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 SEPTEMBER 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 3 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 September 30, 2001 1,671,459
INDEX
==============================================================================
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statement of Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis Results of Operations
and Financial Condition 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
==============================================================================
PART II. OTHER INFORMATION
Other Information 18
Signatures 19
==============================================================================
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information is included in the consolidated financial statements and related
notes.
1
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets
September 30, 2001 March 31, 2001
------------- -------------
Assets: (Unaudited) (Audited)
Cash And Cash Equivalents $ 6,967,516 $ 12,616,129
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized cost of
$90,575,895 at September 30, 2001 and
$71,574,673 at March 31, 2001) 92,227,355 72,111,240
Held To Maturity: (Fair value of
$1,898,897 at September 30, 2001 and
$2,334,809 at March 31, 2001) 1,840,180 2,293,922
------------- -------------
Total Investment and Mortgage-Backed
Securities 94,067,535 74,405,162
------------- -------------
Loans Receivable Net:
Held For Sale 1,713,732 2,245,951
Held For Investment: (Net of allowance
of $2,980,284 at September 30, 2001 and
$2,784,117 at March 31, 2001) 245,247,221 228,751,063
------------- -------------
Total Loans Receivable Net 246,960,953 230,997,014
------------- -------------
Accrued Interest Receivable:
Loans 1,421,910 1,348,178
Mortgage-Backed Securities 271,687 179,977
Investments 389,536 572,074
Premises And Equipment, Net 4,964,754 5,262,957
Federal Home Loan Bank Stock, At Cost 2,669,300 3,431,000
Real Estate Acquired In Settlement Of Loans 94,657 130,157
Other Assets 1,242,050 1,698,995
------------- -------------
Total Assets $ 359,049,898 $ 330,641,643
============= =============
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts 288,512,998 257,410,417
Advances From Federal Home Loan Bank 37,576,000 42,704,000
Other Borrowed Money 3,898,953 3,409,362
Advance Payments By Borrowers For Taxes
and Insurance 585,111 382,478
Other Liabilities 3,204,533 3,235,022
------------- -------------
Total Liabilities 333,777,595 307,141,279
------------- -------------
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
September 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 1,024,566 348,015
Retained Earnings, Substantially Restricted 20,603,880 19,565,195
------------- -------------
Total Shareholders' Equity 25,272,303 23,500,364
------------- -------------
Total Liabilities And Shareholders' Equity $ 359,049,898 $ 330,641,643
============= =============
See accompanying notes to consolidated financial statements.
1
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended September 30,
--------------------------------
2001 2000
----------- -----------
Interest Income:
Loans $ 5,096,914 $ 4,524,913
Mortgage-Backed Securities 751,300 582,417
Investment Securities 480,170 844,771
Other 10,302 19,458
----------- -----------
Total Interest Income 6,338,686 5,971,559
----------- -----------
Interest Expense:
NOW And Money Market Accounts 579,296 630,056
Passbook Accounts 81,274 79,841
Certificate Accounts 2,117,664 1,697,815
Advances And Other Borrowed Money 570,778 1,026,973
----------- -----------
Total Interest Expense 3,349,012 3,434,685
----------- -----------
Net Interest Income 2,989,674 2,536,874
Provision For Loan Losses 250,000 150,000
----------- -----------
Net Interest Income After Provision
For Loan Losses 2,739,674 2,386,874
----------- -----------
Other Income:
Net Gain On Sale Of Investments 1,125 -
Gain On Sale Of Loans 321,019 91,390
Loan Servicing Fees 43,922 69,487
Service Fees On Deposit Accounts 267,576 252,879
Income From Real Estate Operations - 29,330
Other 84,356 156,750
----------- -----------
Total Other Income 717,998 599,836
----------- -----------
General And Administrative Expenses:
Salaries And Employee Benefits 1,425,439 1,148,799
Occupancy 207,699 168,649
Advertising 36,484 37,869
Depreciation And Maintenance Of Equipment 291,393 253,034
FDIC Insurance Premiums 11,957 11,636
Amortization Of Intangibles 116,310 116,310
Other 461,900 428,478
----------- -----------
Total General And Administrative Expenses 2,551,182 2,164,775
----------- -----------
Income Before Income Taxes 906,490 821,935
Provision For Income Taxes 337,692 303,022
----------- -----------
Net Income $ 568,798 $ 518,913
=========== ===========
Basic Net Income Per Common Share $ 0.34 $ 0.31
=========== ===========
Diluted Net Income Per Common Share $ 0.33 $ 0.30
=========== ===========
Cash Dividend Per Share On Common Stock $ 0.02 $ 0.02
=========== ===========
Basic Weighted Average Shares Outstanding 1,671,459 1,673,718
=========== ===========
Diluted Weighted Average Shares Outstanding 1,707,680 1,697,072
=========== ===========
See accompanying notes to consolidated financial statements.
2
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Six Months Ended September 30,
------------------------------
2001 2000
----------- -----------
Interest Income:
Loans $10,054,433 $ 8,685,245
Mortgage-Backed Securities 1,421,451 1,167,477
Investment Securities 981,644 1,713,930
Other 66,132 36,760
----------- -----------
Total Interest Income 12,523,660 11,603,412
----------- -----------
Interest Expense:
NOW And Money Market Accounts 1,289,661 1,303,702
Passbook Accounts 159,359 161,668
Certificate Accounts 4,174,839 3,197,142
Advances And Other Borrowed Money 1,131,712 1,903,886
----------- -----------
Total Interest Expense 6,755,571 6,566,398
----------- -----------
Net Interest Income 5,768,089 5,037,014
Provision For Loan Losses 425,000 325,000
----------- -----------
Net Interest Income After Provision
For Loan Losses 5,343,089 4,712,014
----------- -----------
Other Income:
Net Gain On Sale Of Investments 1,125 -
Gain On Sale Of Loans 615,572 142,307
Loan Servicing Fees 101,479 137,162
Service Fees On Deposit Accounts 565,038 513,049
Income From Real Estate Operations - 60,989
Other 256,500 335,089
----------- -----------
Total Other Income 1,539,714 1,188,596
----------- -----------
General And Administrative Expenses:
Salaries And Employee Benefits 2,908,577 2,283,579
Occupancy 397,842 302,579
Advertising 67,876 97,926
Depreciation And Maintenance Of Equipment 569,676 495,074
FDIC Insurance Premiums 23,068 23,156
Amortization Of Intangibles 232,620 232,620
Other 920,245 834,285
----------- -----------
Total General And Administrative Expenses 5,119,904 4,269,219
----------- -----------
Income Before Income Taxes 1,762,899 1,631,391
Provision For Income Taxes 656,843 603,472
----------- -----------
Net Income $ 1,106,056 $ 1,027,919
=========== ===========
Basic Net Income Per Common Share $ 0.66 $ 0.61
=========== ===========
Diluted Net Income Per Common Share $ 0.65 $ 0.61
=========== ===========
Cash Dividend Per Share On Common Stock $ 0.04 $ 0.04
=========== ===========
Basic Weighted Average Shares Outstanding 1,670,820 1,675,106
=========== ===========
Diluted Weighted Average Shares Outstanding 1,705,688 1,697,072
=========== ===========
See accompanying notes to consolidated financial statements.
3
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 - - - - 1,027,919 1,027,919
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Gains On Securities
Available For Sale - - - 514,130 - 514,130
------------
Comprehensive Income 1,542,049
Increase in Indirect
Guarantee of ESOP
Debt - - (120,602) - - (120,602)
Cash Dividends - - - - (67,369) (67,369)
---------- ----------- ---------- ------------ ------------ ------------
Balance at
September 30, 2000 $ 8,421 $ 3,993,733 $ (307,405) $ (1,115,020) $ 18,533,050 $ 21,112,779
========== =========== ========== ============ ============ ============
Beginning Balance At
March 31, 2001 $ 16,842 $ 3,985,312 $ (415,000) $ 348,015 $ 19,565,195 $ 23,500,364
Net Income - - - - 1,106,056 1,106,056
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Gains On Securities
Available For Sale - - - 676,551 - 676,551
Comprehensive Income 1,782,607
Increase in Indirect
Guarantee of ESOP
Debt - - 56,703 - - 56,703
Cash Dividends (67,371) (67,371)
---------- ----------- ---------- ------------ ------------ ------------
Balance at
September 30, 2001 $ 16,842 $ 3,985,312 $ (358,297) $ 1,024,566 $ 20,603,880 $ 25,272,303
========== =========== ========== ============ ============ ============
See accompanying notes to consolidated financial statements.
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended September 30,
------------------------------
2001 2000
------------ ------------
Cash Flows From Operating Activities:
Net Income $ 1,106,056 $ 1,027,919
Adjustments To Reconcile Net Income To
Net Cash Provided By Operating
Activities:
Depreciation Expense 498,202 431,994
Amortization Of Intangibles 232,620 232,620
Discount Accretion And Premium Amortization (72,501) 15,276
Provisions For Losses On Loans And Real Estate 425,000 325,000
Gain On Sale Of Mortgage-Backed Securities
Available For Sale (1,125) -
Gain (Loss) On Sale Of Loans (431,083) (142,307)
Gain On Sale Of Real Estate 1,681 (93,387)
Amortization Of Deferred Fees On Loans (94,486) (71,241)
Proceeds From Sale Of Loans Held For Sale 35,048,559 7,030,954
Origination Of Loans For Sale (34,085,257) (7,108,338)
(Increase) Decrease In Accrued Interest
Receivable:
Loans (73,732) (171,994)
Mortgage-Backed Securities (91,710) 7,484
Investments 182,538 59,504
Increase In Advance Payments By Borrowers 202,633 294,632
(Gain) Loss On Disposition Of Premises And
Equipment (1,367) 195
Other, Net (187,804) (20,838)
------------ ------------
Net Cash Provided By Operating Activities 2,658,224 1,817,473
------------ ------------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Held To Maturity 453,883 103,082
Principal Repayments On Mortgage-Backed
Securities Available For Sale 8,362,447 3,191,144
Purchase Of Investment Securities Available
For Sale (26,434,157) -
Purchase Of Mortgage-Backed Securities
Available For Sale (24,825,040) (943,380)
Maturities Of Investment Securities
Available For Sale 22,098,169 3,614,416
Proceeds From Sale of Securities Available
For Sale 1,870,844 -
Purchase Of FHLB Stock - (635,300)
Redemption Of FHLB Stock 761,700 -
Increase In Loans To Customers (16,868,653) (25,124,573)
Investment In Real Estate Held For Development - (330,162)
Proceeds From Sale Of Real Estate Held For
Development - 672,350
Proceeds From Sale Of Real Estate Acquired
Through Foreclosure 75,800 380,998
Purchase And Improvement Of Premises And
Equipment (198,632) (649,086)
------------ ------------
Net Cash Used By Investing Activities (34,703,639) (19,720,511)
------------ ------------
Cash Flows From Financing Activities:
Increase In Deposit Accounts 31,102,582 4,579,802
Proceeds From FHLB Advances 37,250,000 59,445,000
Repayment Of FHLB Advances (42,378,000) (47,218,000)
Proceeds Of Other Borrowings 489,591 1,083,846
Dividends To Shareholders (67,371) (67,370)
------------ ------------
Net Cash Provided By Financing Activities 26,396,802 17,823,278
------------ ------------
(Continued)
5
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended September 30,
------------------------------
2001 2000
------------ ------------
Net Decrease In Cash And Cash Equivalents (5,648,613) (79,760)
Cash And Cash Equivalents At Beginning
Of Period 12,616,129 7,416,702
------------ ------------
Cash And Cash Equivalents At End Of Period $ 6,967,516 $ 7,336,942
============ ============
Supplemental Disclosure Of Cash Flows
Information:
Cash Paid During The Period For Interest $ 6,984,816 $ 6,585,024
Cash Paid During The Period For Income Taxes $ 891,253 $ 833,183
Additions To Real Estate Acquired Through
Foreclosure $ 40,981 $ 301,203
(Increase) Decrease In Unrealized Net Loss
On Securities Available For Sale, Net
Of Taxes $ (676,551) $ 514,130
See accompanying notes to consolidated financial statements.
6
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions from Form 10-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 and six-month periods ended September 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, changes in the securities market.
Management cautions readers of Form 10-Q not to place undue reliance on
forward-looking statements contained herein.
2. Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Security Federal Corporation (the "Company") and its wholly owned
subsidiary, Security Federal Bank (the "Bank"), and the Bank's wholly owned
subsidiary Security Financial Services Corporation ("SFSC"). 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 engages primarily in
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 September 30, 2001 and March 31, 2001 consisted of
the following:
Loans held for sale were $1,713,732 and $2,245,951 at September 30, 2001 and
March 31, 2001, respectively.
Loans Held For Investment: September 30, 2001 March 31, 2001
------------------ --------------
Residential Real Estate $ 118,712,067 $ 121,736,566
Consumer 49,880,135 46,277,098
Commercial Business & Real Estate 90,321,220 74,520,017
------------- -------------
258,913,422 242,533,681
------------- -------------
Less:
Allowance For Possible Loan Loss 2,980,284 2,784,117
Loans In Process 10,460,465 10,738,528
Deferred Loan Fees 225,452 259,973
------------- -------------
13,666,201 13,782,618
------------- -------------
$ 245,247,221 $ 228,751,063
============= =============
The following is a reconciliation of the allowance for loan losses for the six
months ending:
September 30, 2001 March 31, 2001
------------------ --------------
Beginning Balance $ 2,784,117 $ 2,120,767
Provision 425,000 325,000
Charge-offs (299,300) (159,659)
Recoveries 70,467 21,269
------------- -------------
Ending Balance $ 2,980,284 $ 2,307,377
============= =============
7
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
4. Securities
Investment and Mortgage-Backed Securities, Held to Maturity
-----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities held to maturity are as
follows:
Gross Gross
September 30, 2001 Amortized Unrealized Unrealized
------------------ Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
US Government and Agency
Obligations $ 249,668 $ 3,521 $ - $ 253,189
Mortgage-Backed Securities 1,590,512 55,196 - 1,645,708
---------- ---------- ---------- ----------
Total $1,840,180 $ 58,717 $ - $1,898,897
========== ========== ========== ==========
March 31, 2001
--------------
US 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
September 30, 2001 Amortized Unrealized Unrealized
------------------ Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
US Government and Agency
Obligations $39,467,934 $ 631,108 $ 14,391 $40,084,651
Mortgage-Backed Securities 51,107,961 1,046,224 11,481 52,142,704
----------- ---------- ---------- -----------
Total $90,575,895 $1,677,332 $ 25,872 $92,227,355
=========== ========== ========== ===========
March 31, 2001
--------------
US 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
=========== ========== ========== ===========
8
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
5. Deposit Accounts
A summary of deposit accounts by type with weighted average rates is as
follows:
September 30, 2001 March 31, 2001
-------------------- --------------------
Demand Accounts: Balance Rate Balance Rate
-------------------- --------------------
Checking $ 66,670,351 0.55% $ 61,453,344 0.86%
Money Market 55,138,887 3.16% 49,855,497 4.66%
Regular Savings 13,399,497 1.97% 12,911,410 2.44%
------------ ------------
Total Demand Accounts $135,208,735 1.75% $124,220,251 2.55%
============ ============
Certificate Accounts:
0 - 4.99% $ 71,675,091 $ 10,021,153
5.00 - 6.99% 71,972,744 112,040,419
7.00 - 8.99% 9,656,428 11,128,594
------------ ------------
Total Certificate Accounts $153,304,263 5.28% $133,190,166 6.15%
============ ============
Total Deposit Accounts $288,512,998 3.63% $257,410,417 4.41%
============ ============
6. Advances From Federal Home Loan Bank
Federal Home Loan Bank Advances are summarized by year of maturity and
weighted average interest rate in the table below:
September 30, 2001 March 31, 2001
-------------------- --------------------
Fiscal Year Due: Balance Rate Balance Rate
-------------------- --------------------
2002 $ 4,450,000 3.16% $ 9,560,000 5.63%
2003 5,000,000 6.40% 5,000,000 6.40%
2004 - 0% - -
2005 10,126,000 6.15% 10,144,000 6.16%
Thereafter 18,000,000 5.98% 18,000,000 5.98%
------------ ------------
Total Advances $ 37,576,000 5.75% $ 42,704,000 5.99%
============ ============
7. Regulatory Matters
The following table reconciles the Bank's Shareholders' equity to its various
regulatory capital positions:
September 30, 2001 March 31, 2001
(Dollars in Thousands)
-----------------------------------
Bank's Shareholders' Equity $ 25,267 $ 23,484
Unrealized Loss On Available For Sale
Of Securities, Net Of Tax (1,025) (348)
Reduction For Goodwill And Other Intangibles (418) (650)
---------- ----------
Tangible Capital 23,824 22,486
Qualifying Core Deposits And Intangible Assets 418 470
---------- ----------
Core Capital 24,242 22,956
Supplemental Capital 2,773 2,582
Assets Required To Be Deducted (235) (227)
---------- ----------
Risk-Based Capital $ 26,780 $ 25,311
========== ==========
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at September 30, 2001.
(Dollars in Thousands)
-------------------------------------------------------
Amt. % Actual Actual Excess Excess
Required Required Amt. % Amt. %
-------------------------------------------------------
Tangible Capital $ 7,154 2.0% $ 23,824 6.66% $ 16,670 4.66%
Tier 1 Leverage
(Core) Capital 14,323 4.0% 24,242 6.77% 9,919 2.77%
Total Risk-Based
Capital 17,765 8.0% 26,780 12.06% 9,015 4.06%
Tier 1 Risk-Based
(Core) Capital 8,791 4.0% 24,242 11.03% 15,451 7.03%
9
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
7. Regulatory Matters, Continued
The Company's regulatory capital amounts and ratios at September 30, 2001 are
as follows:
(Dollars in Thousands)
To Be Well
Capitalized
For Capital Under Prompt
Adequacy Corrective Action
Actual Purposes Provisions
-----------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------
Tier I Risk-Based Core
Capital $ 24,242 11.0% $ 8,791 4.0% $ 13,187 6.0%
Risk-Based Capital (To
Risk Weighted Assets) 26,780 12.1% 17,765 8.0% 22,206 10.0%
Core Capital (To Adjusted
Tangible Assets) 24,242 6.8% 14,323 4.0% 17,904 5.0%
Tangible Capital (To
Tangible Assets) 23,824 6.7% 7,154 2.0% 17,886 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
-----------------------------------------------------
September 30, 2001
-----------------------------------------------------
Income (Numerator) Shares
Amount (Denominator) Per Share
------------------ ------------- ---------------
Basic EPS $568,798 1,671,459 $0.34
Effect of Diluted
Securities:
Stock Options - 23,480
ESOP - 12,741
------------------ ------------- ---------------
Diluted EPS $568,798 1,707,680 $0.33
For the Quarter Ended
-----------------------------------------------------
September 30, 2000
-----------------------------------------------------
Income (Numerator) Shares
Amount (Denominator) Per Share
------------------ ------------- ---------------
Basic EPS $518,913 1,673,718 $0.31
Effect of Diluted Securities:
Stock Options - 12,872
ESOP - 10,482
------------------ ------------- ---------------
Diluted EPS $518,913 1,697,072 $0.30
10
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
8. Earnings Per Share, Continued
For the Six Months Ended
-----------------------------------------------------
September 30, 2001
-----------------------------------------------------
Income (Numerator) Shares
Amount (Denominator) Per Share
------------------ ------------- ---------------
Basic EPS $1,106,056 1,670,820 $0.66
Effect of Diluted
Securities:
Stock Options - 21,488
ESOP - 13,380
------------------ ------------- ---------------
Diluted EPS $1,106,056 1,705,688 $0.65
For the Six Months Ended
-----------------------------------------------------
September 30, 2000
-----------------------------------------------------
Income (Numerator) Shares
Amount (Denominator) Per Share
------------------ ------------- ---------------
Basic EPS $1,027,919 1,675,106 $0.61
Effect of Diluted
Securities:
Stock Options - 12,872
ESOP - 9,094
------------------ ------------- ---------------
Diluted EPS $1,027,919 1,697,072 $0.61
11
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 $28.4 million or 8.6% during the six
months ended September 30, 2001 due primarily to increases of $19.7 million or
26.4% in total investment securities, and an increase of $16.0 million, or
6.9% in total net loans receivable offset partially by a $5.6 million or 44.8%
decrease in cash and cash equivalents.
Residential real estate loans, net of loans in process, decreased $2.5 million
or 2.2% during the period while other loans increased $19.4 million or 13.8%.
Real estate acquired in settlement of loans decreased $36,000 to $95,000
during the six months ended September 30, 2001.
Non-accrual loans totaled $1.4 million at September 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 three loans totaling
$549,000 at September 30, 2001 that were troubled debt restructurings compared
to $587,000 at March 31, 2001. The 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 September 30, 2001. All troubled debt restructurings are
also considered impaired. At September 30, 2001, the Bank held $726,000 in
impaired loans compared to $789,000 at March 31, 2001.
Deposits increased $31.1 million or 12.1% during the six months ended
September 30, 2001. Federal Home Loan Bank (FHLB) advances decreased $5.1
million or 12.0% due to the increase in deposits.
The Board of Directors declared the 42nd and 43rd consecutive quarterly
dividend of $.02 per share per quarter in May and August 2001, which totaled
$67,000. The employee stock ownership trust of the Company paid $57,000 in
principal on the employee stock ownership plan loan during the six-month
period. Unrealized net gains on securities available for sale, net of tax,
increased $677,000 during the six months ended September 30, 2001. The
Company's net income for the six months was $1.1 million. These items combined
to increase shareholders' equity by $1.8 million or 7.5% during the six months
ended September 30, 2001. Book value per share was $15.12 at September 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 six months ended
September 30, 2001 was approximately 20%. 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 six months ended September 30, 2001, loan disbursements exceeded
loan repayments resulting in a $16.0 million or 6.9% increase in total net
loans receivable.
Deposits and other borrowings are also an important source of funds for the
Company. During the six months ended September 30, 2001, deposits increased
$31.1 million while FHLB advances decreased $5.1 million. The Bank had $47.4
million in additional borrowing capacity at the FHLB at the end of the period.
At September 30, 2001, the Bank had $135.2 million of certificates of deposit
maturing within one year. Based on previous experience, the Bank anticipates
a major portion of these certificates will be renewed.
Liquidity resources at September 30, 2001 are sufficient to meet outstanding
mortgage loan commitments of $1.2 million and unused lines of credit of $30.2
million. Management believes that the Company's liquidity needs will continue
to be supported by the Company's deposit base and borrowing capacity during
the next year.
12
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
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.
On July 2, 2001, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) 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.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This
SFAS addresses accounting and reporting for all business combinations and
defines the purchase method as the only acceptable method. This statement is
effective for all business combinations initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This SFAS addresses how goodwill and other intangible assets should
be accounted for at their acquisition (except for those acquired in a business
combination) and after they have been initially recognized in the financial
statements. The statement is effective for all fiscal years beginning after
December 15, 2001. The impact of this SFAS will not be material to the
Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, " Accounting for the Impairment
or Disposal of Long-Lived Assets." This SFAS supercedes prior pronouncements
associated with impairment or disposal of long-lived assets. The SFAS
establishes methodologies for assessing impairment of long-lived assets,
including assets to be disposed of by sale or by other means. This statement
is effective for all fiscal years beginning after December 15, 2001. This
SFAS is not expected to have a material impact on the Company's financial
position.
Additional accounting standards that have been issued or proposed by the 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.
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.
13
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
-------------------------------------------------------------------
Net Income
Net income was $569,000 for the three months ended September 30, 2001,
representing an increase in earnings of $50,000 or 9.6% compared to the same
period in 2000.
Net Interest Income
Net interest income increased $453,000 or 17.9% during the three months ended
September 30, 2001 as a result of an increase in total interest income offset
in part by an increase in interest expense.
Interest income on loans increased $572,000 or 12.6% during the period as a
result of total net loans significantly increasing in the portfolio.
Investment, mortgage-backed, and other securities interest income decreased
$205,000 or 14.2% as a result of a decrease in the average yield in the
investment portfolio of 33 basis points. Total interest income increased
$367,000 or 6.2% compared to the same period in 2000.
Total interest expense decreased $86,000 or 2.5% during the three months ended
September 30, 2001 compared to the same period one-year earlier. Interest
expense on deposits increased $371,000 or 13.3% during the period as the
average balance and the average cost of deposits increased during the quarter
ended September 30, 2001. Interest expense on advances and other borrowings
decreased $456,000 or 44.4% as the average amount of debt outstanding
decreased and the cost of those borrowings decreased during the 2001 period
compared to same period in 2000.
Provision for Loan Losses
The Bank's provision for loan losses was $250,000 and $150,000 during the
three months ended September 30, 2001 and 2000, respectively. 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 $1.4 million at September 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 both September 30, 2001 and March 31, 2001. Net charge-offs were
$109,000 for the three months ended September 30, 2001 compared to $34,000
during the same period in 2000.
14
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 SEPTEMBER 30, 2001, Continued
------------------------------------------------------------------------------
Other Income
Total other income increased $118,000 or 19.7% during the three months ended
September 30, 2001 as a result of the increase in the gain on sale of loans.
Gain on sale of loans increased $230,000 during the period. Loan servicing
fees decreased $26,000 as the portfolio of loans serviced for others
decreased. Service fees on deposit accounts increased $15,000. 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
$29,000. 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 $72,000 during the three months ended September
30, 2001.
General and Administrative Expenses
General and administrative expenses increased $386,000 or 17.9% during the
three months ended September 30, 2001 compared to the same period in 2000.
Salaries and employee benefits expense grew $277,000 or 24.1% due to the
opening and staffing of a new full-service branch office in West Columbia,
South Carolina, normal salary increases, and an increase in business
development officers. Occupancy expense increased $39,000 or 23.2% during the
period due to the opening of the new branch office. Advertising expense
decreased $1,000 while the depreciation and maintenance of equipment expense
increased $38,000 during the quarterly period. FDIC insurance premiums
remained stable at $12,000 during both periods while the amortization of
intangibles expense was $116,000 during the three months ended September 30 in
2001 and 2000. Other miscellaneous expense, consisting of legal,
professional, and consulting expenses, stationery and office supplies, and
other sundry expenses, increased $33,000 or 7.8% for the three months ended
September 30, 2001 compared to the three months ended September 30, 2000.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2001
-----------------------------------------------------------------
Net Income
Net income was $1.1 million for the six months ended September 30, 2001,
representing an increase in earnings of $78,000 or 7.6% compared to the same
period in 2000.
Net Interest Income
Net interest income increased $731,000 or 14.5% during the six months ended
September 30, 2001 as a result of an increase in total interest income offset
in part by an increase in interest expense.
Interest income on loans increased $1.4 million or 15.8% during the six months
in 2001 as a result of total net loans increasing during the period.
Investment, mortgage-backed, and other securities interest income decreased
$449,000 or 18.2% due to a decrease of 22 basis points in the average yield of
the investment portfolio. Total interest income increased $920,000 or 7.9%
during the six months compared to the same period in 2000.
Total interest expense increased $189,000 or 2.9% during the six months ended
September 30, 2001 compared to the same period one-year earlier. Interest
expense on deposits increased $961,000 or 20.6% during the period as deposits
grew compared to the average balance in 2000 and the cost of deposits also
increased. Interest expense on advances and other borrowings decreased
$772,000 as the average amount of debt outstanding decreased during the 2001
period compared to 2000.
15
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2001, Continued
----------------------------------------------------------------------------
Provision for Loan Losses
The Bank's provision for loan losses was $425,000 during the six months ended
September 30, 2001 compared to $325,000 during the six months ended September
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 $1.4 million at September 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 September 30, 2001 and 1.19% at March 31,
2001. Net charge-offs were $229,000 during the six months ended September 30,
2001 compared to $138,000 during the same period in 2000.
Other Income
Total other income increased $351,000 or 29.5% during the six months ended
September 30, 2001 compared to the same period one-year earlier. Gain on sale
of loans increased $473,000 as the volume of fixed rate mortgage loans sold
during the period increased due to mortgage loan rates falling.
Loan-servicing fees decreased $36,000 while service fees on deposit accounts
grew $52,000 as the number of commercial and personal demand deposit accounts
increased. 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 $61,000. 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 $79,000
during the six months ended September 30, 2001.
General and Administrative Expenses
General and administrative expenses increased $851,000 or 19.9% during the six
months ended September 30, 2001 compared to the same period in 2000.
Salaries and employee benefits expense increased $625,000 or 27.4% 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 by $95,000 or 31.5% during
the period due to the opening of the new branch office. Advertising expense
decreased $30,000 while the depreciation and maintenance of equipment expense
increased $75,000 during the six-month period. FDIC insurance premiums
remained stable at $23,000 during both quarters while amortization of
intangibles expense was $233,000 during the six months ended September 30 in
2001 and 2000, respectively. Other miscellaneous expense, consisting of
legal, professional, and consulting expenses, stationery and office supplies,
and other sundry expenses, increased $86,000 or 10.3% for the six months ended
September 30, 2001 compared to the six months ended September 30, 2000.
16
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 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 Bank's
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 six month period ended September 30, 2001, the Bank's interest rate
spread, defined as the average yield on interest bearing assets less the
average rate paid on interest bearing liabilities was 3.13%. 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.
17
Security Federal Corporation and Subsidiaries
Other Information
Item 1 Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Company is a party
to legal proceedings in the ordinary course of business wherein it
enforces its security interest in mortgage loans it has made.
Item 2 Changes In Securities And Use Of Proceeds
-----------------------------------------
Not applicable.
Item 3 Defaults Upon Senior Securities
-------------------------------
None
Item 4 Submission Of Matters To A Vote Of Security Holders
---------------------------------------------------
The election of directors was presented for vote to shareholders at
the Annual Meeting on July 17, 2001. Votes for Gasper L. Toole III
were as follows: 1,381,876 votes for, 5,200 votes withheld. Votes
for Thomas L Moore were as follows: 1,381,876 votes for, 5,200 votes
withheld.
Item 5 Other Information
-----------------
None
Item 6 Exhibits And Reports On Form 8-K
--------------------------------
Exhibits:
2.1 Articles Of Incorporation*
2.2 Articles Of Amendment, Dated August 28, 1998, To Articles Of
Incorporation
2.3 Bylaws**
10.1 Executive Compensation Plans And Arrangements:
10.2 Salary Continuation Agreements***
10.3 Amendment One To Salary Continuation Agreements****
10.4 Stock Option Plan***
10.5 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 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-K.
18
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: November 6, 2001 By: /s/Roy G. Lindburg
----------------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
19