SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD:
FROM: TO:
--------------- ---------------
COMMISSION FILE NUMBER: 0-16120
SECURITY FEDERAL CORPORATION
South Carolina 57-0858504
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification)
1705 WHISKEY ROAD, AIKEN, SOUTH CAROLINA 29801
(Address of Principal Executive Office) (Zip code)
(803) 641-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practical date.
CLASS: OUTSTANDING SHARES AT: $0.01 PAR VALUE:
------------------ -------------------------- ------------------
Common Stock June 30, 2001 1,671,459
INDEX
Security Federal Corporation and Subsidiaries
- ------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE
NO.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statement of Shareholders' Equity 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis Results of Operations
and Financial Condition 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
- ------------------------------------------------------------------------------
PART II. OTHER INFORMATION
Other Information 14
Signatures 15
- ------------------------------------------------------------------------------
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information is included in the consolidated financial statements and related
notes.
I
Security Federal Corporation and Subsidiaries
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
June 30, 2001 March 31, 2001
---------------- ---------------
Assets: (Unaudited) (Audited)
Cash and Cash Equivalents $ 9,130,196 $ 12,616,129
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized cost of
$78,991,846 at
June 30, 2001 and
$71,574,673 at
March 31, 2001) 79,496,536 72,111,240
Held To Maturity: (Fair value of $2,052,721
at June 30, 2001 and
$2,334,809 at
March 31, 2001) $ 2,019,032 $ 2,293,922
---------------- ---------------
Total Investment And Mortgage-Backed
Securities 81,515,568 74,405,162
---------------- ---------------
Loans Receivable Net:
Held For Sale 2,233,461 2,245,951
Held For Investment: (Net of allowance of
$2,839,694 at
June 30, 2001 and
$2,784,117 at
March 31, 2001) 235,146,487 228,751,063
---------------- ---------------
Total Loans Receivable, Net $ 237,379,948 $ 230,997,014
---------------- ---------------
Accrued Interest Receivable:
Loans 1,338,465 1,348,178
Mortgage-Backed Securities 286,946 179,977
Investments 344,294 572,074
Premises And Equipment, Net 5,160,961 5,262,957
Federal Home Loan Bank Stock, At Cost 2,669,300 3,431,000
Real Estate Acquired In Settlement Of Loans 148,157 130,157
Real Estate Held For Development And Sale - -
Other Assets 1,926,279 1,698,995
---------------- ---------------
Total Assets $ 339,900,114 $ 330,641,643
================ ===============
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $ 273,301,121 $ 257,410,417
Advances From Federal Home Loan Bank 35,626,000 42,704,000
Other Borrowed Money 3,703,053 3,409,362
Advance Payments By Borrowers For Taxes
and Insurance 474,871 382,478
Other Liabilities 2,769,336 3,235,022
---------------- ---------------
Total Liabilities $ 315,874,381 $ 307,141,279
---------------- ---------------
Shareholders' Equity:
Serial Preferred Stock, $.01 Par Value;
Authorized Shares 200,000; Issued
And Outstanding Shares - None
Common Stock, $.01 Par Value; Authorized
Shares - 5,000,000; Issued And
Outstanding Shares - 1,671,459 At June 30,
2001 And 1,669,901 At March 31, 2001 $ 16,842 $ 16,842
Additional Paid-In Capital 3,985,312 3,985,312
Indirect Guarantee of Employee Stock
Ownership Trust Debt (358,297) (415,000)
Accumulated Other Comprehensive Gain 313,109 348,015
Retained Earnings, Substantially Restricted 20,068,767 19,565,195
---------------- ---------------
Total Shareholders' Equity $ 24,025,733 $ 23,500,364
---------------- ---------------
Total Liabilities And Shareholders' Equity $ 339,900,114 $ 330,641,643
================ ===============
See accompanying notes to consolidated financial statements.
1
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended June 30,
------------------------------------
2001 2000
---------------- ---------------
Interest Income:
Loans $ 4,957,519 $ 4,160,332
Mortgage-Backed Securities 670,151 585,060
Investment Securities 501,474 869,159
Other 55,830 17,302
---------------- ---------------
Total Interest Income $ 6,184,974 $ 5,631,853
---------------- ---------------
Interest Expense:
NOW And Money Market Accounts 710,365 673,646
Passbook Accounts 78,085 81,827
Certificate Accounts 2,057,175 1,499,327
Advances And Other Borrowed Money 560,934 876,913
---------------- ---------------
Total Interest Expense $ 3,406,559 $ 3,131,713
---------------- ---------------
Net Interest Income 2,778,415 2,500,140
Provision For Loan Losses 175,000 175,000
---------------- ---------------
Net Interest Income After Provision
For Loan Losses $ 2,603,415 $ 2,325,140
---------------- ---------------
Other Income:
Gain On Sale Of Loans 294,553 50,917
Loan Servicing Fees 57,557 67,675
Service Fees On Deposit Accounts 297,462 260,170
Income From Real Estate Operations - 31,659
Other 172,144 178,339
---------------- ---------------
Total Other Income $ 821,716 $ 588,760
---------------- ---------------
General And Administrative Expenses:
Salaries And Employee Benefits 1,483,138 1,134,780
Occupancy 190,143 133,930
Advertising 31,392 60,057
Depreciation And Maintenance Of
Equipment 278,283 242,040
FDIC Insurance Premiums 11,111 11,520
Amortization Of Intangibles 116,310 116,310
Other 458,345 405,807
---------------- ---------------
Total General And Administrative
Expenses $ 2,568,722 $ 2,104,444
---------------- ---------------
Income Before Income Taxes 856,409 809,456
Provision For Income Taxes 319,151 300,450
---------------- ---------------
Net Income $ 537,258 $ 509,006
================ ===============
Basic Net Income Per Common Share $ 0.32 $ 0.30
================ ===============
Diluted Net Income Per Common Share $ 0.32 $ 0.30
================ ===============
Cash Dividend Per Share On Common Stock $ 0.02 $ 0.02
================ ===============
Basic Weighted Average Shares
Outstanding 1,670,175 1,676,494
================ ===============
Diluted Weighted Average Shares
Outstanding 1,703,675 1,693,672
================ ===============
See accompanying notes to consolidated financial statements.
2
Security Federal Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity (Unaudited)
Accumulated
Additional Indirect Other
Common Paid-In Guarantee of Comprehensive Retained
Stock Capital ESOP Debt Income (Loss) Earnings Total
---------- ------------ ------------- ---------------- ----------- -----------
<s> <c> <c> <c> <c> <c> <c>
Beginning Balance At
March 31, 2000 $ 8,421 $ 3,993,733 $ (186,803) (1,629,150) $ 17,572,500 $19,758,701
Net Income - - - - 509,006 509,006
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Losses On Securities
Available For Sale - - - (2,266) - (2,266)
-----------
Comprehensive Income 506,740
Increase In Indirect
Guarantee Of ESOP
Debt (59,577) (59,577)
Cash Dividends - - - (33,684) (33,684)
---------- ------------ ------------- ---------------- ----------- -----------
Balance At
June 30, 2000 $ 8,421 $ 3,993,733 $ (246,380)$ (1,631,416) $18,047,822 $20,172,180
========== ============ ============= ================ =========== ===========
Beginning Balance At
March 31, 2001 $ 16,842 $ 3,985,312 $ (415,000) 348,015 $19,565,195 $23,500,364
Net Income - - - - 537,258 537,258
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Losses On Securities
Available For Sale - - - (34,906) - (34,906)
-----------
Comprehensive Income 502,352
Decrease in Indirect
Guarantee of ESOP
Debt 56,703 56,703
Cash Dividends - - - - (33,686) (33,686)
---------- ------------ ------------- ---------------- ----------- -----------
Balance at
June 30, 2001 $ 16,842 $ 3,985,312 $ (358,297) 313,109 $20,068,767 $24,025,733
========== ============ ============= ================ =========== ===========
3
See accompanying notes to consolidated financial statements.
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended June 30,
-------------------------------------
2001 2000
---------------- ----------------
Cash Flows From Operating Activities:
Net Income $ 537,258 $ 509,006
Adjustments To Reconcile Net Income To
Net Cash Provided By Operating
Activities:
Depreciation Expense $ 248,177 $ 211,436
Amortization Of Intangibles 116,310 116,310
Discount Accretion And Premium
Amortization (100,193) 9,227
Provisions For Losses On Loans And
Real Estate 175,000 175,000
Gain On Sale Of Loans (294,553) (50,917)
Gain On Sale Of Real Estate - (43,477)
Amortization Of Deferred Fees On Loans (45,705) (31,038)
Proceeds From Sale Of Loans Held
For Sale 17,267,184 2,834,675
Origination Of Loans For Sale (16,960,141) (2,305,573)
(Increase) Decrease In Accrued
Interest Receivable:
Loans 9,713 (45,885)
Mortgage-Backed Securities (106,969) (5,694)
Investments 227,780 121,854
Increase In Advance Payments By
Borrowers 92,393 138,481
(Gain) Loss On Disposition Of Premises
And Equipment (1,367) 195
Other, Net (755,606) 52,327
---------------- ----------------
Net Cash Provided By Operating
Activities $ 409,281 $ 1,685,927
---------------- ----------------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Held To Maturity $ 274,986 $ 54,492
Principal Repayments On Mortgage-Backed
Securities Available For Sale 3,871,582 1,483,937
Purchase Of Investment Securities
Available For Sale (8,073,750) -
Purchase Of Mortgage-Backed Securities
Available For Sale (21,075,981) (943,380)
Proceeds From Sale of Mortgage Backed
Securities Available For Sale 599,735 0
Maturities Of Investment Securities
Available For Sale 17,361,338 2,038,860
Maturities Of Investment Securities
Held To Maturity - -
Purchase Of FHLB Stock 0 (414,100)
Redemption Of FHLB Stock 761,700 -
Increase In Loans To Customers (6,553,719) (11,016,731)
Investment In Real Estate Held
For Development 0 (152,714)
Proceeds From Sale Of Real Estate
Held For Development 0 306,850
Proceeds From Sale Of Repossessed Assets 11,000 74,222
Purchase And Improvement Of Premises
And Equipment (144,814) (352,842)
Proceeds From Sale Of Premises And
Equipment - -
---------------- ----------------
Net Cash Used By Investing Activities $ (12,967,923) $ (8,921,406)
---------------- ----------------
Cash Flows From Financing Activities:
Increase In Deposit Accounts $ 15,890,704 $ 1,132,377
Proceeds From FHLB Advances 11,700,000 30,800,000
Repayment Of FHLB Advances (18,778,000) (21,018,000)
Proceeds Of Other Borrowings 293,691 223,017
Repayment Of Other Borrowings - -
Dividends To Shareholders (33,686) (33,685)
---------------- ----------------
Net Cash Provided By Financing
Activities $ 9,072,709 $ 11,103,709
---------------- ----------------
(Continued)
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended June 30,
-------------------------------------
2001 2000
---------------- ----------------
Net Increase (Decrease) In Cash And
Cash Equivalents $ (3,485,933) $ 3,868,230
Cash And Cash Equivalents At Beginning
Of Period 12,616,129 7,416,702
---------------- ----------------
Cash And Cash Equivalents At End
Of Period $ 9,130,196 $ 11,284,932
================ ================
Supplemental Disclosure Of Cash Flows
Information:
Cash Paid During The Period For
Interest $ 3,574,251 $ 3,239,696
Cash Paid During The Period For
Income Taxes $ 554,623 $ 135,000
Additions To Repossessed Assets $ 29,000 $ 301,203
Decrease In Unrealized Net Gain On
Securities Available For Sale,
Net Of Taxes $ 34,906 $ 2,266
See accompanying notes to consolidated financial statements.
5
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions from Form 10-Q and generally accepted accounting
principles; therefore, they do not include all disclosures necessary for a
complete presentation of financial condition, results of operations, and cash
flows. Such statements are unaudited but, in the opinion of Management,
reflect all adjustments, all of which are of a normal recurring nature and
necessary for a fair presentation of results for the selected interim periods.
Users of financial information produced for interim periods are encouraged to
refer to the footnotes contained in the Annual Report to Shareholders when
reviewing interim financial statements. The results of operations for the
three-month period ended June 30, 2001 are not necessarily indicative of the
results that may be expected for the entire fiscal year. This Form 10-Q
contains certain forward-looking statements with respect to the financial
condition, results of operations, and business. These forward-looking
statements involve certain risks and uncertainties. Factors that may cause
actual results to differ materially from those anticipated by such
forward-looking statements include, but are not limited to, changes in
interest rates, changes in the regulatory environment, changes in general
economic conditions and inflation, and changes in the securities market.
Management cautions readers of this Form 10-Q not to place undue reliance on
forward- looking statements contained herein.
2. Basis of Consolidation and Nature of Operations
The accompanying unaudited consolidated financial statements include the
accounts of Security Federal Corporation (the "Company") and its wholly owned
subsidiary, Security Federal Bank (the "Bank"), and the Bank's wholly owned
subsidiary, Security Financial Services Corporation ("SFSC"). The Bank is
primarily engaged in the business of accepting savings and demand deposits and
originating mortgage loans and other loans to individuals and small businesses
for various personal and commercial purposes. SFSC consists primarily of
investment brokerage services. Also included in the consolidation is a real
estate partnership, Willow Woods. Willow Woods sold its remaining property in
fiscal 2001. Thus, at March 31, 2001, the real estate partnership was
liquidated.
3. Loans Receivable, Net
Loans Receivable, Net, at June 30, 2001 and March 31, 2001 consisted of the
following:
Loans held for sale were $2,233,461 and $2,245,951 at June 30, 2001 and March
31, 2001, respectively.
Loans Held For Investment: June 30, 2001 March 31, 2001
------------------ -----------------
Residential Real Estate $ 120,428,068 $ 121,536,566
Consumer 47,521,638 46,277,098
Commercial Business And Real Estate 81,547,343 74,520,017
------------------ -----------------
$ 249,497,049 $ 242,333,681
------------------ -----------------
Less:
Allowance For Possible Loan Loss 2,839,694 2,784,117
Loans In Process 11,276,859 10,738,528
Deferred Loan Fees 234,009 259,973
------------------ -----------------
$ 14,350,562 $ 13,782,618
------------------ -----------------
$ 235,146,487 $ 228,551,063
================== =================
The following is a reconciliation of the allowance for loan losses for the
three months ending:
June 30, 2001 June 30, 2000
------------------ -----------------
Beginning Balance $ 2,784,117 $ 2,120,767
Provision 175,000 175,000
Charge-offs (171,557) (110,332)
Recoveries 52,134 5,478
------------------ -----------------
Ending Balance $ 2,839,694 $ 2,190,913
================== =================
6
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
4. Securities
Investment and Mortgage-Backed Securities, Held to Maturity
- -----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities held to maturity are as
follows:
Gross Gross
June 30, 2001 Amortized Unrealized Unrealized
- -------------
Cost Gains Losses Fair Value
--------- ---------- ---------- -----------
U.S. Government and
Agency Obligations $ 265,707 $ 3,305 $ - $ 269,012
Mortgage-Backed Securities 1,753,325 30,384 - 1,783,709
--------- ---------- ---------- -----------
Total $2,019,032 $ 33,689 $ - $ 2,052,721
========= ========== ========== ===========
March 31, 2001
- --------------
U.S. Government and
Agency Obligations $ 265,707 $ 1,733 $ - $ 267,440
Mortgage-Backed Securities 2,028,215 39,154 - 2,067,369
--------- ---------- ---------- -----------
Total $2,293,922 $ 40,887 $ - $ 2,334,809
========= ========== ========== ===========
Investment And Mortgage-Backed Securities, Available For Sale
- -------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities available for sale are as
follows:
Gross Gross
June 30, 2001 Amortized Unrealized Unrealized
- -------------
Cost Gains Losses Fair Value
---------- ---------- ---------- -----------
U.S. Government and
Agency Obligations $25,845,480 $ 182,048 $ 34,348 $25,993,180
Mortgage-Backed Securities 53,146,366 429,933 72,943 53,503,356
---------- ---------- ---------- -----------
Total $78,991,846 $ 611,981 $ 107,291 $79,496,536
========= ========== ========== ===========
March 31, 2001
- --------------
U.S. Government and
Agency Obligations $35,101,611 $ 218,542 $ 30,713 $35,289,440
Mortgage-Backed Securities 36,473,062 380,794 32,056 36,821,800
---------- ---------- ---------- -----------
Total $71,574,673 $ 599,336 $ 62,769 $72,111,240
========= ========== ========== ===========
7
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
5. Deposits
A summary of deposit accounts by type with weighted average rates is as
follows:
June 30, 2001 March 31, 2001
------------------- -------------------
Balance Rate Balance Rate
Demand Accounts: ------------------- -------------------
Checking $ 62,356,239 0.82% $ 61,453,344 0.86%
Money Market 54,551,336 3.90% 49,855,497 4.66%
Regular Savings 12,763,812 2.44% 12,911,410 2.44%
------------ ------------
Total Demand Accounts $129,671,387 2.28% $124,220,251 2.55%
============ ============
Certificate Accounts:
0 - 4.99% $ 30,900,438 $ 10,021,153
5.00 - 6.99% 102,317,124 112,040,419
7.00 8.99% 10,412,172 11,128,594
------------ ------------
Total Certificate Accounts $143,629,734 5.84% $133,190,166 6.15%
============ ============
Total Deposit Accounts $273,301,121 4.15% $257,410,417 4.41%
============ ============
6. Federal Home Loan Bank Advances
FHLB Advances are summarized by year of maturity and weighted average interest
rate in the table below:
June 30, 2001 March 31, 2001
------------------- -------------------
Balance Rate Balance Rate
Fiscal Year Due: ------------------- -------------------
2002 $ 2,500,000 4.16% $ 9,560,000 5.63%
2003 5,000,000 6.40% 5,000,000 6.40%
2004 - - - -
2005 10,126,000 6.15% 10,144,000 6.16%
Thereafter 18,000,000 5.98% 18,000,000 5.98%
------------ ------------
Total Advances $ 35,626,000 5.96% $ 42,704,000 5.99%
============ ============
7. Regulatory Matters
The following table reconciles the Bank's shareholders' equity to its various
regulatory capital positions:
June 30, 2001 March 31, 2001
----------------- -------------------
(Dollars in Thousands)
--------------------------------------
Bank's Shareholders' Equity $ 23,986 $ 23,484
Unrealized Gain On Available For Sale
Of Securities, Net Of Tax (313) (348)
Reduction For Goodwill And Other
Intangibles (534) (650)
----------------- -------------------
Tangible Capital 23,139 22,486
Qualifying Core Deposits And Intangible
Assets 451 470
----------------- -------------------
Core Capital 23,590 22,956
Supplementary Capital 2,601 2,582
Assets Required To Be Deducted (223) (227)
================= ===================
Risk-Based Capital $ 25,968 $ 25,311
================= ===================
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at June 30, 2001:
(Dollars in Thousands)
------------------------------------------------------------------
Amt. Required % Required Actual Amt. Actual % Excess Amt. Excess %
------------------------------------------------------------------
Tangible
Capital $ 6,782 2.0% 23,139 6.82% $ 16,357 4.82%
Tier 1 Leverage
(Core) Capital 13,583 4.0% 23,590 6.95% 10,007 2.95%
Total Risk-Based
Capital 16,648 8.0% 25,968 12.48% 9,320 4.48%
Tier 1 Risk-Based
(Core) Capital 8,324 4.0% 23,590 11.34% 15,266 7.34%
8
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
7. Regulatory Matters, Continued
The Company's regulatory capital amounts and ratios at June 30, 2001 are as
follows:
To Be Well Capitalized
Under Prompt
(Dollars in Thousands) For Capital Adequacy Corrective Action
Actual Purposes Provisions
--------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------
Tier I Risk-Based
Core Capital $23,590 11.3% $ 8,324 4.0% $12,486 6.0%
Risk-Based Capital
(To Risk Weighted
Assets) 25,968 12.5% 16,648 8.0% 20,810 10.0%
Core Capital (To
Adjusted Tangible
Assets) 23,590 6.9% 13,583 4.0% 16,978 5.0%
Tangible Capital
(To Tangible Assets) 23,139 6.8% 6,782 2.0% 16,956 5.0%
8. Earnings Per Share
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings Per Share." SFAS 128 specifies the computation, presentation and
disclosure requirements for earnings per share (EPS) for entities with
publicly held common stock or potential common stock such as options,
warrants, convertible securities or contingent stock agreements if those
securities trade in a public market.
This standard specifies computation and presentation requirements for both
basic EPS and, for entities with complex capital structures, diluted EPS.
Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share is
similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the dilutive potential common shares had
been issued. The dilutive effect of options outstanding under the Company's
stock option plan is reflected in diluted earnings per share by application of
the treasury stock method.
RECONCILIATION OF THE NUMERATOR AND DENOMINATORS OF THE BASIC AND DILUTED EPS
COMPUTATIONS:
For the Quarter Ended
-------------------------------------------------------
June 30, 2001
-------------------------------------------------------
Income (Numerator) Shares (Denominator) Per Share
Amount ---------------------- ----------
------------------
Basic EPS $537,258 1,670,175 $0.32
Effect of Diluted Securities:
Stock Options - 19,475
ESOP - 14,025
------------------ ---------------------- ----------
Diluted EPS $537,258 1,703,675 $0.32
For the Quarter Ended
-------------------------------------------------------
June 30, 2000
-------------------------------------------------------
Income (Numerator) Shares (Denominator) Per Share
Amount ---------------------- ----------
------------------
Basic EPS $509,006 1,676,494 $0.30
Effect of Diluted Securities:
Stock Options - 7,836
ESOP - 9,342
------------------ ---------------------- ----------
Diluted EPS $509,006 1,693,672 $0.30
9
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Changes in Financial Condition
Total assets of the Company increased $9.3 million or 2.8% during the three
months ended June 30, 2001, due primarily to increases of $6.4 million or 2.8%
in total net loans receivable, and an increase of $7.1 million in total
investment securities, offset in part by a $3.5 million decrease in cash and
cash equivalents.
Residential real estate loans, net of loans in process, decreased $1.7 million
or 1.5% during the period while other loans increased $8.3 million or 6.8%.
Repossessed assets increased $18,000 to $148,000 during the three months ended
June 30, 2001.
Non-accrual loans totaled $1.0 million at June 30, 2001 compared to $183,000
at March 31, 2001. The Bank classifies all loans as non-accrual when they
become 90 days or more delinquent. The Bank had four loans totaling $556,000
at June 30, 2001 that were troubled debt restructurings compared to $587,000
at March 31, 2001. One loan, a $6,000 automobile loan that is a troubled debt
restructuring, was more than 90 days delinquent and is non-accrual. The other
three loans, a $4,000 unsecured consumer loan, a $58,000 commercial loan
secured by two single-family rental properties, and a $487,000 commercial loan
secured by commercial real estate were current as of June 30, 2001. All
troubled debt restructurings are also considered impaired. At June 30, 2001,
the Bank held $690,000 in impaired loans compared to $ 789,000 at March 31,
2001.
Deposits increased $15.9 million or 6.2% during the three months ended June
30, 2001. Federal Home Loan Bank (FHLB) advances decreased $7.1 million or
16.6% due to the increase in deposits.
The Board of Directors declared the 42nd consecutive quarterly dividend of
$.02 per share per quarter in May 2001, which totaled $34,000. The employee
stock ownership plan of the Company paid $57,000 in principal on the employee
stock ownership plan loan during the three-month period. Unrealized net gains
on securities available for sale decreased $35,000 during the three months
ended June 30, 2001. The Company's net income for the three months was
$537,000. These items combined to increase shareholders' equity by $525,000
or 2.2% during the three months ended June 30, 2001. Book value per share was
$14.37 at June 30, 2001 compared to $14.07 at March 31, 2001.
Liquidity and Capital Resources
In accordance with Office of Thrift Supervision (OTS) regulations, the Company
is required to maintain a liquidity ratio at specified levels that are subject
to change. Currently, a minimum of 4.0% of the combined total of deposits and
certain borrowings must be maintained in the form of cash or eligible
investments. The Company's average liquidity during the three months ended
June 30, 2001 was approximately 22%. The Company's current liquidity level is
deemed adequate to meet the requirements of normal operations, potential
deposit outflows, and loan demand while still allowing for optimal investment
of funds and return on assets.
Loan repayments and maturities of investments are a significant source of
funds, whereas loan disbursements are a primary use of the Company's funds.
During the three months ended June 30, 2001, loan disbursements exceeded loan
repayments resulting in a $6.4 million or 2.8% increase in total net loans
receivable.
Deposits and other borrowings are also an important source of funds for the
Company. During the three months ended June 30, 2001, deposits increased
$15.9 million while FHLB advances decreased $7.1 million. At June 30, 2001,
the Bank had $126.5 million of certificates of deposit maturing within one
year. Based on previous experience, the Bank anticipates a major portion
of these certificates will be renewed.
Liquidity resources at June 30, 2001 are sufficient to meet outstanding
mortgage loan commitments of $105,000 and unused lines of credit of $28.1
million. Management believes that the Company's liquidity needs will continue
to be supported by the Company's deposit base and borrowing capacity during
the next year.
10
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Accounting and Reporting Changes
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) 133, "Accounting for Derivative
Instrument and Hedging Activities." All derivatives are to be measured at
fair value and recognized in the balance sheet as assets or liabilities. SFAS
No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities" was issued in June 2000 and amends the accounting and reporting 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.
In July 2001, FASB issued SFAS No. 141 "Business Combinations," and SFAS No.
142 "Goodwill and Other Intangible Assets." These standards will be adopted
in fiscal 2002. The Company is currently evaluating the impact that these
standards will have on its financial statements.
On July 2, 2001, The Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SFAB) No. 102 "Selected Loan Loss Allowance Methodology
and Documentation Issues." SAB No. 102 expresses the SEC's views on
development, documentation, and application of a systematic methodology for
determining allowance for loan and lease losses in accordance with Generally
Accepted Accounting Principles. The Company believes that it is currently in
compliance with the requirements of SAB No.102.
Impact of Inflation and Changing Prices
The consolidated financial statements, related notes, and other financial
information presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in relative purchasing power over time due to inflation.
Unlike industrial companies, substantially all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest
rates generally have a more significant impact on a financial institution's
performance than does inflation.
11
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001
- --------------------------------------------------------------
Net Income
Net income was $537,000 for the three months ended June 30, 2001, representing
an increase in earnings of $28,000 or 5.5% compared to the same period in
2000.
Net Interest Income
Net interest income increased $278,000 or 11.1% during the three months ended
June 30, 2001 due to an increase in total interest income offset in part by an
increase in interest expense.
Interest income on loans increased $797,000 or 19.2% during the quarter as a
result of total net loans significantly increasing in the portfolio.
Investment, mortgage-backed, and other securities interest income decreased
$244,000 or 16.6% due to a decrease in the average balance in the investment
portfolio and a 14 basis points decrease in the average yield in the
portfolio. Total interest income rose $553,000 or 9.8% compared to the same
period in 2000.
Total interest expense increased $275,000 or 8.8% during the three months
ended June 30, 2001 compared to the same period a year ago. Interest expense
on deposits increased $591,000 or 26.2% during the period as deposits grew
compared to the average balance in 2000 and the cost of deposits increased
approximately 37 basis points. Interest expense on advances and other
borrowings decreased $316,000 as the average amount of debt outstanding
decreased during the 2001 period compared to 2000 and as the average cost of
the borrowings decreased approximately 25 basis points in the 2001 period.
Provision for Loan Losses
The Company's provision for loan losses was $175,000 during the three months
ended June 30, 2001 and June 30, 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 $1.0
million at June 30, 2001 compared to $183,000 at March 31, 2001. The ratio of
allowance for loan losses to the Company's total loans was 1.19% at June 30,
2001 compared to 1.19% at March 31, 2001.
Other Income
Total other income increased $233,000 or 39.6% during the three months ended
June 30, 2001 compared to the same period a year ago. Gain on sale of loans
increased $244,000 to $295,000 during the period due to an increase in
mortgage loan originations and better management of the selling process. Loan
servicing fees decreased $10,000 while service fees on deposit accounts
increased $37,000. The Company sold its remaining lots in its real estate
development partnership in March 2001. Therefore, there was no income from
real estate operations in the 2001 quarter, while during the 2000 quarter,
income from real estate operations was $32,000. The Company has no plans to
further invest in real estate for development at this time. Other
miscellaneous income including credit life insurance commissions, net gain on
sale of repossessed assets, safe deposit rental income, annuity and stock
brokerage commissions through SFSC, and other miscellaneous fees decreased
$6,000 or 3.5% during the three months ended June 30, 2001.
General and Administrative Expenses
General and administrative expenses increased $464,000 or 22.1% during the
three months ended June 30, 2001 compared to the same period in 2000.
Salaries and employee benefits expense grew $348,000 or 30.7% due to the
opening and staffing of a new full-service branch office in West Columbia,
South Carolina, normal annual salary increases, and an increase in business
development officers. Occupancy expense increased $56,000 or 42.0% during the
period due to the opening of the new branch. Advertising expense decreased
$29,000 while the depreciation and maintenance of equipment expense increased
$36,000 during the quarterly period. FDIC insurance premiums remained stable
at $11,000 during both periods while the amortization of intangible expense
was $116,000 during the three months ended June 30, 2001 and June 30, 2000.
Other miscellaneous expense, consisting of legal, professional, and consulting
expenses, stationery and office supplies, and other sundry expenses, increased
$53,000 or 13.0% for the three months ended June 30, 2001 compared to the
three months ended June 30, 2000.
12
Security Federal Corporation and Subsidiaries
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, investment, deposit and borrowing activities.
Management actively monitors and manages its interest rate risk exposure.
Although the Company manages other risks such as credit quality and liquidity
risk in the normal course of business, management considers interest rate risk
to be its most significant market risk that could potentially have the largest
material effect on the Company's financial condition and results of
operations. Other types of market risks such as foreign currency exchange
rate risk and commodity price risk do not arise in the normal course of the
Company's business activities.
The Company's profitability is affected by fluctuations in the market interest
rate. Management's goal is to maintain a reasonable balance between exposure
to interest rate fluctuations and earnings. A sudden and substantial increase
or decrease in interest rates may adversely impact the Company's earnings to
the extent that the interest rates on interest-earning assets and
interest-bearing liabilities do not change at the same rate, to the same
extent or on the same basis. The Company monitors the impact of changes in
interest rates on its net interest income using a test that measures the
impact on net interest income and net portfolio value of an immediate change
in interest rates in 100 basis point increments and by measuring the Banks'
interest sensitivity gap ("Gap"). Net Portfolio value is defined as the net
present value of assets, liabilities, and off-balance sheet contracts. Gap is
the amount of interest sensitive assets repricing or maturing over the next
twelve months compared to the amount of interest sensitive liabilities
maturing or repricing in the same time period. Recent net portfolio value
reports furnished by the Office of Thrift Supervision indicate that the Bank's
interest sensitivity has improved in recent quarters over the past year. The
Bank has rated favorably compared to Thrift peers concerning interest rate
sensitivity.
For the three month period ended June 30, 2001, the Banks interest rate
spread, defined as the average yield on interest bearing assets less the
average rate paid on interest bearing liabilities was 3.15%. As of the year
ended March 31, 2001, the interest rate spread was 3.11%. The Company's
management believes that the interest rate spread has improved slightly as
market interest rates have decreased and liabilities have matured or repriced.
The Bank's interest bearing liabilities are currently repricing or maturing at
a slightly faster rate than their interest earning assets, and are repricing
at lower interest rates, thereby improving the Bank's interest rate spread
modestly.
13
Security Federal Corporation and Subsidiaries
Part II. Other Information
Item 1 Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Company is a party
to legal proceedings in the ordinary course of business wherein it
enforces its security interest in mortgage loans it has made.
Item 2 Changes In Securities And Use Of Proceeds
-----------------------------------------
Not applicable.
Item 3 Defaults Upon Senior Securities
-------------------------------
None
Item 4 Submission Of Matters To A Vote Of Security Holders
---------------------------------------------------
None
Item 5 Other Information
-----------------
None
Item 6 Exhibits And Reports On Form 8-K
--------------------------------
Exhibits:
3.1 Articles Of Incorporation*
3.2 Articles Of Amendment, Dated August 28, 1998, To Articles Of
Incorporation
3.3 Bylaws**
10 Executive Compensation Plans And Arrangements:
Salary Continuation Agreements***
Amendment One To Salary Continuation Agreements****
Stock Option Plan***
Incentive Compensation Plan***
* Filed as an exhibit to the Company's June 23, 1998 proxy statement and
incorporated herein by reference.
** Filed as an exhibit to the Company's Form 8-K dated August 31, 1998 and
incorporated herein by reference.
*** Filed on June 28, 1993, as an exhibit to the Company's Annual Report on
Form 10-KSB pursuant to Section 12(g) of the Securities Exchange Act of
1934. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-K.
**** Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended December 31, 1993 pursuant to Section 12(g) of the
Securities Exchange Act of 1934. All of such previously filed documents
are hereby incorporated herein by reference in accordance with Item 601
of Regulation S-K.
14
Security Federal Corporation and Subsidiaries
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: August 8, 2001 By: /s/ Roy G. Lindburg
-------------- -------------------
Roy G. Lindburg
Treasurer/Chief Financial Officer
Duly Authorized Representative
15