SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
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 No.)
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
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: SHARES:
------------------- ---------------------- ---------
Common Stock, par July 31, 2004 2,533,291
value $0.01 per share
INDEX
- -------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at June 30, 2004 and March
31, 2004 1
Consolidated Statement of Income for the Three Months
Ended June 30, 2004 and 2003 2
Consolidated Statements of Shareholders' Equity at June
30, 2003and 2004 3
Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 2004 and 2003 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis - of Results of Operations
and Financial Condition 11
Item 3. Quantitative and Qualitative Disclosure about Market Risk 17
Item 4. Controls and Procedures 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.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets
June 30, 2004 March 31, 2004
------------- --------------
Assets: (Unaudited) (Audited)
Cash And Cash Equivalents $ 7,609,472 $ 6,749,211
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized cost of
$185,072,407 at June 30, 2004 and
$173,300,028 at March 31, 2004) 182,601,227 174,411,819
Held To Maturity: (Fair value of
$77,384,947 at June 30, 2004 and
$71,686,256 at March 31, 2004) 261,882,839 71,303,507
Total Investment And Mortgage-Backed ----------- -----------
Securities 264,412,308 245,715,326
Loans Receivable, Net: ----------- -----------
Held For Sale 1,315,132 1,703,869
Held For Investment: (Net of allowance
of $5,921,549 at June 30, 2004 and
$5,763,935 at March 31, 2004) 263,097,176 258,190,791
----------- -----------
Total Loans Receivable, Net 264,412,308 259,894,660
Accrued Interest Receivable: ----------- -----------
Loans 872,765 902,589
Mortgage-Backed Securities 592,185 549,541
Investments 794,590 778,725
Premises And Equipment, Net 7,461,175 6,562,734
Federal Home Loan Bank Stock, At Cost 5,576,600 4,816,800
Repossessed Assets Acquired In Settlement
Of Loans 155,000 50,869
Other Assets 3,352,650 1,984,598
----------- -----------
Total Assets $ 552,709,584 $ 528,005,053
=========== ===========
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $ 402,155,052 $ 389,592,645
Advances From Federal Home Loan Bank 109,831,000 96,336,000
Other Borrowed Money 5,612,708 5,477,023
Advance Payments By Borrowers For Taxes
And Insurance 484,148 317,421
Other Liabilities 2,565,520 2,810,049
----------- -----------
Total Liabilities $ 520,648,428 $ 494,533,138
----------- -----------
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 - 2,533,291 And
Outstanding Shares - 2,519,562 At June 30,
2004 And 2,533,291 And 2,516,191 At March
31, 2004 25,333 25,333
Additional Paid-In Capital 4,013,674 4,013,674
Indirect Guarantee Of Employee Stock
Ownership Trust Debt (276,217) (336,972)
Accumulated Other Comprehensive Income (Loss) (1,533,120) 689,755
Retained Earnings, Substantially Restricted 29,831,486 29,080,125
----------- -----------
Total Shareholders' Equity $32,061,156 $33,471,915
----------- -----------
Total Liabilities And Shareholders' Equity $552,709,584 $528,005,053
=========== ===========
See accompanying notes to consolidated financial statements.
1
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended June 30,
2004 2003
----------- -----------
Interest Income:
Loans $3,835,261 $3,955,505
Mortgage-Backed Securities 878,361 922,079
Investment Securities 1,323,278 731,383
Other 6,600 4,768
----------- -----------
Total Interest Income 6,043,500 5,613,735
----------- -----------
Interest Expense:
NOW And Money Market Accounts 894,613 664,392
Passbook Accounts 43,399 45,656
Certificate Accounts 770,868 1,057,100
Advances And Other Borrowed Money 886,770 620,983
----------- -----------
Total Interest Expense 2,595,650 2,388,131
----------- -----------
Net Interest Income 3,447,850 3,225,604
Provision For Loan Losses 195,000 300,000
----------- -----------
Net Interest Income After Provision For Loan Losses 3,252,850 2,925,604
----------- -----------
Other Income:
Gain On Sale Of Loans 122,425 642,551
Loan Servicing Fees 43,637 49,187
Service Fees On Deposit Accounts 313,680 351,612
Other 179,213 157,214
----------- -----------
Total Other Income 658,955 1,200,564
----------- -----------
General And Administrative Expenses:
Salaries And Employee Benefits 1,598,825 1,612,656
Occupancy 254,535 219,060
Advertising 31,622 26,532
Depreciation And Maintenance Of Equipment 275,924 263,831
FDIC Insurance Premiums 14,705 13,595
Other 518,167 513,714
----------- -----------
Total General And Administrative Expenses 2,693,778 2,649,388
----------- -----------
Income Before Income Taxes 1,218,027 1,476,780
Provision For Income Taxes 416,000 554,121
----------- -----------
Net Income $ 802,027 $ 922,659
=========== ===========
Basic Net Income Per Common Share $ 0.32 $ 0.37
=========== ===========
Diluted Net Income Per Common Share $ 0.31 $ 0.36
=========== ===========
Cash Dividend Per Share On Common Stock $ 0.02 $ 0.02
=========== ===========
Basic Weighted Average Shares Outstanding 2,522,600 2,510,526
=========== ===========
Diluted Weighted Average Shares Outstanding 2,562,892 2,558,299
=========== ===========
See accompanying notes to consolidated financial statements.
2
Security Federal Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity (Unaudited)
Accumulated
Additional Indirect Other
Common Paid-In Guarantee of Comprehensive Retained
Stock Capital ESOP Debt Income (Loss) Earnings Total
------ ---------- ---------- ------------- ---------- ----------
<s> <c> <c> <c> <c> <c> <c>
Beginning Balance At March 31, 2003 $ 25,298 $3,995,230 $(444,685) $1,444,585 $25,019,525 $30,039,953
Net Income - - - - 922,659 922,659
Other Comprehensive Income, Net
Of Tax:
Unrealized Holding Gains On
Securities Available For Sale 9,424 - 9,424
-------
Comprehensive Income 932,083
Decrease In Indirect Guarantee of
ESOP Debt 62,713 - - 62,713
Exercise of Stock Options 6 3,032 3,038
Cash Dividends ($.02 per share) - - - - (50,596) (50,596)
------ ---------- ---------- ------------- ---------- ----------
Balance at June 30, 2003 $ 25,304 $3,998,262 $(381,972) $1,454,009 $25,891,588 $30,987,191
====== ========== ========== ============= ========== ==========
Beginning Balance At March 31, 2004 $25,333 $4,013,674 $(336,972) $ 689,755 $29,080,125 $33,471,915
Net Income - - - - 802,027 802,027
Other Comprehensive Income, Net
Of Tax:
Unrealized Holding Losses On
Securities Available For Sale - - - (2,222,875) - (2,222,875)
---------
Comprehensive Income (1,420,848)
Decrease In Indirect Guarantee of
ESOP Debt - - 60,755 - - 60,755
Cash Dividends ($.02 per share) - - - - (50,666) (50,666)
------ ---------- ---------- ------------- ---------- ----------
Balance at June 30, 2004 $ 25,333 $4,013,674 $(276,217) $(1,533,120) $29,831,486 $32,061,156
====== ========== ========== ============= ========== ==========
See accompanying notes to consolidated financial statements.
3
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended June 30,
--------------------------
2004 2003
Cash Flows From Operating Activities: ------ ------
Net Income $802,027 $922,659
Adjustments To Reconcile Net Income To Net
Cash Provided By Operating Activities:
Depreciation Expense 215,846 197,102
Discount Accretion And Premium Amortization 313,403 407,943
Provisions For Losses On Loans And Real Estate 195,000 300,000
Gain On Sale Of Loans (122,425) (642,551)
Gain On Sale Of Real Estate - (2,500)
Amortization Of Deferred Fees On Loans (52,233) (52,743)
Proceeds From Sale Of Loans Held For Sale 7,477,620 27,331,214
Origination Of Loans For Sale (6,966,458) (28,884,037)
(Increase) Decrease In Accrued Interest
Receivable:
Loans 29,824 44,577
Mortgage-Backed Securities (42,644) (33,106)
Investments (15,865) 38,917
Increase In Advance Payments By Borrowers 166,727 130,908
(Gain) Loss on Disposition of Premises and
Equipment (3,325) -
Other, Net (191,730) 183,748
---------- ----------
Net Cash Provided (Used) By Operating Activities 1,805,767 (57,869)
---------- ----------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Available For Sale 14,162,776 14,926,451
Principal Repayments On Mortgage-Backed
Securities Held To Maturity 8,284 185,327
Purchase Of Investment Securities Held
To Maturity (11,991,800) (22,984,825)
Purchase Of Mortgage-Backed Securities
Available For Sale (30,243,147) (31,842,449)
Maturities Of Investment Securities
Available For Sale 4,000,000 18,119,749
Maturities of Investment Securities
Held To Maturity 4,000,000 13,030,331
Purchase Of FHLB Stock (1,320,000) (590,400)
Redemption Of FHLB Stock 560,200 478,800
(Increase) Decrease In Loans To Customers (5,205,349) 2,188,882
Proceeds From Sale Of Repossessed Assets 52,066 209,450
Purchase And Improvement Of Premises And
Equipment (1,114,286) (755,143)
Proceeds from Sale of Premises And Equipment 3,325 -
---------- ----------
Net Cash Used By Investing Activities (27,087,931) (7,033,827)
---------- ----------
Cash Flows From Financing Activities:
Increase In Deposit Accounts 12,562,407 3,706,100
Proceeds From FHLB Advances 40,863,000 36,200,000
Repayment Of FHLB Advances (27,368,000) (31,768,000)
Net Proceeds Of Other Borrowings 135,685 635,489
Dividends To Shareholders (50,666) (50,596)
Proceeds From Exercise of Stock Options - 3,038
---------- ----------
Net Cash Provided By Financing Activities 26,142,426 8,726,031
---------- ----------
(Continued)
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended June 30,
--------------------------
2004 2003
------ ------
Net Increase In Cash And Cash Equivalents 860,261 1,634,335
Cash And Cash Equivalents At Beginning Of Period 6,749,211 8,238,690
---------- ----------
Cash And Cash Equivalents At End Of Period $7,609,472 $9,873,025
========== ==========
Supplemental Disclosure Of Cash Flows Information:
Cash Paid During The Period For Interest $2,775,454 $2,491,885
Cash Paid During The Period For Income Taxes $ 338,532 $ 1,788
Additions To Repossessed Acquired Through
Foreclosure $ 156,197 $ 238,800
Increase (Decrease) In Unrealized Net Gain On
Securities Available For Sale, Net Of Taxes $(2,222,875) $ 9,424
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 for Form 10-Q and accounting principles generally
accepted in the United States of America; 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, 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 audited
financial statements appearing in our 2004 Annual Report to Shareholders when
reviewing interim financial statements. The results of operations for the
three-month period ended June 30, 2004 are not necessarily indicative of the
results that may be expected for the entire fiscal year. This Quarterly Report
on Form 10-Q contains certain forward-looking statements with respect to the
financial condition, results of operations, and business of Security Federal
Corporation. 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, the demand for loans, the regulatory
environment, general economic conditions and inflation, and the securities
markets. Management cautions readers of this Form 10-Q not to place undue
reliance on the 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, Inc. ("SFINS"), Security Federal
Investments, Inc. ("SFINV"), Security Federal Trust, Inc. ("SFT"), and Security
Financial Services Corporation ("SFSC"). The Bank is primarily engaged in the
business of accepting savings and demand deposits and originating mortgage 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 operation 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, 2004 and March 31, 2004 consisted of the
following:
Loans held for sale were $1,315,132 and $1,703,869 at June 30, 2004 and March
31, 2004, respectively.
June 30, 2004 March 31, 2004
Loans Held For Investment: ------------- --------------
Residential Real Estate $108,168,943 $109,722,301
Consumer 46,239,096 45,641,450
Commercial Business & Real Estate 125,272,612 121,111,848
------------- --------------
279,680,651 276,475,599
------------- --------------
Less:
Allowance For Possible Loan Loss 5,921,549 5,763,935
Loans In Process 10,508,636 12,356,346
Deferred Loan Fees 153,290 164,527
------------- --------------
16,583,475 18,284,808
------------- --------------
$263,097,176 $258,190,791
============= ==============
The following is a reconciliation of the allowance for loan losses for the three
months ending:
June 30, 2004 June 30, 2003
------------- -------------
Beginning Balance $ 5,763,935 $ 4,911,224
Provision 195,000 300,000
Charge-offs (119,198) (159,544)
Recoveries 81,812 71,654
------------- -------------
Ending Balance $ 5,921,549 $ 5,123,334
============= =============
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:
June 30, 2004 Gross Gross
------------- Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
US Government and Agency
Obligations $78,940,096 $ 15,427 $1,932,352 $77,023,171
Mortgage-Backed Securities 341,516 20,260 - 361,776
--------- ---------- ---------- ----------
Total $79,281,612 $ 35,687 $1,932,352 $77,384,947
========== ========== ========== ==========
March 31, 2004
--------------
US Government and Agency
Obligations $70,953,710 $ 448,405 $ 88,542 $71,313,573
Mortgage-Backed Securities 349,797 22,886 - 372,683
--------- ---------- ---------- ----------
Total $71,303,507 $ 471,291 $ 88,542 $71,686,256
========== ========== ========== ==========
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:
June 30, 2004 Gross Gross
------------- Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
US Government and Agency
Obligations $12,587,649 $ 132,863 $ - $12,720,512
Mortgage-Backed Securities 172,484,758 519,283 3,123,326 169,880,715
----------- ---------- ---------- -----------
Total $185,072,407 $ 652,146 $3,123,326 $182,601,227
=========== ========== ========== ===========
March 31, 2004
--------------
US Government and Agency
Obligations $16,603,568 $ 296,338 $ - $16,899,906
Mortgage-Backed Securities 156,696,460 1,437,219 621,766 157,511,913
----------- ---------- ---------- -----------
Total $173,300,028 $1,733,557 $ 621,766 $174,411,819
=========== ========== ========== ===========
7
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:
June 30, 2004 March 31, 2004
Demand Accounts: ------------------ -------------------
Balance Rate Balance Rate
------------------ -------------------
Checking $82,967,314 0.44% $80,738,298 0.47%
Money Market 166,007,980 1.97% 158,587,076 1.97%
Regular Savings 17,676,465 0.98% 17,367,047 0.98%
----------- -----------
Total Demand Accounts 266,651,759 1.43% 256,692,421 1.43%
----------- -----------
Certificate Accounts:
0 - 4.99% 125,249,082 122,599,195
5.00 - 6.99% 10,254,211 10,301,029
----------- -----------
Total Certificate Accounts 135,503,293 2.35% 132,900,224 2.26%
----------- -----------
Total Deposit Accounts $402,155,052 1.74% $389,592,645 1.71%
=========== ===========
6. Advances From Federal Home Loan Bank ("FHLB")
Federal Home Loan Bank advances are summarized by year of maturity and weighted
average interest rate in the table below:
June 30, 2004 March 31, 2004
------------------ ------------------
Balance Rate Balance Rate
Fiscal Year Due: ------------------ ------------------
2005 $20,468,000 3.64% $13,336,000 4.92%
2006 33,000,000 4.14% 33,000,000 4.09%
2007 13,000,000 2.61% 10,000,000 2.66%
2008 10,000,000 2.96% 10,000,000 2.96%
2009 20,000,000 2.80% 20,000,000 2.80%
Thereafter 13,363,000 3.21% 10,000,000 3.29%
----------- ----------
Total Advances $109,831,000 3.40% $96,336,000 3.59%
=========== ==========
These advances are secured by a blanket collateral agreement with the FHLB by
pledging the Bank's portfolio of residential first mortgage loans and
approximately $56.7 million in investment securities at June 30, 2004. Advances
are subject to prepayment penalties.
The following table shows callable FHLB advances as of the dates indicated.
These advances are also included in the above table. All callable advances are
callable at the option of the FHLB. If an advance is called, the Bank has the
option to payoff the advance without penalty, re-borrow funds on different
terms, or convert the advance to a three-month floating rate advance tied to
LIBOR.
As of June 30, 2004
- -------------------------------------------------------------------------------
Borrow Date Maturity Date Amount Int.Rate Type Call Dates
- ----------- ------------- ------ -------- ---------- --------------------
11/10/00 11/10/05 $5,000,000 5.85% Multi-Call 08/10/04 and
quarterly thereafter
09/04/02 09/04/07 5,000,000 2.82% 1 Time Call 09/06/05
11/07/02 11/07/12 5,000,000 3.354% 1 Time Call 11/07/07
10/24/03 10/24/08 10,000,000 2.705% Multi-call 10/24/06 and
quarterly thereafter
12/10/03 12/12/05 5,000,000 2.16% Multi-call 12/12/05 and
quarterly thereafter
02/20/04 02/20/14 5,000,000 3.225% 1 Time Call 02/20/09
04/16/04 04/16/14 3,000,000 3.33% 1 Time Call 04/16/08
8
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
As of March 31, 2004
- -------------------------------------------------------------------------------
Borrow Date Maturity Date Amount Int.Rate Type Call Dates
- ----------- ------------- ------ -------- ---------- --------------------
11/10/00 11/10/05 5,000,000 5.85% Multi-Call 05/10/04 and
quarterly thereafter
09/04/02 09/04/07 5,000,000 2.82% 1 Time Call 09/06/05
11/07/02 11/07/12 5,000,000 3.35% 1 Time Call 11/07/07
03/10/03 03/10/06 5,000,000 1.15% Multi-Call 06/10/04 and
quarterly thereafter
10/24/03 10/24/08 10,000,000 2.705% Multi-Call 10/24/06 and
quarterly thereafter
12/10/03 12/10/08 5,000,000 2.16% Multi-Call 12/12/05 and
quarterly thereafter
02/20/04 02/20/14 5,000,000 2.14 1 Time Call 02/20/09
7. Regulatory Matters
The following table reconciles the Bank's shareholders' equity to its various
regulatory capital positions:
June 30, 2004 March 31, 2004
(Dollars in Thousands)
--------------------------------
Bank's Shareholders' Equity $31,409 $32,830
Unrealized Loss (Gain) On Available For
Sale Of Securities, Net Of Tax 1,533 (690)
Reduction For Goodwill And Other Intangibles - -
------- -------
Tangible Capital 32,942 32,140
Qualifying Core Deposits And Intangible Assets - -
------- -------
Core Capital 32,942 32,140
Supplemental Capital 3,575 3,412
Assets Required To Be Deducted (49) (54)
======= =======
Risk-Based Capital $36,468 $35,498
======= =======
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at June 30, 2004:
(Dollars in Thousands)
---------------------------------------------------------------
Amt.Required %Required Actual Amt. Actual % Excess Amt. Excess%
---------------------------------------------------------------
Tangible Capital $11,085 2.0% $32,942 5.94% $21,857 3.94%
Tier 1 Leverage
(Core) Capital 22,170 4.0% 32,942 5.94% 10,772 1.94%
Total Risk-Based
Capital 22,879 8.0% 36,468 12.75% 13,589 4.75%
Tier 1 Risk-Based
(Core) Capital 11,439 4.0% 32,942 11.52% 21,503 7.52%
8. Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS
No. 128 specifies the computation, presentation and disclosure requirements for
("EPS") 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 EPS
is computed by dividing net income by the weighted average number of common
shares outstanding. Diluted EPS is similar to the computation of basic EPS
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.
9
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
The following table provides a reconciliation of the numerators and denominators
of the basic and diluted EPS computations:
For the Quarter Ended
----------------------------------------------------------
June 30, 2004
----------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ---------
Basic EPS $ 802,027 2,522,600 $ 0.32
Effect of Diluted
Securities:
Stock Options - 29,601 (0.007)
ESOP - 10,691 (0.003)
------------------------- -------------------- ---------
Diluted EPS $ 802,027 2,562,892 $ 0.31
========================= ==================== =========
For the Quarter Ended
----------------------------------------------------------
June 30, 2003
----------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ---------
Basic EPS $ 922,659 2,510,526 $ 0.37
Effect of Diluted
Securities:
Stock Options - 28,387 (0.006)
ESOP - 19,386 (0.004)
------------------------- -------------------- ---------
Diluted EPS $ 922,659 2,558,299 $ 0.36
========================= ==================== =========
9. Stock-Based Compensation
The Company has a stock-based employee compensation plan which is accounted for
under the recognition and measurement principles of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all stock options granted under these plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and earnings per share
as if we had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation
for the three months ended June 30, 2004 and 2003.
Three Months Ended
June 30,
2004 2003
------ ------
Net income, as reported $802,027 $922,659
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effect $(57,124) $(60,298)
Net Income, Pro Forma $744,903 $862,361
Basic earnings share:
As Reported $ 0.32 $ 0.37
Pro Forma $ 0.30 $ 0.34
Diluted earnings share:
As reported $ 0.31 $ 0.36
Pro forma $ 0.29 $ 0.34
10
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 $24.7 million or 4.7% during the three
months ended June 30, 2004 primarily as a result of an increase of $16.2 million
or 6.6% in total investment securities and a $4.5 million or 1.7% increase in
net loans receivable.
Residential real estate loans, net of loans in process, increased $294,000 or
0.3% during the three months ended June 30, 2004, commercial loans increased
$4.2 million or 3.4%, while consumer loans increased $598,000 or 1.3%. Loans
held for sale decreased $389,000 to $1.3 million during the same period.
Repossessed assets increased $104,000 to $155,000 during the three months ended
June 30, 2004.
Non-accrual loans totaled $2.3 million at June 30, 2004 compared to $2.0 million
at March 31, 2004. The Bank classifies all loans as non-accrual when they
become 90 days or more delinquent. At June 30, 2004, the Bank held $1.2 million
in impaired loans compared to $1.4 million at March 31, 2004. The Bank includes
troubled debt restructuring ("TDR") within the meaning of SFAS No. 114 in
impaired loans. At June 30, 2004, the Bank had six loans totaling $449,000 in
TDR's compared to seven loans totaling $646,000 at March 31, 2004. A commercial
loan TDR of $214,000, secured by equipment, and a $14,000 consumer loan TDR
secured by a second mortgage on a residential dwelling, were 30 days delinquent.
The other four TDR's, two consumer loans totaling $141,000 secured by
residential dwellings, a $22,000 unsecured commercial loan, and a $58,000
commercial loan secured by two rental properties were current as of June 30,
2004.
Deposits increased $12.6 million or 3.2% during the three months ended June 30,
2004 as a result of competitive rates offered by the Bank. FHLB advances
increased $13.5 million or 14.0% to $109.8 million during the same period due
to investment leverage strategies employed to increase net interest income.
Other borrowings, consisting of commercial repurchase sweep accounts, increased
$136,000 or 2.5% to $5.6 million during the three-month period.
The Board of Directors of the Company declared the 54th consecutive quarterly
dividend of $.02 per share, in April 2004, which totaled $51,000. The employee
stock ownership trust of the Company paid $61,000 of principal on the employee
stock ownership plan loan during the three-month period. Unrealized net gains
on securities available for sale, net of tax, decreased $2.2 million during the
three months ended June 30, 2004 due to the rise in interest rates. The
Company's net income for the three-month period was $802,000. These items, in
total, decreased shareholders' equity by $1.4 million or 4.2% during the three
months ended June 30, 2004. Book value per share was $12.72 at June 30, 2004
compared to $13.30 at March 31, 2004.
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 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 and the purchase of investments are a primary use of
the Company's funds. During the three months ended June 30, 2004, loan
disbursements exceeded loan repayments resulting in a $4.5 million or 1.7%
increase in total net loans receivable.
Deposits and other borrowings are also an important source of funds for the
Company. During the three months ended June 30, 2004, deposits increased $12.6
million and FHLB advances increased $13.5 million. The Bank had $28.3 million
in additional borrowing capacity at the FHLB at the end of the period. At June
30, 2004, the Bank had $86.7 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.
11
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Liquidity and Capital Resources, Continued
Through its operations, the Bank has made contractual commitments to extend
credit in the ordinary course of its 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, 2004, the Bank had
$25.6 million in unused consumer lines of credit, including home equity lines
and unsecured lines. The Bank also had $17.1 million in unused commercial lines
of credit and $548,000 in letters of credit committed to customers. The
majority of the $43.2 million will not be drawn at the same time. The Bank
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary, by the Bank 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. The Bank manages the credit risk on
these commitments by subjecting them to normal underwriting and risk management
processes.
Historically, the Company's cash flows from operating activities have been
relatively stable. The cash flow from investing activities have had a trend of
increasing outflows due to increases in purchases of mortgage-backed and
investment securities. The cash flows from financing activities have had a
trend of increased inflows as a result of increases in FHLB advances.
Management believes that the Company's liquidity will continue to be supported
by the Company's deposit base and borrowing capacity during the next year.
Critical Accounting Policies
We have adopted various accounting policies which govern the application of
accounting principles generally accepted in the United States in the preparation
of our financial statements. Our significant accounting policies are described
in the footnotes to the audited consolidated financial statements at March 31,
2004 as filed on our annual report on Form 10-K. Certain accounting policies
involve significant judgements and assumptions by us which have a material
impact on the carrying value of certain assets and liabilities. We consider
these accounting policies to be critical accounting policies. The judgments and
assumptions we use are based on historical experience and other factors, which
we believe to be reasonable under the circumstances. Because of the nature of
the judgments and assumptions we make, actual results could differ from these
judgments and estimates which could have a material impact on our carrying
values of assets and liabilities and our results of operations.
We believe the allowance for loan losses is a critical accounting policy that
requires the most significant judgements and estimates used in preparation of
our consolidated financial statements. The Company provides for loan losses
using the allowance method. Accordingly, all loan losses are charged to the
related allowance and all recoveries are credited to the allowance for loan
losses. Additions to the allowance for loan losses are provided by charges to
operations based on various factors, which, in Management's judgment, deserve
current recognition in estimating possible losses. Such factors considered by
Management include the fair value of the underlying collateral; stated
guarantees by the borrow, if applicable, the borrower's ability to repay from
other economic resources, growth and composition of the loan portfolios, the
relationship of the allowance for loan losses to the outstanding loans, loss
experience, delinquency trends, and general economic conditions. Management
evaluates the carrying value of the loans periodically and the allowance is
adjusted accordingly. While Management uses the best information available to
make evaluations, future adjustments may be necessary if economic conditions
differ substantially from the assumptions used in making these evaluations.
Allowance for loan losses are subject to periodic evaluations by various
authorities and may be subject to adjustments based upon the information that is
available at the time of their examination.
The Company values impaired loans at the loan's fair value if it is probable
that the Company will be unable to collect all amounts due according to the
terms of the loan agreement at the present value of expected cash flows, the
market price of the loan, if available, or the value of the underlying
collateral. Expected cash flows are required to be discounted at the loan's
effective interest rate. When the ultimate collectibility of an impaired loan's
principal is in doubt, wholly or partially, all cash receipts are applied to
principal. When this doubt does not exist, cash receipts are applied under the
contractual terms of the loan agreement first to interest then to principal.
Once the recorded principal balance has been reduced to zero, future cash
receipts are applied to interest income to the extent that any interest has been
foregone. Further cash receipts are recorded as recoveries of any amounts
previously charged off.
12
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Accounting and Reporting Changes
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-based Compensation-Transition and Disclosure", an amendment of FASB
Statement No. 123, "Accounting for Stock-Based Compensation", to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure provisions of SFAS No. 123 and Accounting Pronouncement
Board ("APB") Opinion No. 28, "Interim Financial Reporting", to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB Opinion No. 25. The provisions of SFAS No. 148 are effective for
annual financial statements for fiscal years ending after December 15, 2002, and
for financial reports containing condensed financial statements for interim
period beginning after December 15, 2002. The Company has adopted the disclosure
provisions of SFAS No. 148, which had no impact on the financial condition or
operating results of the Company.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts and loan commitments that relate to the
origination of mortgage loans held for sale, and for hedging activities under
SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or
modified after June 30, 2003. The adoption of SFAS No. 149 did not have a
material impact on the financial condition or operating results of the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances.) Many of those instruments
were previously classified as equity. SFAS No. 150 is generally effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 did not have a material impact on the
financial condition or operating results of the Company.
In November 2002, the FASB issued Interpretation ("Fin") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 requires a company, at the
time it issues a guarantee, to recognize an initial liability for the fair value
of obligations assumed under the guarantee, to recognize an initial liability
for the fair value of obligations assumed under the guarantee and elaborates on
existing disclosure requirements related to guarantees and warranties. The
initial recognition requirements of Fin No. 45 are effective for guarantees
issued or modified after December 31, 2002. The disclosure requirements are
effective for financial statements of periods ending after December 15, 2002.
The adoption of FIN No. 45 did not have a material impact on the financial
condition or operating results of the Company.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities." FIN No. 46 requires a variable interest entity to be consolidated by
a company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns, or both. FIN No. 46 also requires disclosures about
variable interest entities that a company is not required to consolidate, but in
which it has a significant variable interest. FIN No. 46 provides guidance for
determining whether an entity qualifies as a variable interest entity by
considering, among other considerations, whether the entity lacks sufficient
equity or its equity holders lack adequate decision-making ability. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply
to existing entities in the first fiscal year or interim period beginning after
June 15, 2003. Certain of the disclosure requirements apply in all financial
statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The adoption of FIN No. 46 did not have a
material effect on the Company's financial position or results of operations.
13
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Accounting and Reporting Changes, Continued
In June 2003, the American Institute of Certified Public Accountants ("AICPA")
issued an exposure draft of a proposed Statement of Position ("SOP"), "Allowance
for Credit Losses." The proposed SOP addresses the recognition and measurement
by creditors of the allowance for credit losses related to all loans, as that
term is defined in SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan." The proposed SOP provides that the allowance for credit losses reported
on a creditor's balance sheet should consist only of (1) a component for
individual loan impairment recognized and measured pursuant to FASB Statement
No. 114 and (2) one or more components of collective loan impairment recognized
pursuant to FASB Statement No. 5, "Accounting for Contingencies", and measured
in accordance with the guidance in the proposed SOP. The provisions of the
proposed SOP would be effective for financial statements for fiscal years
beginning after December 15, 2003, with earlier application permitted. The
effect of initially applying the provisions of the proposed SOP would be
reported as a change in accounting estimate. In January 2004, the AICPA decided
to no longer pursue this Statement of Position.
In March 2004, the FASB issued an exposure draft on "Share-Based Payment". The
proposed Statement addresses the accounting for transactions in which an
enterprise receives employee services in exchange for a) equity instruments of
the enterprise or b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of the
such equity instruments. This proposed Statement would eliminate the ability to
account for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and generally would require instead
that such transactions be accounted for using a fair-value-based method. This
Statement, is approved, will be effective for awards that are granted, modified,
or settled in fiscal years beginning after a) December 15, 2004 for public
entities and nonpublic entities that used the fair-value-based method of
accounting under the original provisions of Statement 123 for recognition or pro
forma disclosures purposes and b) December 15, 2005 for all other nonpublic
entities. Earlier application is encouraged provided that financial statements
for those earlier years have not yet been issued. Retrospective application of
this Statement is not permitted. The adoption of this Statement, if approved,
could have an impact on the Company's financial position or results of
operations.
Other accounting standards that have been issued proposed by the FASB or other
standards-setting bodies 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. See "Item 3. Quantitative and Qualitative
Disclosures about Market Risk" for additional discussions of changes in interest
rates.
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 JUNE 30, 2004
- --------------------------------------------------------------
Net Income
Net income was $802,000 for the three months ended June 30, 2004, representing a
decrease in earnings of $121,000 or 13.1% from $923,000 for the same period in
2003. The primary reason for the decreased earnings was a decrease on the gain
on sale of mortgage loans offset partial by an increase in net interest income
and a decrease in the provision for loan losses.
Net Interest Income
Net interest income increased $222,000 or 6.9% to $3.4 million during the three
months ended June 30, 2004 as a result of an increase in interest income offset
in part by an increase in interest expense. Average interest earning assets
increased $91.5 million while average interest-bearing liabilities increased
$88.8 million. The interest rate spread decreased 29 basis points to 2.46%
during the three months ended June 30, 2004 compared to the same period in 2003.
Interest income on loans decreased $120,000 or 3.0% to $3.8 million during the
three months ended June 30, 2004 as a result of the yield in the loan portfolio
decreasing 194 basis points despite the average loan portfolio balance
increasing by $18.3 million. Interest income from investment, mortgage-backed,
and other securities increased $550,000 or 33.2% due to an increase in the
average balance of the portfolio of $73.2 million despite a decrease in the
yield in the portfolio of 15 basis points. Total interest income increased
430,000 or 7.7% to $6.0 million for the three months ended June 30, 2004 from
$5.6 million for the same period in 2003.
Total interest expense increased $208,000 or 8.7% to $2.6 million during the
three months ended June 30, 2004 compared to $2.4 million for the same period
one-year earlier. Interest expense on deposits decreased $58,000 or 3.3% during
the period as average interest bearing deposits grew $40.3 million compared to
the average balance in the three months ended June 30, 2003 while the cost of
deposits decreased 29 basis points. Interest expense on advances and other
borrowings increased $266,000 or 42.8% as the cost of debt outstanding decreased
93 basis points during the 2004 period compared to 2003 while average total
borrowings outstanding increased approximately $48.6 million.
Provision for Loan Losses
The Bank's provision for loan losses was $195,000 during the three months ended
June 30, 2004 compared to $300,000 for the quarter ended June 30, 2003. 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 $2.3 million at June 30, 2004 compared to $2.0 million at March 31,
2004. The ratio of allowance for loan losses to the Company's total loans was
2.20% at June 30, 2004 compared to 2.17% at March 31, 2004. Net charge-offs
were $37,000 during the three months ended June 30, 2004 compared to $88,000
during the same period in 2003.
Other Income
Total other income decreased $542,000 or 45.1% to $659,000 during the three
months ended June 30, 2004 compared to the same period a year ago, primarily as
a result of a decrease in the gain on sale of loans. Gain on sale of loans
decreased $520,000 or 81.0% to $122,000 during the period as the origination and
sale of fixed rate mortgages decreased due to an increase in mortgage loan
rates. Loan servicing fees decreased $6,000 to $44,000 while service fees on
deposit accounts decreased $38,000 or 10.8% to $314,000. Other miscellaneous
income including credit life insurance commissions, net gain on sale of
repossessed assets, safe deposit rental income, annuity and stock brokerage
commissions, trust fees, and other miscellaneous fees increased $22,000 or 14.0%
to $179,000 during the three months ended June 30, 2004.
15
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, 2004, CONTINUED
- -------------------------------------------------------------------------
General and Administrative Expenses
General and administrative expenses increased $44,000 or 1.7% to $2.7 million
during the three months ended June 30, 2004 compared to the same period in 2003.
Salaries and employee benefits expense decreased $14,000 or 0.9%. Occupancy
expense increased $35,000 or 16.2% due primarily to the new Lexington branch
office, which opened in August 2003. Advertising expense increased $5,000 to
$32,000 primarily to promote deposit rates. Depreciation and maintenance of
equipment expense increased $12,000 or 4.6% during the quarterly period. FDIC
insurance premiums increased $1,000 or 8.2% to $15,000. Other miscellaneous
expense, consisting of legal, professional, and consulting expenses, stationery
and office supplies, and other sundry expenses, increased $4,000 or 0.9% for the
three months ended June 30, 2004 compared to the three months ended June 30,
2003.
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 OTS indicate that the Bank's
interest rate risk sensitivity has increased slightly 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, 2004, 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 2.46%. As of the year ended March 31,
2004, the interest rate spread was 2.59%. The interest rate spread has decreased
due to investment securities growing faster than loan receivables. Loan
receivables earn a higher yield than investment securities. Also, loan yields
are falling due to refinancing of residential and commercial loans. If interest
rates were to increase suddenly and significantly, the Bank's net interest
income and net interest spread would be compressed.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Sections 13a - 15(e)
and 15d-15(e) of the Securities Exchange Act of 1934) was carried out under the
supervision and with the participation of the Company's Chief Executive Officer,
Chief Financial Officer and several other members of the Company's senior
management as of the end of the period covered by this quarterly report. The
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures as currently in effect are
effective in ensuring that the information required to be disclosed by the
Company in the reports it files or submits under the Act is (i) accumulated and
communicated to the Company's management (including the Chief Executive Officer
and Chief Financial Officer) in a timely manner, and (ii) recorded, processed,
summarized and reported within the time period specified in the Securities and
Exchange Commission's rules and forms.
(b) Changes in Internal Controls: In the quarter ended June 30, 2004, the
Company did not make any significant changes in, nor take any corrective actions
regarding, its internal controls or other factors that could significantly
affect these controls.
17
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 Use Of Proceeds and Issuer Purchases of Equity
Securities
--------------------------------------------------------------------
Stock Repurchases. The Company did not repurchase any shares of its
outstanding Common Stock during the three months ended June 30, 2004.
In addition, The Company has no publicly announced plans to repurchase
its common stock.
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
--------------------------------
(a) 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)
31.1 Certification of the Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act.
31.2 Certification of the Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act.
32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act.
(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 filed September 1, 1998
and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the year ended March 31, 1993 and incorporated herein by reference.
18
Security Federal Corporation and Subsidiaries
Exhibits And Reports on Form 8-K, Continued
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended December 30, 1993 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Registration Statement on Form S-8
filed March 2, 2002 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's June 19, 2002 proxy statement and
incorporated herein by reference.
(b) Reports on Form 8-K.
Current Report on Form 8-K dated April 27, 2004 regarding the
Company's earnings release for the quarter ended March 31,
2004 (Items 7 and 12).
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 11, 2004 By: /s/Timothy W. Simmons
--------------- ------------------------------
Timothy W. Simmons
President
Duly Authorized Representative
Date: August 11, 2004 By: /s/Roy G. Lindburg
--------------- ------------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
19
EXHIBIT 31.1
Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
20
Certification
I, Timothy W. Simmons, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 11, 2004
/s/Timothy W. Simmons
-------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
21
EXHIBIT 31.2
Certification of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
22
Certification
I, Roy G. Lindburg, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of
the period covered by this report based on such evaluation and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 11, 2004
/s/Roy G. Lindburg
-------------------------------------
Roy G. Lindburg
Chief Financial Officer
23
EXHIBIT 32
Certification Pursuant to Section 906 of the Sarbanes Oxley Act
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:
1. the report fully complies with the requirements of Section 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
2. 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 11, 2004