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 DECEMBER 31, 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 December 31, 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.
i
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 2001 March 31, 2001
----------------- --------------
Assets: (Unaudited) (Audited)
Cash And Cash Equivalents $ 8,389,635 $ 12,616,129
Investment And Mortgage-Backed
Securities:
Available For Sale: (Amortized
cost of $103,164,783 at December
31, 2001 and $71,574,673 at
March 31, 2001) 104,146,643 72,111,240
Held To Maturity: (Fair value of
$1,811,139 at December 31, 2001
and $2,334,809 at March 31, 2001) 1,765,750 2,293,922
------------- -------------
Total Investment and Mortgage-Backed
Securities 105,912,393 74,405,162
------------- -------------
Loans Receivable Net:
Held For Sale 2,027,593 2,245,951
Held For Investment: (Net of
allowance of $3,317,775 at
December 31, 2001 and $2,784,117
at March 31, 2001) 238,359,768 228,751,063
------------- -------------
Total Loans Receivable Net 240,387,361 230,997,014
------------- -------------
Accrued Interest Receivable:
Loans 1,235,732 1,348,178
Mortgage-Backed Securities 248,308 179,977
Investments 499,173 572,074
Premises And Equipment, Net 4,785,927 5,262,957
Federal Home Loan Bank Stock, At Cost 2,669,300 3,431,000
Real Estate Acquired In Settlement Of
Loans 295,657 130,157
Other Assets 1,611,472 1,698,995
------------- -------------
Total Assets $ 366,034,958 $ 330,641,643
============= =============
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $ 294,621,997 $ 257,410,417
Advances From Federal Home Loan Bank 38,658,000 42,704,000
Other Borrowed Money 4,281,133 3,409,362
Advance Payments By Borrowers For
Taxes and Insurance 166,754 382,478
Other Liabilities 2,792,374 3,235,022
------------- -------------
Total Liabilities 340,520,258 307,141,279
------------- -------------
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
December 31, 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 609,146 348,015
Retained Earnings, Substantially
Restricted 21,261,697 19,565,195
------------- -------------
Total Shareholders' Equity 25,514,700 23,500,364
------------- -------------
Total Liabilities And Shareholders'
Equity $ 366,034,958 $ 330,641,643
============= =============
See accompanying notes to consolidated financial statements.
1
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended December 31,
-------------------------------
2001 2000
------------ ------------
Interest Income:
Loans $ 4,907,767 $ 4,874,332
Mortgage-Backed Securities 662,920 554,754
Investment Securities 618,811 830,953
Other 7,044 22,501
------------ ------------
Total Interest Income 6,196,542 6,282,540
------------ ------------
Interest Expense:
NOW And Money Market Accounts 491,682 686,393
Passbook Accounts 62,193 75,926
Certificate Accounts 1,807,157 1,819,846
Advances And Other Borrowed Money 562,253 1,146,083
------------ ------------
Total Interest Expense 2,923,285 3,728,248
------------ ------------
Net Interest Income 3,273,257 2,554,292
Provision For Loan Losses 500,000 150,000
------------ ------------
Net Interest Income After Provision
For Loan Losses 2,773,257 2,404,292
------------ ------------
Other Income:
Net Gain On Sale Of Investments 1,487 -
Gain On Sale Of Loans 556,542 144,326
Loan Servicing Fees 45,394 80,781
Service Fees On Deposit Accounts 310,099 259,009
Income From Real Estate Operations - (14,328)
Other 140,814 121,061
------------ ------------
Total Other Income 1,054,336 590,849
------------ ------------
General And Administrative Expenses:
Salaries And Employee Benefits 1,504,688 1,206,099
Occupancy 219,309 185,580
Advertising 31,978 53,085
Depreciation And Maintenance Of
Equipment 279,999 259,118
FDIC Insurance Premiums 12,411 11,479
Amortization Of Intangibles 116,310 116,310
Other 544,732 370,524
------------ ------------
Total General And Administrative Expenses 2,709,427 2,202,195
------------ ------------
Income Before Income Taxes 1,118,166 792,946
Provision For Income Taxes 426,665 284,886
------------ ------------
Net Income $ 691,501 $ 508,060
============ ============
Basic Net Income Per Common Share $ 0.41 $ 0.30
============ ============
Diluted Net Income Per Common Share $ 0.40 $ 0.30
============ ============
Cash Dividend Per Share On Common Stock $ 0.02 $ 0.02
============ ============
Basic Weighted Average Shares Outstanding 1,671,459 1,670,434
============ ============
Diluted Weighted Average Shares
Outstanding 1,708,146 1,702,206
============ ============
See accompanying notes to consolidated financial statements.
2
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Nine Months Ended December 31,
-------------------------------
2001 2000
------------ ------------
Interest Income:
Loans $ 14,962,200 $ 13,559,577
Mortgage-Backed Securities 2,084,371 1,722,231
Investment Securities 1,600,455 2,544,883
Other 73,176 59,261
------------ ------------
Total Interest Income 18,720,202 17,885,952
------------ ------------
Interest Expense:
NOW And Money Market Accounts 1,781,343 1,990,095
Passbook Accounts 221,552 237,594
Certificate Accounts 5,981,996 5,016,988
Advances And Other Borrowed Money 1,693,965 3,049,969
------------ ------------
Total Interest Expense 9,678,856 10,294,646
------------ ------------
Net Interest Income 9,041,346 7,591,306
Provision For Loan Losses 925,000 475,000
------------ ------------
Net Interest Income After Provision
For Loan Losses 8,116,346 7,116,306
------------ ------------
Other Income:
Net Gain On Sale Of Investments 2,612 -
Gain On Sale Of Loans 1,172,114 286,633
Loan Servicing Fees 146,873 217,943
Service Fees On Deposit Accounts 875,137 772,058
Income From Real Estate Operations - 46,661
Other 397,314 456,150
------------ ------------
Total Other Income 2,594,050 1,779,445
------------ ------------
General And Administrative Expenses:
Salaries And Employee Benefits 4,413,265 3,489,678
Occupancy 617,151 488,159
Advertising 99,854 151,011
Depreciation And Maintenance Of
Equipment 849,675 754,192
FDIC Insurance Premiums 35,479 34,635
Amortization Of Intangibles 348,930 348,930
Other 1,464,977 1,204,809
------------ ------------
Total General And Administrative
Expenses 7,829,331 6,471,414
------------ ------------
Income Before Income Taxes 2,881,065 2,424,337
Provision For Income Taxes 1,083,508 888,358
------------ ------------
Net Income $ 1,797,557 $ 1,535,979
============ ============
Basic Net Income Per Common Share $ 1.08 $ 0.92
============ ============
Diluted Net Income Per Common Share $ 1.05 $ 0.90
============ ============
Cash Dividend Per Share On Common Stock $ 0.06 $ 0.06
============ ============
Basic Weighted Average Shares
Outstanding 1,671,034 1,672,798
============ ============
Diluted Weighted Average Shares
Outstanding 1,706,500 1,702,206
============ ============
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 - - - - 1,535,979 1,535,979
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Gains On Securities
Available For Sale - - - 1,283,401 - 1,283,401
------------
Comprehensive Income 2,819,380
Effect of Stock Split 8,421 (8,421)
Increase in Indirect
Guarantee of ESOP Debt - - (193,752) - - (193,752)
Cash Dividends - - - - (101,053) (101,053)
--------- ----------- ----------- ------------ ------------ ------------
Balance at
December 31, 2000 $ 16,842 $ 3,985,312 $ (380,555) $ (345,749) $ 19,007,426 $ 22,283,276
========= =========== =========== ============ ============ ============
Beginning Balance
At March 31, 2001 $ 16,842 $ 3,985,312 $ (415,000) $ 348,015 $ 19,565,195 $ 23,500,364
Net Income - - - - 1,797,557 1,797,557
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Gains On Securities
Available For Sale - - - 261,131 - 261,131
------------
Comprehensive Income 2,058,688
Decrease in Indirect
Guarantee of ESOP Debt - - 56,703 - - 56,703
Cash Dividends (101,055) (101,055)
--------- ----------- ----------- ------------ ------------ ------------
Balance at
December 31, 2001 $ 16,842 $ 3,985,312 $ (358,297) $ 609,146 $ 21,261,697 $ 25,514,700
========= =========== =========== ============ ============ ============
See accompanying notes to consolidated financial statements.
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended December 31,
-------------------------------
2001 2000
-------------- -------------
Cash Flows From Operating Activities:
Net Income $ 1,797,557 $ 1,535,979
Adjustments To Reconcile Net Income To
Net Cash Provided By Operating
Activities:
Depreciation Expense 737,844 654,941
Amortization Of Intangibles 348,930 348,930
Discount Accretion And Premium
Amortization (3,878) 20,532
Provisions For Losses On Loans And Real
Estate 925,000 475,000
Gain On Sale Of Mortgage-Backed
Securities Available For Sale (2,612) -
Gain On Sale Of Loans (806,943) (286,633)
Gain (Loss) On Sale Of Real Estate 1,681 (78,967)
Amortization Of Deferred Fees On Loans (163,602) (108,794)
Proceeds From Sale Of Loans Held For
Sale 68,600,336 16,067,773
Origination Of Loans For Sale (67,575,035) (16,775,659)
(Increase) Decrease In Accrued Interest
Receivable:
Loans 112,446 (304,470)
Mortgage-Backed Securities (68,331) 17,099
Investments 72,901 188,519
Decrease In Advance Payments By Borrowers (215,724) (104,355)
(Gain) Loss On Disposition Of Premises And
Equipment (330) 195
Other, Net (831,514) 45,768
------------- -------------
Net Cash Provided By Operating Activities 2,928,726 1,695,858
------------- -------------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Held To Maturity 528,311 145,991
Principal Repayments On Mortgage-Backed
Securities Available For Sale 13,373,497 4,948,570
Purchase Of Investment Securities
Available For Sale (47,731,254) -
Purchase Of Mortgage-Backed Securities
Available For Sale (27,228,672) (943,380)
Maturities Of Investment Securities
Available For Sale 26,927,070 3,655,169
Proceeds From Sale of Securities
Available For Sale 3,075,600 -
Purchase Of FHLB Stock - (825,400)
Redemption Of FHLB Stock 761,700 -
Increase In Loans To Customers (10,613,084) (33,038,766)
Investment In Real Estate Held For
Development - (402,534)
Proceeds From Sale Of Real Estate Held
For Development - 712,400
Proceeds From Sale Of Repossessed
Assets 75,800 406,509
Purchase And Improvement Of Premises
And Equipment (260,484) (1,536,930)
------------- -------------
Net Cash Used By Investing Activities (41,091,516) (26,878,371)
------------- -------------
Cash Flows From Financing Activities:
Increase In Deposit Accounts 37,211,580 6,745,214
Proceeds From FHLB Advances 59,000,000 78,645,000
Repayment Of FHLB Advances (63,046,000) (60,636,000)
Proceeds Of Other Borrowings 871,771 1,187,321
Dividends To Shareholders (101,055) (101,053)
------------- -------------
Net Cash Provided By Financing
Activities 33,936,296 25,840,482
------------- -------------
(Continued)
5
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended December 31,
-------------------------------
2001 2000
-------------- -------------
Net Increase (Decrease) In Cash And
Cash Equivalents (4,226,494) 657,969
Cash And Cash Equivalents At Beginning
Of Period 12,616,129 7,416,702
------------- -------------
Cash And Cash Equivalents At End Of
Period $ 8,389,635 $ 8,074,671
============= =============
Supplemental Disclosure Of Cash Flows
Information:
Cash Paid During The Period For Interest $ 10,084,131 $ 9,959,311
Cash Paid During The Period For Income
Taxes $ 1,397,883 $ 1,188,183
Additions To Repossessed Assets $ 242,981 $ 301,203
Increase In Unrealized Net Gain On
Securities Available For Sale, Net Of
Taxes $ 261,131 $ 1,283,401
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 nine-month periods ended December 31, 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
subsidiaries Security Federal Insurance ("SFINS"), Security Federal
Investments ("SFINV"), Security Federal Trust ("SFT"), and 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. SFINS, SFINV, and SFT were formed during fiscal 2002 and
began operating during the December 2001 quarter. SFINS is an insurance
agency offering business, health, home and life insurance. SFINV engages
primarily in investment brokerage services. SFT offers trust, financial
planning and financial management services. SFSC is currently inactive. 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 December 31, 2001 and March 31, 2001 consisted of
the following:
Loans held for sale were $2,027,593 and $2,245,951 at December 31, 2001 and
March 31, 2001, respectively.
December 31, 2001 March 31, 2001
Loans Held For Investment: ----------------- ---------------
Residential Real Estate $ 103,152,379 $ 121,736,566
Consumer 50,199,693 46,277,098
Commercial Business & Real Estate 96,016,913 74,520,017
--------------- ---------------
249,368,985 242,533,681
--------------- ---------------
Less:
Allowance For Possible Loan Loss 3,317,775 2,784,117
Loans In Process 7,496,277 10,738,528
Deferred Loan Fees 195,165 259,973
--------------- ---------------
11,009,217 13,782,618
--------------- ---------------
$ 238,359,768 $ 228,751,063
=============== ===============
7
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
3. Loans Receivable, Net, Continued
The following is a reconciliation of the allowance for loan losses for the
nine months ending:
December 31, 2001 December 31, 2000
----------------- -----------------
Beginning Balance $ 2,784,117 $ 2,120,767
Provision 925,000 475,000
Charge-offs (506,460) (203,376)
Recoveries 115,118 57,907
-------------- --------------
Ending Balance $ 3,317,775 $ 2,450,298
============== ==============
4. Securities
Investment and Mortgage-Backed Securities, Held to Maturity
- -----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities held to maturity are as
follows:
Gross Gross
December 31, 2001 Amortized Unrealized Unrealized
- ----------------- Cost Gains Losses Fair Value
---------- --------- --------- ----------
US Government and Agency
Obligations $ 205,082 $ 3,704 $ - $ 208,786
Mortgage-Backed Securities 1,560,668 41,685 - 1,602,353
---------- --------- --------- ----------
Total $1,765,750 $ 45,389 $ - $1,811,139
========== ========= ========= ==========
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
December 31, 2001 Amortized Unrealized Unrealized
- ----------------- Cost Gains Losses Fair Value
----------- ----------- --------- ------------
US Government and Agency
Obligations $ 55,925,863 $ 541,374 $ 253,725 $ 56,213,512
Mortgage-Backed Securities 47,238,920 733,944 39,733 47,933,131
------------ ----------- --------- ------------
Total $103,164,783 $ 1,275,318 $ 293,458 $104,146,643
============ =========== ========= ============
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:
December 31, 2001 March 31, 2001
-------------------- --------------------
Balance Rate Balance Rate
Demand Accounts: -------------------- --------------------
Checking $ 68,422,516 0.56% $ 61,453,344 0.86%
Money Market 60,998,841 2.69% 49,855,497 4.66%
Regular Savings 13,480,042 1.72% 12,911,410 2.44%
------------ ------------
Total Demand Accounts $142,901,399 1.58% $124,220,251 2.55%
============ ============
Certificate Accounts:
0 - 4.99% $115,197,548 $ 10,021,153
5.00 6.99% 30,091,978 112,040,419
7.00 8.99% 6,431,072 11,128,594
------------ ------------
Total Certificate Accounts $151,720,598 4.21% $133,190,166 6.15%
============ ============
Total Deposit Accounts $294,621,997 2.94% $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:
December 31, 2001 March 31, 2001
------------------- --------------------
Balance Rate Balance Rate
Fiscal Year Due: ------------------- --------------------
2002 $ 5,550,000 1.99% $ 9,560,000 5.63%
2003 5,000,000 6.40% 5,000,000 6.40%
2004 - 0% - -
2005 10,108,000 6.15% 10,144,000 6.16%
Thereafter 18,000,000 5.98% 18,000,000 5.98%
----------- -----------
Total Advances $38,658,000 5.50% $42,704,000 5.99%
=========== ===========
7. Regulatory Matters
The following table reconciles the Bank's Shareholders' equity to its various
regulatory capital positions:
December 31, 2001 March 31, 2001
(Dollars in Thousands)
------------------------------------
Bank's Shareholders' Equity $ 25,543 $ 23,484
Unrealized Loss On Available For
Sale Of Securities, Net Of Tax (609) (348)
Reduction For Goodwill And Other
Intangibles (302) (650)
----------- -----------
Tangible Capital 24,632 22,486
Qualifying Core Deposits And Intangible
Assets 302 470
----------- -----------
Core Capital 24,934 22,956
Supplemental Capital 2,849 2,582
Assets Required To Be Deducted (245) (227)
=========== ===========
Risk-Based Capital $ 27,538 $ 25,311
=========== ===========
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at December 31, 2001.
(Dollars in Thousands)
-------------------------------------------------------------------
Amt. % Actual Excess Excess
Required Required Actual Amt. % Amt. %
-------------------------------------------------------------------
Tangible
Capital $ 7,309 2.0% $ 24,632 6.74% $ 17,323 4.74%
Tier 1
Leverage
(Core)
Capital 14,624 4.0% 24,934 6.82% 10,310 2.82%
Total Risk-
Based
Capital 18,237 8.0% 27,538 12.08% 9,301 4.08%
Tier 1
Risk-Based
(Core)
Capital 9,117 4.0% 24,934 10.94% 15,518 6.94%
9
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
7. Regulatory Matters, Continued
The Company's regulatory capital amounts and ratios at December 31, 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 $ 24,934 10.9% $ 9,117 4.0% $ 13,675 6.0%
Risk-Based Capital (To
Risk Weighted Assets) 27,538 12.1% 18,237 8.0% 22,796 10.0%
Core Capital (To
Adjusted Tangible
Assets) 24,934 6.8% 14,624 4.0% 18,280 5.0%
Tangible Capital (To
Tangible Assets) 24,632 6.7% 7,309 2.0% 18,273 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
-------------------------------------------------------------
December 31, 2001
-------------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ----------
Basic EPS $ 691,501 1,671,459 $0.41
Effect of Diluted
Securities:
Stock Options - 23,946
ESOP - 12,741
------------------------- -------------------- ----------
Diluted EPS $ 691,501 1,708,146 $0.40
For the Quarter Ended
-------------------------------------------------------------
December 31, 2000
-------------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ---------
Basic EPS $ 508,860 1,670,434 $0.30
Effect of Diluted
Securities:
Stock Options - 18,006
ESOP - 13,766
------------------------- -------------------- ---------
Diluted EPS $ 508,860 1,702,206 $0.30
10
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
8. Earnings Per Share, Continued
For the Nine Months Ended
-------------------------------------------------------------
December 31, 2001
-------------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ----------
Basic EPS $1,797,557 1,671,034 $1.08
Effect of Diluted
Securities:
Stock Options - 22,300
ESOP - 13,166
------------------------- -------------------- ----------
Diluted EPS $1,797,557 1,706,500 $1.05
For the Nine Months Ended
-------------------------------------------------------------
December 31, 2000
-------------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ----------
Basic EPS $1,535,979 1,672,798 $0.92
Effect of Diluted
Securities:
Stock Options - 18,006
ESOP - 11,402
------------------------- ------------------- ----------
Diluted EPS $1,535,979 1,702,206 $0.90
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 $35.4 million or 10.7% during the nine
months ended December 31, 2001 due primarily to increases of $31.5 million or
42.4% in total investment securities, and an increase of $9.4 million, or 4.1%
in total net loans receivable offset partially by a $4.2 million or 33.5%
decrease in cash and cash equivalents.
Residential real estate loans, net of loans in process, decreased $15.6
million or 13.7% during the period while other loans increased $25.4 million
or 21.4%.
Real estate acquired in settlement of loans increased $166,000 to $296,000
during the nine months ended December 31, 2001.
Non-accrual loans totaled $1.0 million at December 31, 2001 compared to
$183,000 at March 31, 2001. Non-accrual loans have averaged $875,000 during
the fiscal year. The Bank classifies all loans as non-accrual when they
become 90 days or more delinquent. The Bank had four loans totaling $626,000
at December 31, 2001 that were troubled debt restructurings compared to
$587,000 at March 31, 2001. The four loans, a $16,000 consumer loan, a
$61,000 single family residential loan, a $58,000 commercial loan secured by
two single-family rental properties, and a $491,000 commercial loan secured by
commercial real estate were current as of December 31, 2001. All troubled
debt restructurings are also considered impaired. At December 31, 2001, the
Bank held $829,000 in impaired loans compared to $789,000 at March 31, 2001.
Deposits increased $37.2 million or 14.5% during the nine months ended
December 31, 2001. Federal Home Loan Bank (FHLB) advances decreased $4.0
million or 9.5% due to the increase in deposits.
The Board of Directors declared the 42nd, 43rd, and 44th consecutive quarterly
dividend of $.02 per share per quarter in May, August, and November 2001,
which totaled $101,000. The employee stock ownership trust of the Company
paid $57,000 in principal on the employee stock ownership plan loan during the
nine-month period. Unrealized net gains on securities available for sale, net
of tax, increased $261,000 during the nine months ended December 31, 2001.
The Company's net income for the nine months was $1.8 million. These items
combined to increase shareholders' equity by $2.0 million or 8.6% during the
nine months ended December 31, 2001. Book value per share was $15.27 at
December 31, 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 nine months ended
December 31, 2001 was approximately 21%. 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 nine months ended December 31, 2001, loan disbursements exceeded
loan repayments resulting in a $9.4 million or 4.1% increase in total net
loans receivable.
Deposits and other borrowings are also an important source of funds for the
Company. During the nine months ended December 31, 2001, deposits increased
$37.2 million while FHLB advances decreased $4.0 million. The Bank had $52.9
million in additional borrowing capacity at the FHLB at the end of the period.
At December 31, 2001, the Bank had $127.9 million of certificates of deposit
maturing within one year. Based on previous experience, the Bank anticipates
a major portion of these certificates will be renewed.
Liquidity resources at December 31, 2001 are sufficient to meet outstanding
mortgage loan commitments of $270,000 and unused lines of credit of $28.8
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 DECEMBER 31, 2001
- ------------------------------------------------------------------
Net Income
Net income was $692,000 for the three months ended December 31, 2001,
representing an increase in earnings of $183,000 or 36.1% compared to $508,000
for the same period in 2000.
Net Interest Income
Net interest income increased $719,000, or 28.2%, to $3.3 million during the
three months ended December 31, 2001 compared to $2.6 million for the same
period in 2000. The increase is a result of a decrease in total interest
expense.
Interest income on loans increased $33,000 to $4.9 million during the period
as a result of total net loans increasing in the portfolio. Investment,
mortgage-backed, and other securities interest income decreased $119,000 or
8.5% as a result of a decrease in the average yield in the investment
portfolio of 68 basis points. Total interest income decreased $86,000 or 1.4%
compared to the same period in 2000.
Total interest expense decreased $805,000, or 21.6%, to $2.9 million during
the nine months ended December 31, 2001 compared to $3.7 million for the same
period one-year earlier. Interest expense on deposits decreased $221,000 or
8.6% during the period as the average cost of deposits decreased despite
deposits increasing significantly during the quarter ended December 31, 2001.
Interest expense on advances and other borrowings decreased $584,000 or 50.9%
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 $500,000 and $150,000 during the
three months ended December 31, 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 $1.0 million at December 31, 2001 compared to $183,000 at March 31,
2001. The ratio of allowance for loan losses to the Company's total loans was
1.37% at December 31, 2001 and 1.19% at March 31, 2001. Net charge-offs were
$162,000 for the three months ended December 31, 2001 compared to $7,000
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 DECEMBER 31, 2001, Continued
- -----------------------------------------------------------------------------
Other Income
Total other income increased $463,000, or 78.4%, to $1.0 million during the
three months ended December 31, 2001compared to $591,000 for the same period
in 2000. The increase is a result of the increase in the gain on sale of
loans, which increased $412,000 during the period. Loan servicing fees
decreased $35,000 while service fees on deposit accounts increased $51,000.
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, the loss from real estate
operations was $14,000. 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, and other
miscellaneous fees increased $20,000 during the three months ended December
31, 2001.
General and Administrative Expenses
General and administrative expenses increased $507,000, or 23.0%, to $2.7
million during the three months ended December 31, 2001 compared to $2.2
million for the same period in 2000.
Salaries and employee benefits expense grew $299,000 or 24.8% 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 $34,000 or 18.2% during the
period due to the opening of the new branch office. Advertising expense
decreased $21,000 while the depreciation and maintenance of equipment expense
increased $21,000 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 December 31 in
2001 and 2000. Other miscellaneous expense, consisting of legal,
professional, and consulting expenses, stationery and office supplies, and
other sundry expenses, increased $174,000 or 47.0% for the three months ended
December 31, 2001 compared to the three months ended December 31, 2000.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2001
- -----------------------------------------------------------------
Net Income
Net income was $1.8 million for the nine months ended December 31, 2001,
representing an increase in earnings of $262,000 or 17.0% compared to $1.5
million for the same period in 2000.
Net Interest Income
Net interest income increased $1.4 million, or 19.1%, to $9.0 million during
the nine months ended December 31, 2001 compared to $7.6 million for the same
period in 2000. The increase is 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 10.3%, to $15.0 million
during the nine months in 2001 as a result of total net loans increasing
during the period. Investment, mortgage-backed, and other securities interest
income decreased $568,000 or 13.1% due to a decrease of 38 basis points in the
average yield of the investment portfolio. Total interest income increased
$834,000 or 4.7% during the nine months compared to the same period in 2000.
Total interest expense decreased $616,000, or 6.0%, to $9.7 million during the
nine months ended December 31, 2001 compared to $10.3 million for the same
period one-year earlier. Interest expense on deposits increased $740,000 or
10.2% 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 $1.4 million 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 NINE MONTHS ENDED DECEMBER 31, 2001, Continued
- ----------------------------------------------------------------------------
Provision for Loan Losses
The Bank's provision for loan losses was $925,000 during the nine months ended
December 31, 2001 compared to $475,000 during the nine months ended December
31, 2000, an increase of $450,000. 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
December 31, 2001 compared to $183,000 at March 31, 2001. The ratio of
allowance for loan losses to the Company's total loans was 1.37% at December
31, 2001 and 1.19% at March 31, 2001. Net charge-offs were $391,000 during
the nine months ended December 31, 2001 compared to $145,000 during the same
period in 2000.
Other Income
Total other income increased $815,000, or 45.8%, to $2.6 million during the
nine months ended December 31, 2001 compared to $1.8 million for the same
period one-year earlier. Gain on sale of loans increased $885,000 as the
volume of fixed rate mortgage loans sold during the period increased due to
mortgage loan rates falling. Loan-servicing fees decreased $71,000 while
service fees on deposit accounts grew $103,000 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 $47,000. 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, and other miscellaneous fees decreased
$59,000 during the nine months ended December 31, 2001.
General and Administrative Expenses
General and administrative expenses increased $1.3 million, or 21.0%, to $7.8
million during the nine months ended December 31, 2001 compared to $6.5
million for the same period in 2000.
Salaries and employee benefits expense increased $924,000 or 26.5% 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 $129,000 or 26.4% during
the period due to the opening of the new branch office. Advertising expense
decreased $51,000 while the depreciation and maintenance of equipment expense
increased $95,000 during the nine-month period. FDIC insurance premiums
remained stable at $35,000 during both quarters while amortization of
intangibles expense was $349,000 during the nine months ended December 31 in
2001 and 2000, respectively. Other miscellaneous expense, consisting of
legal, professional, and consulting expenses, stationery and office supplies,
and other sundry expenses, increased $260,000 or 21.6% for the nine months
ended December 31, 2001 compared to the nine months ended December 31, 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 nine month period ended December 31, 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 3.24%. 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
---------------------------------------------------
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***
10.1 Salary Continuation Agreements****
10.2 Amendment One To Salary Continuation Agreements*****
10.3 Stock Option Plan****
10.4 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 10-QSB for the quarter
ended September 30, 1998 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 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 d uly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: February 12, 2002 By: /s/Roy G. Lindburg
--------------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
19