, 2001, Jumbo CDs constituted 13.9% of
the Bank's total deposits. Security Federal has not relied heavily on Jumbo CDs
to manage interest rate sensitivity. Security Federal has, however, exhibited an
ability to attract and maintain such deposits to desired levels during recent
periods.
The following table sets forth the deposit flows at the Bank during the
periods indicated.
Years Ended March 31,
---------------------------------------
2001 2000 1999
---------- ---------- ----------
(Dollars in Thousands)
Opening balance...................... $ 228,823 $ 216,533 $181,786
Deposits............................. 1,058,611 1,015,561 997,726
Withdrawals.......................... (1,039,969) (1,011,879) (970,599
Interest credited.................... 9,945 8,608 7,620
--------- --------- --------
Ending balance....................... 257,410 228,823 216,533
--------- --------- --------
Net increase (decrease).............. $ 28,587 $ 12,290 $ 34,747
========= ========= ========
Percent increase (decrease).......... 12.5% 5.7% 19.1%
==== === ====
19
The following table shows rate and maturity information for the Bank's
certificates of deposit as of March 31, 2001.
4.00- 5.00- 6.00- 7.00-
4.99% 5.99% 6.99% 7.99% Total
----- ----- ----- ----- -----
(In Thousands)
Certificate accounts maturing
in quarter ending:
June 30, 2001........... $2,710 $11,772 $10,724 $ 988 $26,194
September 30, 2001...... 1,744 14,053 16,234 803 32,834
December 31, 2001....... 1,158 9,367 26,045 3,197 39,767
March 31, 2002.......... 1,537 2,375 7,275 5,509 16,696
June 30, 2002........... 1,510 1,150 3,256 161 6,077
September 30, 2002...... 549 2,930 2,431 16 5,926
December 31, 2002....... 164 88 719 364 1,335
March 31, 2003.......... 285 319 1,115 66 1,785
June 30, 2003........... 85 267 797 25 1,174
September 30, 2003...... 29 98 147 -- 274
December 31, 2003....... 107 62 16 -- 185
Thereafter.............. 143 407 393 -- 943
------ ------- ------- ------ -------
Total................. $10,021 $42,888 $69,152 $11,129 $133,190
======= ======= ======= ======= ========
The following table indicates the amount of the Bank's deposits of
$100,000 or more by time remaining until maturity at March 31, 2001.
Passbook, NOW and
Certificates of Deposit Money Market Accounts
----------------------- ---------------------
(In Thousands)
Maturity Period
- ---------------
Three months or less.............. $ 5,737 $ 35,451
Over three through six months..... 9,435 --
Over six through twelve month..... 16,529 --
Over twelve months................ 4,019 --
-------- --------
Total.......................... $ 35,720 $ 35,451
======== ========
Borrowings
- ----------
As a member of the FHLB of Atlanta, the Bank is required to own capital
stock in the FHLB of Atlanta and is authorized to apply for advances from the
FHLB of Atlanta. Each FHLB credit program has its own interest rate, which may
be fixed or variable, and range of maturities. The FHLB of Atlanta may prescribe
the acceptable uses to which these advances may be put, as well as limitations
on the size of the advances and repayment provisions. See Note 9 of Notes to
Consolidated Financial Statements contained in the Annual Report for disclosure
regarding the maturities and rate structure of the Bank's FHLB advances. Federal
law contains certain collateral requirements for FHLB advances. See "Regulation
- -- Federal Regulation of Savings Associations -- Federal Home Loan Bank System."
Occasionally, the Bank has used the sale of securities under agreements
to repurchase as a source of funds. The securities sold pursuant to these
agreements consist of mortgage loans which have been convened to FHLMC
participation certificates. The Bank has sold securities under agreements to
repurchase to both FHLMC and Wachovia
20
Bank and Trust Company. These funds are used whenever its costs are favorable
compared to alternative sources of funds. At March 31, 2001, the Bank had no
wholesale repurchase agreements outstanding. At March 31, 2001, the Bank had
$3.4 million in retail repurchase agreements with an average rate of 4.88%.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances at the dates indicated.
Years Ended March 31,
-------------------------------------
2001 2000 1999
---- ---- ----
(In Thousands)
Maximum Balance:
FHLB advances...................... $68,620 $50,611 $21,658
Average Balance:
FHLB advances...................... $58,555 $31,909 $16,958
The following table sets forth information as to the Bank's borrowings
and the weighted average interest rates thereon at the dates indicated.
At March 31,
-------------------------------------
2001 2000 1999
---- ---- ----
(Dollars in Thousands)
Balance:
FHLB advances...................... $42,704 $50,611 $14,600
Weighted Average Interest Rate:
At Fiscal Year End:
FHLB advances..................... 5.99% 5.99% 5.82%
During Fiscal Year:
FHLB advances..................... 6.42% 5.65% 5.91%
Quarterly Results
- -----------------
Quarter ended
------------------------------------------------------
2001 June 30 September 30 December 31 March 31
- ---- ------- ------------ ----------- ---------
Interest income........ $ 5,632 $ 5,972 $ 6,282 $ 6,267
Interest expense....... 3,132 3,435 3,728 3,576
------- ------- ------- -------
Net interest income.... 2,500 2,537 2,554 2,691
Provisions for loan losses 175 150 150 450
------- ------- ------- -------
Net interest income after
provision for loan losses 2,325 2,387 2,404 2,241
Other income........... 589 600 591 960
General and Administrative
expenses............. 2,104 2,165 2,202 2,380
------- ------- ------- -------
Income before income taxes 810 822 793 821
Income taxes........... 301 303 285 230
------- ------- ------- -------
Net income............. $ 509 $ 519 $ 508 $ 591
======= ======= ======= =======
Net income per share... $ 0.30 $ 0.31 $ 0.30 $ 0.35
======= ======= ======= =======
Weighted average shares
outstanding.......... 1,676,494 1,673,718 1,670,434 1,669,901
(actual) ========= ========= ========= =========
21
Quarter ended
---------------------------------------------------
2000 June 30 September 30 December 31 March 31
- ---- ------- ------------ ----------- --------
Interest income........... $ 4,565 $ 4,752 $ 5,061 $ 5,427
Interest expense.......... 2,334 2,469 2,705 2,870
------- ------- ------- -------
Net interest income....... 2,231 2,283 2,356 2,557
Provisions for loan losses 150 150 175 275
------- ------- ------- -------
Net interest income after
provision for loan losses 2,081 2,133 2,181 2,282
Other income.............. 568 638 583 507
General and Administrative
expenses................. 1,928 1,991 1,985 1,941
------- ------- ------- -------
Income before income taxes 721 780 779 848
Income taxes.............. 246 271 281 309
------- ------- ------- -------
Net income................ $ 475 $ 509 $ 498 $ 539
======= ======= ======= =======
Net income per share...... $ 0.28 $ 0.30 $ 0.30 $ 0.32
======= ======= ======= =======
Weighted average shares
outstanding............. 1,684,240 1,677,048 1,674,240 1,677,048
(actual) ========= ========= ========= =========
Competition
- -----------
The Bank serves the counties of Aiken, Bamberg, and Lexington, South
Carolina through its eleven branch offices located in Aiken, Denmark, North
Augusta, Graniteville, Langley, Clearwater, Wagener, and West Columbia, South
Carolina. On October 21, 1993 the Bank expanded its market area through the
acquisition of four branch offices of NationsBank of South Carolina, N.A. The
branches are located in Langley, Graniteville, Clearwater and Wagener, Aiken
County, South Carolina.
Security Federal faces strong competition both in originating loans and
in attracting deposits. Competition in originating loans comes primarily from
other thrift institutions, commercial banks, mortgage bankers and credit unions
who also make loans in the Bank's market area. The Bank competes for loans
principally on the basis of the interest rates and loan fees it charges, the
types of loans it makes and the quality of services it provides to borrowers.
The Bank faces substantial competition in attracting deposits from
other thrift institutions, commercial banks, money market and mutual funds,
credit unions and other investment vehicles. The ability of the Bank to attract
and retain deposits depends on its ability to provide an investment opportunity
that satisfies the requirements of investors as to rate of return, liquidity,
risk and other factors. The Bank attracts a significant amount of deposits
through its branch offices primarily from the communities in which those branch
offices are located. Therefore, competition for those deposits is principally
from other thrift institutions and commercial banks located in the same
communities. The Bank competes for these deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours, and convenient
branch locations with interbranch deposit and withdrawal privileges at each.
The authority to offer money market deposits, and expanded lending and
other powers authorized for thrift institutions by federal law, have resulted in
increased competition for both deposits and loans between thrift institutions
and other financial institutions such as commercial banks and credit unions.
22
REGULATION
General
- -------
The Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer of
its deposits. The activities of federal savings institutions are governed by the
Home Owners' Loan Act ("HOLA") and, in certain respects, the Federal Deposit
Insurance Act ("FDIA"), and the regulations issued by the OTS and the FDIC to
implement these statutes. These laws and regulations delineate the nature and
extent of the activities in which federal savings associations may engage.
Lending activities and other investments must comply with various statutory and
regulatory capital requirements. In addition, the Bank's relationship with its
depositors and borrowers is also regulated to a great extent, especially in such
matters as the ownership of deposit accounts and the form and content of the
Bank's mortgage documents. The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other financial institutions. There are periodic
examinations by the OTS to review the Bank's compliance with various regulatory
requirements. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such policies, whether by the OTS, the
FDIC or Congress, could have a material adverse impact on the Company, the Bank
and their operations. The Company, as a savings and loan holding company, is
also required to file certain report with, and otherwise comply with the rules
and regulations of, the OTS.
Federal Regulation of Savings Associations
- ------------------------------------------
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the Treasury.
The OTS has extensive authority over the operations of savings associations.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
All savings associations are required to pay assessments to the OTS to
fund the agency's operations. The general assessments, paid on a semi-annual
basis, are determined based on the savings association's total assets, including
consolidated subsidiaries. The Bank's OTS assessment for the fiscal year ended
March 31, 2001 was $68,000.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner.
The Bank, as a member of the FHLB of Atlanta, is required to acquire
and hold shares of capital stock in the FHLB of Atlanta in an amount equal to
the greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (i.e., borrowings) from
the FHLB of Atlanta. The Bank is in compliance with this requirement with an
investment in FHLB of Atlanta stock of $3.4 million at March 31, 2001.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes advances
to members in accordance with policies and procedures established by the FHFB
and the Board of Directors of the FHLB of Atlanta.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. The FDIC maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the
23
SAIF. The Bank's deposit accounts are insured by the FDIC under the SAIF to the
maximum extent permitted by law. As insurer of the Bank's deposits, the FDIC
has examination, supervisory and enforcement authority over all savings
associations.
Under applicable regulations, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending seven months before the assessment period. The
capital categories are: (i) well-capitalized, (ii) adequately capitalized, or
(iii) undercapitalized. An institution is also placed in one of three
supervisory subcategories within each capital group. The supervisory subgroup to
which an institution is assigned is based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information that
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is assigned
with the most well-capitalized, healthy institutions receiving the lowest rates.
Effective January 1, 1997, the premium schedule for BIF and SAIF
insured institutions ranged from 0 to 27 basis points. However, SAIF insured
institutions and BIF insured institutions are required to pay a Financing
Corporation assessment in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s. This amount is currently equal to about 2.1 basis
points for each $100 in domestic deposits for both BIF and SAIF members. These
assessments, which are revised quarterly based upon the level of BIF and SAIF
deposits, will continue until the bonds mature in the year 2015.
The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
Under the FDIA, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. Management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of specified liquid assets
equal to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement is currently 4%, but may be changed from time to time by the OTS to
any amount within the range of 4% to 10%. Monetary penalties may be imposed for
failure to meet liquidity requirements. The Bank has never been subject to
monetary penalties for failure to meet its liquidity requirements.
Prompt Corrective Action. The OTS is required to take certain
supervisory actions against undercapitalized savings associations, the severity
of which depends upon the institution's degree of undercapitalization.
Generally, an institution that has a ratio of total capital to risk-weighted
assets of less than 8%, a ratio of Tier I (core) capital to risk- weighted
assets of less than 4%, or a ratio of core capital to total assets of less than
4% (3% or less for institutions with the highest examination rating) is
considered to be "undercapitalized." An institution that has a total risk-based
capital ratio less than 6%, a Tier I capital ratio of less than 3% or a leverage
ratio that is less than 3% is considered to be "significantly undercapitalized"
and an institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for a
savings institution that is "critically undercapitalized." OTS regulations also
require that a capital restoration plan be filed with the OTS within 45 days of
the date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company in an amount of
up to the lesser of 5% of the institution's assets or the amount which would
bring the institution into compliance with all capital standards. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS also could
24
take any one of a number of discretionary supervisory actions, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
At March 31, 2001, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv)
interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the OTS determines that the Bank fails to
meet any standard prescribed by the Guidelines, the agency may require the Bank
to submit to the agency an acceptable plan to achieve compliance with the
standard. Management is aware of no conditions relating to these safety and
soundness standards which would require submission of a plan of compliance.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio asset (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code ("Code"). Under either test, such assets primarily
consist of residential housing related loans and investments. At March 31, 2001,
the Bank met the test and its QTL percentage was 85%.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is subject to national bank limits for payment of dividends. If such
association has not requalified or converted to a national bank within three
years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a holding
company, then within one year after the failure, the holding company must
register as a bank holding company and become subject to all restrictions on
bank holding companies. See "-- Savings and Loan Holding Company Regulations."
Capital Requirements. Federally insured savings associations, such as
the Bank, are required to maintain a minimum level of regulatory capital. The
OTS has established capital standards, including a tangible capital requirement,
a leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). At March 31, 2001, the Bank
had tangible capital of $22.5 million, or 6.8% of adjusted total assets, which
is approximately $15.9 million above the minimum requirement of 2.0% of adjusted
total assets in effect on that date.
The capital standards also require core capital equal to at least 4% of
adjusted total assets, depending on an institution's supervisory rating. Core
capital generally consists of tangible capital. At March 31, 2001, the Bank had
core capital equal to $23.0 million, or 6.9% of adjusted total assets, which is
$9.7 million above the minimum leverage ratio requirement of 4% as in effect on
that date.
25
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, are multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to- four family first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by FNMA or FHLMC.
On March 31, 2001, the Bank had total risk-based capital of
approximately $25.3 million, including $22.7 million in core capital and $2.6
million in qualifying supplementary capital, and risk-weighted assets of $206.6
million, or total capital of 12.2% of risk-weighted assets. This amount was $8.8
million above the 8% requirement in effect on that date.
The OTS is authorized to impose capital requirements in excess of these
standards on individual associations on a case-by-case basis. The OTS and the
FDIC are authorized and, under certain circumstances required, to take certain
actions against savings associations that fail to meet their capital
requirements. The OTS is generally required to take action to restrict the
activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital
ratio or an 8% risk-based capital ratio). Any such association must submit a
capital restoration plan and until such plan is approved by the OTS may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The OTS
is authorized to impose the additional restrictions that are applicable to
significantly undercapitalized associations.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Company or the Bank may have a substantial adverse effect on their operations
and profitability.
Limitations on Capital Distributions. The OTS imposes various
restrictions on savings associations with respect to their ability to make
distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account. The OTS also prohibits a savings association from declaring or paying
any dividends or from repurchasing any of its stock if, as a result of such
action, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with the association's mutual to stock conversion.
The Bank may make a capital distribution without OTS approval provided
that the Bank notify the OTS 30 days before it declares the capital distribution
and that the following requirements are met: (i) the Bank has a regulatory
rating in one of the two top examination categories, (ii) the Bank is not of
supervisory concern, and will remain adequately or well capitalized, as defined
in the OTS prompt corrective action regulations, following the proposed
distribution, and (iii) the distribution does not exceed the Bank's net income
for the calendar year-to-date plus retained net income for the previous two
calendar years (less any dividends previously paid). If the Bank does not meet
these stated requirements, it must obtain the prior approval of the OTS before
declaring any proposed distributions.
In the event the Bank's capital falls below its regulatory requirements
or the OTS notifies it that it is in need of more than normal supervision, the
Bank's ability to make capital distributions will be restricted. In addition, no
26
distribution will be made if the Bank is notified by the OTS that a proposed
capital distribution would constitute an unsafe and unsound practice, which
would otherwise be permitted by the regulation.
Loans to One Borrower. Federal law provides that savings institutions
are generally subject to the national bank limit on loans to one borrower. A
savings institution may not make a loan or extend credit to a single or related
group of borrowers in excess of 15% of its unimpaired capital and surplus. An
additional amount may be lent, equal to 10% of unimpaired capital and surplus,
if secured by specified readily-marketable collateral. At March 31, 2001, the
Bank's limit on loans to one borrower was $3.8 million. At March 31, 2001, the
Bank's largest single loan to one borrower was $3.5 million, which was
performing according to its original terms.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings associations also
must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
association were a Federal Reserve member bank. Generally, transactions between
a savings association or its subsidiaries and its affiliates are required to be
on terms as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Community Reinvestment Act. Under the federal Community Reinvestment
Act ("CRA"), all federally-insured financial institutions have a continuing and
affirmative obligation consistent with safe and sound operations to help meet
all the credit needs of its delineated community. The CRA does not establish
specific lending requirements or programs nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to meet all the credit needs of its delineated community. The CRA
requires the federal banking agencies, in connection with regulatory
examinations, to assess an institution's record of meeting the credit needs of
its delineated community and to take such record into account in evaluating
regulatory applications to establish a new branch office that will accept
deposits, relocate an existing office, or merge or consolidate with, or acquire
the assets or assume the liabilities of, a federally regulated financial
institution, among others. The CRA requires public disclosure of an
institution's CRA rating. The Bank received an "outstanding" rating as a result
of its latest evaluation.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders,
27
and any attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
directive or cease and desist order to removal of officers or directors,
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $27,500 per day, or
$1.1 million per day in especially egregious cases. Under the FDIA, the FDIC has
the authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
Savings and Loan Holding Company Regulations
- --------------------------------------------
The Company is a unitary savings and loan holding company subject to
regulatory oversight of the OTS. Accordingly, the Company is required to file
reports with the OTS and is subject to regulation and examination by the OTS. In
addition, the OTS has enforcement authority over the Company and its non-savings
association subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to present a serious risk to the subsidiary
savings association.
Acquisitions. Federal law and OTS regulations issued thereunder
generally prohibit a savings and loan holding company, without prior OTS
approval, from acquiring more than 5% of the voting stock of any other savings
association or savings and loan holding company or controlling the assets
thereof. They also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or controls more
than 25% of the voting shares of such holding company, from acquiring control of
any savings association not a subsidiary of such savings and loan holding
company, unless the acquisition is approved by the OTS.
Activities. As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions. If the Company acquires
control of another savings association as a separate subsidiary other than in a
supervisory acquisition, it would become a multiple savings and loan holding
company and the activities of the Bank and any other subsidiaries (other than
the Bank or any other SAIF insured savings association) would generally become
subject to additional restrictions. There generally are more restrictions on the
activities of a multiple savings and loan holding company than on those of a
unitary savings and loan holding company. Federal law provides that, among other
things, no multiple savings and loan holding company or subsidiary thereof which
is not an insured association shall commence or continue for more than two years
after becoming a multiple savings and loan association holding company or
subsidiary thereof, any business activity other than: (i) furnishing or
performing management services for a subsidiary insured institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary insured institution,
(iv) holding or managing properties used or occupied by a subsidiary insured
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by regulation as of March 5, 1987 to be engaged
in by multiple holding companies or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the OTS
by regulation, prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above also must be approved by
the OTS prior to being engaged in by a multiple savings and loan holding
company.
Qualified Thrift Lender Test. If the Bank fails the qualified thrift
lender test, within one year the Company must register as, and will become
subject to, the significant activity restrictions applicable to bank holding
companies. See "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test" for information regarding the Bank's qualified thrift lender
test.
28
TAXATION
Federal Taxation
- ----------------
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. The Bank's deductions with respect
to "qualifying real property loans," which are generally loans secured by
certain interest in real property, were computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted additions to the non-qualifying reserve. Due to the Bank's loss
experience, the Bank generally recognized a bad debt deduction equal to 8% of
taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new
rules eliminated the 8% of taxable income method for deducting additions to the
tax bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also required that all institutions recapture all or a portion
of their bad debt reserves added since the base year (last taxable year
beginning before January 1, 1988). The Bank has no post-1987 reserves subject to
recapture. For taxable years beginning after December 31, 1995, the Bank's bad
debt deduction will be determined under the experience method using a formula
based on actual bad debt experience over a period of years. The unrecaptured
base year reserves will not be subject to recapture as long as the institution
continues to carry on the business of banking. In addition, the balance of the
pre-1988 bad debt reserves continue to be subject to provisions of present law
referred to below that require recapture in the case of certain excess
distributions to shareholders.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Bank's loan portfolio decreased since December
31, 1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Bank's bad debt
reserve. The amount of additional taxable income created from an Excess
Distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after the
Conversion, the Bank makes a "nondividend distribution," then approximately one
and one-half times the Excess Distribution would be includable in gross income
for federal income tax purposes, assuming a 34% corporate income tax rate
(exclusive of state and local taxes). See "Regulation" for limits on the payment
of dividends by the Bank. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the
tax bad debt reserve deduction using the percentage of taxable income method
over the deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this preference
and prior to reduction for net operating losses). For taxable years beginning
after December 31, 1986, and before January 1, 1996, an environmental tax of
0.12% of the excess of
29
AMTI (with certain modification) over $2.0 million is imposed on corporations,
including the Bank, whether or not an Alternative Minimum Tax is paid.
Dividends-Received Deduction. The Company may exclude from its income
100% of dividends received from the Bank as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is generally
70% in the case of dividends received from unaffiliated corporations with which
the Company and the Bank will not file a consolidated tax return, except that if
the Company or the Bank owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be deducted.
Audits. The Company, the Bank and its consolidated subsidiary have been
audited or their books closed without audit by the IRS with respect to
consolidated federal income tax returns through March 31, 1994. See Note 10 of
Notes to Consolidated Financial Statements contained in the Annual Report for
additional information regarding income taxes of the Bank.
State Taxation
- --------------
South Carolina has adopted the Code as it relates to savings banks,
effective for taxable years beginning after December 31, 1986. The Bank is
subject to South Carolina income tax at the rate of 6%. The Bank has not been
audited by the State of South Carolina during the past five years.
The Corporation's income tax returns have not been audited by federal
or state authorities within the last five years. For additional information
regarding income taxes, see Note 10 of the Notes to Consolidated Financial
Statements contained in the Annual Report.
ITEM 2. PROPERTIES
At March 31, 2001, Security Federal owned the buildings and land for
its main office, five of its branch offices, including the operations center,
leased the land and owned the improvements thereon for one of its offices, and
leased the remaining five offices. The property related to the offices owned by
Security Federal had a depreciated cost (including land) of approximately $3.7
million at March 31, 2001. At March 31, 2001, the aggregate net book value of
leasehold improvements (excluding furniture and equipment) associated with
leased premises was $1.3 million. See Note 5 of Notes to Consolidated Financial
Statements contained in the Annual Report.
The following table sets forth the net book value of the offices owned
(including land) and leasehold improvements on properties leased by Security
Federal at March 31, 2001.
Date
Lease Facility Gross
Owned or Expiration Opened/ Square Net Book
Location Leased Date Acquired Footage Value
- --------------------- -------- --------- -------- ------- --------
Main Office:
1705 Whiskey Road S. Owned N/A 1980 10,000 $447,000
Aiken, South Carolina
(table continued on following page)
30
Date
Lease Facility Gross
Owned or Expiration Opened/ Square Net Book
Location Leased Date Acquired Footage Value
- --------------------- -------- --------- -------- ------- --------
Full Service Branch Offices
149 E. Baruch Street Owned N/A 1984 2,258 $182,000
Denmark, South Carolina
100 Laurens Street, N.W. Leased 2013 1959 4,500 18,000
Aiken, South Carolina
313 East Martintowne Road Owned(1) N/A 1973 4,356 111,000
North Augusta, South Carolina
1665 Richland Avenue, W. Owned N/A 1984 1,942 226,000
Aiken, South Carolina
Montgomery & Canal Streets Leased 2007 1993(2) 3,576 25,000
Masonic Shopping Center
Graniteville, South Carolina
2812 Augusta Road Owned N/A 1993(2) 2,509 173,000
Langley, South Carolina
Highway 125 and Highways
1 and 78 Leased 2003 1993(2) 2,287 213,000
Midland Valley Shopping Center
Clearwater, South Carolina
118 Main Street North Owned N/A 1993(2) 3,600 256,000
Wagener, South Carolina
Walmart Superstore Leased 2001 1996 517 296,000
2035 Whiskey Road
Aiken, South Carolina
1185 Sunset Boulevard
West Columbia, South Carolina Leased 2015 2000 10,000 792,000
Operations Center:
871 East Pine Log Road Owned N/A 1988 10,000 924,000
Aiken, South Carolina
- -----------------------
(1) Security Federal has a lease on the land for this office which expires in
2003, but has options through 2063.
(2) Represents acquisition date.
31
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is involved as plaintiff or defendant in various legal
actions arising in the course of its business. It is the opinion of management,
after consultation with counsel, that the resolution of these legal actions will
not have a material adverse effect on the Company's financial condition and
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended March 31, 2001.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
-----------------------------------------------------------------
The information contained in the section captioned "Stockholders
Information -- Price Range of Common Stock" and "-- Dividends" in the Annual
Report is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The information contained in the section captioned "Selected
Consolidated Financial and Other Data" in the Annual Report is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset and Liability Management" in the Annual Report is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Independent Auditors' Report*
Consolidated Balance Sheets, March 31, 2001 and 2000*
Consolidated Statements of Income For the Years Ended March 31, 2001,
2000 and 1999*
Consolidated Statements of Changes in Shareholders' Equity For the
Years Ended March 31, 2001, 2000 and 1999*
Consolidated Statements of Cash Flows For the Years Ended March 31,
2001, 2000 and 1999*
Notes to Consolidated Financial Statements*
* Contained in the Annual Report filed as an exhibit hereto and
incorporated herein by reference. All schedules have been omitted as
the required information is either inapplicable or contained in the
Consolidated Financial Statements or related Notes contained in the
Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
---------------------------------------------------------------
None.
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information contained under the section captioned "Election of
Directors" in the Proxy Statement is incorporated herein by reference. The
information contained under the section captioned "Compliance With Section 16(a)
of the Exchange Act" in the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information contained in the section captioned "Election of
Directors -- Compensation of Executive Officers" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information contained in the section captioned "Voting Securities
and Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information contained in the section captioned "Certain
Transactions" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) Exhibits:
- -------------
3.1 Articles of Incorporation and amendments thereto*
3.2 Bylaws*
4 Instruments defining the rights of security holders, including
indentures**
10 Executive Compensation Plans and Arrangements:
Salary Continuation Agreements***
Amendment One to Salary Continuation Agreements****
Stock Option Plan***
Incentive Compensation Plan***
13 Annual Report to Stockholders
21 Subsidiaries of Registrant
23 Consent of Elliott Davis, LLP
- ---------------------------------
* Filed on August 3, 1998, as an exhibit to the Company's Form 8-K Current
Report.
** Filed on August 12, 1987, as an exhibit to the Company's Form 8-A
registration statement pursuant to Section 12(g) of the Securities
Exchange Act of 1934 or as a part of reports filed pursuant to Section
13 of such Act.
*** 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.
33
(b) Reports on Form 8-K.
- ------------------------
No current reports on Form 8-K were filed by the Company during the
three months ended March 31, 2001.
34
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: June 25, 2001 By: /s/ Timothy W. Simmons
--------------------------
Timothy W. Simmons
President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Timothy W. Simmons June 25, 2001
-----------------------
Timothy W. Simmons
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Roy G. Lindburg June 25, 2001
--------------------
Roy G. Lindburg, Treasurer and Chief
Financial Accounting Officer (Principal
Financial and Accounting Officer)
By: /s/ T. Clifton Weeks June 25, 2001
---------------------
T. Clifton Weeks
Chairman of the Board and Director
By: June __, 2001
------------------------
Gasper L. Toole, II
Director
By: June __, 2001
----------------------
Robert E. Johnson
Director
By: /s/ Harry O. Weeks, Jr. June 25, 2001
------------------------
Harry O. Weeks, Jr.
Director
By: /s/ Robert E. Alexander June 25, 2001
------------------------
Robert E. Alexander
Director
By: June __, 2001
--------------------
Thomas L. Moore
Director
By: /s/ William Clyburn June 25, 2001
--------------------
William Clyburn
Director
INDEX TO EXHIBITS
Exhibit Number
- --------------
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Elliott Davis, LLP
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
TABLE OF CONTENTS
Letter to Shareholders ............................................ 1
Financial Highlights ............................................ 2
Selected Consolidated Financial and Other Data .................. 3
Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 4
Report of Elliott Davis, LLP, Independent Auditors ............. 17
Consolidated Balance Sheets ...................................... 18
Consolidated Statements of Income ................................ 19
Consolidated Statements of Shareholders' Equity .................. 20
Consolidated Statements of Cash Flows ............................. 21
Notes to Consolidated Financial Statements ........................ 23
Shareholders Information .......................................... 40
Security Federal Bank Board of Directors and Management Team ...... 42
SECURITY FEDERAL CORPORATION
- -------------------------------------------------------------------------------
Fellow Shareholders:
We are pleased to report our fourth consecutive year of record earnings. Net
income for our most recent fiscal year ending March 31, 2001 increased 5.3% to
$2.1 million or $1.27 per share compared to $2.0 million or $1.20 per share, on
a split adjusted basis, for our fiscal year ending March 31, 2000. In addition,
as of March 31, 2001, total assets reached a record high of over $330 million
and total loans reached a record high of over $230 million. Recent regulatory
reports show Security Federal Bank to be the home financing leader in our market
area. Small business lending also continues to be one of our strengths. Our
asset growth during the year was primarily funded by deposits which increased
12.5% to over $257 million.
In view of our record earnings, your Board of Directors approved a dividend of
$.02 per share which was paid on June 15, 2001 to shareholders of record as of
May 31, 2001. This represented the 42nd consecutive quarterly dividend paid
since the Bank's conversion to a stock form of ownership in 1987.
The highlight of our year was the opening of our West Columbia branch office in
December 2000. This branch offers all banking services including mortgage
lending, financial counseling, investment and insurance products. Under the
leadership of Regional President Steve Nivens, this office has gotten off to a
fantastic start with excellent growth in both loans and deposits. West Columbia
became our eleventh full service branch.
We recently began offering on-line banking and automatic bill payment services.
These services allow our customers to bank from the convenience of their home 24
hours per day, seven days per week. Our web site address is
WWW.SECURITYFEDERALBANK.COM. We feel this site is informative, graphically
pleasing, and very easy to navigate. Please check us out on the web.
During the year, we expanded our line of financial services by offering
financial planning, plus additional investment and insurance products. We intend
to continue to expand these financial products plus add trust services during
the next year which will round us out as a one-stop financial services provider.
We would like to take this opportunity to thank our many fine and dedicated
employees. They are the ones who truly make Security Federal a community bank.
Thanks also to all of you for your continued support. We appreciate you banking
with us. Be sure to mention us to your friends and relatives as we all benefit
from your referrals.
Sincerely, Sincerely,
/s/T. Clifton Weeks /s/Timothy W. Simmons
T. Clifton Weeks Timothy W. Simmons
Chairman President & Chief Executive Officer
1
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
Years Ended March 31,
-----------------------------------
2001 2000
---------------- ----------------
Net Income $ 2,127,434 $ 2,021,213
Earnings Per Share - Basic 1.27 1.20
Book Value Per Share 14.07 11.78
Total Interest Income 24,152,829 19,805,361
Total Interest Expense 13,871,311 10,378,254
Net Interest Income Before Provision For
Loan Losses 10,281,518 9,427,107
Provision For Loan Losses 925,000 750,000
Net Income After Provision For Loan Losses 9,356,518 8,677,107
Net Interest Margin 3.38% 3.54%
Total Loans Originated 124,731,000 118,490,000
Adjustable Rate Loans As A Percentage Of
Total Gross Loans 55.3% 59.6%
NET INCOME (In Thousands) EARNINGS PER SHARE - BASIC
1997 $835 1997 $0.50
1998 $1,713 1998 $1.02
1999 $1,806 1999 $1.07
2000 $2,021 2000 $1.20
2001 $2,127 2001 $1.27
RETURN ON EQUITY TOTAL ASSETS (In Millions)
1997 5.28% 1997 $202
1998 9.96% 1998 $216
1999 9.56% 1999 $255
2000 10.41% 2000 $305
2001 9.98% 2001 $331
BOOK VALUE PER SHARE ALLOWANCE FOR LOAN LOSSES(1)
1997 $ 9.70 1997 1.19%
1998 $10.73 1998 1.09%
1999 $11.62 1999 1.12%
2000 $11.78 2000 1.09%
2001 $14.07 2001 1.19%
(1)ALLOWANCE FOR LOSSES AS A PERCENTAGE OF TOTAL LOANS.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Selected Consolidated Financial and Other Data
At Or For The Year Ended March 31,
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Balance Sheet Data (Dollars In Thousands, Except Per Share Data)
- ---------------------------------
Total Assets $330,642 304,802 $254,718 $215,512 $201,646
Cash And Cash Equivalents 12,616 7,417 6,951 4,659 7,904
Investment And Mortgage-Backed
Securities 74,405 91,531 85,569 62,813 36,970
Loans Receivable - Net (1) 230,997 193,001 151,986 137,724 146,769
Deposits 257,410 228,823 216,533 181,786 168,061
Advances From Federal Home Loan
Bank 42,704 50,611 14,600 12,126 14,114
Total Shareholders' Equity 23,500 19,759 19,560 18,076 16,182
Income Data
- ---------------------------------
Total Interest Income 24,153 19,805 17,312 16,618 15,843
Total Interest Expense 13,871 10,378 8,638 8,001 7,908
------ ------ ------ ------ ------
Net Interest Income 10,282 9,427 8,674 8,617 7,935
Provision For Loan Losses 925 750 600 780 300
------ ------ ------ ------ ------
Net Interest Income After
Provision For Loan Losses 9,357 8,677 8,074 7,837 7,635
Other Income 2,739 2,296 2,641 2,004 1,659
General And Administrative
Expense 8,851 7,845 7,962 7,220 8,045
Income Taxes 1,118 1,107 947 908 414
------ ------ ------ ------ ------
Net Income $2,127 2,021 $1,806 $1,713 $ 835
====== ====== ====== ====== ======
Per Common Share Data
- ---------------------------------
Net Income Per Common Share(Basic)$1.27 1.20 $1.07 $1.02 $0.51
Cash Dividends Declared $0.08 0.08 $0.07 $0.06 $0.05
====== ====== ====== ====== ======
Other Data
- ---------------------------------
Interest Rate Spread Information:
Average During Period 3.00% 3.19% 3.53% 4.00% 3.82%
End Of Period 3.11% 2.90% 3.15% 3.91% 4.01%
Net Interest Margin (Net Interest
Income/Average Earning Assets) 3.38% 3.54% 3.96% 4.33% 4.09%
Average Interest-Earning Assets
To Average Interest-Bearing
Liabilities 108.39% 109.11% 110.85% 108.27% 106.40%
Equity To Total Assets 7.11% 6.48% 7.68% 8.39% 8.03%
Non-Performing Assets To
Total Assets (2) .11% .40% .52% 1.02% .70%
Return On Assets (Ratio Of Net
Income To Average Total Assets) .66% .72% .77% .80% .40%
Return On Equity (Ratio Of Net
Income To Average Equity) 9.98% 10.41% 9.56% 9.96% 5.28%
Equity To Assets Ratio (Ratio Of
Average Equity To Average
Total Assets) 6.62% 6.93% 8.08% 8.05% 7.55%
Dividend Pay-Out Ratio On
Common Shares 6.30% 6.67% 6.53% 5.87% 9.94%
Number Of Full-Service Offices 11 10 10 10 10
(1) INCLUDES LOANS HELD FOR SALE
(2) NON-PERFORMING ASSETS CONSIST OF NON-ACCRUAL LOANS AND REPOSSESSED REAL
ESTATE.
3
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
GENERAL
The following discussion is presented to provide the reader with an
understanding of the financial condition and results of operations of Security
Federal Corporation and its subsidiaries. The investment and other activities of
the parent company, Security Federal Corporation (the Company), have had no
significant impact on the results of operations for the periods presented in the
financial statements. The information presented in the following discussion of
financial results is indicative of the activities of Security Federal Bank (the
Bank), a wholly owned subsidiary of the Company. The Bank is a federally
chartered thrift that was founded in 1922.
The principal business of the Bank is accepting deposits from the general
public and originating consumer and commercial business loans as well as
mortgage loans that enable borrowers to purchase or refinance one-to-four family
residential real estate. The Bank also originates construction loans on
single-family residences; multi-family dwellings and projects; commercial real
estate; and loans for the acquisition, development and construction of
residential subdivisions and commercial projects.
The Bank's net income is dependent on its interest rate spread which is the
difference between the average yield earned on its loan and investment
portfolios and the average rate paid on its deposits and borrowings. The Bank's
interest spread is impacted by interest rates, deposit flows, and loan demands.
Levels of non-interest income and operating expense are also significant factors
in earnings.
FORWARD-LOOKING STATEMENTS
This document, including information included or incorporated by reference,
contents, and future filings by the Company on Form 10-K, Form 10Q, and Form
8-K, and future oral and written statements by the Company and its management
may contain forward-looking statements about Security Federal Corporation and
its subsidiaries which we believe are within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include, without limitation, statements with respect to anticipated future
operating and financial performance; growth opportunities; interest rates;
acquisition and divestiture opportunities; and synergies, efficiencies,
cost-savings, and funding advantages expected to be realized from prior
acquisitions. Words such as "may," "could," "should," "would," "believe,"
"anticipate," "estimate," "expect," "intend," "plan," and similar expressions
are intended to identify these forward-looking statements. Forward-looking
statements by the Company and its management are based on beliefs, plans,
objectives, goals, expectations, anticipations, estimates, and intentions of
Management and are not guarantees of future performance. The Company disclaims
any obligation to update or revise any forward-looking statements based on the
occurrence of future events, the receipt of new information, or otherwise. The
important factors we discuss below and elsewhere in this document, identified in
our filings with the Securities and Exchange Commission ("SEC"), and presented
by our Management from time to time could cause actual results to differ
materially from those indicated by the forward-looking statements made in this
document.
ASSET AND LIABILITY MANAGEMENT
The Bank's program of asset and liability management seeks to limit the
Bank's vulnerability to material and prolonged increases or decreases in
interest rates, or "interest rate risk." The principal determinant of the
exposure of the Bank's earnings to interest rate risk is the timing difference
(gap) between the repricing or maturity of the Bank's interest-earning assets
and the repricing or maturity of its interest-bearing liabilities. If the
maturities of the Bank's assets and liabilities were perfectly matched and the
interest rates borne by its assets and liabilities were equally flexible and
moved concurrently (neither of which is the case), the impact on net interest
income of any material and prolonged changes in interest rates would be minimal.
The Bank's asset and liability policies are directed toward the objectives of
increasing the interest rate sensitivity of the Bank's assets by shortening
their maturities or periods to reprice while reducing the interest rate
sensitivity of the Bank's interest-bearing liabilities by extending their
maturities. The success of Management's strategy is evidenced by the composition
of the loan portfolio that includes $135.4 million of adjustable rate consumer
loans, commercial loans, and mortgage loans or approximately 55.3% of total
gross loans at March 31, 2001. At March 31, 2001, the negative mismatch of
interest-earning assets repricing or maturing within one year with
interest-bearing liabilities repricing or maturing within one year was $107.2
million or 32.4% of total assets compared to $96.8 million or 31.8% at March 31,
2000. The increase in the negative gap is due to an increase in interest-bearing
demand deposit accounts that are catagorized as repricing in the less than
3-month category and the popularity of the Bank's nine month certificate of
deposit.
4
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
ASSET AND LIABILITY MANAGEMENT, CONTINUED
During the past year, the Bank originated approximately $37.0 million in
adjustable rate residential real estate loans, which are generally held for
investment and not sold. Also, as part of the Bank's asset liability program,
the Bank originated a total of $51.9 million in consumer and commercial loans,
which are usually short term in nature. During fiscal 2001, 93.4% of total loan
originations were comprised of consumer, commercial, and adjustable rate
mortgage loans compared to 94.5% of total originations in fiscal 2000. The
Bank's portfolio of consumer and commercial loans was $120.8 million at March
31, 2001, $103.8 million at March 31, 2000, and $94.0 million at March 31, 1999.
Consumer and commercial loans combined were 49.3% of total loans at March 31,
2001; 51.5% at March 31, 2000; and 58.4% at March 31, 1999.
The Bank originated $6.3 million, $6.2 million, and $6.0 million in fixed
rate residential loans of which most were short-term construction loans with
terms of one year or less, and residential lot loans with terms of two to five
years, in fiscal 2001, 2000, and 1999, respectively. At March 31, 2001, these
fixed rate residential loans amounted to $34.1 million or 13.9% of the total
loan portfolio compared to $13.4 million or 6.6% at the end of the previous
fiscal year. The Bank sells virtually all its 15 year and 30 year fixed rate
mortgage loans at origination. In fiscal 2001, the Bank decided to no longer
service loans for Freddie Mac or other investors, because of the fixed cost of
servicing those loans, while its portfolio of loans serviced for others was
shrinking. Thus, during fiscal 2001, the Bank sold all of its new fixed
originations exclusively on a service-released basis. The Bank sold $631,000 in
fixed rate residential loans to secondary market agencies on a service-retained
basis in fiscal 2000, $5.6 million in fiscal 1999, and $3.4 million in fiscal
1998. Fixed rate residential loans passed directly on to institutional investors
including Freddie Mac, on a service-released basis, totaled $29.5 million in
fiscal 2001, $16.0 million in fiscal 2000, $28.1 million in fiscal 1999, and
$7.9 million in fiscal 1998.
Certificates of deposit of $100,000 or more (Jumbo Certificates) are
normally considered to be interest rate sensitive because of their relatively
short maturities. Many financial institutions have used Jumbo Certificates to
manage interest rate sensitivity and liquidity. The Bank has not relied on Jumbo
Certificates for liquidity or asset liability management. As of March 31, 2001,
the Bank had $35.7 million outstanding in Jumbo Certificates compared to $19.1
million at March 31, 2000. The Bank was more aggressive on bidding for
municipalities' and individual's Jumbo Certificates this past year.
The following table sets forth the maturity schedule of certificates of
deposit with balances of $100,000 or greater at March 31, 2001.
Within 3 Months $ 5,737,000
AFTER 3, WITHIN 6 MONTHS 9,435,000
AFTER 6, WITHIN 12 MONTHS 16,529,000
AFTER 12 MONTHS 4,019,000
--------------
$ 35,720,000
==============
A negative gap position is expected to have an adverse effect on net
interest income during periods of rising interest rates. A negative one-year gap
position occurs when the dollar amount of rate sensitive liabilities maturing or
repricing within one year exceeds the dollar amount of rate sensitive assets
maturing or repricing during that same period. As a result, during periods of
rising interest rates, the interest paid on interest-bearing liabilities will
increase faster than interest received from earning assets, thus reducing net
interest income. The reverse is true in periods of declining interest rates
resulting in an expected increase in net interest income.
The table on the following page sets forth the Bank's interest-bearing
liabilities and interest-earning assets being repriced or maturing within one
year. The table on Page 7 presents the Bank's entire interest-bearing
liabilities and interest-earning assets into repricing or maturity time periods.
Both tables present adjustable rate loans in the periods they are scheduled to
reprice, not mature. Both tables also assume investments reprice at the earlier
of maturity; the likely call date, if any, based on current interest rates; or
the next scheduled interest rate change, if any. NOW accounts, money market
accounts, and regular savings accounts are assumed to reprice in the less than
three-month category.
5
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
ASSET AND LIABILITY MANAGEMENT, CONTINUED
The following table sets forth the Bank's interest-bearing liabilities and
interest-earning assets repricing or maturing within one year.
At March 31
----------------------------
2001 2000
------------- ------------
(Dollars in Thousands)
LOANS (1) $ 100,482 $ 104,107
MORTGAGE-BACKED SECURITIES:
HELD TO MATURITY 638 343
AVAILABLE FOR SALE 17,184 16,863
INVESTMENT SECURITIES:
HELD TO MATURITY 266 266
AVAILABLE FOR SALE 21,355 9,467
OTHER INTEREST-EARNING ASSETS 5,586 1,069
TOTAL INTEREST RATE SENSITIVE ASSETS REPRICING
WITHIN 1 YEAR $ 145,511 $ 132,115
------------- ------------
DEPOSITS 239,711 191,254
FHLB ADVANCES AND OTHER BORROWED MONEY 12,969 37,642
TOTAL INTEREST RATE SENSITIVE LIABILITIES
REPRICING WITHIN 1 YEAR $ 252,680 $ 228,896
------------- ------------
GAP $ (107,169) $ (96,781)
============= ============
INTEREST RATE SENSITIVE ASSETS/INTEREST RATE
SENSITIVE LIABILITIES 57.59% 57.72%
GAP AS A PERCENT OF TOTAL ASSETS (32.4)% (31.8)%
(1) LOANS ARE NET OF UNDISBURSED FUNDS AND LOANS IN PROCESS.
6
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
ASSET AND LIABILITY MANAGEMENT, CONTINUED
The following table sets forth the interest sensitivity of the Bank's assets and
liabilities at March 31, 2001, on the basis of the factors and assumptions set
forth in the table on the previous page.
Remaining Time Before Asset/Liability Matures Or Can Be Repriced
----------------------------------------------------------------
Less Than More
Three 3-12 1-3 3-5 5-10 10-20 Than 20
Months Months Years Years Years Years Years Total
------ ------ ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
INTEREST-EARNINGS ASSETS
- -----------------------------
LOANS (1) $48,635 $51,847 $58,027 $52,234 $20,553 $2,637 $108 234,041
MORTGAGE-BACKED SECURITIES:
HELD TO MATURITY,
AT COST 133 505 447 238 644 61 -- 2,028
AVAILABLE FOR SALE,
AT FAIR VALUE 3,834 13,350 8,520 7,821 2,787 439 71 36,822
INVESTMENT SECURITIES:(2)
HELD TO MATURITY,
AT COST 266 -- -- -- -- -- -- 266
AVAILABLE FOR SALE,
AT FAIR VALUE 18,065 3,290 7,033 5,927 974 -- -- 35,289
FHLB STOCK, AT COST -- -- 3,431 -- -- -- -- 3,431
OTHER INTEREST-
EARNING ASSETS 5,586 -- -- -- -- -- -- 5,586
------ ------ ----- ----- ----- ----- ----- -----
TOTAL FINANCIAL
ASSETS $76,519 $68,992 $77,458 $66,220 $24,958 $3,137 $ 179 317,463
======= ======= ======= ======= ======= ====== ===== =======
INTEREST-BEARING LIABILITIES
- -----------------------------
DEPOSITS:
CERTIFICATE
ACCOUNTS $26,194 $89,297 $17,054 $ 645 $ -- $ -- $ --$133,190
NOW ACCOUNTS 61,453 -- -- - - - 61,453
MONEY MARKET
ACCOUNTS 49,856 - -- -- -- -- 49,856
PASSBOOK ACCOUNTS 12,911 - -- -- -- -- 12,911
BORROWINGS 12,969 -- 5,000 28,144 -- -- 46,113
------ ------ ----- ----- ----- ----- ----- -----
TOTAL INTEREST-BEARING
LIABILITIES $163,383 $89,297 $22,054 $28,789 $ -- $ -- $ --$303,523
======== ======= ======= ======= ===== ===== ===== =======
CURRENT PERIOD
GAP $(86,864)(20,305)$55,404 $37,431 $24,958 $3,137 $179 $13,940
CUMULATIVE GAP $(86,864)(107,169(51,765)(14,334) 10,624 $13,761 13,940 $13,940
CUMULATIVE GAP AS
A PERCENT OF
TOTAL ASSETS (26.3)% (32.4)% (15.7)% (4.3)% 3.2% 4.2% 4.2% 4.2%
(1) LOANS ARE NET OF UNDISBURSED FUNDS AND LOANS IN PROCESS.
(2) CALLABLE SECURITIES ARE SHOWN AT THEIR LIKELY CALL DATES BASED ON
MANAGEMENT'S ESTIMATES AT MARCH 31, 2001.
In evaluating the Bank's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing
tables must be considered. For example, although certain assets and liabilities
may have similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates. Additionally, the interest rates of
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates. Loan repayment rates and withdrawals of deposits will
likely differ substantially from the assumed rates previously set forth in the
event of significant changes in interest rates due to the option of borrowers to
prepay their loans and the ability of depositors to withdraw funds prior to
maturity. Further, certain assets, such as adjustable rate mortgages, have
features that restrict changes in interest rates on a short-term basis as well
as over the life of the asset.
7
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
FINANCIAL CONDITION
Total assets at March 31, 2001 were $330.6 million, an increase of $25.8
million or 8.5% from March 31, 2000. This increase was the result of an increase
in net loans receivable, offset, in part, by a decrease in investment
securities.
Total net loans receivable were $231.0 million at March 31, 2001; an
increase of $38.0 million or 19.7% from the prior year. Residential real estate
loans increased $23.4 million to $121.5 million at March 31, 2001 due primarily
to an increase in residential construction and lot loans. Security Federal sells
virtually all its long-term fixed rate mortgages, while retaining its adjustable
rate mortgages originated. Consumer loans increased $4.6 million while
commercial business and commercial real estate loans increased to $74.5 million
at fiscal year end from $62.1 million at March 31, 2000; an increase of $12.4
million or 20.1%. Loans held for sale increased $950,000 at March 31, 2001 from
the previous fiscal year end.
Real estate acquired in settlement of loans (REO) decreased $238,000 to
$94,000 at March 31, 2001 from $332,000 at fiscal year end 2000. REO at March
31, 2001 consisted primarily of single-family homes. Real estate acquired for
development was liquidated as the remaining lots on the Company's real estate
partnership were completely sold by March 31, 2001.
Non-accrual loans totaled $183,000 at March 31, 2001 compared to $890,000 a
year earlier. The Bank classifies all loans as non-accrual when they become 90
days or more delinquent. The Bank had six loans totaling $587,000 at March 31,
2001 that were troubled debt restructurings compared to 3 loans of $784,000 at
March 31, 2000. None of the trouble debt restructurings at March 31, 2001 were
more than 90 days delinquent. One $16,000 unsecured commercial loan was sixty
days delinquent. The other five troubled debt restructurings consisted of a
$4,000 unsecured consumer loan, a $6,000 automobile loan, a $19,000 loan secured
by a certificate of deposit, a $53,000 commercial loan secured by two rental
properties, and a $489,000 commercial loan secured by commercial real estate.
All troubled debt restructurings are also considered impaired. At March 31,
2001, the Bank held $789,000 in impaired loans compared to $897,000 at March 31,
2000.
The Bank reviews its loan portfolio and loan loss allowance on a monthly
basis. Future additions to the Bank's allowance for loan losses are dependent
on, among other things, the performance of the Bank's loan portfolio, the
economy, changes in real estate values, and interest rates. There can be no
assurance that additions to the allowance will not be required in future
periods. Management constantly monitors its loan portfolio for the impact of
local economic changes. The ratio of allowance for loan losses to total loans
was 1.19% at March 31, 2001 compared to 1.09% at March 31, 2000.
Deposits at the Bank increased $28.6 million or 12.5% to $257.4 million at
March 31, 2001 from $228.8 million at March 31, 2000. Advances from the Federal
Home Loan Bank (FHLB) decreased to $42.7 million at March 31, 2001; down from
$50.6 million a year earlier, a decrease of $7.9 million. The Bank was able to
pay off advances due to the magnitude of growth in deposits. Other borrowed
money increased $1.2 million to $3.4 million during the year compared to $2.2
million at March 31, 2000.
Total shareholders' equity was $23.5 million at March 31, 2001; an increase
of $3.7 million or 18.9% compared to $19.8 million a year earlier. The increase
was attributable to net income of $2.1 million and an increase of $2.0 in
unrealized net gain on securities available for sale, offset partially by an
increase in the indirect guarantee of the ESOP debt of $228,000, and $135,000 in
dividends paid.
8
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF OPERATIONS
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
higher or lower outstanding balances and the changes due to the volatility of
interest rates. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to: 1)
changes in rate (changes in rate multiplied by old volume); 2) changes in
volume (changes in volume multiplied by old rate); and 3) net change (the sum of
the prior columns). For purposes of this table, changes attributable to both
rate and volume, which cannot be segregated, have been allocated proportionately
to the change due to volume and the change due to rate.
Fiscal Year 2001 Fiscal Year 2000
Compared To 2000 Compared To 1999
----------------------- -----------------------
Volume Rate Net Volume Rate Net
------ ------ ----- ------ ------ -----
(In Thousands)
INTEREST-EARNING ASSETS:
LOANS: (1)
REAL ESTATE LOANS $2,005 426 2,431 $1,497 $(437) $1,060
OTHER LOANS 1,555 330 1,885 731 (294) 437
------ ------ ----- ------ ------ -----
TOTAL LOANS 3,560 756 4,316 2,228 (731) 1,497
MORTGAGE-BACKED SECURITIES(2) (78) 292 214 1,187 (12) 1,175
INVESTMENTS (2) (228) 23 (205) (57) (60) (117)
OTHER INTEREST-EARNING ASSETS 3 20 23 (53) (9) (62)
TOTAL INTEREST-EARNING ------ ------ ----- ------ ------ -----
ASSETS $3,257 1,091 4,348 $3,305 $(812) $2,493
====== ===== ===== ====== ====== ======
INTEREST-BEARING LIABILITIES:
DEPOSITS:
CERTIFICATE ACCOUNTS $ 687 922 1,609 $ 445 $ (297) $ 148
NOW ACCOUNTS 14 (50) (36) 34 (118) (84)
MONEY MARKET ACCOUNTS (232) 112 (120) 823 (36) 787
PASSBOOK ACCOUNTS (7) 0 (7) 27 2 29
------ ------ ----- ------ ------ -----
TOTAL DEPOSITS 462 984 1,446 1,329 (449) 880
BORROWINGS 1,907 140 2,047 907 (47) 860
TOTAL INTEREST-BEARING
LIABILITIES 2,369 1,124 3,493 2,236 (496) 1,740
EFFECT ON NET INCOME $ 888 (33) 855 $1,069 $ (316) $ 753
====== ====== ===== ====== ====== =====
(1) INTEREST ON NON-ACCRUAL LOANS IS NOT INCLUDED IN INCOME, ALTHOUGH THEIR
LOAN BALANCES ARE INCLUDED IN AVERAGE LOANS OUTSTANDING.
(2) SECURITIES AVAILABLE FOR SALE ARE COMPUTED USING THEIR HISTORICAL COST.
9
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF OPERATIONS, CONTINUED
The following table presents the total dollar amount of interest income from
average interest-earning assets for the periods indicated and the resultant
yields as well as the interest expense on average interest-bearing liabilities
expressed both in dollars and rates. No tax equivalent adjustments were made.
Averages For Fiscal Years Ended March 31,
-----------------------------------------------------------------------------
Yield/ 2001 2000 1999
Rate At ------------------------ ------------------------- ------------------------
March 31, Average Yield/ Average Yield/ Average Yield/
2001 Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- ------- -------- ------ ------- -------- ------ ------- -------- ------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
MORTGAGE LOANS 7.79% $104,171 $ 7,874 7.56% $77,275 $ 5,443 7.04% $56,465 $ 4,383 7.76%
OTHER LOANS 9.32% 110,477 10,646 9.64% 94,241 8,761 9.30% 86,426 8,324 9.63%
-------- ------- -------- ------ ------- -------- ------ ------- -------- ------
TOTAL LOANS (1) 8.58% 214,648 18,520 8.63% 171,516 14,204 8.28% 142,891 12,707 8.89%
MORTGAGE-BACKED
SECURITIES (2) 6.28% 33,707 2,253 6.68% 35,009 2,039 5.82% 14,633 864 5.90%
INVESTMENTS (2) 5.97% 54,487 3,288 6.03% 58,296 3,493 5.99% 59,235 3,610 6.09%
OTHER INTEREST-
EARNING ASSETS 5.33% 1,427 92 6.43% 1,376 69 5.01% 2,406 131 5.43%
TOTAL INTEREST- -------- ------- -------- ------ ------- -------- ------ ------- -------- ------
EARNING ASSETS 7.91% $304,269 $24,153 7.94% $266,197 $19,805 7.44% $219,165 $17,312 7.90%
======== ======== ======= ====== ======== ======== ====== ======== ======= ======
INTEREST-BEARING LIABILITIES:
CERTIFICATE ACCOUNTS 6.15% $117,555 $ 6,964 5.92% $104,978 $ 5,355 5.10% $ 96,512 $ 5,207 5.40%
NOW ACCOUNTS 1.21% 41,408 382 0.92% 40,081 418 1.04% 37,402 502 1.34%
MONEY MARKET ACCTS. 4.66% 47,682 2,289 4.80% 52,589 2,409 4.58% 34,696 1,622 4.68%
PASSBOOK ACCOUNTS 2.44% 12,584 311 2.47% 12,890 318 2.47% 11,806 289 2.45%
TOTAL INTEREST- -------- ------- -------- ------ ------- -------- ------ ------- -------- ------
BEARING ACCOUNTS 4.55% 219,229 9,946 4.54% 210,538 8,500 4.04% 180,416 7,620 4.22%
OTHER BORROWINGS 4.88% 2,924 167 5.71% 1,534 74 4.82% 369 15 4.07%
FHLB ADVANCES 5.99% 58,555 3,758 6.42% 31,909 1,804 5.65% 16,958 1,003 5.91%
TOTAL INTEREST- -------- ------- -------- ------ ------- -------- ------ ------- -------- ------
BEARING LIABILITIES 4.80% $280,708 $13,871 4.94% $243,981 $10,378 4.25% $197,743 $ 8,638 4.37%
======== ======= ======== ====== ======= ======== ====== ======= ======= ======
NET INTEREST INCOME $10,282 $ 9,427 $ 8,674
======== ======== =======
INTEREST RATE SPREAD 3.11% 3.00% 3.19% 3.53%
======= ====== ====== ======
NET YIELD ON EARNING ASSETS 3.38% 3.54% 3.96%
====== ======= ======
(1) INTEREST ON NON-ACCRUAL LOANS IS NOT INCLUDED IN INCOME,
ALTHOUGH THEIR LOAN BALANCES ARE INCLUDED IN AVERAGE LOANS OUTSTANDING.
(2) SECURITIES AVAILABLE FOR SALE ARE COMPUTED USING THEIR HISTORICAL COST.
10
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Comparison of the Years Ended March 31, 2001 and 2000
GENERAL
The Company earned record net income of $2.1 million for the year ended March
31, 2001, an increase of $106,000 or 5.3% over earnings of $2.0 million for the
year ended March 31, 2000. This marked the fourth consecutive year of record
earnings. The primary reason for the increased earnings was an increase in net
interest income and other income offset in part by increases in the provision
for loan losses and general and administrative expenses.
NET INTEREST INCOME
Net interest income increased $854,000 to $10.3 million in fiscal 2001 compared
to $9.4 million in fiscal 2000 despite a 16 basis point decline in the net yield
on interest-earning assets. The increase in income was accomplished by
increasing the average of total loans by $43.1 million in fiscal 2001. The Bank
has also been successful in attracting demand, money market, and certificate of
deposit accounts.
Interest income on loans increased $4.3 million as residential real estate loans
and commercial loans both increased during the year. The yield of the loan
portfolio during fiscal 2001 increased 35 basis points. Interest income on
investment securities, mortgage-backed securities, and other securities
increased $32,000 during fiscal 2001. The yield during the year increased 37
basis points as lower yielding investments matured and adjustable rate
mortgage-backed securities rolled into higher rates, but the average balance of
the investment portfolio decreased $5.1 million.
Interest expense on deposits increased $1.4 million during the year ended March
31, 2001 compared to the year ended March 31, 2000. Average interest bearing
deposits increased $8.7 million and the average cost of those deposits increased
fifty basis points during the year due to increases in market interest rates
during the first 9 months of the year. Interest expense on FHLB advances and
other borrowings increased $2.0 during fiscal 2001 due to the average amount of
borrowings increasing $28.0 million. The average cost of borrowings increased 76
basis points comparing fiscal 2001 to fiscal 2000.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses increased $175,000 to $925,000 during
the year ended March 31, 2001. 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 $183,000 at March 31, 2001
compared to $890,000 at March 31, 2000. Net charge-offs were $262,000 in fiscal
2001 compared to $344,000 in fiscal 2000. The ratio of the allowance for loan
losses to total loans at March 31, 2001 was 1.19% compared to 1.09% at March 31,
2000. Management felt it prudent to increase the provision due to the predicted
general slowing of the national economy, the cyclical nature of economic
business cycles, and the entrance into a new loan market for the Bank.
Management believes the allowance for loan losses is adequate based on
Management's estimates of the losses inherent in the loan portfolio, although
there can be no guarantee as to these estimates. In addition, bank regulatory
agencies may require additions to the allowance for loan losses based on their
judgments and estimates as part of their examination process.
OTHER INCOME
Other income increased $444,000 or 19.3% from $2.3 million during fiscal 2000 to
$2.7 million during fiscal 2001. Gain on sale of loans increased $239,000 to
$496,000 during fiscal 2001 compared to $257,000 during fiscal 2000 due to a
$13.3 million or 80.2% increase in originations of loans held for sale and a
concerted effort to better manage the Bank's secondary market sales. The
origination trend changed due to the decrease in mortgage rates during the year.
Loan servicing fees increased $12,000. The Bank sold its remaining portfolio of
loans serviced for others in January 2001 for a profit on sale of approximately
$400,000. Service fees on deposit accounts decreased $42,000 due to the interest
credit rate used by commercial accounts to offset service fees increasing the
first nine months of the year. Income from real estate operations decreased
$24,000 as the Company sold its remaining lots held for development in March
2001. Other miscellaneous income decreased $106,000 or 24.1% during fiscal 2001
due primarily to a decrease in the commissions earned on annuity and investment
products.
11
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $1.0 million or 12.8% to $8.9
million during the year ended March 31, 2001 compared to $7.9 million during the
same period one year earlier. Salaries and employee benefits increased $602,000
or 14.4% due to the opening of the West Columbia branch office and normal annual
salary adjustments. Occupancy expense increased $170,000 or 32.4% also due to
the new branch office. Advertising expense increased $35,000 during fiscal 2001
due to the "Loan on Us" campaign. Depreciation and maintenance of equipment
expense increased $126,000 or 14.1% as the Bank added on-line banking and bill
payment software and software and hardware purchased for the year 2000 was
depreciated for a full year. Other miscellaneous expenses encompassing REO
expense, legal, professional, and consulting expenses, stationery and office
supplies, and other sundry expenses increased $106,000 or 7.0% during fiscal
2001 due primarily to slight increases in most of the above mentioned expenses
and the opening of a new branch office.
INCOME TAXES
Income taxes increased $11,000 during the year ended March 31, 2001 compared to
the year ended March 31, 2000 due to an increase in taxable income. The
effective tax rate was 34% for fiscal 2001 and 35% for fiscal 2000.
12
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Comparison of the Years Ended March 31, 2000 and 1999
GENERAL
The Company earned record net income of $2.0 million for the year ended March
31, 2000, an increase of $215,000 or 11.9% over earnings of $1.8 million for the
year ended March 31, 1999. This marked the third consecutive year of record
earnings and the fourth consecutive year for record operating earnings. The
primary reason for the increased earnings was an increase in net interest income
and a decrease in general and administrative expenses, offset partially by a
decrease in other income.
NET INTEREST INCOME
Net interest income increased $753,000 to $9.4 million in fiscal 2000 compared
to $8.7 million in fiscal 1999 despite a 42 basis point decline in the net yield
on interest-earning assets. The increase was accomplished by increasing the
average of total loans by $28.6 million in fiscal 2000. The Bank has also been
successful in attracting demand, money market, and savings accounts.
Interest income on loans increased $1.5 million as residential real estate loans
and commercial loans both increased during the year. The yield of the loan
portfolio during fiscal 2000 decreased 61 basis points as residential real
estate loans, which are generally the lowest yielding loans in the portfolio,
grew faster than commercial and consumer loans. Interest income on investment
securities, mortgage-backed securities, and other securities increased $1.0
million during fiscal 2000. The yield during the year decreased 12 basis points,
but the average balance of the investment portfolio increased $18.4 million.
Interest expense on deposits increased $881,000 during the year ended March 31,
2000 compared to the year ended March 31, 1999. The average of interest bearing
deposits increased $30.1 million as the average cost of those deposits decreased
four basis points during the year. Interest expense on FHLB advances and other
borrowings increased $860,000 during fiscal 2000 due to the average amount of
borrowings increasing $16.1 million. The average cost of borrowings decreased 26
basis points comparing fiscal 2000 to fiscal 1999.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses increased $150,000 to $750,000 during
the year ended March 31, 2000. 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 $890,000 at March 31, 2000
compared to $1.2 million at March 31, 1999. Net charge-offs were $344,000 in
fiscal 2000 compared to $397,000 in fiscal 1999. The ratio of the allowance for
loan losses to total loans at March 31, 2000 was 1.09% compared to 1.12% at
March 31, 1999. Management believes the allowance for loan losses is adequate
based on Management's estimates of the losses inherent in the loan portfolio,
although there can be no guarantee as to these estimates. In addition, bank
regulatory agencies may require additions to the allowance for loan losses based
on their judgments and estimates as part of their examination process.
OTHER INCOME
Other income decreased $345,000 or 13.1% from $2.6 million during fiscal 1999 to
$2.3 million during fiscal 2000. Gain on sale of loans decreased $413,000 to
$257,044 during fiscal 2000 compared to $669,757 during fiscal 1999 due to the
mix of single-family mortgages shifting to adjustable rate loans, which are held
in portfolio, from fixed rate mortgages, which are sold to investors. The
origination trend changed due to the increase in mortgage rates during the year.
Loan servicing fees declined $35,000 as the portfolio of loans serviced for
others decreased. Service fees on deposit accounts increased $232,000 due to an
increase in the number of demand deposit accounts. Income from real estate
operations decreased $38,000. Other miscellaneous income decreased $96,000 or
14.4% during fiscal 2000 due primarily to a decrease in the net gain on sale of
REO.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased $117,000 or 1.5% to $7.8 million
during the year ended March 31, 2000 compared to $7.9 million during the same
period one year earlier. Salaries and employee benefits increased $100,000 or
2.5% due to normal annual salary adjustments. Occupancy expense increased
$30,000 or 6.0%. Advertising expense decreased $169,000 during fiscal 2000.
Depreciation and maintenance of equipment expense increased $88,000 or 11.0% as
new ancillary software and personal computers were purchased in preparation for
the year 2000. Other miscellaneous expenses encompassing REO expense, legal,
professional, and consulting expenses, stationery and office supplies, and other
sundry expenses decreased $165,000 or 9.8% during fiscal 2000.
13
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
INCOME TAXES
Income taxes increased $159,000 during the year ended March 31, 2000 compared to
the year ended March 31, 1999 due to an increase in taxable income. The
effective tax rate was 35% for fiscal 2000 and 34% for fiscal 1999.
14
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
REGULATORY CAPITAL
The following table reconciles the Bank's shareholders' equity to its various
regulatory capital positions:
March 31,
---------------------------------
2001 2000
--------------- ---------------
(In Thousands)
Shareholders' Equity (1) (2) $ 23,136 $ 21,043
Reduction For Goodwill And Other Intangibles 650 1,116
--------------- ---------------
Tangible Capital 22,486 19,927
--------------- ---------------
Qualifying Core Deposit Intangibles 470 559
Core Capital 22,956 20,486
SUPPLEMENTAL CAPITAL 2,582 2,121
LESS ASSETS REQUIRED TO BE DEDUCTED 227 103
=============== ===============
TOTAL RISK-BASED CAPITAL $ 25,311 $ 22,504
=============== ===============
(1) FOR 2001 AND 2000, EXCLUDES UNREALIZED GAINS OF $348,000 AND INCLUDES
UNREALIZED LOSSES OF $1,629,000, RESPECTIVELY ON AVAILABLE FOR SALE
SECURITIES.
(2) FOR 2001 AND 2000, EXCLUDES EQUITY OF SECURITY FEDERAL CORPORATION, THE
PARENT.
The following table compares the Bank's capital levels relative to regulatory
requirements at March 31, 2001:
Amount Percent Actual Actual Excess Excess
Required Required Amount Percent Amount Percent
-------- -------- ------ ------- ------ -------
(Dollars in Thousands)
Tangible Capital $ 6,600 2.0% $22,486 6.8% $15,886 4.8%
Tier 1 Leverage
(Core) Capital 13,219 4.0% 22,956 6.9% 9,737 2.9%
Tier 1 Risk-Based
(Core) Capital 8,266 4.0% 22,956 11.1% 14,690 7.1%
Total Risk-Based
Capital 16,531 8.0% 25,311 12.2% 8,780 4.2%
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the ability of the Bank to generate sufficient cash flows to
fund current loan demand, repay maturing borrowings, fund maturing deposit
withdrawals, and meet operating expenses. The Bank's primary sources of funds
include loan repayments, loan sales, increased deposits, advances from the FHLB,
and cash flow generated from operations. The need for funds varies among periods
depending on funding needs as well as the rate of amortization and prepayment on
loans. The use of FHLB advances varies depending on their relative costs.
The principal use of the Bank's funds is the origination of mortgages and other
loans and the purchase of investments and mortgage-backed securities. Loan
originations were $95.2 million in fiscal 2001 compared to $102.5 million in
fiscal 2000 and $87.7 million in fiscal 1999. Purchases of investments and
mortgage-backed securities were $9.5 million in fiscal 2001 compared to $30.4
million in fiscal 2000 and $69.4 million in fiscal 1999.
Outstanding loan commitments for which the Bank has not obtained prior
commitments to purchase from other institutional investors amounted to $422,000
at March 31, 2001 compared to $1.4 million at March 31, 2000. In addition,
unused lines of credit on home equity loans, credit cards, and other loans
amounted to $27.4 million at March 31, 2001. Management does not anticipate that
the percentage of funds drawn on unused lines of credit will increase
substantially over amounts currently utilized. Funding of undisbursed
loans-in-process of $10.7 million at March 31, 2001 and commitments to originate
loans and future advances on lines of credit are expected to be provided from
loan amortizations and prepayments, deposit inflows, and short-term borrowing
capacity.
15
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
The Bank is required under applicable Federal regulations 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. At March 31, 2001, the
Bank's liquidity ratio was approximately 17%. Management believes that liquidity
during fiscal 2002 can be met through the Bank's deposit base and borrowing
ability and from maturing investments. See "Consolidated Statements of Cash
Flows" in the consolidated financial statements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." All derivatives are to be measured at fair
value and recognized in the balance sheet as assets and liabilities. SFAS No.
138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" was issued in June 2000 and amends the accounting and reporting
standards of SFAS No. 133 for certain derivative instruments and certain hedging
activities. The two statements are to be adopted concurrently and are effective
for fiscal years and quarters beginning after June 15, 2000. Adoption of SFAS
No. 133 and SFAS No. 138 did not have a material impact on the presentation of
the Company's financial results or financial position.
Other accounting standards that have been issued or proposed by the Financial
Accounting Standards Board that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.
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 (GAAP) that 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.
16
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
[GRAPHIC OMITTED]
Elliott Davis, LLP
Advisors-CPAs-Consutants
One 10th Street, Suite 460
P.O. Box 2278
Augusta, GA 30903-2278
ELLIOTT DAVIS-----------------------------------------------------------------
Phone 706.722.9090
Fax 706.722.9092
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Security Federal Corporation and Subsidiaries
Aiken, South Carolina
We have audited the accompanying consolidated balance sheets of Security
Federal Corporation and Subsidiaries as of March 31, 2001 and 2000, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended March 31, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Security Federal Corporation and Subsidiaries as of March 31, 2001 and 2000 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended March 31, 2001, in conformity with auditing
standards generally accepted in the United States of America.
/s/Elliott Davis, LLP
Elliott Davis, LLP
Greenville, South Carolina
April 27, 2001
www.elliottdavis.com
Internationally - Moore Stephens Elliott Davis LLC
17
SECURITY FEDERAL CORPORATION AND SUBSIDIARIESS
Consolidated Balance Sheets
March 31,
---------
2001 2000
------ ------
ASSETS:
Cash And Cash Equivalents $12,616,129 $7,416,702
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized Cost of $71,574,673 and
$91,446,235 at March 31, 2001 and 2000, Respectively) 72,111,240 88,820,651
Held To Maturity: (Market Value of $2,334,809 and
$2,634,400 at March 31, 2001 and 2000, Respectively) 2,293,922 2,710,103
---------- ----------
Total Investment And Mortgage-Backed Securities 74,405,162 91,530,754
---------- ----------
Loans Receivable, Net:
Held For Sale 2,245,951 1,295,676
Held For Investment:(Net of Allowance of $2,784,117 and
$2,120,767 at March 31, 2001 and 2000, Respectively) 228,751,063 191,704,890
---------- ----------
Total Loans Receivable, Net 230,997,014 193,000,566
---------- ----------
Accrued Interest Receivable:
Loans 1,348,178 963,219
Mortgage-Backed Securities 179,977 204,003
Investments 572,074 761,428
Total Accrued Interest Receivable 2,100,229 1,928,650
---------- ----------
Premises And Equipment, Net 5,262,957 4,284,693
Federal Home Loan Bank Stock, At Cost 3,431,000 2,605,600
Real Estate Acquired In Settlement Of Loans 93,657 332,000
Real Estate Held For Development And Sale 0 535,878
Other Assets 1,735,495 3,167,115
---------- ----------
Total Assets $330,641,643$304,801,958
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposit Accounts $257,410,417$228,823,331
Advances From Federal Home Loan Bank 42,704,000 50,611,000
Other Borrowings 3,409,362 2,210,500
Advance Payments By Borrowers For Taxes And Insurance 382,478 373,660
Other Liabilities 3,235,022 3,024,766
---------- ----------
Total Liabilities 307,141,279 285,043,257
---------- ----------
Shareholders' Equity:
Serial Preferred Stock, $.01 Par Value; Authorized
200,000 Shares; Issued And Outstanding, None -- --
Common Stock, $.01 Par Value; Authorized 5,000,000 Shares,
Issued And Outstanding Shares, 1,669,901 at March 31, 2001;
Authorized 5,000,000 Shares, Issued And Outstanding Shares,
838,524 at March 31, 2000 16,842 8,421
Additional Paid-In Capital 3,985,312 3,993,733
Indirect Guarantee Of Employee Stock Ownership
Trust Debt (415,000) (186,803)
Accumulated Other Comprehensive Gain (Loss) 348,015 (1,629,150)
Retained Earnings, Substantially Restricted 19,565,195 17,572,500
---------- ----------
Total Shareholders' Equity 23,500,364 19,758,701
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $330,641,643$304,801,958
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
SECURITY FEDERAL CORPORATION AND SUBSIDIARIESS
Consolidated Statements of Income
For the Years Ended March 31,
-----------------------------
2001 2000 1999
-------- -------- --------
Interest Income:
Loans $18,519,958 $14,204,384 $12,707,359
Mortgage-Backed Securities 2,253,322 2,038,716 863,443
Investment Securities 3,287,767 3,493,565 3,610,039
Other 91,782 68,696 130,669
-------- -------- --------
Total Interest Income 24,152,829 19,805,361 17,311,510
-------- -------- --------
Interest Expense:
NOW And Money Market Accounts 2,671,159 2,827,007 2,124,348
Passbook Accounts 310,941 318,378 288,950
Certificate Accounts 6,964,464 5,355,057 5,206,502
Advances And Other Borrowed Money 3,924,747 1,877,812 1,018,022
-------- -------- --------
Total Interest Expense 13,871,311 10,378,254 8,637,822
-------- -------- --------
Net Interest Income 10,281,518 9,427,107 8,673,688
Provision For Loan Losses 925,000 750,000 600,000
-------- -------- --------
Net Interest Income After Provision For
Loan Losses 9,356,518 8,677,107 8,073,688
-------- -------- --------
Other Income:
Gain On Sale Of Investment Securities -- 3,896 --
Gain On Sale Of Loans 496,132 257,044 669,757
Gain On Sale Of Loan Servicing 400,000 -- --
Loan Servicing Fees 302,885 291,193 326,424
Service Fees On Deposit Accounts 1,064,030 1,106,007 873,716
Income From Real Estate Operations 46,741 71,117 109,007
Other 429,941 566,742 662,426
-------- -------- --------
Total Other Income 2,739,729 2,295,999 2,641,330
-------- -------- --------
General And Administrative Expenses:
Compensation And Employee Benefits 4,798,804 4,196,630 4,096,201
Occupancy 692,023 522,392 492,863
Advertising 200,668 165,567 334,627
Depreciation And Maintenance Of Equipment 1,021,274 895,498 807,042
Amortization Of Intangibles 465,240 465,240 465,240
FDIC Insurance Premiums 45,949 78,743 79,326
Other 1,627,302 1,521,146 1,686,540
-------- -------- --------
Total General And Administrative Expenses 8,851,260 7,845,216 7,961,839
-------- -------- --------
Income Before Income Taxes 3,244,987 3,127,890 2,753,179
Provision For Income Taxes 1,117,553 1,106,677 947,430
Net Income $2,127,434 $2,021,213 $1,805,749
========= ========= =========
Net Income Per Common Share (Basic) $ 1.27 $ 1.20 $ 1.07
========= ========= =========
Net Income Per Common Share (Diluted) $ 1.25 $ 1.19 $ 1.06
========= ========= =========
Cash Dividend Per Share On Common Stock $ .08 $ .08 $ .07
========= ========= =========
Weighted Average Shares Outstanding (Basic) 1,672,694 1,680,644 1,684,240
========= ========= =========
Weighted Average Shares Outstanding (Diluted) 1,703,776 1,694,198 1,691,688
========= ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
SECURITY FEDERAL CORPORATION AND SUBSIDIARIESS
Consolidated Statements of Shareholders' Equity
For the Years Ended March 31, 2001, 2000 and 1999
Additional Accumulated Other
Common Paid-In Comprehensive Retained
Stock Capital Income(Loss) Earnings Total
------ -------- ----------- -------- -------
Balance At March 31,
1998 $4,211 $3,997,943 $75,713 $13,998,174 $18,076,041
Net Income -- -- -- 1,805,749 1,805,749
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding Gains
On Securities Available
For Sale -- -- (203,451) -- (203,451)
Comprehensive Income -- -- -- -- 1,602,298
2-For-1 Stock Split 4,210 (4,210) -- -- --
Cash Dividends -- -- -- (117,897) (117,897)
Balance At March 31, ------ -------- ----------- -------- -------
1999 $8,421 $3,993,733 $(127,738) $15,686,026 $19,560,442
====== ========= =========== ========== ==========
Accumulated Other
Additional Indirect Compre-
Common Paid-In Guarantee hensive Retained
Stock Capital of ESOP Debt Loss Earnings Total
----- ------- ------------ -------- -------- -------
Balance At March
31, 1999 $8,421 $3,993,733 $ $(127,738) $15,686,026 19,560,442
Net Income -- - -- -- 2,021,213 2,021,213
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding Losses
On Securities Available
For Sale -- -- --(1,498,841) -- (1,498,841)
Reclassification Adjustment
For Gains Included In
Net Income -- -- -- (2,571) -- (2,571)
-------
Comprehensive Income -- -- -- -- -- 519,801
Increase in Indirect
Guarantee of ESOP
Debt -- -- (186,803) -- -- (186,803)
Cash Dividends -- -- -- -- (134,739) (134,739)
----- ------- ------------ -------- -------- -------
Balance At March
31, 2000 $8,421 $3,993,733 $(186,803)(1,629,150)17,572,500 $19,758,701
===== ========= ======== ========= ========== ==========
Accumulated Other
Additional Indirect Compre-
Common Paid-In Guarantee hensive Retained
Stock Capital of ESOP Debt Loss Earnings Total
----- ------- ------------ --------- -------- -------
Balance At March
31, 2000 $8,421 $3,993,733 $(186,803) (1,629,150)$17,572,500$19,758,701
Net Income -- -- -- -- 2,127,434 2,127,434
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding Losses
On Securities Available
For Sale -- -- - 1,977,165 -- 1,977,165
---------
Comprehensive Income -- - -- -- -- 4,104,599
2-For-1 Stock
Split 8,421 (8,421) -- -- -- --
Increase in Indirect
Guarantee of ESOP
Debt -- -- (228,197) -- -- (228,197)
Cash Dividends -- -- -- -- (134,739) (134,739)
Balance At March ----- ------- ------------ --------- -------- -------
31, 2001 $16,842 $3,985,312 $(415,000) $348,015 $19,565,195$23,500,364
====== ========= ======== ======= ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
SECURITY FEDERAL CORPORATION AND SUBSIDIARIESS
Consolidated Statements of Cash Flows
For the Years Ended March 31,
-----------------------------
2001 2000 1999
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $2,127,434 $2,021,213 $1,805,749
Adjustments To Reconcile Net Income To Net
Cash Provided By Operating Activities:
Depreciation 893,682 783,805 658,035
Amortization Of Intangibles 465,240 465,240 465,240
Discount Accretion And Premium Amortization 25,750 144,460 16,741
Provisions For Losses On Loans And Real Estate 875,000 750,000 600,000
Gain On Sales Of Loans (496,132) (257,044) (669,757)
Gain On Sales Of Investment Securities -- (3,896) --
Gain On Sale Of Real Estate (88,134) (60,834) (252,559)
Amortization Of Deferred Fees On Loans (148,692) (3,859) (198,055)
Loss On Disposition Of Premises And Equipment 6,008 6,538 9,479
Proceeds From Sale Of Loans Held For Sale 29,042,592 17,184,431 34,395,529
Origination Of Loans For Sale (29,496,735)(16,618,763)(34,097,891)
(Increase) Decrease In Accrued Interest Receivable:
Loans (384,959) (306,066) 79,048
Mortgage-Backed Securities 24,026 (57,264) (111,045)
Investments 189,354 42,268 (42,291)
Increase In Advance Payments By Borrowers 8,818 99,593 7,939
Other, Net (206,547) (301,338) (227,310)
-------- -------- --------
Net Cash Provided By Operating Activities $2,836,705 $3,888,484 $2,438,852
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase Of Mortgage-Backed Securities
Available For Sale $(7,496,845)(17,409,175)(27,926,399)
Principal Repayments On Mortgage-Backed
Securities Available For Sale 6,627,764 6,580,795 3,080,957
Principal Repayments On Mortgage-Backed
Securities Held To Maturity 416,356 750,408 1,155,200
Purchase Of Investment Securities Available
For Sale (1,975,000)(13,006,730)(41,481,782)
Maturities Of Investment Securities Available
For Sale 22,689,718 11,985,716 38,532,104
Maturities Of Investment Securities Held
To Maturity -- 71,115 3,541,227
Proceeds From Sales Of Investment Securities
Available For Sale -- 2,503,985 --
Purchase Of FHLB Stock (825,400) (1,734,200) --
Redemption Of FHLB Stock -- 373,600 103,600
Increase In Loans Receivable (38,154,684)(42,357,135)(14,963,098)
Investment In Real Estate Held For Development (463,361) (689,318) (425,675)
Proceeds From Sale Of Real Estate Held For
Development 1,095,900 776,668 606,350
Proceeds From Sale Of Real Estate Acquired
Through Foreclosure 582,019 99,265 826,683
Purchase And Improvement Of Premises And
Equipment (1,877,954) (888,372) (1,045,528)
Proceeds From Sale Of Premises and Equipment -- 12,110 7,000
-------- -------- --------
Net Cash Used By Investing Activities $(19,381,487)(52,931,268)(37,989,361)
-------- -------- --------
(Continued)
21
SECURITY FEDERAL CORPORATION AND SUBSIDIARIESS
Consolidated Statements of Cash Flows, Continued
For the Years Ended March 31,
-----------------------------
2001 2000 1999
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase In Deposit Accounts $28,587,086 $12,290,648 $34,746,735
Proceeds From FHLB Advances 98,273,305 143,350,000 78,600,000
Repayment Of FHLB Advances (106,180,305)(107,339,000) (76,126,000)
Proceeds From Other Borrowings, Net 1,198,862 1,341,328 740,337
Dividends To Shareholders (134,739) (134,739) (117,897)
-------- -------- --------
Net Cash Provided By Financing Activities $21,744,209 $49,508,139 $37,843,175
-------- -------- --------
Net Increase In Cash And Cash Equivalents 5,199,427 465,355 2,292,666
Cash And Cash Equivalents At Beginning Of
Year 7,416,702 6,951,347 4,658,681
-------- -------- --------
Cash And Cash Equivalents At End Of Year $12,616,129 $7,416,702 $6,951,347
========== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash Paid During The Period For:
Interest $13,596,058 $10,592,614 $8,657,187
========== ========= =========
Income Taxes $ 1,503,183 $ 1,216,350 $1,067,586
========== ========= =========
Supplemental Schedule Of Non Cash Transactions:
Additions To Real Estate Acquired Through
Foreclosure, Net $ 332,203 $ 287,405 $ 672,104
========== ========= =========
(Increase) Decrease In Unrealized Net
Loss On Securities Available For Sale,
Net Of Taxes $ 1,977,165 $(1,501,412) $ (203,451)
========== ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
The following is a description of the more significant accounting and reporting
policies used in the preparation and presentation of the accompanying
consolidated financial statements. All significant intercompany transactions
have been eliminated in consolidation.
(a) Basis of Consolidation and Nature of Operations
-----------------------------------------------
The accompanying 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. The real estate partnership sold its remaining property in
fiscal 2001. Thus, at March 31, 2001, the real estate partnership was
liquidated.
(b) Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks, interest-bearing balances in other banks, and
federal funds sold. Cash equivalents have maturities of three months or less.
(c) Investment and Mortgage-Backed Securities
-----------------------------------------
Investment securities, including mortgage-backed securities, are
classified in one of three categories: held to maturity, available for sale, or
trading. Management determines the appropriate classification of debt securities
at the time of purchase.
Investment securities are classified as held to maturity when the
Company has the positive intent and ability to hold the securities to maturity.
These securities are recorded at cost and adjusted for amortization of premiums
and accretion of discounts over the estimated life of the security using a
method that approximates a level yield. Prepayment assumptions on
mortgage-backed securities are anticipated.
Management classifies investment securities that are not
considered to be held to maturity as available for sale. These type investments
are stated at fair value with unrealized gains and losses, net of tax, reported
in a separate component of shareholders' equity (accumulated other comprehensive
income). Gains and losses from sales of investment and mortgage-backed
securities available for sale are determined using the specific identification
method. The Company has no trading securities.
The Bank maintained liquid assets in excess of the amount required
by regulations. The required amount is 4% of the average daily balances of
deposits and certain borrowings. Liquid assets consist primarily of cash, time
deposits, and certain investment securities.
23
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
------------------------------------------
(d) Allowance for Loan Losses
-------------------------
The Company provides for loan losses using the allowance method.
Accordingly, all loan losses are charged to the related allowance and all
recoveries are credited to the allowance for loan losses. Additions to the
allowance for loan losses are provided by charges to operations based on various
factors which, in Management's judgment, deserve current recognition in
estimating possible losses. Such factors considered by Management include the
fair value of the underlying collateral; stated guarantees by the borrower, if
applicable; the borrower's ability to repay from other economic resources;
growth and composition of the loan portfolios; the relationship of the allowance
for loan losses to outstanding loans; loss experience; delinquency trends; and
general economic conditions. Management evaluates the carrying value of the
loans periodically and the allowance is adjusted accordingly. While Management
uses the best information available to make evaluations, future adjustment to
the allowance may be necessary if economic conditions differ substantially from
the assumptions used in making these evaluations. Allowances for loan losses are
subject to periodic evaluations by various regulatory authorities and may be
subject to adjustments based upon the information that is available at the time
of their examinations.
The Company values impaired loans at the loan's fair value if it
is probable that the Company will be unable to collect all amounts due according
to the terms of the loan agreement at the present value of expected cash flows;
the market price of the loan, if available; or the value of the underlying
collateral. Expected cash flows are required to be discounted at the loan's
effective interest rate. When the ultimate collectibility of an impaired loan's
principal is in doubt, wholly or partially, all cash receipts are applied to
principal. When this doubt does not exist, cash receipts are applied under the
contractual terms of the loan agreement first to interest then to principal.
Once the recorded principal balance has been reduced to zero, future cash
receipts are applied to interest income to the extent that any interest has been
foregone. Further cash receipts are recorded as recoveries of any amounts
previously charged off.
(e) Loans Held for Sale
-------------------
Loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated fair value in the aggregate. Net
unrealized losses are provided for in a valuation allowance by charges to
operations.
(f) Real Estate Acquired in Settlement of Loans (REO)
-------------------------------------------------
REO represents real estate acquired through foreclosure and is
initially recorded at the lower of cost (principal balance of the former
mortgage loan less any specific valuation allowances) or estimated fair value
less costs to sell. Subsequent improvements are capitalized. Costs of holding
real estate, such as property taxes, insurance, general maintenance and interest
expense, are expensed as a period cost. Fair values are reviewed regularly and
allowances for possible losses are established when the carrying value of the
real estate owned exceeds the fair value less estimated costs to sell. Fair
values are generally determined by reference to an outside appraisal.
(g) Real Estate Held for Development and Sale
-----------------------------------------
Real estate held for development and sale and investments in real
estate partnerships are stated at the lower of cost or estimated net realizable
value. Costs directly related to such real estate are capitalized until
construction required to bring these properties to a saleable condition is
completed. Capitalized costs include direct costs incurred during the
improvement period.
Gains on the sale of real estate held for development and sale are
recorded at the time of the sale provided certain criteria relating to property
type, cash down payment, loan terms, and other factors are met. If these
criteria are not met at the date of sale, the gain is deferred and recognized
using the installment or cost recovery method until they are satisfied, at which
time the remaining deferred gain is recorded as income.
Fair values of real estate held for development and sale are
reviewed regularly and allowances for losses are established when the carrying
value exceeds the estimated net realizable value. In determining the estimated
net realizable value, the Company deducts the projected cost to complete and
dispose of the property from the estimated selling price and the estimated cost
to hold the property to an expected date of sale.
24
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
------------------------------------------
(h) Premises and Equipment
----------------------
Premises and equipment are carried at cost, net of accumulated
depreciation. Depreciation of premises and equipment is amortized on a
straight-line method over the estimated useful life of the related asset.
Estimated lives are 7-30 years for buildings and improvements and generally 5-10
years for furniture, fixtures and equipment.
(i) Income Taxes
------------
Deferred tax expense or benefit is recognized for the net change
during the year in the deferred tax liability or asset. That amount together
with income taxes currently payable is the total amount of income tax expense or
benefit for the year. Deferred taxes are provided for in differences in
financial reporting bases for assets and liabilities compared with their tax
bases. Basically, a current tax liability or asset is established for taxes
presently payable or refundable and a deferred tax liability or asset is
established for future tax items. A valuation allowance, if applicable, is
established for deferred tax assets that may not be realized. Tax bad debt
reserves in excess of the base year amount (established as taxable years ending
March 31, 1988 or later) would create a deferred tax liability. Deferred income
taxes are provided for in differences between the provision for loan losses for
financial statement purposes and those allowed for income tax purposes.
(j) Loan Fees and Costs Associated with Originating Loans
-----------------------------------------------------
Loan fees received, net of direct incremental costs of originating
loans, are deferred and amortized over the contractual life of the related loan.
The net fees are recognized as yield adjustments by applying the interest
method. Prepayments are not anticipated.
(k) Intangible Assets
-----------------
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line basis over the
expected periods to be benefited. The Company assesses the recoverability of
this intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through projected undiscounted
future results. The amount of goodwill impairment, if any, is measured based on
projected discounted future results using a discount rate reflecting the
Company's average cost of funds.
Deposit based premiums, representing the cost of acquiring
deposits from other financial institutions, are included in the balance sheet as
"Other Assets" and are being amortized by charges to operations over the
expected periods to be benefited. The effective amortization period for
intangible assets is approximately 10 years.
(l) Interest Income
---------------
Interest on loans is accrued and credited to income monthly based
on the principal balance outstanding and the contractual rate on the loan. The
Company places loans on non-accrual status when they become greater than 90 days
delinquent or when, in the opinion of Management, full collection of principal
or interest is unlikely. The Company provides an allowance for uncollectible
accrued interest on loans that are 90 days delinquent for all interest accrued
prior to the loan being placed on non-accrual status. The loans are returned to
an accrual status when full collection of principal and interest appears likely.
25
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
------------------------------------------
(m) Fair Value of Financial Instruments
-----------------------------------
The Company discloses the fair value of on- and off-balance sheet
financial instruments when it is practicable to do so. Fair values are based on
quoted market prices, where available; on estimates of present value; or on
other valuation techniques. These estimates are made at a specific point in
time, are subjective in nature, and involve uncertainties and significant
judgment. In addition, the Company does not disclose the fair value of
non-financial instruments. Accordingly, the aggregate fair values presented do
not represent the underlying fair value of the Company.
Fair values for consolidated financial statement reporting
purposes are estimated for loans with similar financial characteristics. These
loans are segregated by the type of loan and consider credit risk, interest
rate, and prepayment characteristics. Each loan category is further segmented
into fixed and adjustable rate categories.
The fair value of performing loans is calculated by discounting
scheduled cash flows through estimated maturity dates. Expected cash flows are
discounted using the Company's current rates that reflect the credit and
interest rate risks inherent in each category of loans. A prepayment assumption
is used as an estimate of the portion of loans that will be repaid prior to
their scheduled maturity.
(n) Earnings Per Share
------------------
Net income per share is computed by dividing consolidated net
income by the weighted average number of common shares outstanding during the
period. The treasury stock method is used to compute the dilutive effect of
stock options in the diluted weighted average number of common shares. All per
share data has been restated to reflect the 2-for-1 stock splits issued during
the years ended March 31, 2001 and March 31, 1999.
(o) Use of Estimates
----------------
The preparation of financial statements in conformity with
Generally Accepted Accounting Principles (GAAP) requires Management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of income and expenses
during the reporting periods. Actual results could differ from those estimates.
(p) Recently Issued Accounting Standards
------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities." All derivatives are to be
measured at fair value and recognized in the balance sheet as assets and
liabilities. SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities" was issued in June 2000 and amends the accounting
and reporting standards of SFAS No. 133 for certain derivative instruments and
hedging activities. The two statements are to be adopted concurrently and are
effective for fiscal years and quarters beginning after June 15, 2000. Adoption
of SFAS No. 133 and SFAS No. 138 did not have a material impact on the
presentation of the Company's financial results or financial position.
Other accounting standards that have been issued or proposed by
FASB that do not require adoption until a future date are not expected to have a
material impact on the consolidated financial statements upon adoption.
(q) Reclassifications
-----------------
Certain amounts in prior years' consolidated financial statements
have been reclassified to conform to current year classifications.
26
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(2) 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:
March 31, 2001
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair value
--------- ---------- ---------- ----------
GNMA Bond $1,975,022 -- -- 1,975,022
FHLB Securities 26,102,565 167,703 17,345 26,252,923
Federal Farm Credit Securities 4,971,771 50,839 -- 5,022,610
FHLMC Bonds 2,052,253 -- 13,368 2,038,885
Mortgage-Backed Securities 36,473,062 380,794 32,056 36,821,800
$71,574,673 599,336 62,769 72,111,240
========== ======= ====== ==========
March 31, 2000
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair value
--------- ---------- ---------- ----------
U.S. Treasury Notes $ 999,613 $ 1,017 $ -- $1,000,630
FHLB Securities 42,776,873 -- 1,292,682 41,484,191
Federal Farm Credit Securities 9,957,106 -- 240,856 9,716,250
FHLMC Bond 2,049,882 -- 85,196 1,964,686
Mortgage-Backed Securities 35,662,761 1,293 1,009,160 34,654,894
--------- ---------- ---------- ----------
$91,446,235 $ 2,310 $2,627,894 $88,820,651
========== ======= ========= ==========
The amortized cost and fair value of investment and mortgage-backed
securities available for sale at March 31, 2001 are shown below by contractual
maturity. Expected maturities will differ from contractual maturities because
borrowers have the right to prepay obligations with or without call or
prepayment penalties.
Amortized Cost Fair value
------------------- -------------------
Less Than 1 Year $ 3,000,240 $ 3,018,300
1 - 5 Years 23,580,662 23,766,676
More Than 5 Years 8,520,709 8,504,464
Mortgage-Backed Securities 36,473,062 36,821,800
---------- ----------
$ 71,574,673 $ 72,111,240
=================== ===================
At March 31, 2001, investment and mortgage-backed securities available
for sale of $12,850,000 were pledged as collateral for certain deposit accounts.
The Bank received $2,504,000 in proceeds from sales of available for sale
securities with approximately $3,900 recorded in gross gains and no gross losses
in the year ending March 31, 2000. The Bank sold no securities in fiscal 2001
and fiscal 1999.
27
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) 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:
March 31, 2001
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair value
--------- ---------- ---------- ----------
FNMA Securities $ 265,707 1,733 -- 267,440
Mortgage-Backed Securities 2,028,215 39,154 -- 2,067,369
--------- ---------- ---------- ----------
$2,293,922 40,887 -- 2,334,809
========= ========== ========== ==========
March 31, 2000
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair value
--------- ---------- ---------- ----------
FNMA Securities $ 265,707 $ 3,034 $ -- $ 268,741
Mortgage-Backed Securities 2,444,396 2,966 81,703 2,365,659
--------- ---------- ---------- ----------
$2,710,103 $ 6,000 $ 81,703 $2,634,400
========= ========== ========== ==========
The amortized cost and fair value of investment and mortgage-backed
securities held to maturity at March 31, 2001, by contractual maturity, are
shown below. Expected maturities will differ from contractual maturities due to
call features on certain investments.
Amortized Cost Fair value
------------------- -------------------
Less Than 1 Year $ -- $ --
1 - 5 Years -- --
265,707 267,440
More Than 5 Years
Mortgage-Backed Securities 2,028,215 2,067,369
------------------- -------------------
$ 2,293,922 $ 2,334,809
=================== ===================
At March 31, 2001, investment and mortgage-backed securities held to
maturity of $2,233,000 were pledged as collateral for certain deposit accounts.
28
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(4) LOANS RECEIVABLE, NET
---------------------
Loans Receivable, Net, at March 31 consisted of the following:
2001 2000
---------------- ----------------
Residential Real Estate Loans $ 121,536,566 $ 98,151,348
Consumer Loans 46,277,098 41,719,221
Commercial Business And Real Estate Loans 74,520,017 62,062,134
Loans Held For Sale 2,445,951 1,295,676
------------- -------------
$ 244,779,632 $ 203,228,379
------------- -------------
Less:
Allowance For Loan Losses 2,784,117 2,120,767
Loans In Process 10,738,528 7,832,280
Deferred Loan Fees 259,973 274,766
------------- -------------
13,782,618 10,227,813
------------- -------------
Total Loans Receivable, Net $ 230,997,014 $ 193,000,566
============= =============
Changes in the allowance for loan losses for the years ended March 31 are
summarized as follows:
2001 2000 1999
-------- -------- --------
Balance At Beginning Of Year $ 2,120,767 1,715,068 $ 1,512,038
Provision For Loan Losses 925,000 750,000 600,000
Charge Offs (329,825) (383,466) (430,116)
Recoveries 68,175 39,165 33,146
-------- -------- --------
Total Allowance For Loan Losses $ 2,784,117 2,120,767 $ 1,715,068
========= ========= =========
The following table sets forth the amount of the Company's non-accrual
loans and the status of the related interest income at March 31.
2001 2000
--------------- ---------------
Non-Accrual Loans $ 183,000 $ 890,000
Interest Income That Would Have Been ========== ==========
Recognized Under Original Terms $ 13,000 $ 52,000
========== ==========
Loans serviced for others at March 31, 2001, 2000 and 1999, were
approximately $48.3 million, $54.1 million, and $64.0 million, respectively. On
January 31, 2001, the Company sold the mortgage loan servicing for others to
another bank. The gain on sale of servicing was $400,000. The Company
sub-serviced for the buyer of the servicing, until the transfer date of April
15, 2001.
At March 31, 2001 and 2000, impaired loans amounted to $789,000 and
$897,000, respectively. Losses on impaired loans are accounted for in the
allowance for loan loss. For the years ended March 31, 2001 and 2000, the
average recorded investment in impaired loans was $740,000 and $1.2 million
respectively.
29
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(5) PREMISES AND EQUIPMENT, NET
---------------------------
Premises and equipment, net, at March 31 are summarized as follows:
2001 2000
------------ ------------
Land $ 496,163 $ 496,163
Buildings And Improvements 5,170,080 4,247,498
Furniture And Equipment 4,642,542 4,129,698
------------ ------------
10,308,785 8,873,359
Less Accumulated Depreciation (5,045,828) (4,588,666)
------------ ------------
Total Premises And Equipment, Net $ 5,262,957 $ 4,284,693
============ ============
Depreciation expense for the years ended March 31, 2001, 2000, and 1999
was approximately $894,000, $784,000, and $658,000, respectively.
The Bank has entered into non-cancelable operating leases related to
buildings and land. At March 31, 2001, future minimum payments under
non-cancelable operating leases with initial or remaining terms of one year or
more are as follows (by fiscal year):
2002 $ 188,094
2003 182,671
2004 178,514
2005 177,293
2006 173,067
Thereafter 1,284,981
-----------
$ 2,184,620
===========
Total rental expense amounted to $150,000, $69,000, and $73,000 for the
years ended March 31, 2001, 2000 and 1999, respectively. Five lease agreements
with monthly expenses of $2,297, $2,113, $493, $407 and $700 have renewal
options of 10, 10, 60, 5, and 20 years, respectively.
(6) FHLB STOCK
----------
By law, every federally insured savings institution is required to invest
in FHLB stock. No ready market exists for this stock and it has no quoted fair
value. However, because redemption of this stock has been at par, it is carried
at cost.
The Bank, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount equal to the
greater of: 1) 1.0% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year; or, 2) 1/20th of its advances (borrowings) from the FHLB
of Atlanta. The Bank is in compliance with this requirement with an investment
in FHLB of Atlanta stock of $3,431,000 as of March 31, 2001.
30
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(7) REAL ESTATE OPERATIONS
----------------------
The Company participated in a real estate joint venture near Aiken;
Willow Woods. The Company owned 50% of the Willow Woods partnership as a joint
venture. The joint venture has been consolidated into the Company's financial
statements since the Company has voting control in the partnership. In the
latter part of fiscal 2001, the Company liquidated the remaining assets of the
Willow Woods partnership and therefore the Company had no investment in real
estate held for development and sale at March 31, 2001. Income from real estate
operations at March 31 is as follows:
2001 2000 1999
-------- -------- --------
Real Estate Held For Development And Sale:
Sales $1,095,900 776,668 $606,350
Cost Of Sales 1,049,159 705,551 497,343
--------- -------- --------
Gross Profit 46,741 71,117 109,007
Recovery Of Previously Recognized Loss (50,000) -- --
Other Expenses, Net 72,099 90,994 73,849
--------- -------- --------
Net Income (Loss) $ 24,642 (19,877) $ 35,158
========= ======== ========
The allowance for estimated losses on real estate was $0 at March 31,
2001 and $50,000 at March 31, 2000 and 1999.
Condensed combined financial information for the joint ventures at March
31 is as follows:
2001 2000
-------------- --------------
Real Estate Held For Development, Net $ -- $ 585,878
Other Assets -- 40,689
-------------- --------------
Total Assets -- 626,567
Liabilities (Principally A Loan Payable To The Company) -- 258,167
Partners' Equity $ -- $ 368,400
============== ==============
31
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(8) DEPOSITS
--------
Deposits outstanding by type of account are summarized as follows:
At March 31, 2001 At March 31, 2000
----------------- -----------------
Interest Interest
Weighted Rate Weighted Rate
Amount Rate Range Amount Rate Range
------ -------- -------- ------ -------- -------
Checking Accounts $61,453,344 0.86% 0.00-4.89% $58,304,679 0.89% 0.00-1.09%
Money Market Accts. 49,855,497 4.66% 2.20-5.13% 51,636,465 4.60% 2.20-5.13%
Passbook Accounts 12,911,410 2.44% 0.00-2.50% 13,203,395 2.50% 0.00-3.00%
----------- ----- --------- ----------- ----- ---------
Total $124,220,251 2.55% 0.00-5.13% $123,144,539 2.62% 0.00-5.13%
----------- ----- --------- ----------- ----- ---------
Certificate Accounts:
0.00 - 4.99% $10,021,153 $15,575,152
5.00 - 6.99% 112,040,419 90,103,640
7.00 - 8.99% 11,128,594 --
----------- -----------
Total $133,190,166 6.15% 4.17-7.26% $105,678,792 5.41% 4.12-6.97%
----------- ----- --------- ----------- ----- ---------
Total Deposits $257,410,417 4.41% 0.00-7.26% $228,823,331 3.90% 0.00-6.97%
============ ===== ========== ============ ===== =========
The aggregate amount of short-term certificates of deposit with a minimum
denomination of $100,000 was $35,720,000 and $19,127,000 at March 31, 2001 and
2000, respectively. The amounts and scheduled maturities of certificates of
deposit at March 31 are as follows:
March 31,
--------------------------------
2001 2000
--------------- ---------------
Within 1 Year $ 115,491,473 $ 79,879,440
After 1 Year, Within 2 15,122,512 20,389,061
After 2 Years, Within 3 1,931,789 4,251,310
After 3 Years, Within 4 254,103 951,273
After 4 Years, Within 5 390,289 207,708
Thereafter --
--------------- ---------------
$ 133,190,166 $ 105,678,792
=============== ===============
(9) ADVANCES FROM FEDERAL HOME LOAN BANK (FHLB)
-------------------------------------------
Advances from the FHLB at March 31 are summarized by year of maturity and
weighted average interest rate below:
2001 2000
------------------------- -------------------------
Year Ending March 31 Amount Weighted Rate Amount Weighted Rate
-------- ------------- -------- -------------
2001 $ -- -- $35,431,000 5.88%
2002 9,560,000 5.63% 5,000,000 5.71%
2003 5,000,000 6.40% 5,000,000 6.36%
2004 -- -- -- --
2005 10,144,000 6.16% 5,180,000 6.60%
Thereafter 18,000,000 5.98% -- --
-------- ------------- -------- -------------
$42,704,000 5.99% $50,611,000 5.99%
=========== ============= =========== =============
These advances are secured by a blanket collateral agreement with the
FHLB pledging the Bank's portfolio of residential first mortgage loans. Advances
are subject to prepayment penalties.
At March 31, 2001, the Bank had $39.8 million in an unused line of credit
at the FHLB.
32
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
10) INCOME TAXES
------------
Income tax expense is comprised of the following:
For the Years Ended March 31,
-----------------------------------------------
2001 2000 1999
-------- -------- --------
Current:
Federal $1,323,058 1,409,595 $ 997,347
State 46,000 --
--------- --------- ---------
Total Current Tax Expense 1,396,056 1,409,595 997,347
--------- --------- ---------
Deferred:
Federal (251,505) (302,918) (49,917)
State -- -- --
--------- --------- ---------
Total Deferred Tax Expense (251,505) (302,918) (49,917)
--------- --------- ---------
Total Income Tax Expense $1,117,553 1,106,677 $ 947,430
========= ========= =========
The Company's income taxes differ from those computed at the statutory
Federal income tax rate, as follows:
For the Years Ended March 31,
---------------------------------------
2001 2000 1999
-------- ------- --------
Tax At Statutory Income Tax Rate $1,103,296 1,063,483 $ 936,081
Other 14,257 43,194 11,349
-------- ------- --------
Total Income Tax Expense $1,117,553 1,106,677 $ 947,430
========== ========= =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below.
At March 31,
-----------------------------
2001 2000
------------- -------------
Deferred Tax Assets:
Provision For Loan Losses $ 885,628 $ 660,089
Goodwill Tax Basis Over Financial Statement Basis 433,198 363,152
Net Fees Deferred For Financial Reporting 52,771 58,887
Unrealized Loss On Securities Available For Sale -- 996,434
Other Real Estate Basis For Tax Purposes Over
Financial Statement Basis - 17,000
Other 25,479 85,499
------------- -------------
Total Gross Deferred Tax Assets 1,397,076 2,181,061
------------- -------------
Deferred Tax Liabilities:
Unrealized Gain on Securities Available For Sale 212,933 --
FHLB Stock Basis Over Tax Basis 113,362 113,362
Depreciation 112,032 151,088
Total Gross Deferred Tax Liability 438,327 264,450
------------- -------------
Net Deferred Tax Asset $ 958,749 $1,916,611
============= =============
The balance of the change in the net deferred tax asset results from the
current period deferred tax expense of $251,505. The net deferred tax asset is
included in other assets in the accompanying consolidated balance sheets.
No valuation allowance for deferred tax assets was required at March 31,
2001 and 2000. The realization of net deferred tax assets may be based on
utilization of carrybacks to prior taxable periods, anticipation of future
taxable income in certain periods, and the utilization of tax planning
strategies. Management has determined that the net deferred tax asset can be
supported based upon these criteria.
33
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(10) INCOME TAXES, CONTINUED
-----------------------
Retained earnings at March 31, 2001 include tax bad debt reserves of
approximately $2.2 million for which no provision for federal income tax has
been made. If in the future these amounts are used for any purpose other than to
absorb bad debt losses including dividends, stock redemptions, or distributions
in liquidation or the Company ceases to be qualified as a bank, then these
amounts may be subject to federal income tax at the then prevailing corporate
tax rate.
(11) REGULATORY MATTERS
------------------
The Bank is subject to various regulatory capital requirements that are
administered by Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and discretionary actions by
regulators that could have a material adverse effect on the Company. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classifications are also subject to qualitative judgements by regulators
with regard to components, risk weightings, and other factors.
As of March 31, 2001 and 2000, the Bank was categorized as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank had to maintain total risk-based
capital, Tier 1 risk-based capital, and Tier 1 leverage ratios at 10%, 6%, and
5%, respectively. There are no conditions or events that Management believes
have changed the Bank's classification.
The Bank's regulatory capital amounts and ratios are as follows as of the
dates indicated:
To Be Well Capitalized
Under Prompt
For Corrective Action
Actual Capital Adequacy Provisions
------------- ------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
MARCH 31, 2001
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets) $22,956 11.1% 8,267 4.0% 12,400 6.0%
Total Risk-Based Capital
(To Risk Weighted Assets) $25,311 12.2% 16,533 8.0% 20,667 10.0%
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets) $22,956 6.9% 13,219 4.0% 16,523 5.0%
Tangible Capital
(To Tangible Assets) $22,486 6.8% 6,600 2.0% 16,500 5.0%
MARCH 31, 2000
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets) $20,486 11.3% $7,227 4.0% $10,840 6.0%
Total Risk-Based Capital
(To Risk Weighted Assets) $22,504 12.5% $14,453 8.0% $18,066 10.0%
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets) $20,486 6.7% $12,216 4.0% $15,270 5.0%
Tangible Capital
(To Tangible Assets) $19,927 6.5% $ 6,097 2.0% $15,242 5.0%
The payment of dividends by the Company depends primarily on the ability of the
Bank to pay dividends to the Company. The payment of dividends by the Bank to
the Company is subject to substantial restrictions and would require prior
notice to, and approval of, the Office of Thrift Supervision (OTS).
34
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(12) EMPLOYEE BENEFIT PLANS
----------------------
The Company is participating in a multiple employer defined contribution
employee benefit plan covering substantially all employees with one or more
years of service. The Company matches a portion of the employees' contributions
and has a discretionary profit sharing provision. The total employer
contributions were $143,000, $130,000, and $120,000 for the years ended March
31, 2001, 2000 and 1999, respectively.
The Company has an Employee Stock Ownership Plan (ESOP) for the exclusive
benefit of employee participants. The discretionary contributions for the years
ended March 31, 2001, 2000 and 1999 were $67,000, $57,000, and $61,000,
respectively. The ESOP from time to time borrows funds from financial
institutions to purchase the Company's stock. The balance of the loan was
$415,000 and $187,000 at March 31, 2001 and 2000, respectively. The Company
carries the debt as a liability and a reduction in equity, although the Company
neither endorses nor guarantees the loan. The loan is repaid by Company
contributions to the trustee, who in turn makes the loan payment to the
financial institution.
Certain officers of the Company participate in an incentive stock option
plan. Options are granted at exercise prices not less than the fair value of the
Company's common stock on the date of the grant. There were no shares granted in
fiscal 1998 or fiscal 1999. Of the outstanding options at March 31, 2001, there
were 67,000 shares of options granted during fiscal 2000. 63,000 shares were
granted at an option price of $25 per share and 4,000 shares were granted at an
option price of $27.50 per share. An additional 4,000 shares of options at
$27.50 per share were granted during fiscal 2001. During fiscal 2001, 1,500
option shares at an option price of $25 per share were forfeited. At March 31,
2001, the Company had the following options outstanding:
Grant Outstanding Option Earliest Date Expiration
Date Options Price Exercisable Date
--------- ----------- ------ ------------- ----------
1/07/97 11,556 $ 8.00 1/1/02 to 12/31/02 to
1/1/06 12/31/06
10/19/99 63,000 $25.00 10/1/04 to 9/30/05 to
10/01/08 9/30/09
10/19/99 4,000 $ 27.50 10/01/03 9/30/04
4/18/00 2,000 $ 27.50 4/1/05 to 3/31/06 to
4/1/09 3/31/10
11/21/00 2,000 $27.50 12/1/05 to 11/30/06 to
12/1/09 11/30/10
The above options vest over ten years with the first vesting earned after
five years and 20% vesting earned evenly in years six through ten except for the
4,000 shares granted on 10/19/99 which fully vest on 10/1/03. All options which
vest must be exercised within one year of vesting.
There were 9,000 options available for granting at March 31, 2001.
35
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(12) EMPLOYEE BENEFIT PLANS, CONTINUED
---------------------------------
The Company has elected the disclosure-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the stock option plan. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the grant
date for awards in fiscal 1997, consistent with the provisions of SFAS No. 123,
the Company's net income and earnings per share amounts as of March 31 would
have been reduced to the pro forma amounts indicated below.
2001 2000 1999
------------ ----------- -----------
Net Income, As Reported $ 2,127,434 2,021,213 $ 1,805,749
Net Income, Pro Forma $ 2,070,652 2,005,458 $ 1,802,583
Net Income Per Common Share
(Basic), As Reported $ 1.27 2.41 $ 2.14
Net Income Per Common Share
(Basic), Pro Forma $ 1.24 2.39 $ 2.14
Net Income Per Common Share
(Diluted), As Reported $ 1.25 2.39 $ 2.13
Net Income Per Common Share
(Diluted), Pro Forma $ 1.22 2.37 $ 2.13
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for grants: Dividend yield of $.08 per share for options granted
during the years ended 2001 and 2000 and $.055 for shares granted during the
year ended 1997, expected volatility of 30% for options granted in 2001 and 2000
and 20% for options granted in1997, risk-free interest rate of 5.9%, and
expected lives of 6-10 years.
(13) COMMITMENTS
-----------
In conjunction with its lending activities, the Bank enters into various
commitments to extend credit and issue letters of credit. Loan commitments
(unfunded loans and unused lines of credit) and letters of credit are issued to
accommodate the financing needs of the Bank's customers. Loan commitments are
agreements by the Bank to lend at a future date, so long as there are no
violations of any conditions established in the agreement. Letters of credit
commit the Bank to make payments on behalf of customers when certain specified
events occur.
Financial instruments where the contract amount represents the Bank's
credit risk include commitments under pre-approved but unused lines of credit of
$25.4 million and $22.0 million and letters of credit of $132,000 and $78,000 at
March 31, 2001 and 2000, respectively.
These loan and letter of credit commitments are subject to the same
credit policies and reviews as loans on the balance sheet. Collateral, both the
amount and nature, is obtained based upon Management's assessment of the credit
risk. Since many of the extensions of credit are expected to expire without
being drawn, the total commitment amounts do not necessarily represent future
cash requirements. In addition to these loan commitments noted above, the Bank
had unused credit card loan commitments of $2.0 million and $1.5 million at
March 31, 2001 and 2000, respectively. Outstanding commitments on mortgage loans
not yet closed amounted to $422,000 at March 31, 2001. Such commitments, which
are funded subject to certain limitations, extend over varying periods of time
with the majority being funded within 90 days. At March 31, 2001, the Bank had
outstanding commitments to sell approximately $2.2 million of loans.
(14) RELATED PARTY TRANSACTIONS
--------------------------
At March 31, 2001, the total aggregate indebtedness to the Bank by
executive officers and directors of the Bank, whose individual indebtedness
exceeded $60,000 at any time over the period since April 1, 1999, was $460,000.
There were $32,000 in additional loans to executive officers whose individual
indebtedness exceeded $60,000 during fiscal 2001. Repayments on these loans
totaled approximately $95,000. Loans to all employees, officers, and directors
of the Company, in the aggregate constituted approximately 5.90% of the total
shareholders' equity of the Company at March 31, 2001.
The Company rents office space from a company in which a director and an
officer of the Company and the Bank have an ownership interest. The Bank
incurred expenses of $28,000, $27,000, and $27,000 for rent for the years ended
March 31, 2001, 2000 and 1999, respectively. Management is of the opinion that
the transactions with respect to office rent are made on terms that are
comparable to those which would be made with unaffiliated persons.
36
(15) SECURITY FEDERAL CORPORATION CONDENSED FINANCIAL STATEMENTS (PARENT
COMPANY ONLY)
-------------------------------------------------------------------
The following is condensed financial information of Security Federal
Corporation (Parent Company only). The primary asset is its investment in the
Bank subsidiary and the principal source of income for the Company is equity in
undistributed earnings from the Bank.
Condensed Balance Sheet Data
At March 31,
----------------------------------
2001 2000
---------------- ---------------
Assets:
Cash $ 421,979 $ 151,400
Investment In Security Federal Bank 23,484,072 19,414,475
Investment In Real Estate Partnership -- 159,204
Income Tax Receivable From Bank 31,356 53,086
Other Assets -- 180,983
---------------- ---------------
Total Assets $ 23,937,407 $ 19,959,148
================ ===============
Liability And Shareholders' Equity:
Accounts Payable $ 437,043 $ 200,447
Shareholders' Equity 23,500,364 19,758,701
---------------- ---------------
Total Liabilities And Shareholders' Equity $ 23,937,407 $ 19,959,148
================ ===============
Condensed Statements of Income Data
For the Years Ended March 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
Income:
Equity In Earnings Of Security
Federal Bank $2,092,433 2,036,062 $1,789,267
Equity In (Loss) Earnings Of Real
Estate Partnership (12,678) 12,380 17,581
Miscellaneous Income 30,382 21,599 21,052
----------- ----------- -----------
$2,110,137 2,070,041 $1,827,900
Expenses:
Recovery Of Previously Recognized Loss (50,000) - --
Other Expenses 32,703 48,828 22,151
----------- ----------- -----------
(17,297) 48,828 22,151
----------- ----------- -----------
Net Income $ 2,127,434 2,021,213 $ 1,805,749
=========== =========== ===========
37
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(15) SECURITY FEDERAL CORPORATION CONDENSED FINANCIAL STATEMENTS (PARENT
COMPANY ONLY), CONTINUED
-------------------------------------------------------------------
Condensed Statements of Cash Flow Data
For the Years Ended March 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
Operating Activities:
Net Income $2,127,434 $2,021,213 $1,805,749
Adjustments To Reconcile Net Income To
Net Cash Provided By (Used In)
Operating Activities:
Equity In Earnings Of Security Federal
Bank (2,092,433) (2,036,062) (1,789,267)
Equity In Earnings (Loss) Of Real
Estate Partnership 12,678 (12,380) (17,581)
Recovery of Previously Recognized Loss (50,000) -- --
(Increase) Decrease In Income Taxes
Receivable And Other Assets 202,704 25,899 (99,570)
Increase (Decrease) In Accounts Payable 236,606 195,202 2,028
Net Cash Provided By (Used In) ------------- ------------- ------------
Operating Activities $ 436,989 $ 193,872 $(98,641)
------------- ------------- ------------
Investing Activities:
Return Of Capital From Real Estate
Partnerships 196,526 40,000 70,438
Purchase of Stock by ESOP (228,197) (186,803) --
Net Cash Provided By (Used In) ------------- ------------- -----------
Investing Activities $ (31,671) (146,803) $ 70,438
------------- ------------- -----------
Financing Activities:
Dividends Paid $(134,739) $(134,739) $(117,897)
------------- ------------- -----------
Net Increase (Decrease) In Cash 270,579 (87,670) (146,100)
Cash At Beginning Of Year 151,400 239,070 385,170
------------- ------------- -----------
Cash At End Of Year $ 421,979 $ 151,400 $ 239,070
============= ============= ===========
(16) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
--------------------------------------------------------
The carrying amounts and fair value of financial instruments are
summarized below:
At March 31,
-------------------------------------
2001 2000
-------- --------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------- -------- -------- ---------
(In Thousands)
Financial Assets:
Cash And Cash Equivalents $12,616 12,616 $ 7,417 $ 7,417
Investment And Mortgage-Back Securities $74,405 74,446 $91,531 $91,455
Loans Receivable, Net $230,997 232,005 $193,001 $191,051
Federal Home Loan Bank Stock $ 3,431 3,431 $ 2,606 $ 2,606
Financial Liabilities:
Deposits:
Checking, Savings, and Money Market
Accounts $124,220 124,220 $123,144 $122,821
Certificate Accounts $133,190 134,693 $105,679 $105,069
Advances From Federal Home Loan Bank $ 42,704 43,313 $ 50,611 $ 50,108
Other Borrowed Money $ 3,409 3,409 $ 2,211 $ 2,201
38
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(16) CARRYING AMOUNTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
-------------------------------------------------------------------
At March 31, 2001, the Bank had $27.7 million of off-balance sheet
financial commitments. These commitments are to originate loans and unused
consumer lines of credit and credit card lines. Since these obligations are
based on current market rates, if funded, the original principal is considered
to be a reasonable estimate of fair value.
Fair value estimates are made at a specific point in time, based on
relevant market data and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale the Bank's entire holdings of a particular financial instrument.
Because no active market exists for a significant portion of the Bank's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, current interest
rates and prepayment trends, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in any of these assumptions used in
calculating fair value would also significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Bank has significant assets and
liabilities that are not considered financial assets or liabilities including
deposit franchise values, loan servicing portfolios, deferred tax liabilities,
and premises and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in any of these estimates.
Fair value methods and assumptions are as follows:
Cash and due from banks, interest-bearing deposit in the FHLB, certificate of
deposit in another bank and FHLB stock - the carrying value is a reasonable
estimate of the fair value.
Investment securities, and mortgage-backed securities - fair value is based on
available quoted market prices or quoted market prices for similar securities if
a quoted market price is not available.
Loans - fair value for fixed and adjustable rate loans is estimated based upon
discounted future cash flows using discount rates comparable to rates currently
offered for such loans.
Deposits - the fair value of time deposits is estimated using rates currently
offered for deposits of similar remaining maturities. The fair value of all
other deposit account types is the amount payable on demand at year-end.
FHLB advances and note payables - fair value is estimated based on the current
rates offered for debt with the same remaining maturities.
Commitments to extend credit and standby letter of credit -variable rate credit
commitments are subject to minimal interest risk exposure since the rates
periodically (generally one year or less) adjust to market. Fixed rate loan
commitments do not represent significant interest rate risk exposure as these
loans are typically sold.
39
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
SHAREHOLDERS INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held at 2:00 p.m., Tuesday, July 17,
2001 at the University of South Carolina - Aiken, Business and Educational
Building, Room 116, 471 University Parkway, Aiken, SC.
STOCK LISTING
The Company's stock is traded over the counter and trades infrequently.
PRICE RANGE OF COMMON STOCK
The table below shows the range of high and low bid prices as reported by the
Robinson-Humphrey Company, Inc., located in Aiken, SC. These prices represent
actual transactions and do not include retail markups, markdowns or commissions.
The Robinson-Humphrey Company creates a market for the stock.
Quarter Ending High Low
------------------- -------------- --------------
06-30-99 $ 25.00 $ 22.50
09-30-99 $ 25.75 $ 25.00
12-31-99 $ 30.00 $ 25.00
03-31-00 $ 30.00 $ 30.00
06-30-00 $ 30.00 $ 22.50
09-30-00 $ 27.50 $ 27.50
12-31-00 $ 27.56 $ 27.50
03-31-01 $ 30.00 $ 28.00
As of March 31, 2001, the Company had approximately 274 shareholders and
1,669,901 outstanding shares of common stock.
DIVIDENDS
The first quarterly dividend on the stock was paid to shareholders on March 15,
1991. Dividends will be paid upon the determination of the Board of Directors
that such payment is consistent with the long-term interest of the Company. The
factors affecting this determination include the Company's current and projected
earnings, operating results, financial condition, regulatory restrictions,
future growth plans and other relevant factors. The Company declared and paid
dividends of $0.02 per share, on a split-adjusted-basis, for each of the four
quarters of the fiscal years ended March 31, 2001 and 2000. There was a 2-for-1
stock split in the fiscal years ended March 31, 2001 and 1999.
The ability of the Company to pay dividends depends primarily on the ability of
the Bank to pay dividends to the Company. The Bank may not declare or pay a cash
dividend on its stock or repurchase shares of its stock if the offset thereof
would be to cause its regulatory capital to be reduced below the amount required
for the liquidation account or to meet applicable regulatory capital
requirements. Pursuant to the OTS regulations, Tier 1 Associations (associations
that before and after the proposed distribution meet or exceed their fully
phased-in capital requirements) may make capital distributions during any
calendar year equal to 100% of net income for the year-to-date plus 50% of the
amount by which the association's total capital exceeds its fully phased-in
capital requirement as measured at the beginning of the capital year. However, a
Tier 1 Association deemed to be in need of more than normal supervision by the
OTS may be downgraded to a Tier 2 or Tier 3 Association as a result of such a
determination. The Bank is also required to give the OTS 30 days notice prior to
the declaration of a dividend. Unlike the Bank, there is no regulatory
restriction on the payment of dividends by the Company. However, it is subject
to the requirements of South Carolina. South Carolina generally prohibits the
Company from paying dividends if, after giving effect to a proposed dividend, 1)
the Company would be unable to pay its debts as they become due in the normal
course of business, or 2) the Company's total assets would be less than its
total liabilities plus the sum that would be needed to satisfy the preferential
rights upon dissolution of shareholders whose preferential rights are superior
to those receiving the dividend. The ability of the Company to pay dividends
depends primarily on the ability of the Bank to pay dividends to the Company.
40
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
SHAREHOLDERS INFORMATION
ANNUAL AND OTHER REPORTS
The Company is required to file an annual report on Form 10-K for its fiscal
year ended March 31, 2001 with the Securities and Exchange Commission. Copies of
Form 10-K, Security Federal Corporation's annual report, and the Company's
quarterly reports may be obtained from any of the following companies listed
below. Additionally, shareholder and/or general inquiries may be addressed to
Mrs. Ruth Vance of Security Federal Corporation.
GENERAL INQUIRIES: TRANSFER AGENT:
- ------------------ ---------------
Mrs. Ruth Vance Security Federal Corporation
Security Federal Corporation 1705 Whiskey Road, S
1705 Whiskey Road, S P.O. Box 810
P.O. Box 810 Aiken, SC 29802-0810
Aiken, SC 29802-0810
Phone: 803-641-3000
SPECIAL COUNSEL: INDEPENDENT AUDITORS:
- ---------------- ---------------------
Breyer & Associates, PC Elliott Davis , LLP
Suite 700 East 225 Chesterfield Street, N.W.
1100 New York Ave., NW P.O. Box 930
Washington, DC 20005 Aiken, SC 29802-0930
41
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
BOARD OF DIRECTORS*
- -------------------------------------------------------------------------------
T. Clifton Weeks Senator Thomas L. Moore Harry O. Weeks, Jr.
Chairman President, Boiler Efficiency, Business Development
Security Federal Inc. Executive
Corporation Clearwater, SC Hutson-Etherredge Companies
Aiken, SC Aiken, SC
Dr. Robert E. Alexander Timothy W. Simmons DIRECTORS EMERITI:
Chancellor President/Chief Executive Walter E. Brooker, Sr.
University of South Officer President, Brooker's Inc.
Carolina at Aiken Security Federal Corporation Denmark, SC
Aiken, SC Aiken, SC
William Clyburn G. L. Toole, III Robert E. Johnson
Advisor for Community Alliances Attorney-At-Law Corporate Secretary
Westinghouse Savannah River Co. Aiken, SC Attorney-At-Law (Retired)
Aiken, SC Aiken, SC
DENMARK ADVISORY BOARD**
- -------------------------------------------------------------------------------
Walter E. Brooker, Sr. David Crum Jim Harrison Claude E. McCain
President Attorney-At-Law Owner President
Brookers's Inc. Crum, Crum and Crum Jim Harrison H.C. McCain
Denmark, SC Denmark, SC Art Gallery Insurance Agency
Denmark, SC Denmark, SC
Rev. Isaiah Odom
Owner
Odom's Auto Sure Auto Parts
Denmark, SC
NORTH AUGUSTA ADVISORY BOARD**
- -------------------------------------------------------------------------------
Richard Borden Rev. G.L. Brightharp Helen Butler Sen.Thomas L. Moore
Owner Owner Retired Banker President
Borden Pest Control G.L. Brightharp & Sons North Augusta,SC Boiler Efficiency,
North Augusta, SC Mortuary North Inc. Clearwater, SC
John Potter
Director of Finance
City of North Augusta
North Augusta, SC
WAGENER ADVISORY BOARD**
- -------------------------------------------------------------------------------
M. Judson Busbee Chad Ingram Mary Lybrand Richard H. Sumpter
Owner Vice President Retired Banker Retired Educator
Busbee Hardware New World Enterprises Wagener, SC Wagener, SC
Wagener, SC Wagener, SC
MIDLAND VALLEY ADVISORY BOARD**
- -------------------------------------------------------------------------------
Charles Hilton Rev. Nathaniel Irvin, Sr Gloria Bush-Johnson
General Manager Pastor Consultant
Breezy Hill Water & Old Storm Branch Aiken, SC
Sewer Baptist Churce
Graniteville, SC Clearwater, SC
Sen. Thomas L. Moore Rev. Dennis Phillips
President Pastor
Boiler Efficiency, Inc. Christian Heritage Church
Clearwater, SC Graniteville, SC
Glenda K. Napier Carlton Shealy
Co-Owner Owner
Napier Funeral Home C. Shealy Realty Builders & Developers
Graniteville, SC North Augusta, SC
WEST COLUMBIA ADVISORY BOARD**
- -------------------------------------------------------------------------------
Eleanor Powell Clark Dr. G. Tripp Jones L. Ed Kirkland
Owner/Operator Physician Owner/Agent
B & E Enterprises Inc. South Carolina Oncology L. Ed Kirkland & Co.,
Dba McDonald's Associates LLC
Columbia, SC West Columbia, SC Columbia, SC
Donald T. Martin L. Todd Sease
Controller, CPA Partner
Nexsen, Pruet, Jacobs & Jumper,,Carter, Sease,
Pollard, LLP Architects, PA
Columbia, SC Columbia, SC
Jan Hook-Stamps Sen. Nikki Setzler
Owner Senior Partner
Southern Anesthesia & Setzler & Scott, P.A.
Surgical Co. West Columbia, SC
West Columbia, SC
* Serves as Members of the Board for: Security Federal Corporation, Security
Federal Bank, and Security Financial Services Corporation
** Serves as Members of the Board for: Security Federal Bank
42
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
SECURITY FEDERAL BANK MANAGEMENT TEAM:
- -------------------------------------------------------------------------------
T. Clifton Weeks .................... Chairman
Timothy W. Simmons .................... President and Chief Executive Officer
G.L. Toole, III .................... Vice President
Robert E. Johnson .................... Corporate Secretary
Roy G. Lindburg .................... Treasurer and Chief Financial Officer
Harley Henkes .................... Internal Auditor and
Compliance/Security Officer
Thomas Clark .................... Senior Vice President -
Commercial/Consumer Lending
Floyd Blackmon .................... Senior Vice President -Operations
Frank Thomas .................... Senior Vice President -Mortgage Loans
Stephen P. Nivens .................... Regional President - West Columbia
Sandy Bartlett .................... Vice President - Human Resources
Kathryn Carr .................... Vice President - Special Assets
Carol McCleskey .................... Vice President and Branch Coordinator
Gabriele Dukes .................... Vice President - Financial Counseling
Rodney Ingle .................... Vice President - Business
Development/Commercial Loans
Jack R. Bowles .................... Vice President - Business
Development/Commercial Loans
Greg Warfield .................... Vice President - Mortgage Loan
Originator
Deborah Vermillion .................... Vice President - Single-Family
Mortgage Lending
Ruth Vance .................... Assistant Secretary and Assistant
Vice President
Margaret Hurt .................... Assistant Treasurer - Accounting
Joseph Taylor .................... Assistant Vice President -
Information Services
Patricia Moseley .................... Assistant Vice President - Loan and
Credit Card Servicing
Ann Johnson .................... Assistant Vice President - Purchasing
and Equipment Maintenance
Dana Hall .................... Assistant Vice President - Business
Development/Commercial Loans
Lee Hutto .................... Assistant Vice President - Business
Development/Commercial Loans
Todd Lucas .................... Assistant Vice President - Business
Development/Commercial Loans
Elsie Dicks .................... Assistant Vice President -Call Center
Manager
Laura Conway .................... Manager - Operations
Al McKay .................... Executive Vice President - Security
Financial Services Corp.
Sherry Stone .................... Vice President - Security
Financial Services Corp.
SECURITY FEDERAL BANK BRANCHES:
- -------------------------------------------------------------------------------
Whiskey Road .................... Jason Redd, Manager
North Augusta .................... Pat Weber, Manager
Denmark .................... Cynthia Towne, Manager
Laurens Street .................... Vicky Moseley, Assistant Vice
President/Manager
Richland Avenue .................... Kevin Price, Manager
Wal-Mart .................... Faye Anderson, Manager
Graniteville .................... Kathy Williamson, Assistant Vice
President/Manager
Langley .................... Pat Guglieri, Assistant Vice
President/Manager
Clearwater .................... Gail Dotson, Assistant Vice
President/Manager
Wagener .................... Sharon Swift, Manager
West Columbia .................... Mary Clark, Assistant Vice
President/Manager
43
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
State of Percentage
Parent Subsidiary Incorporation of Ownership
- ------ ---------- ------------- ------------
Security Federal Security Federal Bank United States 100%
Corporation
Security Federal Bank Security Financial Services South Carolina 100%
Corporation
EXHIBIT 23
CONSENT OF ELLIOTT DAVIS, LLP
INDEPENDENT AUDITORS' CONSENT
-----------------------------
Board of Directors
Security Federal Corporation:
We consent to incorporation by reference in the Registration Statement No.
33-80008 on Form S-8 of our report dated April 27, 2001, relating to the
consolidated balance sheet of Security Federal Corporation and subsidiary as of
March 31, 2001 and the related consolidated statements of income, shareholders'
equity and cash flows for the year then ended, which report appears in the March
31, 2001 annual report on Form 10-K.
/s/Elliott Davis, LLP
- ---------------------
Elliott Davis, LLP
Greenville, South Carolina
June 25, 2001