SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD:
FROM: TO:
-------- --------
COMMISSION FILE NUMBER: 0-16120
SECURITY FEDERAL CORPORATION
South Carolina 57-0858504
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification)
1705 WHISKEY ROAD, AIKEN, SOUTH CAROLINA 29801
(Address of Principal Executive Office)(Zip code)
(803) 641-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practical date.
CLASS: OUTSTANDING SHARES AT: $0.01 PAR VALUE:
------------- ---------------------- ----------------
Common Stock June 30, 2002 1,673,138
INDEX
Security Federal Corporation and Subsidiaries
==============================================================================
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statement of Shareholders' Equity 3
Consolidated Statements of Cash Flows 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis-Results of
Operations and Financial Condition 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
==============================================================================
PART II. OTHER INFORMATION
Other Information 14
Signatures 15
==============================================================================
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information is included in the consolidated financial statements and related
notes.
i
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets
June 30, 2002 March 31, 2002
------------- --------------
Assets: (Unaudited) (Audited)
Cash and Cash Equivalents $ 8,926,313 $ 11,528,411
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized cost of
$127,896,079 at June 30,
2002 and $117,657,245
at March 31, 2002) 129,977,290 117,361,736
Held To Maturity: (Fair value of $1,545,634
at June 30, 2002 and
$1,571,667 at March 31,
2002) 1,483,607 1,536,656
------------ ------------
Total Investment And Mortgage-Backed
Securities 131,460,897 118,898,392
------------ ------------
Loans Receivable Net:
Held For Sale 1,683,224 2,165,918
Held For Investment: (Net of allowance of
$4,041,544 at June 30,
2002 and $3,689,079 at
March 31, 2002) 231,781,403 232,152,950
------------ ------------
Total Loans Receivable, Net 233,464,627 234,318,868
------------ ------------
Accrued Interest Receivable:
Loans 1,179,479 1,249,273
Mortgage-Backed Securities 287,479 283,775
Investments 825,289 650,034
Premises And Equipment, Net 4,890,499 4,859,140
Federal Home Loan Bank Stock, At Cost 2,669,300 2,669,300
Repossessed Assets Acquired In Settlement
Of Loans 114,000 98,157
Other Assets 752,831 1,764,980
------------ ------------
Total Assets $384,570,714 $376,320,330
============ ============
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $315,907,433 $309,037,602
Advances From Federal Home Loan Bank 33,090,000 33,108,000
Other Borrowed Money 5,516,591 6,169,411
Advance Payments By Borrowers For Taxes
and Insurance 368,418 247,149
Other Liabilities 2,096,011 2,357,605
------------ ------------
Total Liabilities $356,978,453 $350,919,767
------------ ------------
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 - 1,684,200 And
Outstanding Shares - 1,673,138 At June 30,
2002 And 1,671,459 At March 31, 2002 $ 16,842 $ 16,842
Additional Paid-In Capital 3,985,312 3,985,312
Indirect Guarantee of Employee Stock
Ownership Trust Debt (324,583) (358,297)
Accumulated Other Comprehensive Income (Loss) 1,291,184 (183,335)
Retained Earnings, Substantially Restricted 22,623,506 21,940,041
------------ ------------
Total Shareholders' Equity $ 27,592,261 $ 25,400,563
------------ ------------
Total Liabilities And Shareholders' Equity $384,570,714 $376,320,330
============ ============
See accompanying notes to consolidated financial statements.
1
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended June 30,
----------------------------
2002 2001
----------- -----------
Interest Income:
Loans $ 4,360,728 $ 4,957,519
Mortgage-Backed Securities 798,626 670,151
Investment Securities 835,177 501,474
Other 7,150 55,830
----------- -----------
Total Interest Income 6,001,681 6,184,974
----------- -----------
Interest Expense:
NOW And Money Market Accounts 623,248 710,365
Passbook Accounts 69,284 78,085
Certificate Accounts 1,261,794 2,057,175
Advances And Other Borrowed Money 557,368 560,934
----------- -----------
Total Interest Expense 2,511,694 3,406,559
----------- -----------
Net Interest Income: 3,489,987 2,778,415
Provision For Loan Losses 450,000 175,000
----------- -----------
Net Interest Income After Provision For
Loan Losses 3,039,987 2,603,415
----------- -----------
Other Income:
Gain On Sale Of Loans 289,851 294,553
Loan Servicing Fees 50,792 57,557
Service Fees On Deposit Accounts 281,602 297,462
Other 176,886 172,144
----------- -----------
Total Other Income 799,131 821,716
----------- -----------
General And Administrative Expenses:
Salaries And Employee Benefits 1,490,544 1,483,138
Occupancy 195,314 190,143
Advertising 76,390 31,392
Depreciation And Maintenance Of Equipment 269,005 278,283
FDIC Insurance Premiums 12,766 11,111
Amortization Of Intangibles 116,310 116,310
Other 523,639 458,345
----------- -----------
Total General And Administrative Expenses 2,683,968 2,568,722
----------- -----------
Income Before Income Taxes 1,155,150 856,409
Provision For Income Taxes 438,000 319,151
----------- -----------
Net Income $ 717,150 $ 537,258
=========== ===========
Basic Net Income Per Common Share $ 0.43 $ 0.32
=========== ===========
Diluted Net Income Per Common Share $ 0.42 $ 0.32
=========== ===========
Cash Dividends Per Share On Common Stock $ 0.02 $ 0.02
=========== ===========
Basic Weighted Average Shares Outstanding 1,671,715 1,670,175
=========== ===========
Diluted Weighted Average Shares Outstanding 1,709,863 1,703,675
=========== ===========
See accompanying notes to consolidated financial statements.
2
Security Federal Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity (Unaudited)
Accumulated
Other
Compre-
Additional Indirect hensive
Common Paid-In Guarantee of Income Retained
Stock Capital ESOP Debt (Loss) Earnings Total
--------- ----------- ---------- ---------- ----------- -----------
<s> <c> <c> <c> <c> <c> <c>
Beginning Balance At
March 31, 2001 $ 16,842 $ 3,985,312 $ (415,000) $ 348,015 $19,565,195 $23,500,364
Net Income - - - - 537,258 537,258
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Losses On Securities
Available For Sale - - - (34,906) - (34,906)
-----------
Comprehensive Income 502,352
Decrease In Indirect
Guarantee Of ESOP
Debt 56,703 56,703
Cash Dividends - - - (33,686) (33,686)
--------- ----------- ---------- ---------- ----------- -----------
Balance At
June 30, 2001 $ 16,842 $ 3,985,312 $ (358,297) $ 313,109 $20,068,767 $24,025,733
========= =========== ========== ========== =========== ===========
Beginning Balance At
March 31, 2002 $ 16,842 $ 3,985,312 $ (358,297) $ (183,335) $21,940,041 $25,400,563
Net Income - - - - 717,150 717,150
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Gains On Securities
Available For Sale - - - 1,474,519 - 1,474,519
-----------
Comprehensive Income 2,191,669
Decrease in Indirect
Guarantee of ESOP
Debt 33,714 33,714
Cash Dividends - - - - (33,685) (33,685)
--------- ----------- ---------- ---------- ----------- -----------
Balance at
June 30, 2002 $ 16,842 $ 3,985,312 $ (324,583) $1,291,184 $22,623,506 $27,592,261
========= =========== ========== ========== =========== ===========
See accompanying notes to consolidated financial statements.
3
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended June 30,
---------------------------
2002 2001
------------ ------------
Cash Flows From Operating Activities:
Net Income $ 717,150 $ 537,258
Adjustments To Reconcile Net Income To Net Cash
Provided By Operating Activities:
Depreciation Expense 200,778 248,177
Amortization Of Intangibles 116,310 116,310
Discount Accretion And Premium Amortization 67,824 (100,193)
Provisions For Losses On Loans And Real Estate 450,000 175,000
Gain On Sale Of Loans (289,851) (294,553)
Gain On Sale Of Real Estate (5,000) -
Amortization Of Deferred Fees On Loans (45,888) (45,705)
Proceeds From Sale Of Loans Held For Sale 14,888,734 17,267,184
Origination Of Loans For Sale (14,146,189) (16,960,141)
(Increase) Decrease In Accrued Interest
Receivable:
Loans 69,794 9,713
Mortgage-Backed Securities (3,704) (106,969)
Investments (175,255) 227,780
Increase In Advance Payments By Borrowers 121,269 92,393
(Gain) Loss On Disposition Of Premises And
Equipment - (1,367)
Other, Net (234,242) (755,606)
------------ ------------
Net Cash Provided By Operating Activities 1,731,730 409,281
------------ ------------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Held To Maturity 21,467 274,986
Principal Repayments On Mortgage-Backed
Securities Available For Sale 4,033,557 3,871,582
Purchase Of Investment Securities Available
For Sale (15,975,750) (8,073,750)
Purchase Of Mortgage-Backed Securities
Available For Sale (6,477,998) (21,075,981)
Proceeds From Sale of Mortgage Backed
Securities Available For Sale - 599,735
Maturities Of Investment Securities Available
For Sale 8,113,539 17,361,338
Maturities Of Investment Securities Held
To Maturity 31,576 -
Redemption Of FHLB Stock - 761,700
Increase In Loans To Customers (158,565) (6,553,719)
Proceeds From Sale Of Repossessed Assets 145,157 11,000
Purchase And Improvement Of Premises And
Equipment (232,137) (144,814)
------------ ------------
Net Cash Used By Investing Activities (10,499,154) (12,967,923)
------------ ------------
Cash Flows From Financing Activities:
Increase In Deposit Accounts 6,869,831 15,890,704
Proceeds From FHLB Advances 23,600,000 11,700,000
Repayment Of FHLB Advances (23,618,000) (18,778,000)
Proceeds Of Other Borrowings - 293,691
Repayment Of Other Borrowings (652,820) -
Dividends To Shareholders (33,685) (33,686)
------------ ------------
Net Cash Provided By Financing Activities 6,165,326 9,072,709
------------ ------------
(Continued)
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended June 30,
---------------------------
2002 2001
------------ ------------
Net Decrease In Cash And Cash Equivalents (2,602,098) (3,485,933)
Cash And Cash Equivalents At Beginning Of Period 11,528,411 12,616,129
------------ ------------
Cash And Cash Equivalents At End Of Period $ 8,926,313 $ 9,130,196
============ ============
Supplemental Disclosure Of Cash Flows Information:
Cash Paid During The Period For Interest $ 2,619,162 $ 3,574,251
Cash Paid During The Period For Income Taxes $ 247,772 $ 554,623
Additions To Repossessed Assets $ 156,000 $ 29,000
Increase (Decrease) In Unrealized Net Gain On
Securities Available For Sale, Net Of Taxes $ 1,474,519 $ (34,906)
See accompanying notes to consolidated financial statements.
5
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions from Form 10-Q and generally accepted accounting
principles; therefore, they do not include all disclosures necessary for a
complete presentation of financial condition, results of operations, and cash
flows. Such statements are unaudited but, in the opinion of Management,
reflect all adjustments, all of which are of a normal recurring nature and
necessary for a fair presentation of results for the selected interim periods.
Users of financial information produced for interim periods are encouraged to
refer to the footnotes contained in the Annual Report to Shareholders when
reviewing interim financial statements. The results of operations for the
three-month period ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the entire fiscal year. This Form 10-Q
contains certain forward-looking statements with respect to the financial
condition, results of operations, and business. These forward-looking
statements involve certain risks and uncertainties. Factors that may cause
actual results to differ materially from those anticipated by such
forward-looking statements include, but are not limited to, changes in
interest rates, changes in the regulatory environment, changes in general
economic conditions and inflation, and changes in the securities market.
Management cautions readers of this Form 10-Q not to place undue reliance on
forward- looking statements contained herein.
2. Basis of Consolidation and Nature of Operations
The accompanying unaudited consolidated financial statements include the
accounts of Security Federal Corporation (the "Company") and its wholly owned
subsidiary, Security Federal Bank (the "Bank"), and the Bank's wholly owned
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.
3. Loans Receivable, Net
Loans Receivable, Net, at June 30, 2002 and March 31, 2002 consisted of the
following: Loans held for sale were $1,683,224 and $2,165,918 at June 30, 2002
and March 31, 2002, respectively.
Loans Held For Investment: June 30, 2002 March 31, 2002
------------- --------------
Residential Real Estate $ 101,270,166 $ 100,065,942
Consumer 48,086,702 49,851,549
Commercial Business And Real Estate 98,627,923 97,396,184
------------- -------------
$ 247,984,791 $ 247,313,675
------------- -------------
Less:
Allowance For Loan Losses 4,041,544 3,689,079
Loans In Process 11,981,877 11,287,518
Deferred Loan Fees 179,967 184,128
------------- -------------
$ 16,203,388 $ 15,160,725
------------- -------------
$ 231,781,403 $ 232,152,950
============= =============
The following is a summary of the activity in the allowance for loan losses
for the three months ending:
June 30, 2002 June 30, 2001
------------- -------------
Beginning Balance $ 3,689,079 $ 2,784,117
Provision 450,000 175,000
Charge-offs (166,660) (171,557)
Recoveries 69,125 52,134
------------- -------------
Ending Balance $ 4,041,544 $ 2,839,694
============= =============
6
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
4. Securities
Investment and Mortgage-Backed Securities, Held to Maturity
- -----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities held to maturity are as
follows:
Gross Gross
June 30, 2002 Amortized Unrealized Unrealized Fair
- ------------- Cost Gains Losses Value
----------- ---------- --------- ------------
U.S. Government and Agency
Obligations $ 131,780 $ 1,054 $ - $ 132,834
Mortgage-Backed Securities 1,351,827 60,973 - 1,412,800
----------- ---------- --------- ------------
Total $ 1,483,607 $ 62,027 $ - $ 1,545,634
=========== ========== ========= ============
March 31, 2002
- --------------
U.S. Government and Agency
Obligations $ 163,356 $ 2,771 $ - $ 166,127
Mortgage-Backed Securities 1,373,300 32,240 - 1,405,540
----------- ---------- --------- ------------
Total $ 1,536,656 $ 35,011 $ - $ 1,571,667
=========== ========== ========= ============
Investment And Mortgage-Backed Securities, Available For Sale
- -------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities available for sale are as
follows:
Gross Gross
June 30, 2002 Amortized Unrealized Unrealized Fair
- ------------- Cost Gains Losses Value
------------ ---------- ---------- ------------
U.S. Government and Agency
Obligations $ 69,803,652 $ 840,539 $ 52,473 $ 70,591,718
Mortgage-Backed Securities 58,092,427 1,293,145 - 59,385,572
------------ ---------- ---------- ------------
Total $127,896,079 $2,133,684 $ 52,473 $129,977,290
============ ========== ========== ============
March 31, 2002
- --------------
U.S. Government and Agency
Obligations $ 61,983,824 $ 239,410 $ 866,931 $ 61,356,303
Mortgage-Backed Securities 55,673,421 594,414 262,402 56,005,433
------------ ---------- ---------- ------------
Total $117,657,245 $ 833,824 $1,129,333 $117,361,736
============ ========== ========== ============
7
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
5. Deposits
A summary of deposit accounts by type with weighted average rates is as
follows:
June 30, 2002 March 31, 2002
-------------------- --------------------
Balance Rate Balance Rate
------------ ----- ------------ -----
Demand Accounts:
Checking $ 72,879,050 0.56% $ 71,906,832 0.58%
Money Market 80,981,492 2.74% 74,074,781 2.73%
Regular Savings 16,171,397 1.75% 15,106,897 1.75%
------------ ------------
Total Demand Accounts $170,031,939 1.71% $161,088,510 1.68%
------------ ------------
Certificate Accounts:
0 - 4.99% $127,512,405 $127,067,831
5.00 - 6.99% 17,804,834 19,982,399
7.00 - 8.99% 558,255 898,862
------------ ------------
Total Certificate Accounts $145,875,494 3.42% $147,949,092 3.59%
------------ ------------
Total Deposit Accounts $315,907,433 2.50% $309,037,602 2.60%
============ ============
6. Federal Home Loan Bank Advances
FHLB Advances are summarized by year of maturity and weighted average interest
rate in the table below:
June 30, 2002 March 31, 2002
-------------------- --------------------
Balance Rate Balance Rate
------------ ----- ------------ -----
Fiscal Year Due:
2003 $ 5,000,000 6.17% $ 5,000,000 6.40%
2004 -- -- -- --
2005 10,090,000 6.15% 10,108,000 6.15%
2006 18,000,000 5.98% 18,000,000 5.98%
Thereafter -- -- -- --
------------ ------------
Total Advances $ 33,090,000 6.09% $ 33,108,000 6.09%
============ ============
7. Regulatory Matters
The following table reconciles the Bank's shareholders' equity to its various
regulatory capital positions:
June 30, 2002 March 31, 2002
---------------------------------
(Dollars in Thousands)
---------------------------------
Bank's Shareholders' Equity $ 27,655 $ 25,463
Unrealized Gain On Available For Sale
Of Securities, Net Of Tax (1,291) 183
Reduction For Goodwill And Other
Intangibles (69) (185)
--------------- ---------------
Tangible Capital 26,295 25,461
Qualifying Core Deposits And
Intangible Assets 69 185
--------------- ---------------
Core Capital 26,364 25,646
Supplementary Capital 2,817 2,879
Assets Required To Be Deducted (227) (237)
--------------- ---------------
Risk-Based Capital $ 28,954 $ 28,288
=============== ===============
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at June 30, 2002:
(Dollars in Thousands)
---------------------------------------------------------
Amt. % Actual Actual Excess Excess
Required Required Amt. % Amt. %
---------------------------------------------------------
Tangible Capital $ 7,666 2.0% $ 26,295 6.86% $ 18,629 4.86%
Tier 1 Leverage
(Core) Capital 15,328 4.0% 26,364 6.88% 11,036 2.88%
Total Risk-Based
Capital 18,026 8.0% 28,954 12.85% 10,928 4.85%
Tier 1 Risk-Based
(Core) Capital 9,013 4.0% 26,364 11.70% 17,693 7.70%
8
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
7. Regulatory Matters, Continued
The Company's regulatory capital amounts and ratios at June 30, 2002 are as
follows:
To Be Well
Capitalized
For Capital Under Prompt
(Dollars in Thousands) Adequacy Corrective Action
Actual Purposes Provisions
-----------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------
Tier I Risk-Based Core
Capital $ 26,364 11.7% $ 9,013 4.0% $ 13,520 6.0%
Risk-Based Capital (To
Risk Weighted Assets) 28,954 12.8% 18,026 8.0% 22,532 10.0%
Core Capital (To Adjust-
ed Tangible Assets) 26,364 6.9% 15,328 4.0% 18,433 5.0%
Tangible Capital (To
Tangible Assets) 26,295 6.9% 7,666 2.0% 19,165 5.0%
8. Earnings Per Share
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings Per Share." SFAS 128 specifies the computation, presentation and
disclosure requirements for earnings per share (EPS) for entities with
publicly held common stock or potential common stock such as options,
warrants, convertible securities or contingent stock agreements if those
securities trade in a public market.
This standard specifies computation and presentation requirements for both
basic EPS and, for entities with complex capital structures, diluted EPS.
Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share is
similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the dilutive potential common shares had
been issued. The dilutive effect of options outstanding under the Company's
stock option plan is reflected in diluted earnings per share by application of
the treasury stock method.
RECONCILIATION OF THE NUMERATOR AND DENOMINATORS OF THE BASIC AND DILUTED EPS
COMPUTATIONS:
For the Quarter Ended
-----------------------------------------------------
June 30, 2002
-----------------------------------------------------
Income (Numerator)
Amount Shares (denominator) Per Share
------------------ -------------------- ----------
Basic EPS $717,150 1,671,715 $0.43
Effect of Diluted
Securities:
Stock Options - 25,663
ESOP - 12,485
------------------ -------------------- -----------
Diluted EPS $717,150 1,709,863 $0.42
For the Quarter Ended
-----------------------------------------------------
June 30, 2001
-----------------------------------------------------
Income (Numerator)
Amount Shares (Denominator) Per Share
------------------ -------------------- ----------
Basic EPS $537,258 1,670,175 $0.32
Effect of Diluted
Securities:
Stock Options - 19,475
ESOP - 14,025
------------------ -------------------- ----------
Diluted EPS $537,258 1,703,675 $0.32
9
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Changes in Financial Condition
Total assets of the Company increased $8.3 million or 2.2% during the three
months ended June 30, 2002, due primarily to increases of $12.6 million or
10.6% in total investment securities offset in part by a $2.6 million decrease
in cash and cash equivalents and a decrease of $1.0 million in other assets.
Residential real estate loans, net of loans in process, increased $510,000
during the period while consumer and commercial loans decreased a total of
$533,000.
Repossessed assets increased $16,000 to $114,000 during the three months ended
June 30, 2002.
Non-accrual loans totaled $1.1 million at June 30, 2002 compared to $1.4
million at March 31, 2002. The Bank classifies all loans as non-accrual when
they become 90 days or more delinquent. The Bank had four loans totaling
$625,000 at June 30, 2002 that were troubled debt restructurings compared to
$622,000 at March 31, 2002. One loan, a $491,000 commercial loan secured by
commercial real estate that is a troubled debt restructuring, was more than 30
days delinquent. The other three loans, a $61,000 consumer loan secured by a
residential dwelling, a $57,000 commercial loan secured by two rental
properties, and a $16,000 commercial loan secured by a second mortgage on a
residence were current as of June 30, 2002. All troubled debt restructurings
are also considered impaired. At June 30, 2002, the Bank held $659,000 in
impaired loans compared to $897,000 at March 31, 2002.
Deposits increased $6.9 million or 2.2% during the three months ended June 30,
2002 as Federal Home Loan Bank (FHLB) advances decreased $18,000.
The Board of Directors declared the 46th consecutive quarterly dividend of
$.02 per share per quarter in May 2002, which totaled $34,000. The employee
stock ownership plan (ESOP) of the Company paid $34,000 in principal on the
employee stock ownership plan loan during the three-month period. Unrealized
net gains on securities available for sale increased $1.5 million during the
three months ended June 30, 2002. The Company's net income for the three
months was $717,000. These items combined to increase shareholders' equity by
$2.2 million or 8.6% during the three months ended June 30, 2002. Book value
per share of the Company's common stock was $16.49 at June 30, 2002 compared
to $15.20 at March 31, 2002.
Liquidity and Capital Resources
In accordance with Office of Thrift Supervision (OTS) regulations, the Company
is required to maintain sufficient liquidity to operate in a safe and sound
manner. The Company's average liquidity during the three months ended June
30, 2002 was approximately 32%. The Company's current liquidity level is
deemed adequate to meet the requirements of normal operations, potential
deposit outflows, and loan demand while still allowing for optimal investment
of funds and return on assets.
Loan repayments and maturities of investments are a significant source of
funds, whereas loan disbursements are a primary use of the Company's funds.
During the three months ended June 30, 2002, loan repayments exceeded loan
disbursements resulting in a $854,000 decrease in total net loans receivable.
Deposits and other borrowings are also an important source of funds for the
Company. During the three months ended June 30, 2002, deposits increased $6.9
million while FHLB advances decreased $18,000. At June 30, 2002, the Bank had
$123.6 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.
10
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations and
Financial Condition
Liquidity and Capital Resources, Continued
Through the operations of the Bank, we have made contractual commitments to
extend credit in the ordinary course of our business activities. These
commitments are legally binding agreements to lend money to our customers at
predetermined interest rates for a specified period of time. At June 30,
2002, we had issued commitments to extend credit of $27.8 million through
various types of lending arrangements. We evaluate each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by us upon extension of credit, is based on our credit
evaluation of the borrower. Collateral varies but may include accounts
receivable, inventory, property, plant and equipment, commercial and
residential real estate. We manage the credit risk on these commitments by
subjecting them to normal underwriting and risk management processes.
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.
Accounting and Reporting Changes
In July 2001, the SEC issued Staff Accounting Bulletin ("SAB") No. 102
Selected Loan Loss Allowance Methodology and Documentation Issues. This staff
accounting bulletin clearly defines the required development, documentation,
and application of a systematic methodology for determining allowances for
loan and lease losses in accordance with generally accepted accounting
principles. The Company believes that it is in compliance with SAB 102.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141 Business
Combinations. This Statement 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 2002, the FASB issued SFAS No. 142 Goodwill and Other Intangible
Assets. This Statement 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 Company adopted SFAS 142 on April 1,
2002. Adoption did not have a material impact on the financial position of
the Company.
In August 2001, The FASB issued SFAS No. 144 Accounting for the Impairment
or Disposal of Long-Lived Assets. This Statement addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. This Statement supersedes SFAS No. 121
Accounting for the Impairment of Long-Lived assets and for Long-Lived Assets
to Be Disposed Of. However, this Statement retains the fundamental provision
of Statement 121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and used and (b) measurement of long-lived assets
to be disposed of by sale. SFAS No. 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2002, and interim periods
within those fiscal years. The Statement is not expected to have a material
impact on the consolidated financial statements of the Company.
Additional accounting standards that have been issued or proposed by the FASB
that do no 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. See "Item 3. Quantitative and Qualitative
Disclosures about Market Risk" for additional discussions of changes in
interest rates.
11
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002
- --------------------------------------------------------------
Net Income
Net income was $717,000 for the three months ended June 30, 2002, representing
an increase in earnings of $180,000 or 33.5% compared to $537,000 for the same
period in 2001.
Net Interest Income
Net interest income increased $712,000 or 25.6% during the three months ended
June 30, 2002 due to a decrease in total interest expense offset in part by a
decrease in interest income.
Interest income on loans decreased $597,000 or 12.0% during the quarter as a
result of the yield in the loan portfolio decreasing 102 basis points, as the
loan portfolio average balances were virtually the same. Investment,
mortgage-backed, and other securities interest income increased $413,000 or
33.7% due to an increase in the average balance of approximately $54.0 million
in the investment portfolio despite a 122 basis points decrease in the average
yield in the portfolio. Total interest income decreased $183,000 or 3.0%
compared to the same period in 2001.
Total interest expense decreased $895,000 or 26.3% during the three months
ended June 30, 2002 compared to the same period a year ago. Interest expense
on interest bearing deposits decreased $891,000 or 31.3% during the period as
deposits grew compared to the average balance in 2001 although the cost of
those deposits decreased approximately 190 basis points. Interest expense on
advances and other borrowings decreased $4,000 as the cost of debt outstanding
decreased 81 basis points during the 2002 period compared to 2001 despite the
average debt outstanding increasing approximately $5.7 million. The decrease
in yields for 2002 as compared to 2001 is primarily due to decreases in market
interest rates, which occurred throughout 2001.
Provision for Loan Losses
The Company's provision for loan losses was $450,000 during the three months
ended June 30, 2001 compared to $175,000 for the quarter ending June 30, 2001
due to higher than normal net charge-offs during the last two quarters of the
year ending March 31, 2002, the entrance into a new lending market, a slight
increase in the percentage of consumer and commercial loans as compared to
residential mortgage loans, and the cyclical nature of the economy. 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 $1.1 million at June 30, 2002 compared to $1.4 million
at March 31, 2002. The ratio of allowance for loan losses to the Company's
total loans was 1.70% at June 30, 2002 compared to 1.55% at March 31, 2002.
Other Income
Total other income decreased $23,000 or 2.8% during the three months ended
June 30, 2002 compared to the same period a year ago. Gain on sale of loans
decreased $5,000 to $290,000, loan servicing fees decreased $7,000, and
service fees on deposit accounts decreased $16,000. 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 trust fees, and other miscellaneous fees increased $5,000 or 2.8% during
the three months ended June 30, 2002.
General and Administrative Expenses
General and administrative expenses increased $115,000 or 4.5% during the
three months ended June 30, 2002 compared to the same period in 2001.
Salaries and employee benefits expense grew $7,000 due to normal annual salary
increases. Occupancy expense increased $5,000 or 2.7% during the period.
Advertising expense increased $45,000 due to advertising for SFINS, SFINV, SFT
and advertising for longer term certificates of deposit. Depreciation and
maintenance of equipment expense decreased $9,000 during the quarterly period.
FDIC insurance premiums increased slightly to $13,000 during the current
quarter. The amortization of intangible expense remained unchanged at
$116,000 during the three months ended June 30, 2002 and June 30, 2001. Other
miscellaneous expense, consisting of legal, professional, and consulting
expenses, stationery and office supplies, and other sundry expenses, increased
$65,000 or 14.3% for the three months ended June 30, 2002 compared to the
three months ended June 30, 2001.
12
Security Federal Corporation and Subsidiaries
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, investment, deposit and borrowing activities.
Management actively monitors and manages its interest rate risk exposure.
Although the Company manages other risks such as credit quality and liquidity
risk in the normal course of business, management considers interest rate risk
to be its most significant market risk that could potentially have the largest
material effect on the Company's financial condition and results of
operations. Other types of market risks such as foreign currency exchange
rate risk and commodity price risk do not arise in the normal course of the
Company's business activities.
The Company's profitability is affected by fluctuations in the market interest
rate. Management's goal is to maintain a reasonable balance between exposure
to interest rate fluctuations and earnings. A sudden and substantial increase
or decrease in interest rates may adversely impact the Company's earnings to
the extent that the interest rates on interest-earning assets and
interest-bearing liabilities do not change at the same rate, to the same
extent or on the same basis. The Company monitors the impact of changes in
interest rates on its net interest income using a test that measures the
impact on net interest income and net portfolio value of an immediate change
in interest rates in 100 basis point increments and by measuring the Banks'
interest sensitivity gap ("Gap"). Net portfolio value is defined as the net
present value of assets, liabilities, and off-balance sheet contracts. Gap is
the amount of interest sensitive assets repricing or maturing over the next
twelve months compared to the amount of interest sensitive liabilities
maturing or repricing in the same time period. Recent net portfolio value
reports furnished by the OTS indicate that the Bank's interest sensitivity has
improved in recent quarters over the past year. The Bank has rated favorably
compared to Thrift peers concerning interest rate sensitivity.
For the three month period ended June 30, 2002, 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 3.52%. As of the year
ended March 31, 2002, the interest rate spread was 3.48%. The Company's
management believes that the interest rate spread has improved slightly as
market interest rates have decreased and liabilities have matured or repriced.
The Bank's interest bearing liabilities are currently repricing or maturing at
a slightly faster rate than their interest earning assets, and are repricing
at lower interest rates, thereby improving the Bank's interest rate spread
modestly.
13
Security Federal Corporation and Subsidiaries
Part II. Other Information
Item 1 Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Company is a
party to legal proceedings in the ordinary course of business
wherein it enforces its security interest in mortgage loans it has
made.
Item 2 Changes In Securities And Use Of Proceeds
-----------------------------------------
Not applicable.
Item 3 Defaults Upon Senior Securities
-------------------------------
None
Item 4 Submission Of Matters To A Vote Of Security Holders
---------------------------------------------------
None
Item 5 Other Information
-----------------
None
Item 6 Exhibits And Reports On Form 8-K
--------------------------------
Exhibits:
3.1 Articles Of Incorporation (1)
3.2 Articles Of Amendment, Dated August 28, 1998, To Articles Of
Incorporation
3.3 Bylaws(2)
10 Executive Compensation Plans And Arrangements:
Salary Continuation Agreements (3)
Amendment One To Salary Continuation Agreements (4)
Stock Option Plan (3)
1999 Stock Option Plan (5)
2002 Stock Option Plan (6)
Incentive Compensation Plan (3)
(1) Filed as an exhibit to the Company's June 23, 1998 proxy statement and
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Form 8-K dated August 31, 1998 and
incorporated herein by reference.
(3) Filed on June 28, 1993, as an exhibit to the Company's Annual Report on
Form 10-K 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.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1993 pursuant to Section 12(g) of the
Securities Exchange Act of 1934. All of such previously filed documents
are hereby incorporated herein by reference in accordance with Item 601
of Regulation S-K.
(5) Filed on March 2, 2002, as an exhibit to the Company's Registration
Statement on Form S-8 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's June 19, 2002 proxy statement and
incorporated herein by reference.
14
Security Federal Corporation and Subsidiaries
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: August 7, 2002 By: /s/Timothy W. Simmons
---------------------------------------
Timothy W. Simmons
President
Duly Authorized Representative
Date: August 7, 2002 By: /s/Roy G. Lindburg
---------------------------------------
Roy G. Lindburg
Treasurer/Chief Financial Officer
Duly Authorized Representative
15
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF SECURITY FEDERAL CORPORATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on
Form 10-Q, that:
* the report fully complies with the requirements of Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
* the information contained in the report fairly presents, in all
material respects, the company's financial condition and results of
operations.
/s/ Timothy W. Simmons /s/ Roy G. Lindburg
- --------------------------------- ---------------------------------
Timothy W. Simmons Roy G. Lindburg
Chief Executive Officer Chief Financial Officer
Dated: August 7, 2002