SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-K/A
AMENDMENT NO. 1 TO FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-16120
SECURITY FEDERAL CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
South Carolina 57-08580504
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1705 Whiskey Road South, Aiken, South Carolina 29803
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (803) 641-3000
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Securities registered pursuant to Section 12(b)
of the Act: None
-----------------------
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, par value
$0.01 per share
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(Title of Class)
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
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As of June 15, 2004, there were issued and outstanding 2,533,291 shares
of the registrant's Common Stock. The aggregate market value of the voting
stock held by non-affiliates of the registrant, computed by reference to the
average of the bid and asked price of such stock as of September 30, 2003, was
$44.9 million. (The exclusion from such amount of the market value of the
shares owned by any person shall not be deemed an admission by the registrant
that such person is an affiliate of the registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the Fiscal
Year Ended March 31, 2004. (Parts I and II)
2. Portions of the Registrant's Proxy Statement for the 2004 Annual Meeting
of Stockholders. (Part III)
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A ("Amendment") amends the registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 2004 ("Original
Report"), and is being filed solely to include the Report of Independent
Registered Public Accounting Firm in Exhibit 13. The Report of Independent
Registered Public Accounting Firm was issued as of April 30, 2004 and appeared
in the printed Annual Report to Shareholders, but was inadvertently omitted in
the electronic version of the Original Report filed with the Securities and
Exchange Commission ("SEC") on June 25, 2004.
The information contained in the Original Report has not been updated to
reflect events and circumstances occurring since its original filing. Such
matters have been or will be addressed in reports filed with the SEC (other
than this Amendment) subsequent to the date of the Original Report. Pursuant
to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, the
registrant has restated in its entirety only the item of the Original Report
affected by this Amendment.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
(a) 1. Financial Statements.
--------------------
For a list of the financial statements filed as part of this
report see Part II - Item 8 of the Original Report.
2. Financial Statement Schedules.
-----------------------------
All schedules have been omitted as the required information
is either inapplicable or contained in the Consolidated
Financial Statements or related Notes contained in the Annual
Report filed as an exhibit hereto.
3. Exhibits:
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3.1 Articles of Incorporation, as amended (1)
3.2 Bylaws (2)
4 Instruments defining the rights of security holders,
including indentures (3)
10 Executive Compensation Plans and Arrangements:
Salary Continuation Agreements (4)
Amendment One to Salary Continuation Agreements (5)
1999 Stock Option Plan (2)
1987 Stock Option Plan (4)
2002 Stock Option Plan (6)
Incentive Compensation Plan (4)
13 Annual Report to Stockholders
21 Subsidiaries of Registrant
23 Consent of Elliott Davis, LLC
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
32 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act
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(1) Filed on June 26, 1998, as an exhibit to the Company's
Proxy Statement and incorporated herein by reference.
(2) Filed on March 2, 2000, as an exhibit to the Company's
Registration Statement on Form S-8 and incorporated
herein by reference.
(3) Filed on August 12, 1987, as an exhibit to the Company's
Registration Statement on Form 8-A and incorporated
herein by reference.
(4) Filed on June 28, 1993, as an exhibit to the Company's
Annual Report on Form 10-KSB and incorporated herein by
reference.
(5) Filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1993 and
incorporated herein by reference.
(6) Filed on June 19, 2002, as an exhibit to the Company's
Proxy Statement and incorporated herein by reference.
(b) Reports on Form 8-K.
During the three months ended March 31, 2004, the Company
filed three Current Reports on Form 8-K on the following
dates:
1. January 12, 2004 to report the appointment of J. Chris
Verenes, President of the Company's financial institution
subsidiary, Security Federal Bank, and its subsidiaries
Security Federal Trust, Inc., Security Federal
Investments, Inc. and Security Federal Insurance, Inc.
2. January 23, 2004 to report earnings for the quarter
ended December 31, 2003.
3. February 19, 2004 to report the sale of its Denmark,
South Carolina branch office to South Carolina Bank and
Trust, N. A. of Orangeburg, South Carolina.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: August 26, 2004 By: /s/ Timothy W. Simmons
-------------------------------------
Timothy W. Simmons
President, Chief Executive Officer
and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Timothy W. Simmons August 26, 2004
--------------------------------------
Timothy W. Simmons
President, Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/ Roy G. Lindburg August 26, 2004
--------------------------------------
Roy G. Lindburg
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ T. Clifton Weeks August 26, 2004
--------------------------------------
T. Clifton Weeks
Chairman of the Board and Director
By: /s/ J. Chris Verenes August 26, 2004
--------------------------------------
J. Chris Verenes
President of the Bank and Director of
the Company and the Bank
By: /s/ Gasper L. Toole III August 26, 2004
--------------------------------------
Gasper L. Toole III
Director
By: August __, 2004
--------------------------------------
Harry O. Weeks Jr.
Director
By: /s/ Robert E. Alexander August 26, 2004
--------------------------------------
Robert E. Alexander
Director
By: August __, 2004
--------------------------------------
Thomas L. Moore
Director
By: August __, 2004
--------------------------------------
William Clyburn
Director
INDEX TO EXHIBITS
Exhibit Number
- --------------
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Elliott Davis, LLC
31.1 Certification of Chief Executive Officer of Security Federal
Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
31.2 Certification of Chief Financial Officer of Security Federal
Corporation Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32 Certification of Chief Executive Officer and Chief Financial
Officer of Security Federal Corporation Pursuant to Section
906 of the Sarbanes-Oxley Act
Exhibit 13
Annual Report to Stockholders
Annual Report
March 31st, 2004
Security
Federal
Corporation
CONTENTS
Letter to Shareholders 3
Financial Highlights 4-6
Selected Consolidated Financial and Other Data 7
Management's Discussion and Analysis
of Financial Condition and Results of Operations 8
Report of Elliott Davis, LLC, Independent Auditors 23
Consolidated Balance Sheets 24
Consolidated Statements of Income 25
Consolidated Statements of Shareholders' Equity 26
& Comprehensive Income
Consolidated Statements of Cash Flows 27-28
Notes to Consolidated Financial Statements 29-49
Shareholders Information 50-51
Security Federal Bank Board of Directors 52-54
& Management Team
Security Federal Bank's Financial Service Subsidiaries 55
BUILDING COMMUNITY
In addition to meeting and exceeding many of its financial goals for the
fiscal year ending 2004, Security Federal Corporation achieved several
objectives designed to further enhance its customer base and promote solid
growth.
In September, the bank celebrated the grand opening of a new banking branch in
Lexington, South Carolina that further expands our service reach to customers
in the greater Columbia area. In January, the Board of Directors appointed J.
Chris Verenes as President of Security Federal Bank and its subsidiaries -
with a strong background in finance, accounting, strategic planning, business
development, marketing and government affairs, Chris has already proven to be
a positive addition to the leadership team.
In an effort to better serve customers and keep pace with new banking trends,
the bank updated its website to support online transaction services including
money transfer, bill paying, account access and check viewing. Now customers
can access their accounts 24 hours a day, seven days a week. Lastly, the
popular Looney Tunes Savings Club was expanded to serve over 4700 elementary
and middle school students in 17 schools. Created to teach fiscal skills and
promote financial responsibility, it has also been an excellent vehicle for
introducing services to families in our banking communities.
For over 80 years Security Federal's tradition of providing exceptional
customer service continues to be a strong and prosperous business strategy.
2
Fellow Shareholders:
Building our continued commitment to put customers first we are pleased to
report that Security Federal Corporation achieved record earnings for the
seventh consecutive year.
Security Federal Corporation announced earnings totaling $4.3 million or $1.70
per share (basic) for the year ending March 31, 2004 compared to $3.2 million
or $1.29 per share (basic) for the year ending March 31, 2003, an increase in
earnings of 32%. A portion of the increase in earnings was the result of the
sale of the Denmark, SC branch, which increased net income after tax and
contingencies by approximately $820,000. Excluding the gain from the branch
sale, which occurred in February 2004, earnings were a record $3.4 million
$1.37 per share (basic) for they year ending March 31, 2004, an increase of
6.6%. Total assets increased 19% to $528.0 million, net loans receivable
increased 6.9% to $259.9 million, and deposits increased 8.7% to $389.6
million at March 31, 2004 compared to March 31, 2003.
Putting customers first, building on solid business basics and honoring a
tradition of personal accountability have once again produced a prosperous
year. Thank you for your being a part of our continued success.
Sincerely, Sincerely,
/s/T. Clifton Weeks /s/Timothy W. Simmons
T. Clifton Weeks Timothy W. Simmons
Chairman President & Chief Executive Officer
3
FINANCIAL HIGHLIGHTS
Years Ended March 31,
2004 2003
Net Income $4,263,163 $3,231,161
Earnings Per Share - Basic 1.70 1.29
Book Value Per Share 13.30 11.98
Total Interest Income 23,011,005 23,659,833
Total Interest Expense 9,606,100 10,016,264
Net Interest Income Before Provision
For Loan Losses 13,404,905 13,643,569
Provision For Loan Losses 1,200,000 1,800,000
Net Income After Provision For Loan Losses 12,204,905 11,843,569
Net Interest Margin 2.84% 3.46%
Total Loans Originated 228,263,000 208,506,000
Adjustable Rate Loans As A Percentage Of
Total Gross Loans 52.1% 50.7%
4
FINANCIAL HIGHLIGHTS
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Net Income (In Thousands) $4,263 $3,231 $2,510 $2,127 $2,021
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Total Assets (In Millions) $ 528 $ 445 $ 376 $ 331 $ 305
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Return on Equity 13.67% 11.37% 9.97% 9.98% 10.41%
Allowance for Loan Losses (1) 2004 2003 2002 2001 2000
------ ------ ------ ------ ------
2.17% 1.98% 1.55% 1.19% 1.09%
(1) Allowance for losses as a percentage of total loans.
5
FINANCIAL HIGHLIGHTS
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Book Value Per Share $13.30 $11.98 $10.18 $ 9.43 $ 7.89
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Earnings Per Share - Basic $ 1.70 $ 1.29 $ 1.00 $ 0.85 $ 0.80
Security Federal Corporation Stock Prices
<c> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
3/2004 9/2003 3/2003 9/2002 3/2002 9/2001 3/2001 9/2000 3/2000 9/1999 3/1999 9/1998 3/1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
21.00 24.50 20.26 22.33 21.67 21.00 20.00 18.33 18.00 17.17 15.00 8.33 7.33
9/1997 3/1997 9/1996 3/1996 9/1995 3/1995 9/1994 3/1994 9/1993 3/1993 9/1992 3/1992 9/1991
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
7.33 5.17 4.83 4.54 4.13 3.65 3.53 3.37 2.83 2.75 2.59 2.54 2.46
3/1991 9/1990 3/1990 9/1989 3/1989 9/1988 3/1988 10/1987
- ------ ------ ------ ------ ------ ------ ------ -------
2.46 2.52 2.40 1.89 1.83 1.42 1.75 1.67
6
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Selected Consolidated Financial and Other Data
At Or For The Year Ended March 31,
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Balance Sheet Data (Dollars In Thousands, Except Per Share Data)
- -----------------------
Total Assets $528,005 $444,904 $376,320 $330,642 $304,802
Cash And Cash
Equivalents 6,749 8,239 11,528 12,616 7,417
Investment And Mortgage-
Backed Securities 245,715 182,117 118,898 74,405 91,531
Total Loans Receivable,
Net (1) 259,895 243,156 234,319 230,997 193,001
Deposits 389,593 358,474 309,038 257,410 228,823
Advances From Federal
Home Loan Bank 96,336 49,772 33,108 42,704 50,611
Total Shareholders'
Equity 33,472 30,040 25,401 23,500 19,759
Income Data
- -----------------------
Total Interest Income 23,011 23,660 24,632 24,153 19,805
Total Interest Expense 9,606 10,016 12,211 13,871 10,378
-------- -------- -------- -------- --------
Net Interest Income 13,405 13,644 12,421 10,282 9,427
Provision For Loan Losses 1,200 1,800 1,525 925 750
-------- -------- -------- -------- --------
Net Interest Income
After Provision For
Loan Losses 12,205 11,844 10,896 9,357 8,677
Other Income 5,235 3,811 3,465 2,739 2,296
General And
Administrative Expense 10,725 10,483 10,337 8,851 7,845
Income Taxes 2,452 1,941 1,514 1,118 1,107
-------- -------- -------- -------- --------
Net Income $ 4,263 $ 3,231 $ 2,510 $ 2,127 $ 2,021
======== ======== ======== ======== ========
Per Common Share Data
- -----------------------
Net Income Per Common
Share (Basic) $ 1.70 $ 1.29 $ 1.00 $ 0.85 $ 0.80
======== ======== ======== ======== ========
Cash Dividends Declared $ 0.08 $ 0.0602 $ 0.0536 $ 0.0536 $ 0.0536
======== ======== ======== ======== ========
Other Data
- -----------------------
Interest Rate Spread
Information:
Average During Period 2.66% 3.19% 3.42% 3.00% 3.19%
End Of Period 2.59% 3.00% 3.48% 3.11% 2.90%
Net Interest Margin (Net
Interest Income/Average
Earning Assets) 2.84% 3.46% 3.73% 3.38% 3.54%
Average Interest-Earning
Assets To Average
Interest-Bearing
Liabilities 109.05% 110.47% 108.80% 108.39% 109.11%
Equity To Total Assets 6.34% 6.75% 6.75% 7.11% 6.48%
Non-Performing Assets
To Total Assets (2) 0.40% 0.27% 0.40% 0.11% 0.40%
Return On Assets (Ratio
Of Net Income To Average
Total Assets) 0.87% 0.79% 0.71% 0.66% 0.72%
Return On Equity (Ratio
Of Net Income To Average
Equity) 13.67% 11.37% 9.97% 9.98% 10.41%
Equity To Assets Ratio
(Ratio Of Average Equity
To Average Total Assets) 6.36% 6.90% 7.14% 6.62% 6.93%
Dividend Pay-Out Ratio
On Common Shares 4.75% 4.67% 5.31% 6.31% 6.70%
Number Of Full-Service
Offices 11 11 11 11 10
(1) INCLUDES LOANS HELD FOR SALE.
(2) NON-PERFORMING ASSETS CONSIST OF NON-ACCRUAL LOANS AND REPOSSESSED
ASSETS.
7
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The following discussion is presented to provide the reader with an
understanding of the financial condition and results of operations of Security
Federal Corporation and its subsidiaries. The investment and other activities
of the parent company, Security Federal Corporation (the "Company"), have had
no significant impact on the results of operations for the periods presented
in the financial statements. The information presented in the following
discussion of financial results is indicative of the activities of Security
Federal Bank (the "Bank"), a wholly owned subsidiary of the Company. The Bank
is a federally chartered thrift that was founded in 1922. The Bank also has
three wholly owned subsidiaries, Security Federal Insurance Inc., Security
Federal Investments Inc., and Security Federal Trust Inc. that were formed in
the fiscal year ended March 31, 2002. Unless the context indicates otherwise,
references to the Company shall include the Bank and its subsidiaries.
The principal business of the Bank is accepting deposits from the general
public and originating consumer and commercial business loans as well as
mortgage loans that enable borrowers to purchase or refinance one to four
family residential real estate. The Bank also originates construction loans
on single-family residences, multi-family dwellings and projects, and
commercial real estate, as well as loans for the acquisition, development and
construction of residential subdivisions and commercial projects.
The Bank's net income is dependent on its interest rate spread which is the
difference between the average yield earned on its loan and investment
portfolios and the average rate paid on its deposits and borrowings. The
Bank's interest spread is impacted by interest rates, deposit flows, and loan
demands. Levels of non-interest income and operating expense are also
significant factors in earnings.
Forward-Looking Statements
This document, including information included or incorporated by reference,
contents, and future filings by the Company on Form 10-K, Form 10-Q, and Form
8-K, and future oral and written statements by the Company and its management
may contain forward-looking statements about the Company and its subsidiaries
which we believe are within the meaning of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements include, without
limitation: statements with respect to anticipated future operating and
financial performance; growth opportunities; interest rates; acquisition and
divestiture opportunities; and synergies, efficiencies, and cost-savings.
Words such as "may," "could," "should," "would," "believe," "anticipate,"
"estimate," "expect," "intend," "plan," and similar expressions are intended
to identify these forward-looking statements. Forward-looking statements by
the Company and its management are based on beliefs, plans, objectives, goals,
expectations, anticipations, estimates, and intentions of management and are
not guarantees of future performance. Factors which could affect results
include interest rate trends, the general economic climate in the Company's
market area and the nation as a whole, the ability of the Company to control
costs and expenses, deposit flows, demand for mortgages and other loans, real
estate values and vacancy rates, competition, pricing, loan delinquency rates
and changes in federal regulation. These factors should be considered in
evaluating "forward-looking statements," and undue reliance should not be
placed on any such statements. The Company disclaims any obligation to update
or revise any forward-looking statements based on the occurrence of future
events, the receipt of new information, or otherwise. The important factors
we discuss below and elsewhere in this document, identified in our filings
with the Securities and Exchange Commission ("SEC"), and presented by our
management from time to time could cause actual results to differ materially
from those indicated by the forward-looking statements made in this document.
Critical Accounting Policies
The Company has adopted various accounting policies which govern the
application of accounting principles generally accepted in the United States
in the preparation of the Company's financial statements. The significant
accounting policies of the Company are described in Note 1 of the Notes to the
Consolidated Financial Statements.
Certain accounting policies involve significant judgements and assumptions by
management, which have a material impact on the carrying value of certain
assets and liabilities; management considers such accounting policies to be
critical accounting policies. The judgements and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of
the judgements and assumptions made by management, actual results could differ
from these judgements and estimates that could have a material impact on the
carrying values of assets and liabilities and the results of operations of the
Company.
8
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Critical Accounting Policies, Continued
Of these significant accounting policies, the Company considers its policies
regarding the allowance for loan losses to be its most critical accounting
policy because of the significant degree of management judgement involved in
determining the amount of allowance for loan losses. The Company has
developed policies and procedures for assessing the adequacy of the allowance
for loan losses, recognizing that this process requires a number of
assumptions and estimates with respect to its loan portfolio. The Company's
assessments may be impacted in future periods by changes in economic
conditions, the impact of regulatory examinations, and the discovery of
information with respect to borrowers, which is not known to management at the
time of the issuance of the consolidated financial statements. Refer to the
discussion under the section entitled "Financial Condition" and "The Provision
for Loan Losses" section in the "Comparison of the Years Ended March 31, 2004
and 2003" herein for a further discussion of the Company's estimation process
and methodology related to the allowance for loan losses.
Asset and Liability Management
The Bank's program of asset and liability management seeks to limit the Bank's
vulnerability to material and prolonged increases or decreases in interest
rates, or "interest rate risk." The principal determinant of the exposure of
the Bank's earnings to interest rate risk is the timing difference ("gap")
between the repricing or maturity of the Bank's interest-earning assets and
the repricing or maturity of its interest-bearing liabilities. If the
maturities of the Bank's assets and liabilities were perfectly matched and the
interest rates borne by its assets and liabilities were equally flexible and
moved concurrently (neither of which is the case), the impact on net interest
income of any material and prolonged changes in interest rates would be
minimal.
A negative gap position generally has an adverse effect on net interest income
during periods of rising interest rates. A negative one-year gap position
occurs when the dollar amount of rate sensitive liabilities maturing or
repricing within one year exceeds the dollar amount of rate sensitive assets
maturing or repricing during that same period. As a result, during periods of
rising interest rates, the interest paid on interest-bearing liabilities will
increase faster than interest received from earning assets, thus reducing net
interest income. The reverse is true in periods of declining interest rates
resulting generally in an increase in net interest income.
The Bank's Board of Directors reviews the Interest Rate Exposure Report
generated for the Bank by the Office of Thrift Supervision. This report
measures the interest rate sensitivity of the Bank's net portfolio value (NPV)
on a quarterly basis under different interest rate scenarios. The Bank's
sensitivity measure is well within the Bank's policy on changes in NPV. The
Bank's asset and liability policies are directed toward maximizing long term
profitability while managing acceptable interest rate risk within the Bank's
policies.
At March 31, 2004, the negative mismatch of interest-earning assets repricing
or maturing within one year with interest-bearing liabilities repricing or
maturing within one year was $87.0 million or 16.5% of total assets compared
to $52.8 million or 11.9% at March 31, 2003. The increase in the negative gap
was attributable to an overall 12.9% increase in interest-bearing liabilities
repricing within one year compared to a smaller increase of 2.1% in financial
assets repricing within one year. The increase in interest-bearing
liabilities increasing within one year occurred as a result of increases in
money market, savings, and interest -bearing checking accounts totaling $55.3
million. These accounts are assumed to reprice within one year, where in
actuality, they may not entirely be that interest rate sensitive. Many
financial institutions use decay rates that spread those accounts out over
several interest rate time periods. Financial assets repricing within one
year had only a modest increase as a result of a rise in short-term treasury
rates which lengthened the anticipated call dates on the Company's callable
investments. For more information on the Bank's repricing position at March
31, 2004, see the tables on pages 11 and 12.
9
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Asset and Liability Management, Continued
During the past year, the Bank originated, for investment purposes,
approximately $47.3 million in adjustable rate residential real estate loans,
which are held for investment and not sold. The Bank's loan portfolio included
$130.4 million of adjustable rate consumer loans, commercial loans, and
mortgage loans or, approximately 52.1% of total gross loans at March 31, 2004.
The Bank also originated a total of $121.9 million in consumer and commercial
loans, which are usually short term in nature. During fiscal 2004, 93.5% of
total new loan originations on loans held for investment were comprised of
consumer, commercial, and adjustable rate mortgage loans ("ARMs") compared to
92.7% of originations of loans held for investment in fiscal 2003. The Bank's
portfolio of consumer and commercial loans was $166.8 million at March 31,
2004, $153.6 million at March 31, 2003, and $147.2 million at March 31, 2002.
Consumer and commercial loans combined were 59.9% of total loans at March 31,
2004, 59.7% at March 31, 2003, and 59.0% at March 31, 2002.
The Bank originated $11.8 million, $10.5 million, and $9.1 million in fixed
rate residential loans, most of which were residential lot loans with terms of
two to five years, in fiscal 2004, 2003, and 2002, respectively. At March 31,
2004, these fixed rate residential lot loans, including construction loans
with terms of one year or less, amounted to $32.5 million or 11.7% of the
total loan portfolio compared to $32.7 million or 12.7% at the end of the
previous fiscal year. At March 31, 2003, the Bank held approximately $11.4
million in longer term fixed rate residential mortgage loans. These loans,
which amounted to 4.1% of the total loan portfolio, had converted from ARM
loans to fixed rate loans during the previous 24 months. These fixed rate
loans have remaining maturities ranging from 10 to 29 years. The Bank has
approximately $16.4 million remaining in convertible ARM loans that could
convert to fixed rate loans over the next 36 months. On new originations,
the Bank sells virtually all of its 15 and 30 year fixed rate mortgage loans
at origination. In fiscal 2001, the Bank decided to no longer service loans
for the Federal Home Loan Mortgage Corporation ("Freddie Mac") or other
institutional investors, because of the fixed cost of servicing those loans,
while the income stream generated by that portfolio was decreasing as a result
of prepayments. Thus, during fiscal 2004, 2003, and 2002, the Bank sold its
new fixed rate residential loan originations exclusively on a service-released
basis. Fixed rate residential loans sold to Freddie Mac and other
institutional investors, on a service-released basis, totaled $63.5 million in
fiscal 2004, $80.3 million in fiscal 2003, and $84.5 million in fiscal 2002.
Certificates of deposit of $100,000 or more "Jumbo Certificates" are normally
considered to be interest rate sensitive because of their relatively short
maturities. Many financial institutions have used Jumbo Certificates to
manage interest rate sensitivity and liquidity. The Bank has not relied on
Jumbo Certificates for liquidity or asset liability management. As of March
31, 2004, the Bank had $47.0 million outstanding in Jumbo Certificates
compared to $44.4 million at March 31, 2003. The Bank has no brokered
deposits.
The following table sets forth the maturity schedule of certificates of
deposit with balances of $100,000 or greater at March 31, 2004.
At March 31, 2004
(In thousands)
Within 3 Months $ 9,803
After 3, Within 6 Months 14,513
After 6, Within 12 Months 7,015
After 12 Months 15,711
---------
$ 47,042
=========
10
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Asset and Liability Management, Continued
The following table sets forth the Bank's interest-bearing liabilities and
interest-earning assets repricing or maturing within one year. The table on
the following page presents the Bank's entire interest-bearing liabilities and
interest-earning assets into repricing or maturity time periods. Both tables
present adjustable rate loans in the periods they are scheduled to reprice,
not mature. Both tables also assume investments reprice at the earlier of
maturity; the likely call date, if any, based on current interest rates; or
the next scheduled interest rate change, if any. NOW accounts, money market
accounts, and regular savings accounts are deemed to reprice in the less than
three-months category.
At March 31
----------------------
2004 2003
-------- --------
(Dollars in Thousands)
Loans (1) $146,932 $143,398
Mortgage-Backed Securities:
Held To Maturity 103 187
Available For Sale 68,421 56,054
Investment Securities:
Held To Maturity 25,974 16,159
Available For Sale 16,900 37,116
Other Interest-Earning Assets 303 339
-------- --------
Total Interest Rate Sensitive Assets
Repricing Within 1 Year $258,633 $253,253
-------- --------
Deposits 321,785 295,145
FHLB Advances And Other Borrowed Money 23,813 10,893
-------- --------
Total Interest Rate Sensitive Liabilities
Repricing Within 1 Year $345,598 $306,038
-------- --------
Gap $(86,965) $(52,785)
======== ========
Interest Rate Sensitive Assets/Interest Rate
Sensitive Liabilities 74.84% 82.75%
Gap As A Percent Of Total Assets (16.5)% (11.9)%
(1) LOANS ARE NET OF UNDISBURSED FUNDS AND LOANS IN PROCESS.
11
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Asset and Liability Management, Continued
The following table sets forth the interest sensitivity of the Bank's assets
and liabilities at March 31, 2004, on the basis of the factors and assumptions
set forth in the table on the previous page.
< Three 3 - 12 1 - 3 3 - 5 5 - 10 > 10 Years
Months Months Years Years Years Years Total
--------- -------- -------- -------- -------- -------- --------
<s> <c> <c> <c> <c> <c> <c> <c>
Interest-Earnings Assets
Loans (1) $ 86,619 $ 60,313 $ 77,671 $ 25,236 $ 10,092 $ 5,892 $265,823
Mortgage-Backed Securities:
Held To Maturity, At Cost 29 74 197 50 - - 350
Available For Sale, At
Fair Value 22,038 46,383 49,318 20,853 16,424 2,496 157,512
Investment Securities: (2)
Held To Maturity, At Cost 5,000 20,974 34,975 7,976 2,029 - 70,954
Available For Sale, At
Fair Value 4,633 12,267 - - - - 16,900
FHLB Stock, At Cost - - 4,817 - - - 4,817
Other Interest-Earning
Assets 303 - - - - - 303
--------- -------- -------- -------- -------- -------- --------
Total Financial Assets $ 118,622 $140,011 $166,978 $ 54,115 $ 28,545 $ 8,388 $516,659
========= ======== ======== ======== ======== ======== ========
Interest-Bearing Liabilities
Deposits:
Certificate Accounts $ 34,890 $ 54,742 $ 24,568 $ 18,700 $ - $ - $132,900
NOW Accounts 56,199 - - - - - 56,199
Money Market Accounts 158,587 - - - - - 158,587
Passbook Accounts 17,367 - - - - - 17,367
Borrowings 13,777 10,036 58,000 20,000 - - 101,813
--------- -------- -------- -------- -------- -------- --------
Total Interest-Bearing
Liabilities $ 280,820 $ 64,778 $ 82,568 $ 38,700 $ - $ - $466,866
========= ======== ======== ======== ======== ======== ========
Current Period Gap $(162,198) $ 75,233 $ 84,410 $ 15,415 $ 28,545 $ 8,388 $ 49,793
Cumulative Gap $(162,198) $(86,965) $ (2,555) $ 12,860 $ 41,405 $ 49,793 $ 49,793
Cumulative Gap As A Percent
Of Total Assets (30.7)% (16.5)% (0.5)% 2.4% 7.9% 9.4% 9.4%
(1) LOANS ARE NET OF UNDISBURSED FUNDS AND LOANS IN PROCESS.
(2) CALLABLE SECURITIES ARE SHOWN AT THEIR LIKELY CALL DATES BASED ON MANAGEMENT'S ESTIMATES AT MARCH 31,
2004.
In evaluating the Bank's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing tables must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates. Additionally, the interest rates
of certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates. Loan repayment rates and withdrawals of deposits
will likely differ substantially from the assumed rates previously set forth
in the event of significant changes in interest rates due to the option of
borrowers to prepay their loans and the ability of depositors to withdraw
funds prior to maturity. Further, certain assets, such as ARMs, have features
that restrict changes in interest rates on a short-term basis as well as over
the life of the asset.
12
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition
Total assets at March 31, 2004 were $528.0 million, an increase of $83.1
million or 18.7% from March 31, 2003. This increase was the result of a
modest increase in net loans receivable and a significant increase in total
investment and mortgage-backed securities. The Bank sold its Denmark, South
Carolina branch office in February 2004. See Note 2 of the Notes to
Consolidated Financial Statements included herein for additional information.
The Denmark branch was the Bank's only branch in Bamberg County. The Bank
plans to explore expanding its branch network in Aiken and Lexington Counties
during the next few years.
Total net loans receivable were $259.9 million at March 31, 2004, an increase
of $16.7 million or 6.9% from $243.2 million at March 31, 2003. Residential
real estate loans increased $9.8 million or 9.8% to $109.7 million at March
31, 2004. Typically, long term, newly originated fixed rate mortgage loans
are not retained in the portfolio but are sold immediately. ARMs are
typically retained in the portfolio. At March 31, 2004, the Bank held 60.6%
of its residential mortgage loans in ARMs, while it had 39.4% in fixed rate
mortgages. Consumer loans decreased $953,000 or 2.0% while commercial
business and commercial real estate loans increased to $121.1 million at
fiscal year end from $107.0 million at March 31, 2003; an increase of $14.1
million or 13.2%. Loans held for sale, which were $1.7 million at March 31,
2004, decreased $2.0 million from the previous fiscal year end. Total
investments and mortgage-backed securities increased $63.6 million or 34.9% as
a result of the modest growth in net loans receivable, strong deposit growth,
and arbitrage strategies with FHLB advances.
Repossessed assets decreased $101,000 to $51,000 at March 31, 2004 from
$152,000 at March 31, 2003. Repossessed assets at March 31, 2004 consisted of
four automobiles.
Non-accrual loans totaled $2.0 million at March 31, 2004 compared to $1.0
million a year earlier. Non-accrual loans averaged 1.8 million in fiscal 2004
compared to $1.1 million during fiscal 2003. The Bank classifies all loans as
non-accrual when they become 90 days or more delinquent. The Bank had seven
loans totaling $646,000 at March 31, 2004 that were troubled debt
restructurings compared to four loans of $674,000 at March 31, 2003. One
$9,000 commercial loan was 30 days delinquent and a $201,000 commercial loan
was on non-accrual. The seven troubled debt restructurings consisted of three
consumer loans secured by residential dwellings totaling $355,000, a $9,000
commercial loan secured by a second mortgage on a residence, a $58,000
commercial loan secured by two rental properties, a $23,000 unsecured
commercial loan and a $201,000 commercial loan secured by commercial real
estate. All troubled debt restructurings are also considered impaired. At
March 31, 2004, the Bank held $1.4 million in impaired loans compared to $1.2
million at March 31, 2003.
The Bank reviews its loan portfolio and allowance for loan losses on a monthly
basis. Future additions to the Bank's allowance for loan losses are dependent
on, among other things, the performance of the Bank's loan portfolio, the
economy, changes in real estate values, and interest rates. There can be no
assurance that additions to the allowance will not be required in future
periods. Management continually monitors its loan portfolio for the impact of
local economic changes. The ratio of allowance for loan losses to total loans
was 2.17% at March 31, 2004 compared to 1.98% at March 31, 2003.
Deposits at the Bank increased $31.1 million or 8.7% to $389.6 million at
March 31, 2004 from $358.5 million at March 31, 2003. The Bank had tremendous
success in attracting money market accounts and certificate of deposit
accounts with aggressive pricing and advertising. Advances from the Federal
Home Loan Bank ("FHLB") increased to $96.3 million at March 31, 2004 from
$49.8 million a year earlier, an increase of $46.5 million. The Bank utilized
the majority of the increase in advances to use arbitrage strategies with
investments. Other borrowed money, which consists of retail repurchase
agreements, increased $1.3 million to $5.5 million at March 31, 2004 compared
to $4.2 million at March 31, 2003.
Total shareholders' equity was $33.5 million at March 31, 2004, an increase of
$3.5 million or 11.4% compared to $30.0 million a year earlier. The increase
was attributable to net income of $4.3 million and a decrease in the employee
stock ownership debt of $108,000, offset partially by a net decrease in
accumulated other comprehensive income of $755,000 and $203,000 in dividends
paid.
13
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The following table presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table also distinguishes between the
changes related to higher or lower outstanding balances and the changes due to
the volatility of interest rates. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to: (1) changes in rate (changes in rate multiplied by prior year
volume); (2) changes in volume (changes in volume multiplied by prior year
rate); and (3) net change (the sum of the prior columns). For purposes of
this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume
and the change due to rate.
Fiscal Year 2004 Compared To 2003 Fiscal Year 2003 Compared To 2002
---------------------------------- ------------------------------------
Volume Rate Net Volume Rate Net
------- -------- -------- --------- -------- -------
(In Thousands)
<s> <c> <c> <c> <c> <c> <c>
Interest-Earning Assets:
Loans: (1)
Real Estate Loans $ 142 $ (864) $ (722) $ (1,059) $ (495) $ (1,554)
Other Loans 448 (1,206) (758) (2,316) 1,336 (980)
------- -------- -------- -------- -------- --------
Total Loans 590 (2,070) (1,480) (3,375) 841 (2,534)
Mortgage-Backed Securities (2) 2,160 (1,134) 1,026 1,312 (612) 700
Investments (2) 396 (562) (166) 1,423 (527) 896
Other Interest-Earning Assets (21) (7) (28) 21 (55) (34)
------- -------- -------- -------- -------- --------
Total Interest-Earning Assets $ 3,125 $ (3,773) $ (648) $ (619) $ (353) $ (972)
======= ======== ======== ======== ======== ========
Interest-Bearing Liabilities:
Deposits:
Certificate Accounts $ (324) $ (1,196) $ (1,520) $ 352 $ (2,743) $ (2,391)
NOW Accounts 32 (10) 22 32 (24) 8
Money Market Accounts 1,041 (441) 600 796 (661) 135
Savings Accounts 19 (82) (63) 46 (92) (46)
------- -------- -------- -------- -------- --------
Total Deposits 768 (1,729) (961) 1,226 (3,520) (2,294)
Borrowings 1,310 (759) 551 420 (322) 98
------- -------- -------- -------- -------- --------
Total Interest-Bearing
Liabilities 2,078 (2,488) (410) 1,646 (3,842) (2,196)
------- -------- -------- -------- -------- --------
Effect On Net Income $ 1,047 $ (1,285) $ (238) $ (2,265) $ 3,489 $ 1,224
======= ======== ======== ======== ======== ========
(1) INTEREST ON NON-ACCRUAL LOANS IS NOT INCLUDED IN INCOME, ALTHOUGH THEIR LOAN BALANCES ARE INCLUDED IN
AVERAGE LOANS OUTSTANDING.
(2) SECURITIES AVAILABLE FOR SALE ARE COMPUTED USING THEIR HISTORICAL COST.
14
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations, Continued
The following table presents the total dollar amount of interest income from
average interest-earning assets for the periods indicated and the resultant
yields as well as the interest expense on average interest-bearing liabilities
expressed both in dollars and rates. No tax equivalent adjustments were made.
Averages For Fiscal Years Ended March 31,
-----------------------------------------------------------------------------------
Yield/ 2004 2003 2002
Rate At -------------------------- -------------------------- -------------------------
March 31, Average Yield/ Average Yield/ Average Yield/
2004 Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- ------- -------- ------ ------- -------- ------ ------- -------- ------
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
(Dollars in Thousands)
Interest-Earning
Assets:
Mortgage
Loans 5.47% $ 92,824 $ 5,557 5.99% $ 90,729 $ 6,279 6.92% $105,676 $ 7,833 7.41%
Other Loans 6.01% 152,922 9,892 6.47% 146,581 10,650 7.27% 130,359 11,630 8.92%
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total Loans
(1) 5.80% 245,746 15,449 6.29% 237,310 16,929 7.13% 236,035 19,463 8.25%
Mortgage-Backed
Securities
(2) 3.79% 139,025 4,479 3.22% 77,911 3,453 4.43% 50,045 2,753 5.50%
Investments
(2) 3.46% 85,480 3,067 3.59% 75,468 3,233 4.28% 43,924 2,337 5.32%
Other
Interest-
Earning
Assets 1.21% 1,542 16 1.04% 3,478 44 1.27% 2,598 79 3.04%
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total Interest-
Earning Assets 4.77% $471,793 $23,011 4.88% $394,167 $23,659 6.00% $332,602 $24,632 7.41%
==== ======== ======= ==== ======== ======= ==== ======== ======= ====
Interest-
Bearing
Liabilities:
Certificate
Accounts 2.26% $143,986 $ 3,482 2.42% $154,614 $ 5,002 3.24% $147,263 $ 7,393 5.02%
NOW Accounts 0.65% 57,825 354 0.61% 52,455 332 0.63% 47,691 324 0.68%
Money Market
Accts. 1.97% 135,190 2,718 2.01% 86,093 2,118 2.46% 57,804 1,983 3.43%
Savings
Accounts 0.98% 17,291 174 1.01% 15,859 237 1.49% 13,418 283 2.11%
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total
Interest-
Bearing
Accounts 1.83% 354,292 6,728 1.90% 309,021 7,689 2.49% 266,176 9,983 3.75%
Other
Borrowings 0.93% 5,361 52 0.97% 5,663 89 1.57% 4,187 115 2.75%
FHLB
Advances 3.59% 72,995 2,826 3.87% 42,123 2,238 5.31% 35,351 2,114 5.98%
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total Interest-
Bearing
Liabilities 2.18% $432,648 $ 9,606 2.22% $356,807 $10,016 2.81% $305,714 $12,212 3.99%
==== ======== ======= ==== ======== ======= ==== ======== ======= ====
Net Interest
Income $13,405 $13,643 $12,420
======= ======= =======
Interest Rate
Spread 2.59% 2.66% 3.19% 3.42%
==== ==== ==== ====
Net Yield On
Earning
Assets 2.84% 3.46% 3.73%
==== ==== ====
(1) INTEREST ON NON-ACCRUAL LOANS IS NOT INCLUDED IN INCOME, ALTHOUGH THEIR LOAN BALANCES ARE INCLUDED IN
AVERAGE LOANS OUTSTANDING.
(2) SECURITIES AVAILABLE FOR SALE ARE COMPUTED USING THEIR HISTORICAL COST.
15
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of the Years Ended March 31, 2004 and 2003
General
The Company earned record net income of $4.3 million for the year ended March
31, 2004, an increase of $1.0 million or 31.9% over net income of for the year
ended March 31, 2003. This marked the seventh consecutive year of record
earnings. The primary reason for the increased earnings was a branch sale
that netted $820,000 after tax and contingencies and a decrease in the
provision for loan losses of $600,000 offset in part by a decrease of $326,000
in the gain on sale of mortgage loans and an increase of $242,000 in general
and administrative expenses. Without the branch sale, earnings for fiscal
2004 would have been a record $3.4 million or a 6.6% increase from the
previous year.
Net Interest Income
Net interest income decreased $239,000 or 1.8% to $13.4 million in fiscal 2004
compared to $13.6 million in fiscal 2003. The decrease was attributable to a
shrinking interest rate spread. The Bank's interest rate spread decreased 53
basis points to 2.66% during fiscal 2004. The yield of average earning assets
decreased 112 basis points to 4.88%, while the cost of average interest
bearing liabilities decreased 59 basis points to 2.22%.
Interest income on loans decreased $1.5 million to $15.4 million during the
year ended March 31, 2004 compared to $16.9 million during fiscal 2003. The
decrease was attributable to the decrease in overall interest rates charged on
the Bank's loans during fiscal 2004 and a decrease in the yields earned on
average total loans of 0.84%. Average total loan balances during fiscal 2004
and 2003 increased $8.4 million. Interest income on investment securities,
mortgage-backed securities, and other investments increased $832,000 as a
result of a $69.2 million, or 44.1% increase in aggregate average balances
during fiscal 2004 compared with 2003. Consistent with general market
conditions, the yields on aggregate investments and mortgage-backed securities
decreased by 94 basis points in fiscal 2004 compared to 2003.
Interest expense on deposits decreased $961,000 or 12.5% during the year ended
March 31, 2004 compared to the year ended March 31, 2003. Average interest
bearing deposits increased $45.3 million while the average cost of those
deposits decreased 59 basis points during the year. Interest expense on FHLB
advances and other borrowings increased $551,000 or 23.7% during fiscal 2004
compared to 2003. The increase was a result of an increase in average FHLB
advances outstanding during the year of $30.9 million offset partially by a
decrease in the weighted average interest rate paid on FHLB advances of 144
basis points.
Provision for Loan Losses
The Company's provision for loan losses decreased $600,000 to $1.2 million
during the year ended March 31, 2004 from $1.8 million in fiscal 2003. During
fiscal year 2003, the bank's internal review mechanism had identified several
loans as potential problem loans. Management provided extra funding to the
allowance for loan losses to cover these loans. The amount of the provision
is determined by management's on-going monthly analysis of the loan portfolio.
Management uses three methods to measure the estimate of the adequacy of the
allowance for loan losses. These methods incorporate percentage of classified
loans, five-year averages of historical loan losses in each loan category, and
current economic trends, and assign percentage targets of reserves in each
loan category. Management has used all three methods for the past five fiscal
years.
Non-accrual loans, which are loans delinquent 90 days or more, were $2.0
million at March 31, 2004 compared to $1.0 million at March 31, 2003. Net
charge-offs were $347,000 in fiscal 2004 compared to $578,000 in fiscal 2003.
The ratio of the allowance for loan losses to total loans at March 31, 2004
was 2.17% compared to 1.98% at March 31, 2003. Management believes the
allowance for loan losses is adequate based on its best estimates of the
losses inherent in the loan portfolio, although there can be no guarantee as
to these estimates. In addition, bank regulatory agencies may require
additions to the allowance for loan losses based on their judgments and
estimates as part of their examination process. Because the allowance for
loan losses is an estimate, there can be no guarantee that actual loan losses
would not exceed the allowance for loan losses or that additional increases in
the allowance for loan losses will not be required in the future.
16
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Other Income
Other income increased $1.4 million from $3.8 million during fiscal 2003 to
$5.2 million during fiscal 2004 as a result of the before tax and
contingencies gain on the sale of the Denmark, South Carolina branch of $1.5
million. Without the branch sale, other income would have decreased $98,000
or 2.6%. Gain on sale of loans decreased $326,000 to $1.3 million during
fiscal 2004 compared to fiscal 2003 a result of a decline in re-finances in
the mortgage industry. Loan servicing fees increased $5,000 or 2.2% during
fiscal 2004. Service fees on deposit accounts increased $78,000 or 6.2% a
result of growth in demand deposit accounts. Other miscellaneous income
including trust fees, life and casualty insurance commissions, annuity and
investment brokerage commissions, credit life insurance, and other
miscellaneous income increased $142,000 or 21.3% to $811,000 during fiscal
2004 compared to $669,000 during fiscal 2003. The Bank's three financial
subsidiaries, Security Federal Insurance, Inc., Security Federal Investments,
Inc., and Security Federal Trust, Inc., began operating in the latter part of
the fiscal year ended March 31, 2002. Security Federal Insurance, Inc. is an
insurance agency handling property and casualty insurance and life and health
insurance. It became profitable during the fiscal year ended March 31, 2004.
Security Federal Investments, Inc. markets mutual funds, discount brokerage,
and annuities. Security Federal Trust, Inc., is a full-service trust company.
Both companies have not yet attained profitability.
General and Administrative Expenses
General and administrative expenses increased $242,000 or 2.3% to $10.7
million during the year ended March 31, 2004 compared to $10.5 million during
the same period one year earlier primarily a result of a $200,000 contingency
expensed for the sale of the Denmark, South Caroline branch office. Without
that expense, general and administrative expenses would have increased only
$42,000 or 0.4%. Compensation and employee benefits increased $69,000 or 1.2%
a result of normal annual salary adjustments. Occupancy expense increased
$172,000 or 21.1% due to the opening of the new Lexington, South Carolina
branch office. Advertising expense decreased $5,000 while depreciation and
maintenance of equipment expense increased $32,000 or 3.0% and FDIC
insurance premiums increased $3,000 or 5.3% to $56,000. Amortization of
intangibles expense decreased $185,000 to zero for fiscal 2004. At March 31,
2004, the Company has no intangible assets on its balance sheet. Excluding
the branch sale contingency expense of $200,000, other miscellaneous expenses,
which encompasses repossessed assets expense, legal, professional, and
consulting expenses, stationery and office supplies, and other sundry expenses
decreased $43,000 or 1.9% during fiscal 2004.
Income Taxes
The provision for income taxes increased $511,000 to $2.4 million during the
year ended March 31, 2004 compared to $1.9 million for the year ended March
31, 2003 a result of an increase in taxable income. The effective tax rate
was 36.5% for fiscal 2004 and 37.5% for fiscal 2003.
17
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of the Years Ended March 31, 2003 and 2002
General
The Company earned record net income of $3.2 million for the year ended March
31, 2003, an increase of $722,000 or 28.8% over net income of $2.5 million for
the year ended March 31, 2002. This marked the sixth consecutive year of
record earnings. The primary reason for the increased earnings was an
increase in net interest income and other income offset in part by increases
in the provision for loan losses.
Net Interest Income
Net interest income increased $1.2 million to $13.6 million in fiscal 2003
compared to $12.4 million in fiscal 2002. The increase was a result of a
$61.6 million increase in total average interest-earning assets in 2003
compared with 2002. The Bank's net yield on earning assets decreased 27 basis
points during the year primarily as a result of the decline in market interest
rates in calendar year 2002; however the effect of the decrease on net
interest income was more than offset by the 18.5% increase in total average
interest-bearing assets.
Interest income on loans decreased $2.5 million during the year ended March
31, 2003 compared to fiscal 2002. The decrease was attributable to the
decrease in overall interest rates charged on the Bank's loans during fiscal
2003 and a decrease in the yields earned on average total loans of 1.12%.
Average total loan balances during fiscal 2003 and 2002 were relatively
stable. Interest income on investment securities, mortgage-backed securities,
and other investments increased $1.6 million as a result of a $60.3 million,
or 62.4% increase in aggregate average balances during fiscal 2003 compared
with 2002. Consistent with general market conditions, the yields on aggregate
investments and mortgage-backed securities decreased by 1.06% in fiscal 2003
compared to 2002.
Interest expense on deposits decreased $2.3 million during the year ended
March 31, 2003 compared to the year ended March 31, 2002. Average interest
bearing deposits increased $42.8 million while the average cost of those
deposits decreased 1.26% during the year. Interest expense on FHLB advances
and other borrowings increased $98,000 during fiscal 2003 compared to 2002.
The increase was as a result of an increase in the average of other borrowings
and FHLB advances outstanding during the year of $8.2 million offset partially
by a decrease in interest rates on FHLB advances of 67 basis points. The
total average cost of borrowings decreased 77 basis points in fiscal 2003
compared to fiscal 2002.
Provision for Loan Losses
The Company's provision for loan losses increased $275,000 to $1.8 million
during the year ended March 31, 2003. The amount of the provision is
determined by management's on-going monthly analysis of the loan portfolio.
Management uses three methods to measure the estimate of the adequacy of the
allowance for loan losses. These methods incorporate percentage of classified
loans, five-year averages of historical loan losses in each loan category, and
current economic trends, and assign percentage targets of reserves in each
loan category. Management has used all three methods for the past four fiscal
years.
Non-accrual loans, which are loans delinquent 90 days or more, were $1.0
million at March 31, 2003 compared to $1.4 million at March 31, 2002. Net
charge-offs were $578,000 in fiscal 2003 compared to $620,000 in fiscal 2002.
The ratio of the allowance for loan losses to total loans at March 31, 2003
was 1.98% compared to 1.55% at March 31, 2002. Management felt it prudent to
increase the provision due to the predicted general slowing of the national
economy, the cyclical nature of economic business trends, the growing
percentage of commercial loans in the portfolio compared to residential
mortgage loans, and the entrance into a new loan market for the Bank the prior
year. Management believes the allowance for loan losses is adequate based on
its best estimates of the losses inherent in the loan portfolio, although
there can be no guarantee as to these estimates. In addition, bank regulatory
agencies may require additions to the allowance for loan losses based on their
judgments and estimates as part of their examination process. Because the
allowance for loan losses is an estimate, there can be no guarantee that
actual loan losses would not exceed the allowance for loan losses or that
additional increases in the allowance for loan losses will not be required in
the future.
18
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Other Income
Other income increased $346,000 or 10.0% from $3.5 million during fiscal 2002
to $3.8 million during fiscal 2003. Gain on sale of loans increased $134,000
to $1.7 million during fiscal 2003 compared to $1.5 million during fiscal
2002. Proceeds of loans held for sale decreased $4.0 million in fiscal year
2003 compared to the previous year; however, a concerted effort to better
manage the Bank's secondary market sales resulted in better pricing in fiscal
year 2003 compared to 2002. Loan servicing fees increased $11,000. Service
fees on deposit accounts increased $106,000 as a result the growth in demand
deposit accounts. Other miscellaneous income including credit life insurance,
annuity, and investment brokerage commissions, and other miscellaneous income
increased $122,000 or 22.3% during fiscal 2003.
General and Administrative Expenses
General and administrative expenses increased $146,000 or 1.4% to $10.5
million during the year ended March 31, 2003 compared to $10.3 million during
the same period one year earlier. Compensation and employee benefits
increased $149,000 or 2.6% as a result of normal annual salary adjustments.
Occupancy expense increased $6,000 or less than 1.0%. Advertising expense
increased $41,000 during fiscal 2003 due to the promotion of the Bank's
financial service subsidiaries and the advertisement of the Bank's deposit
rates. Depreciation and maintenance of equipment expense decreased $45,000 or
4.1%. Other miscellaneous expenses encompassing repossessed assets expense,
legal, professional, and consulting expenses, stationery and office supplies,
and other sundry expenses increased $271,000 or 14.0% during fiscal 2003
primarily as a result of slight increases in most of the above mentioned
expenses.
Income Taxes
The provision for income taxes increased $427,000 during the year ended March
31, 2003 compared to the year ended March 31, 2002 as a result of an increase
in taxable income. The effective tax rate was 37.5% for fiscal 2003 and 37.6%
for fiscal 2002.
19
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Regulatory Capital
The following table reconciles the Bank's shareholders' equity to its various
regulatory capital positions:
March 31,
------------------------
2004 2003
-------- --------
(In Thousands)
Shareholders' Equity (1) (2) $ 32,140 $ 28,879
Reduction For Goodwill And Other Intangibles - -
-------- --------
Tangible Capital 32,140 28,879
-------- --------
Qualifying Core Deposit Intangibles - -
Core Capital 32,140 28,879
-------- --------
Supplemental Capital 3,412 3,064
Less Assets Required To Be Deducted 54 152
-------- --------
Total Risk-Based Capital $ 35,498 $ 31,791
======== ========
(1) FOR FISCAL 2004 AND 2003, EXCLUDES UNREALIZED GAINS OF $690,000 AND $1.4
MILLION, RESPECTIVELY ON AVAILABLE FOR SALE SECURITIES.
(2) FOR FISCAL 2004 AND 2003, EXCLUDES EQUITY OF THE COMPANY.
The following table compares the Bank's capital levels relative to regulatory
requirements at March 31, 2004:
Amount Percent Actual Actual Excess Excess
Required Required Amount Percent Amount Percent
-------- -------- ------ ------- ------- -------
(Dollars in Thousands)
Tangible Capital $ 10,546 2.0% $ 32,140 6.1% $ 21,594 4.1%
Tier 1 Leverage
(Core) Capital 21,093 4.0% 32,140 6.1% 11,047 2.1%
Tier 1 Risk-Based
(Core) Capital 10,917 4.0% 32,140 11.8% 21,223 7.8%
Total Risk-Based
Capital 21,834 8.0% 35,498 13.0% 13,664 5.0%
20
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
Liquidity refers to the ability of the Bank to generate sufficient cash flows
to fund current loan demand, repay maturing borrowings, fund maturing deposit
withdrawals, and meet operating expenses. The Bank's primary sources of funds
include loan repayments, loan sales, increased deposits, advances from the
FHLB, and cash flow generated from operations. The need for funds varies
among periods depending on funding needs as well as the rate of amortization
and prepayment on loans. The use of FHLB advances varies depending on loan
demand, deposit inflows, and the use of investment leverage strategies to
increase net interest income.
The principal use of the Bank's funds is the origination of mortgages and
other loans and the purchase of investments and mortgage-backed securities.
Loan originations on loans held for investment were $180.9 million in fiscal
2004 compared to $145.3 million in fiscal 2003 and $128.3 million in fiscal
2002. Purchases of investments and mortgage-backed securities were $200.9
million in fiscal 2004 compared to $168.2 million in fiscal 2003 and $104.0
million in fiscal 2002.
Outstanding loan commitments for the Bank's residential mortgage loan
portfolio amounted to $429,000 at March 31, 2004 compared to $200,000 at March
31, 2003. Those commitments were for adjustable rate mortgage loans in which
the commitment generally expires in 45 days. In addition, unused lines of
credit on home equity loans, credit cards, and commercial loans amounted to
$41.9 million at March 31, 2004. Home equity loans are made on a floating
rate basis with final maturities of 10 to 15 years. Credit cards are
generally made on a floating rate basis, and are renewed annually or every
other year. Management does not anticipate that the percentage of funds drawn
on unused lines of credit will increase substantially over amounts currently
utilized. In addition to the above commitments the Bank has undisbursed
loans-in-process of $12.4 million at March 31, 2004 which will disburse over
an average of 90 days. These commitments to originate loans and future
advances of lines of credit are expected to be provided from loan
amortizations and prepayments, deposit inflows, maturing investments and
short-term borrowing capacity.
Management believes that liquidity during fiscal 2005 can be met through the
Bank's deposit base, which increased $31.1 million during fiscal 2004, and
from maturing investments. Also, the Bank has another $35.7 million in unused
borrowing capacity at FHLB.
Historically the Bank's cash flow from operating activities has been
relatively stable. The cash flows from investing activities have had a trend
of increasing outflows as a result of 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. See "Consolidated Statements of Cash Flows" in the
Consolidated Financial Statements.
21
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Contractual Obligations
In the normal course of business, the Company enters into contractual
obligations that meet various business needs. These contractual obligations
include time deposits to customers, borrowings from the FHLB of Atlanta and
lease obligations for facilities. See Notes 6, 8, and 9 of the Notes to
Consolidated Financial Statements included herein for additional information.
The following table summarizes the Company's long-term contractual obligations
at March 31, 2004:
Less than One to Three to
One Year Three Years Five Years Thereafter Total
--------- ----------- ---------- ---------- --------
(In Thousands)
Time deposits $ 89,632 $ 24,568 $ 18,700 $ - $132,900
FHLB Advances 13,336 43,000 30,000 10,000 96,336
Operating Lease
Obligations 278 527 497 1,980 3,282
Purchase
Obligation -
Building
Contract - - - - -
-------- -------- -------- -------- --------
Total $103,246 $ 68,095 $ 49,197 $ 11,980 $232,518
======== ======== ======== ======== ========
Off-Balance Sheet Arrangements
In the normal course of business, the Company makes off-balance sheet
arrangements, including credit commitments to its customers to meet their
financial needs. These arrangements involve, to varying degrees, elements of
credit and interest rate risk not recognized in the consolidated statement of
financial condition. The bank makes personal, commercial, and real estate
lines of credit available to customers and does issue standby letters of
credit.
Commitments to extend credit to customers are subject to the Bank's normal
credit policies and are essentially the same as those involved in extending
loans to customers. See Note 13 of the Notes to Consolidated Financial
Statements included herein for additional information.
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 ("GAAP") that 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 most 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 the effect of inflation.
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Security Federal Corporation and Subsidiaries
Aiken, South Carolina
We have audited the accompanying consolidated balance sheets of Security
Federal Corporation and Subsidiaries as of March 31, 2004 and 2003, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three year period ended March 31, 2004. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Security Federal Corporation and Subsidiaries as of March 31, 2004 and
2003, and the consolidated results of their operations and their cash flows
for each of the years in the three year period ended March 31, 2004, in
conformity with accounting standards generally accepted in the United States
of America.
/s/ Elliott Davis, LLC
Elliot Davis, LLC
Columbia, South Carolina
April 30, 2004
23
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31,
---------------------------
2004 2003
------------ ------------
ASSETS:
Cash And Cash Equivalents $ 6,749,211 $ 8,238,690
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized Cost of
$173,300,028 and $157,821,789 at March 31,
2004 and 2003, Respectively) 174,411,819 160,150,262
Held To Maturity: (Fair Value of $71,686,256
and $22,040,207 at March 31, 2004 and 2003,
Respectively) 71,303,507 21,966,533
------------ ------------
Total Investment And Mortgage-Backed Securities 245,715,326 182,116,795
------------ ------------
Loans Receivable, Net:
Held For Sale 1,703,869 3,670,498
Held For Investment: (Net of Allowance of
$5,763,935 and $4,911,224 at March 31, 2004
and 2003, Respectively) 258,190,791 239,485,158
------------ ------------
Total Loans Receivable, Net 259,894,660 243,155,656
------------ ------------
Accrued Interest Receivable:
Loans 902,589 976,134
Mortgage-Backed Securities 549,541 441,900
Investments 778,725 667,735
------------ ------------
Total Accrued Interest Receivable 2,230,855 2,085,769
------------ ------------
Premises And Equipment, Net 6,562,734 5,219,947
Federal Home Loan Bank Stock, At Cost 4,816,800 2,858,600
Repossessed Assets Acquired In Settlement
Of Loans 50,869 151,450
Other Assets 1,984,598 1,077,078
------------ ------------
Total Assets $528,005,053 $444,903,985
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposit Accounts $389,592,645 $358,473,601
Advances From Federal Home Loan Bank 96,336,000 49,772,000
Other Borrowings 5,477,023 4,193,480
Advance Payments By Borrowers For Taxes
And Insurance 317,421 279,425
Other Liabilities 2,810,049 2,145,526
------------ ------------
Total Liabilities 494,533,138 414,864,032
------------ ------------
Commitments (Notes 6 and 13)
Shareholders' Equity:
Serial Preferred Stock, $.01 Par Value;
Authorized 200,000 Shares; Issued And
Outstanding, None - -
Common Stock, $.01 Par Value; Authorized
5,000,000 Shares, Issued 2,533,291 And
Outstanding Shares, 2,516,191 at March 31,
2004 And 2,529,824 And 2,507,717 at
March 31, 2003 25,333 25,298
Additional Paid-In Capital 4,013,674 3,995,230
Indirect Guarantee Of Employee Stock
Ownership Trust Debt (336,972) (444,685)
Accumulated Other Comprehensive Income 689,755 1,444,585
Retained Earnings, Substantially Restricted 29,080,125 25,019,525
------------ ------------
Total Shareholders' Equity 33,471,915 30,039,953
------------ ------------
Total Liabilities And Shareholders' Equity $528,005,053 $444,903,985
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended March 31,
----------------------------------------
2004 2003 2002
------------ ------------ ------------
Interest Income:
Loans $15,448,987 $16,929,226 $19,462,998
Mortgage-Backed Securities 4,479,444 3,453,195 2,752,563
Investment Securities 3,066,824 3,233,033 2,337,395
Other 15,750 44,379 79,319
------------ ------------ ------------
Total Interest Income 23,011,005 23,659,833 24,632,275
------------ ------------ ------------
Interest Expense:
NOW And Money Market Accounts 3,071,306 2,450,502 2,307,002
Passbook Accounts 174,353 236,657 282,646
Certificate Accounts 3,482,214 5,002,233 7,392,855
FHLB Advances And Other
Borrowed Money 2,878,227 2,326,872 2,229,154
------------ ------------ ------------
Total Interest Expense 9,606,100 10,016,264 12,211,657
------------ ------------ ------------
Net Interest Income 13,404,905 13,643,569 12,420,618
Provision For Loan Losses 1,200,000 1,800,000 1,525,000
------------ ------------ ------------
Net Interest Income After Provision
For Loan Losses 12,204,905 11,843,569 10,895,618
------------ ------------ ------------
Other Income:
Gain On Sale Of Investment
Securities 7,700 4,245 29,817
Gain On Sale Of Loans 1,329,729 1,656,152 1,522,535
Loan Servicing Fees 213,437 208,791 198,124
Service Fees On Deposit Accounts 1,351,175 1,272,782 1,166,958
Gain On Sale Of Branch 1,521,401 - -
Other 811,323 669,143 547,305
------------ ------------ ------------
Total Other Income 5,234,765 3,811,113 3,464,739
------------ ------------ ------------
General And Administrative Expenses:
Compensation And Employee Benefits 6,023,215 5,953,904 5,805,020
Occupancy 985,378 813,113 807,430
Advertising 210,962 216,204 175,256
Depreciation And Maintenance Of
Equipment 1,086,930 1,055,181 1,100,237
Amortization Of Intangibles - 185,210 465,240
FDIC Insurance Premiums 55,596 52,793 48,442
Other 2,362,783 2,206,237 1,934,847
------------ ------------ ------------
Total General And Administrative
Expenses 10,724,864 10,482,642 10,336,472
------------ ------------ ------------
Income Before Income Taxes 6,714,806 5,172,040 4,023,885
Provision For Income Taxes 2,451,643 1,940,879 1,514,299
------------ ------------ ------------
Net Income $ 4,263,163 $ 3,231,161 $ 2,509,586
============ ============ ============
Net Income Per Common Share (Basic) $ 1.70 $ 1.29 $ 1.00
============ ============ ============
Net Income Per Common Share
(Diluted) $ 1.66 $ 1.26 $ 0.98
============ ============ ============
Cash Dividend Per Share On
Common Stock $ 0.08 $ 0.0602 $ 0.0536
============ ============ ============
Weighted Average Shares
Outstanding (Basic) 2,513,319 2,508,774 2,506,709
============ ============ ============
Weighted Average Shares
Outstanding (Diluted) 2,560,710 2,558,607 2,560,368
============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
For the Years Ended March 31, 2004, 2003 and 2002
- -----------------------------------------------------------------------------------------------------------
Accumulated
Additional Indirect Other
Common Paid - In Guarantee Comprehensive Retained
Stock Capital of ESOP Debt Income (Loss) Earnings Total
-------- ---------- ------------- ------------- --------- ----------
<s> <c> <c> <c> <c> <c> <c>
Balance At March 31, 2001 $16,842 $3,985,312 $ (415,000) $ 348,015 $19,565,195 $23,500,364
Net Income - - - - 2,509,586 2,509,586
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Losses
On Securities Available
For Sale - - - (511,671) - (511,671)
Reclassification Adjustment
For Gains Included In Net
Income - - - (19,679) - (19,679)
-----------
Comprehensive Income - - - - - 1,978,236
Decrease in Indirect Guarantee
of ESOP Debt - - 56,703 - - 56,703
Cash Dividends - - - - (134,740) (134,740)
------- ---------- ---------- ----------- ----------- -----------
Balance At March 31, 2002 $16,842 $3,985,312 $ (358,297) $ (183,335) $21,940,041 $25,400,563
======= ========== ========== =========== =========== ===========
- -----------------------------------------------------------------------------------------------------------
Accumulated
Additional Indirect Other
Common Paid - In Guarantee Comprehensive Retained
Stock Capital of ESOP Debt Income (Loss) Earnings Total
-------- ---------- ------------- ------------- --------- ----------
<s> <c> <c> <c> <c> <c> <c>
Balance At March 31, 2002 $16,842 $3,985,312 $ (358,297) $ (183,335) $21,940,041 $25,400,563
Net Income - - - - 3,231,161 3,231,161
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Gains
On Securities Available
For Sale - - - 1,630,552 - 1,630,552
Reclassification Adjustment
For Gains Included In Net
Income - - - (2,632) - (2,632)
-----------
Comprehensive Income - - - - - 4,859,081
Exercise of Stock Options 23 18,473 18,496
3-For- 2 Stock Split 8,433 (8,555) (122)
Increase in Indirect Guarantee
of ESOP Debt - - (86,388) - - (86,388)
Cash Dividends - - - - (151,677) (151,677)
------- ---------- ---------- ----------- ----------- -----------
Balance At March 31, 2003 $25,298 $3,995,230 $ (444,685) $ 1,444,585 $25,019,525 $30,039,953
======= ========== ========== =========== =========== ===========
- -----------------------------------------------------------------------------------------------------------
Accumulated
Additional Indirect Other
Common Paid - In Guarantee Comprehensive Retained
Stock Capital of ESOP Debt Income (Loss) Earnings Total
-------- ---------- ------------- ------------- --------- ----------
<s> <c> <c> <c> <c> <c> <c>
Balance At March 31, 2003 $25,298 $3,995,230 $ (444,685) $ 1,444,585 $25,019,525 $30,039,953
Net Income - - - - 4,263,163 4,263,163
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Gains
On Securities Available
For Sale - - - (750,056) - (750,056)
Reclassification Adjustment
For Gains Included In Net
Income - - - (4,774) - (4,774)
-----------
Comprehensive Income - - - - - 3,508,333
Exercise of Stock Options 35 18,444 18,479
Decrease in Indirect Guarantee
of ESOP Debt - - 107,713 - - 107,713
Cash Dividends - - - - (202,563) (202,563)
------- ---------- ---------- ----------- ----------- -----------
Balance At March 31, 2004 $25,333 $4,013,674 $ (336,972) $ 689,755 $29,080,125 $33,471,915
======= ========== ========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended March 31,
-------------------------------------------
2004 2003 2002
------------- ------------- -------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income $ 4,263,163 $ 3,231,161 $ 2,509,586
Adjustments To Reconcile Net
Income To Net Cash Provided By
Operating Activities:
Depreciation 844,641 825,253 959,341
Amortization Of Intangibles - 185,210 465,240
Discount Accretion And Premium
Amortization 828,444 327,329 178,126
Provisions For Losses On Loans
And Real Estate 1,200,000 1,800,000 1,525,000
Gain On Sales Of Loans (1,329,729) (1,656,152) (1,522,535)
Gain On Sales Of Investment
Securities (7,700) (4,245) (29,817)
(Gain) Loss On Sale Of Real
Estate (85,713) (68,419) 13,681
Amortization Of Deferred Fees
On Loans (187,937) (209,430) (223,581)
(Gain) Loss On Disposition Of
Premises And Equipment (1,815) 1,811 (330)
Proceeds From Sale Of Loans
Held For Sale 64,827,155 82,001,517 86,027,850
Origination Of Loans For Sale (61,530,797) (81,849,945) (84,455,282)
(Increase) Decrease In Accrued
Interest Receivable:
Loans 66,894 273,139 98,905
Mortgage-Backed Securities (107,641) (158,125) (103,798)
Investments (110,990) (17,701) (77,960)
(Decrease) Increase In Advance
Payments By Borrowers 37,996 32,276 (135,329)
Other, Net 359,259 (749,680) (1,098,713)
------------- ------------- -------------
Net Cash Provided By Operating
Activities 9,065,230 3,963,999 4,130,384
------------- ------------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase Of Mortgage-Backed
Securities Available For Sale (110,002,424) (80,157,881) (40,134,586)
Principal Repayments On
Mortgage-Backed Securities
Available For Sale 55,003,975 30,444,934 17,931,424
Principal Repayments On
Mortgage-Backed Securities
Held To Maturity 591,457 431,751 740,244
Purchase Of Investment
Securities Held To Maturity (90,880,070) (20,995,471) -
Purchase Of Investment
Securities Available For Sale - (67,041,485) (63,835,317)
Maturities Of Investment
Securities Available For Sale 36,242,259 75,281,684 34,642,931
Maturities Of Investment
Securities Held To Maturity 40,995,331 133,025 102,351
Proceeds From Sales Of
Investment Securities Available
For Sale - 985,938 2,003,738
Proceeds From Sale of Mortgage-
Backed Securities Available
For Sale 2,413,515 - 3,075,600
Purchase Of FHLB Stock (5,338,000) (1,017,500) -
Redemption Of FHLB Stock 3,379,800 828,200 761,700
Increase In Loans Receivable (22,245,974) (9,796,818) (5,075,962)
Proceeds From Sale Of
Repossessed Assets 781,537 847,009 468,475
Purchase And Improvement Of
Premises And Equipment (2,419,827) (1,187,871) (555,524)
Proceeds From Sale of Premises
and Equipment 1,815 - 330
Net Cash Outflow From Sale
of Branch (9,930,521) - -
------------- ------------- -------------
Net Cash Used By Investing
Activities (101,407,127) (71,244,485) (49,874,596)
------------- ------------- -------------
(Continued)
27
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the Years Ended March 31,
-------------------------------------------
2004 2003 2002
------------- ------------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Increase In Deposit Accounts 43,188,959 49,435,999 51,627,185
Proceeds From FHLB Advances 226,425,000 119,200,000 75,075,000
Repayment Of FHLB Advances (179,861,000) (102,536,000) (84,671,000)
Proceeds (Repayment) Of Other
Borrowings, Net 1,283,543 (1,975,931) 2,760,049
Purchase Of Fractional Shares
Due To Stock Split - (122) -
Proceeds From Exercise Of
Stock Options 18,479 18,496 -
Dividends To Shareholders (202,563) (151,677) (134,740)
------------- ------------- -------------
Net Cash Provided By Financing
Activities 90,852,418 63,990,765 44,656,494
------------- ------------- -------------
Net Decrease In Cash And Cash
Equivalents (1,489,479) (3,289,721) (1,087,718)
Cash And Cash Equivalents At
Beginning Of Year 8,238,690 11,528,411 12,616,129
------------- ------------- -------------
Cash And Cash Equivalents At
End Of Year $ 6,749,211 $ 8,238,690 $ 11,528,411
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash Paid During The Period For:
Interest $ 9,740,893 $ 10,246,814 $ 12,780,647
============= ============= =============
Income Taxes $ 2,076,388 $ 2,710,335 $ 1,994,513
============= ============= =============
Supplemental Schedule Of Non
Cash Transactions:
Additions To Repossessed Assets $ 595,243 $ 874,040 $ 402,656
============= ============= =============
Increase (Decrease) In
Unrealized Net Gain On
Securities Available For Sale,
Net Of Taxes $ (754,830) $ 1,627,920 $ (531,350)
============= ============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies
-------------------------------
The following is a description of the more significant accounting and
reporting policies used in the preparation and presentation of the
accompanying consolidated financial statements. All significant intercompany
transactions have been eliminated in consolidation.
(a) Basis of Consolidation and Nature of Operations
-----------------------------------------------
The accompanying 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.
(b) Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks, interest-bearing balances in other
banks, and federal funds sold. Cash equivalents have original
maturities of three months or less.
(c) Investment and Mortgage-Backed Securities
-----------------------------------------
Investment securities, including mortgage-backed securities, are
classified in one of three categories: held to maturity, available
for sale, or trading. Management determines the appropriate
classification of debt securities at the time of purchase.
Investment securities are classified as held to maturity when the
Company has the positive intent and ability to hold the securities to
maturity. These securities are recorded at cost and adjusted for
amortization of premiums and accretion of discounts over the
estimated life of the security using a method that approximates a
level yield. Prepayment assumptions on mortgage-backed securities
are anticipated.
Management classifies investment securities that are not considered
to be held to maturity as available for sale. These type investments
are stated at fair value with unrealized gains and losses, net of
tax, reported in a separate component of shareholders' equity
("accumulated other comprehensive income (loss)"). Gains and losses
from sales of investment and mortgage-backed securities available for
sale are determined using the specific identification method. The
Company has no trading securities.
The Bank maintained liquid assets in excess of the amount required by
regulations. Liquid assets consist primarily of cash, time deposits,
and certain investment securities.
(d) Loans Receivable Held for Investment
------------------------------------
Loans are stated at their unpaid principal balance. Interest income
is computed using the simple interest method and is recorded in the
period earned.
(e) Allowance for Loan Losses
-------------------------
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 borrower, 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 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 to
the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making these evaluations.
Allowances for loan losses are subject to periodic evaluations by
various regulatory authorities and may be subject to adjustments
based upon the information that is available at the time of their
examinations.
29
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
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.
(f) Loans Receivable Held for Sale
------------------------------
Loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses are provided for in a valuation
allowance by charges to operations.
(g) Repossessed Assets Acquired in Settlement of Loans
--------------------------------------------------
Repossessed assets represent real estate and other assets acquired
through foreclosure or repossession and are initially recorded at the
lower of cost (principal balance of the former mortgage loan less any
specific valuation allowances) or estimated fair value less costs to
sell. Subsequent improvements are capitalized. Costs of holding
real estate, such as property taxes, insurance, general maintenance
and interest expense, are expensed as a period cost. Fair values are
reviewed regularly and allowances for possible losses are established
when the carrying value of the asset owned exceeds the fair value
less estimated costs to sell. Fair values are generally determined
by reference to an outside appraisal.
(h) Premises and Equipment
----------------------
Premises and equipment are carried at cost, net of accumulated
depreciation. Depreciation of premises and equipment is amortized on
a straight-line method over the estimated useful life of the related
asset. Estimated lives are seven to 30 years for buildings and
improvements and generally five to 10 years for furniture, fixtures
and equipment. Maintenance and repairs are charged to current
expense. The cost of major renewals and improvements are
capitalized.
(i) Income Taxes
------------
Deferred tax expense or benefit is recognized for the net change
during the year in the deferred tax liability or asset. That amount
together with income taxes currently payable is the total amount of
income tax expense or benefit for the year. Deferred taxes are
provided for in differences in financial reporting bases for assets
and liabilities compared with their tax bases. Basically, a current
tax liability or asset is established for taxes presently payable or
refundable and a deferred tax liability or asset is established for
future tax items. A valuation allowance, if applicable, is
established for deferred tax assets that may not be realized. Tax
bad debt reserves in excess of the base year amount (established as
taxable years ending March 31, 1988 or later) would create a deferred
tax liability. Deferred income taxes are provided for in differences
between the provision for loan losses for financial statement
purposes and those allowed for income tax purposes.
(j) Loan Fees and Costs Associated with Originating Loans
-----------------------------------------------------
Loan fees received, net of direct incremental costs of originating
loans, are deferred and amortized over the contractual life of the
related loan. The net fees are recognized as yield adjustments by
applying the interest method. Prepayments are not anticipated.
30
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(k) Intangible Assets
-----------------
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line basis
over the expected periods to be benefited. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through projected undiscounted future results. The amount
of goodwill impairment, if any, is measured based on projected
discounted future results using a discount rate reflecting the
Company's average cost of funds.
Deposit based premiums, representing the cost of acquiring deposits
from other financial institutions, are included in the balance sheet
as "Other Assets" and are amortized by charges to operations over the
expected periods to be benefited. The effective amortization period
for intangible assets is approximately 10 years. The balance of
intangible assets was zero at March 31, 2004 and March 31, 2003.
(l) Interest Income
---------------
Interest on loans is accrued and credited to income monthly based on
the principal balance outstanding and the contractual rate on the
loan. The Company places loans on non-accrual status when they
become greater than 90 days delinquent or when, in the opinion of
management, full collection of principal or interest is unlikely.
The Company provides an allowance for uncollectible accrued interest
on loans that are contractually 90 days delinquent for all interest
accrued prior to the loan being placed on non-accrual status. The
loans are returned to an accrual status when full collection of
principal and interest appears likely.
(m) Advertising Expense
-------------------
Advertising and public relations costs are generally expensed as
incurred. External costs relating to direct mailing costs are
expensed in the period in which the direct mailing are sent.
Advertising and public relations costs of $210,962 and $216,204 and
$175,256, were included in the Company's results of operations for
2004, 2003, and 2002, respectively.
(n) Fair Value of Financial Instruments
-----------------------------------
The Company discloses the fair value of on- and off-balance sheet
financial instruments when it is practicable to do so. Fair values
are based on quoted market prices, where available, on estimates of
present value, or on other valuation techniques. These estimates are
made at a specific point in time, are subjective in nature, and
involve uncertainties and significant judgment. In addition, the
Company does not disclose the fair value of non-financial
instruments. Accordingly, the aggregate fair values presented do not
represent the underlying fair value of the Company.
Fair value approximates carrying value for the following financial
instruments due to the short-term nature of the instrument: cash and
cash equivalents.
Securities are valued using quoted fair market prices.
Fair value for the Company's off-balance sheet financial instruments
is based on the discounted present value of the estimated future
cash flows.
Fair value for variable rate loans that reprice frequently, loans
held for sale, and loans that mature in less than three months is
based on the carrying value. Fair value for fixed rate mortgage
loans, personal loans, and other loans (primarily commercial)
maturing after three months is based on the discounted present value
of the estimated future cash flows. Discount rates used in these
computations approximate the rates currently offered for similar
loans of comparable terms and credit quality.
Fair value for demand deposit accounts and interest-bearing accounts
with no fixed maturity date is equal to the carrying value.
Certificates of deposit accounts and securities sold under repurchase
agreements maturing within one year are valued at their carrying
value. The fair value of certificates of deposit accounts and
securities sold under repurchase agreements after one year are
estimated by discounting cash flows from expected maturities using
current interest rates on similar instruments. Fair value for
long-term FHLB advances is based on discounted cash flows using the
Company's current incremental borrowing rate. Discount rates used
in these computations approximate rates currently offered for
similar borrowings of comparable terms and credit quality.
31
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(o) Stock-Based Compensation
------------------------
At March 31, 2004, the Company sponsored stock-based compensation
plans, which are described more fully in Note 12. The Company has
elected the disclosure - only provision of SFAS No. 123, "Accounting
for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the stock option plan. Had compensation cost for
the Company's stock option plan been determined based on the fair
value at the grant date consistent with the provisions of SFAS No.
123, the Company's net income and earnings per share amounts as of
the year ended March 31 would have been reduced to the pro forma
amounts indicated below.
2004 2003 2002
---------- --------- ---------
Net Income, As Reported $4,263,163 3,231,161 2,509,586
Deduct: Total stock-based employee
compensation expense determined
under fair-value based method for
all awards $ (241,193) (205,804) (111,908)
Net Income, Pro Forma $4,021,970 3,025,357 2,397,678
Net Income Per Common Share
(Basic), As Reported $ 1.70 1.29 1.00
Net Income Per Common Share
(Basic), Pro Forma $ 1.60 1.21 0.96
Net Income Per Common Share
(Diluted), As Reported $ 1.66 1.26 0.98
Net Income Per Common Share
(Diluted), Pro Forma $ 1.57 1.18 0.94
(p) Earnings Per Share
------------------
Net income per share is computed by dividing consolidated net income
by the weighted average number of common shares outstanding during
the period. The treasury stock method is used to compute the
dilutive effect of stock options in the diluted weighted average
number of common shares. All per share data has been restated to
reflect the 3-for-2 stock split that occurred during the year ended
March 31, 2003.
For the Year Ended
March 31, 2004 March 31, 2003
------------------------------ ------------------------------
Per share Per share
Income Shares amounts Income Shares amounts
---------- --------- ------- ---------- --------- -------
Basic EPS $4,263,163 2,513,319 $ 1.70 $3,231,161 2,508,774 $ 1.29
Dilutive
effect of:
Stock
Options - 28,959 (0.024) - 33,166 (0.02)
ESOP - 18,432 (0.016) - 16,667 (0.01)
---------- --------- ------- ---------- --------- -------
Diluted EPS $4,263,163 2,560,710 $ 1.66 $3,231,161 2,558,607 $ 1.26
========== ==========
For the Year Ended
March 31, 2002
-----------------------------------
Per share
Income Shares amounts
---------- --------- -------
Basic EPS $2,509,586 2,506,709 $ 1.00
Dilutive effect of:
Stock Options - 34,068 (0.01)
ESOP - 19,591 (0.01)
---------- --------- -------
Diluted EPS $2,509,586 2,560,368 $ 0.98
==========
(p) Use of Estimates
----------------
The preparation of financial statements in conformity with Generally
Accepted Accounting Principles ("GAAP") requires Management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported
amounts of income and expenses during the reporting periods. Actual
results could differ from those estimates.
32
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(q) Recently Issued Accounting Standards
------------------------------------
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
applicable to all companies with stock-based employee compensation,
regardless of whether they account for 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 December 15,
2002, and for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002.
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 any 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 interim period after June 15, 2003. The adoption
of SFAS No. 150 did not have any 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 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 any
effect on the Company's financial position or results of operations.
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 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 No. 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 any effect on the Company's financial position or results of
operations.
33
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
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 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, if 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 disclosure proposes 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. Retrospectively application of this Statement is
not permitted. The adoption of this Statement, if approved, is
expected to have an impact on the Company's financial position or
results of operations.
Other accounting standards that have been issued or 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.
(r) Risks and Uncertainties
-----------------------
In the normal course of its business, the Company encounters two
significant types of risk: economic and regulatory. There are three
main components of economic risk: interest rate risk, credit risk,
and market risk. The Company is subject to interest rate risk to the
degree that its interest-bearing liabilities mature or reprice at
different speeds, or on different bases, than its interest-earning
assets. Credit risk is the risk of default on the Company's loan
portfolio that results from borrowers' inability or unwillingness to
make contractually required payments. Market risk reflects changes
in the value of collateral underlying loans receivable, the valuation
of real estate held by the Company, and the valuation of loans held
for sale and mortgage-backed securities available for sale. The
Company is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to
period. The Company also undergoes periodic examinations by the
regulatory agencies, which may subject it to further changes with
respect to asset valuations, amounts of required loss allowances, and
operating restrictions, resulting form the regulators' judgements
based on information available to them at the time of their
examination.
(s) Reclassifications
-----------------
Certain amounts in prior years' consolidated financial statements
have been reclassified to conform to current year classifications.
(2) Branch Sale
-----------
In February 2004, Security Federal Bank sold its Denmark, South Carolina
branch to South Carolina Bank and Trust, N.A. of Orangeburg, South
Carolina. Included in the sale, were approximately $13.6 million in
deposits, $1.9 million in loans, and the branch building, furniture, and
equipment. Security Federal Bank recorded a $1.5 million in gain on sale
of branch, which includes gains on all the items in the previous sentence.
Gain on sale of branch is included in "Other Income" as a separate line
item in the income statement. Security Federal Bank also booked $200,000
as a contingency expense on the sale, which is included in the line item
called "Other Expense" in the "General and Administrative Expenses"
section of the income statement. The Bank has possible contingent
liabilities for three years. Security Federal netted approximately
$820,000 after tax and contingencies on the transaction.
34
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) 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:
March 31, 2004
-------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair value
-------------- ---------- --------- ------------
FHLB Securities $ 14,019,302 $ 260,728 $ - $ 14,280,030
Federal Farm Credit
Securities 2,019,623 22,567 - 2,042,190
FHLMC Bonds 564,643 13,043 - 577,686
Mortgage-Backed
Securities 156,696,460 1,437,219 621,766 157,511,913
------------ ---------- --------- ------------
$173,300,028 $1,733,557 $ 621,766 $174,411,819
============ ========== ========= ============
March 31, 2003
-------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair value
-------------- ---------- --------- ------------
FHLB Securities $ 47,062,029 $ 744,865 $ 13,094 $ 47,793,800
Federal Farm Credit
Securities 5,062,776 66,304 - 5,129,080
FHLMC Bonds 804,637 11,114 - 815,751
Mortgage-Backed
Securities 104,892,347 1,637,286 118,002 106,411,631
------------ ---------- --------- ------------
$157,821,789 $2,459,569 $ 131,096 $160,150,262
============ ========== ========= ============
The amortized cost and fair value of investment and mortgage-backed
securities available for sale at March 31, 2004 are shown below by
contractual maturity. Expected maturities will differ from contractual
maturities because borrowers have the right to prepay obligations with or
without call or prepayment penalties.
Amortized Cost Fair value
-------------- ------------
Less Than 1 Year $ 2,000,000 $ 2,064,070
1 - 5 Years 8,578,695 8,739,576
More Than 5 Years 6,024,873 6,096,260
Mortgage-Backed Securities 156,696,460 157,511,913
------------ ------------
$173,300,028 $174,411,819
============ ============
At March 31, 2004, investment and mortgage-backed securities available for
sale of $43.2 million were pledged as collateral for certain deposit
accounts. In addition, the Bank had pledged $57.2 million of investment
and mortgage-backed securities as collateral for FHLB advances and other
borrowings.
The Bank received approximately $2.4 million, $986,000, and $5.1 million
in proceeds from sales of available for sale securities with approximately
$7,700, $4,200, and $29,800 recorded in gross gains and no gross losses in
the years ended March 31, 2004, 2003 and 2002, respectively.
35
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) Investment and Mortgage-Backed Securities, Available for Sale, Continued
------------------------------------------------------------------------
The following table shows gross unrealized losses and fair value,
aggregated by investment category, and length of time that individual
available for sale securities have been in a continuous unrealized loss
position, at March 31, 2004.
Less than 12 Months 12 Months or More Total
--------------------- ------------------- ---------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- -------- ---------- ------- ----------- --------
Mortgage-
backed
securities $60,202,930 $602,149 $2,044,437 $19,617 $62,247,367 $621,766
Securities classified as available-for-sale are recorded at fair market
value. Approximately 3.2% of the unrealized losses, or two individual
securities, consisted of securities in a continuous loss position for
twelve months or more. The Company has the ability and intent to hold
these securities until such time as the value recovers or the securities
mature. The Company believes, based in industry analyst reports and
credit ratings, that the deterioration in value is attributable to
changes in market interest rates and is not in the credit quality of the
issuer and therefore, these losses are not considered
other-than-temporary.
(4) 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:
March 31, 2004
-------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair value
-------------- ---------- --------- ------------
FHLB Securities $ 57,943,983 $ 315,901 $ 86,661 $58,173,223
Federal Farm Credit
Securities 13,009,727 132,504 1,881 13,140,350
Mortgage-Backed
Securities 349,797 22,886 - 372,683
----------- -------- -------- -----------
$ 71,303,507 $ 471,291 $ 88,542 $71,686,256
=========== ======== ======== ===========
March 31, 2003
-------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair value
-------------- ---------- --------- ------------
FHLB Securities 18,989,813 $ 15,661 $ 14,071 $18,991,403
Federal Farm Credit
Securities 2,005,459 20,481 - 2,025,940
FNMA Securities $ 30,331 11 - 30,342
Mortgage-Backed
Securities 940,930 51,592 - 992,522
----------- -------- -------- -----------
$21,966,533 $ 87,745 $ 14,071 $22,040,207
=========== ======== ======== ===========
36
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(4) Investment and Mortgage-Backed Securities, Held to Maturity, Continued
----------------------------------------------------------------------
The amortized cost and fair value of investment and mortgage-backed
securities held to maturity at March 31, 2004, by contractual maturity,
are shown below. Expected maturities will differ from contractual
maturities due to call features on certain investments.
Amortized Cost Fair value
-------------- ------------
Less Than 1 Year $ - $ -
1 - 5 Years 28,959,255 29,203,490
More Than 5 Years 41,994,455 42,110,083
Mortgage-Backed Securities 349,797 372,683
----------- -----------
$71,303,507 $71,686,256
=========== ===========
At March 31, 2004, investment and mortgage-backed securities held to
maturity of $10.0 million were pledged as collateral for certain deposit
accounts. In addition, the Bank had pledged $33.0 million of investment
and mortgage-backed securities as collateral for FHLB advances and other
borrowings.
The following table shows gross unrealized losses and fair value,
aggregated by investment category, and length of time that individual held
to maturity securities have been in a continuous unrealized loss position,
at March 31, 2004.
Less than 12 Months 12 Months or More Total
--------------------- ------------------- ---------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- -------- ---------- ------- ----------- --------
FHLB $9,935,020 $88,542 $ - $ - $9,935,020 $88,542
No individual securities were in a continuous loss position for twelve
months or more. The Company's held-to-maturity portfolio is recorded at
amortized cost. The Company has the ability and intends to hold these
securities to maturity. The Company believes, based on industry analysis
reports and credit ratings, that the deterioration in value is
attributable to changes in market interest rates and not in credit quality
of the issuer and therefore, these losses are not considered other-than-
temporary.
(5) Loans Receivable, Net
---------------------
Loans receivable, net, at March 31 consisted of the following:
2004 2003
------------ ------------
Residential Real Estate Loans $109,722,301 $ 99,948,293
Consumer Loans 45,641,450 46,594,413
Commercial Business And Real
Estate Loans 121,111,848 106,996,940
Loans Held For Sale 1,703,869 3,670,498
------------ ------------
278,179,468 257,210,144
------------ ------------
Less:
Allowance For Loan Losses 5,763,935 4,911,224
Loans In Process 12,356,346 8,990,687
Deferred Loan Fees 164,527 152,577
------------ ------------
18,284,808 14,054,488
------------ ------------
Total Loans Receivable, Net $259,894,660 $243,155,656
============ ============
37
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(5) Loans Receivable, Net, Continued
--------------------------------
Changes in the allowance for loan losses for the years ended March 31 are
summarized as follows:
2004 2003 2002
---------- ---------- ----------
Balance At Beginning Of Year $4,911,224 $3,689,079 $2,784,117
Provision For Loan Losses 1,200,000 1,800,000 1,525,000
Charge Offs (669,591) (909,494) (817,680)
Recoveries 322,302 331,639 197,642
---------- ---------- ----------
Total Allowance For Loan Losses $5,763,935 $4,911,224 $3,689,079
========== ========== ==========
The following table sets forth the amount of the Company's non-accrual
loans and the status of the related interest income at March 31.
2004 2003
---------- ----------
Non-Accrual Loans $2,044,000 $1,040,000
========== ==========
Interest Income That Would Have Been
Recognized Under Original Terms $ 105,893 $ 44,173
========== ==========
Loans serviced for others at March 31, 2004, 2003, and 2002, were
approximately $0, $646,000, and $671,000, respectively. On January 31,
2001, the Company sold the mortgage loan servicing for others to another
bank. The gain on sale of servicing was $400,000. The Company
sub-serviced the mortgage loans for the buyer of the servicing, until the
transfer date of April 15, 2001.
At March 31, 2004 and 2003, impaired loans amounted to $1.4 and $1.2
million, respectively. Losses on impaired loans are accounted for in the
allowance for loan loss. For the years ended March 31, 2004 and 2003, the
average recorded investment in impaired loans was $1.3 and $1.0 million,
respectively.
The Bank blanket pledges its portfolio of single family mortgage loans to
secure FHLB advances.
38
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(6) Premises and Equipment, Net
---------------------------
Premises and equipment, net, at March 31 are summarized as follows:
2004 2003
----------- ----------
Land $ 426,163 496,163
Buildings And Improvements 7,254,127 5,420,768
Furniture And Equipment 5,874,011 5,295,138
Construction In Progress - 397,080
----------- ----------
13,554,301 11,609,149
Less Accumulated Depreciation (6,991,567) (6,389,202)
----------- ----------
Total Premises And Equipment, Net $ 6,562,734 5,219,947
=========== ==========
The construction in progress at March 31, 2003 was for a new branch
facility in the city of Lexington, South Carolina that was completed and
began operations in August 2003.
Depreciation expense for the years ended March 31, 2004, 2003, and 2002
was approximately $845,000, $825,000, and $959,000, respectively.
The Bank has entered into non-cancelable operating leases related to
buildings and land. At March 31, 2004, future minimum payments under
non-cancelable operating leases with initial or remaining terms of one
year or more are as follows (by fiscal year):
2005 $ 278,193
2006 273,967
2007 252,837
2008 250,737
2009 246,742
Thereafter 1,979,859
----------
$3,282,335
==========
Total rental expense amounted to $278,000, $209,000, and $190,000 for the
years ended March 31, 2004, 2003 and 2002, respectively. Five lease
agreements with monthly expenses of $7,083, $2,472, $2,113, $743, and $700
have renewal options of 45, 10, 10, 40, and 20 years, respectively.
(7) FHLB Stock
----------
Every federally insured savings institution is required to invest in FHLB
stock. No ready market exists for this stock and it has no quoted fair
value. However, because redemption of this stock has historically been at
par, it is carried at cost.
The Bank, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount equal to
the greater of: (1) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year; or, (2) 1/20th of its advances
(borrowings) from the FHLB of Atlanta. The Bank is in compliance with
this requirement with an investment in FHLB of Atlanta stock of $4.8
million as of March 31, 2004.
39
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(8) Deposits
--------
Deposits outstanding by type of account are summarized as follows:
At March 31, 2004 At March 31, 2003
------------------------------ -------------------------------
Interest Interest
Weighted Rate Weighted Rate
Rate Range Amount Rate Range
---------- -------- --------- ---------- -------- ---------
Checking
Accounts $ 80,738,298 0.47% 0.00-1.74% $ 82,521,610 0.50% 0.00-1.98%
Money
Market
Accts. 158,587,076 1.97% 1.00-2.03% 102,396,950 2.21% 1.09-2.32%
Passbook
Accounts 17,367,047 0.98% 0.00-1.50% 16,455,391 1.23% 0.00-2.50%
------------ ---- --------- ------------ ---- ---------
Total 256,692,421 1.43% 0.00-2.03% 201,373,951 1.43% 0.00-2.50%
------------ ---- --------- ------------ ---- ---------
Certificate
Accounts:
0.00 -
4.99% 122,599,195 144,633,770
5.00 -
6.99% 10,301,029 12,437,463
7.00 -
8.99% - 28,417
------------ ------------
Total 132,900,224 2.26% 0.90-6.55% 157,099,650 2.92% 1.21-7.02%
------------ ---- --------- ------------ ---- ---------
Total
Deposits $389,592,645 1.71% 0.00-6.55% $358,473,601 2.08% 0.00-7.02%
============ ==== ========= ============ ==== =========
The aggregate amount of short-term certificates of deposit with a minimum
denomination of $100,000 was $47.0 million and $44.4 million at March 31,
2004 and 2003, respectively. The amounts and scheduled maturities of all
certificates of deposit at March 31 are as follows:
March 31,
----------------------------
2004 2003
------------ ------------
Within 1 Year $ 89,632,381 $118,710,363
After 1 Year, Within 2 9,736,807 13,749,850
After 2 Years, Within 3 14,831,103 3,160,787
After 3 Years, Within 4 15,338,730 5,272,712
After 4 Years, Within 5 3,361,203 16,205,938
Thereafter - -
------------ ------------
$132,900,224 $157,099,650
============ ============
40
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(9) Advances From Federal Home Loan Bank (FHLB) And Other Borrowings
----------------------------------------------------------------
Advances from the FHLB at March 31 are summarized by year of maturity and
weighted average interest rate below:
2004 2003
------------------------- -------------------------
Year Ending March 31 Amount Weighted Rate Amount Weighted Rate
----------- ------------- ----------- -------------
2004 $ - - $ 1,700,000 1.48%
2005 13,336,000 4.92% 10,072,000 6.14%
2006 33,000,000 4.09% 23,000,000 4.93%
2007 10,000,000 2.66% - -
2008 10,000,000 2.96% 10,000,000 2.96%
Thereafter 30,000,000 2.96% 5,000,000 3.35%
----------- ---- ----------- ----
$96,336,000 3.59% $49,772,000 4.50%
=========== ==== =========== ====
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 $53.7 million of investment securities. Advances are
subject to prepayment penalties.
The following tables show 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 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 5/10/04 and
quarterly
thereafter
09/04/02 09/04/07 5,000,000 2.82% 1 Time Call 09/04/05
11/07/02 11/07/12 5,000,000 3.354% 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 3.225% 1 Time Call 02/20/09
As of March 31, 2003
- ----------------------------------------------------------------------------
Borrow Date Maturity Date Amount Int. Rate Type Call Dates
- ----------- ------------- ----------- --------- ---------- ------------
11/10/00 11/10/05 $ 5,000,000 5.85% Multi-Call 5/10/03 and
quarterly
thereafter
09/04/02 09/04/07 5,000,000 2.82% 1 Time Call 09/04/05
11/07/02 11/07/12 5,000,000 3.354% 1 Time Call 11/07/07
03/10/03 03/10/06 5,000,000 1.15% Multi-Call 03/10/04 and
quarterly
thereafter
At March 31, 2004, the Bank had $35.7 million in additional borrowing
capacity at the FHLB.
The Bank had $5.5 million and $4.2 million in other borrowings (non-FHLB
advances) at March 31, 2004 and 2003, respectively. These borrowings
consisted of repurchase agreements with certain commercial demand deposit
customers for sweep accounts. The interest rate paid on these borrowings
floats monthly with the 13 week Treasury bill. At March 31, 2004 and
2003, the interest rate paid on these borrowings was 0.93% and 1.17%,
respectively. The Bank had pledged $36.4 million in investment securities
at March 31, 2004 and $5.1 million at March 31, 2003, respectively, as
collateral for these borrowings.
41
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(10) Income Taxes
------------
Income tax expense is comprised of the following:
For the Years Ended March 31,
----------------------------------
2004 2003 2002
---------- --------- ---------
Current:
Federal $2,948,661 2,380,675 1,799,303
State 356,824 247,582 200,700
---------- --------- ---------
Total Current Tax Expense 3,305,485 2,628,257 2,000,003
---------- --------- ---------
Deferred:
Federal (653,360) (525,982) (348,904)
State (200,482) (161,396) (136,800)
---------- --------- ---------
Total Deferred Tax Expense (853,842) (687,378) (485,704)
---------- --------- ---------
Total Income Tax Expense $2,451,643 1,940,879 1,514,299
========== ========= =========
The Company's income taxes differ from those computed at the statutory
federal income tax rate, as follows:
For the Years Ended March 31,
-----------------------------------
2004 2003 2002
---------- ---------- ----------
Tax At Statutory Income Tax Rate $2,283,034 $1,758,494 $1,368,121
State Tax And Other 168,609 182,385 146,178
---------- ---------- ----------
Total Income Tax Expense $2,451,643 $1,940,879 $1,514,299
========== ========== ==========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below.
At March 31,
2004 2003
---------- ----------
Deferred Tax Assets:
Provision For Loan Losses $2,305,574 $1,964,489
Goodwill Tax Basis Over Financial
Statement Basis 466,440 568,208
Net Fees Deferred For Financial Reporting 190,114 185,108
Other 173,311 86,292
---------- ----------
Total Gross Deferred Tax Assets 3,135,439 2,804,097
---------- ----------
Deferred Tax Liabilities:
Unrealized Gain On Securities Available
For Sale 422,036 883,888
FHLB Stock Basis Over Tax Basis 133,367 133,367
Depreciation 265,318 192,599
Other - 133,367
---------- ----------
Total Gross Deferred Tax Liability 820,721 1,343,221
---------- ----------
Net Deferred Tax Asset $2,314,718 $1,460,876
========== ==========
The balance of the change in the net deferred tax asset results from the
current period deferred tax expense of $853,842. The net deferred tax
asset is included in other assets in the accompanying consolidated balance
sheets.
No valuation allowance for deferred tax assets was required at March 31,
2004 and 2003. The realization of net deferred tax assets may be based on
utilization of carrybacks to prior taxable periods, anticipation of future
taxable income in certain periods, and the utilization of tax planning
strategies. Management has determined that the net deferred tax asset can
be supported based upon these criteria.
42
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(11) Regulatory Matters
------------------
The Bank is subject to various regulatory capital requirements that are
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and discretionary actions by
regulators that could have a material adverse effect on the Company.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also
subject to qualitative judgements by regulators with regard to components,
risk weightings, and other factors.
As of March 31, 2004 and 2003, the Bank was categorized as "well
capitalized" under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Bank had to maintain total
risk-based capital, Tier 1 risk-based capital, and Tier 1 leverage ratios
at 10%, 6%, and 5%, respectively. There are no conditions or events that
management believes have changed the Bank's classification.
The Bank's regulatory capital amounts and ratios are as follows as of the
dates indicated:
To Be Well
Capitalized Under
For Prompt Corrective
Capital Action
Actual Adequacy Provisions
------------ ------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
March 31, 2004
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets) $32,140 11.8% 10,917 4.0% 16,376 6.0%
Total Risk-Based Capital
(To Risk Weighted Assets) $35,498 13.0% 21,834 8.0% 27,293 10.0%
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets) $32,140 6.1% 21,093 4.0% 26,366 5.0%
Tangible Capital
(To Tangible Assets) $32,140 6.1% 10,546 2.0% 26,366 5.0%
March 31, 2003
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets) $28,879 11.8% 9,806 4.0% 14,709 6.0%
Total Risk-Based Capital
(To Risk Weighted Assets) $31,791 13.0% 19,612 8.0% 24,515 10.0%
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets) $28,879 6.5% 17,762 4.0% 22,203 5.0%
Tangible Capital
(To Tangible Assets) $28,879 6.5% 8,881 2.0% 22,203 5.0%
The payment of dividends by the Company depends primarily on the ability
of the Bank to pay dividends to the Company. The payment of dividends by
the Bank to the Company is subject to substantial restrictions and would
require prior notice to the Office of Thrift Supervision ("OTS").
43
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(12) Employee Benefit Plans
----------------------
The Company is participating in a multiple employer defined contribution
employee benefit plan covering substantially all employees with six
months or more of service. The Company matches a portion of the
employees' contributions and the plan has a discretionary profit sharing
provision. The total employer contributions were $256,000, $215,000, and
$207,000 for the years ended March 31, 2004, 2003, and 2002,
respectively.
The Company has an Employee Stock Ownership Plan ("ESOP") for the
exclusive benefit of employee participants. The discretionary
contributions for the years ended March 31, 2004, 2003, and 2002 were $0,
$123,000, and $109,000, respectively. The ESOP from time to time borrows
funds from financial institutions to purchase the Company's stock. The
balance of the loan was $337,000 and $445,000 at March 31, 2004 and 2003,
respectively. The Company carries the debt as a liability and a reduction
in equity, although the Company neither endorses nor guarantees the loan.
The loan is repaid by Company contributions to the trustee, who in turn
makes the loan payment to the financial institution. The Company plans to
terminate the ESOP during fiscal 2005 and concentrate contributions to the
defined benefit plan, due to the high costs of administration of the ESOP.
Certain officers of the Company participate in an incentive stock option
plan. Options are granted at exercise prices not less than the fair value
of the Company's common stock on the date of the grant. The following is
a summary of the activity under the Company's incentive stock option plan
for the years ended March 31, 2004, 2003, and 2002.
2004 2003 2002
----------------- ----------------- -----------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------- ----------------- -----------------
Balance, Beginning of
Year 114,366 $ 15.77 122,334 $ 15.31 123,834 $ 15.24
Options granted 31,000 22.97 6,000 22.39 3,000 20.00
Options exercised 3,467 5.33 3,468 5.33 - -
Options forfeited 11,760 11.12 10,500 17.62 4,500 16.67
------- ------- -------
Balance, March 31 130,139 $ 18.18 114,366 $ 15.77 122,334 $ 15.31
======= ======= =======
At March 31, 2004, the Company had the following options outstanding:
Outstanding Earliest Date
Grant Date Options Option Price Exercisable Expiration Date
- ---------- ----------- ------------ -------------- -----------------
1/07/97 4,639 $ 5.33 1/1/04 to 1/1/06 12/31/04 to 12/31/06
10/19/99 79,500 $16.67 10/1/04 to 10/01/08 9/30/05 to 9/30/09
10/19/99 6,000 $18.33 10/01/03 9/30/04
4/17/01 3,000 $20.00 5/1/06 to 5/1/10 4/30/07 to 4/30/11
1/16/03 6,000 $22.39 1/1/08 to 1/1/12 12/31/12
9/1/03 3,000 $24.00 9/1/08 to 9/1/12 8/31/13
12/1/03 3,000 $23.65 12/1/08 to 12/1/12 11/30/13
1/01/04 12,000 $24.22 1/1/09 to 1/1/13 12/31/13
3/8/04 13,000 $21.43 3/1/09 to 3/1/13 2/28/14
44
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(12) Employee Benefit Plans, Continued
---------------------------------
The options listed on the previous page vest over ten years with the first
vesting earned after five years and 20% vesting earned evenly in years six
through ten except for the 6,000 shares granted on 10/19/99 which fully
vest on 10/1/03. All options, issued prior to January 16, 2003, which
vest must be exercised within one year of vesting, except those granted
during the year ended March 31, 2004 or later, which may be exercised
anytime between the beginning of the sixth year and the end of the tenth
year after the grant date.
There were 17,000 options available for granting at March 31, 2004.
The incentive stock option plan adopted by the Company includes a
provision for tandem stock appreciation rights ("SARs"). Options granted
after March 31, 2002, were not granted in tandem with SAR's, while options
granted before March 31, 2002 were granted in tandem with SAR's. Upon
vesting, these stock appreciation rights are exercisable in lieu of the
stock options granted to the employee. Upon exercise, the employee
chooses the option or SAR feature, and the tandem instrument is cancelled.
The Company accounts for incentive stock options and tandem SARs under
Accounting Principles Board ("APB") Option No. 25, "Accounting for Stock
Issued to Employees". APB No. 25 states that compensation cost for a
combination plan permitting an employee to elect one part should be
measured according to the terms that an employee is mostly likely to elect
based on the facts available each period. Due to the personal income tax
implications of SARs under the Internal Revenue Code, employees have
historically elected to exercise options rather than the SARs.
Accordingly, the Company has elected to measure compensation cost for
stock options as required by APB No. 25, rather than for the SARs.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions for grants: Dividend yield of $.08 per share for
options granted during the years ended 2004, 2003 and 2002, expected
volatility of 21.4% for options granted in 2004, 10.7% for options granted
in 2003, and 30% for options granted in 2002, risk-free interest rate of
3.78% to 4.45% for options granted in 2004, 3.35% for options granted in
2003, and 5.9% for options granted in 2002, and expected lives of 6-10
years.
(13) Commitments
-----------
In conjunction with its lending activities, the Bank enters into various
commitments to extend credit and issue letters of credit. Loan
commitments (unfunded loans and unused lines of credit) and letters of
credit are issued to accommodate the financing needs of the Bank's
customers. Loan commitments are agreements by the Bank to lend at a
future date, so long as there are no violations of any conditions
established in the agreement. Letters of credit commit the Bank to make
payments on behalf of customers when certain specified events occur.
Financial instruments where the contract amount represents the Bank's
credit risk include commitments under pre-approved but unused lines of
credit of $39.4 million and $30.9 million, undisbursed loans in process
totaled $12.4 million and $9.0 million, and letters of credit of $562,000
and $728,000 at March 31, 2004 and 2003, respectively. At March 31, 2004
and 2003, the fair value of standby letters of credit was immaterial.
These loan and letter of credit commitments are subject to the same credit
policies and reviews as loans on the balance sheet. Collateral, both the
amount and nature, is obtained based upon management's assessment of the
credit risk. Since many of the extensions of credit are expected to
expire without being drawn, the total commitment amounts do not
necessarily represent future cash requirements. In addition to these loan
commitments noted above, the Bank had unused credit card loan commitments
of $2.5 million and $2.4 million at March 31, 2004 and 2003, respectively.
Outstanding commitments on mortgage loans not yet closed amounted to
$429,000 and $200,000 at March 31, 2004 and 2003, respectively. Such
commitments, which are funded subject to certain limitations, extend over
varying periods of time with the majority being funded within 45 days. At
March 31, 2004 and 2003, the Bank had outstanding commitments to sell
approximately $1.7 and $3.7 million of loans, which encompassed the Bank's
held for sale loans. The Bank also has commitments to sell mortgage loans
not yet closed, on a best efforts basis. Best efforts means the Bank
suffers no penalty if they are unable to deliver the loans to the
potential buyers. The fair value of the Bank's commitment to originate
mortgage loans at committed interest rates and to sell such loans to
permanent investors is insignificant.
45
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(14) Related Party Transactions
--------------------------
At March 31, 2004, the total aggregate indebtedness to the Bank by
executive officers and directors of the Bank and Company, whose individual
indebtedness exceeded $60,000, at any time over the period since April 1,
2002,was $517,000. There was $137,000 in additional loans to executive
officers and directors whose individual indebtedness exceeded $60,000
during fiscal 2004. Repayments on these loans totaled approximately
$103,000. Loans to all employees, officers, and directors of the Company,
in the aggregate constituted approximately 6.51% of the total
shareholders' equity of the Company at March 31, 2004. At March 31, 2004,
deposits from executive officers and directors of the Bank and Company
and their related interest in aggregate approximated $2.4 million.
The Company rents office space from a company in which a director and an
officer of the Company and the Bank have an ownership interest. The Bank
incurred expenses of $30,000, $29,000, and $29,000 for rent for the years
ended March 31, 2004, 2003 and 2002, respectively. Management is of the
opinion that the transactions with respect to office rent are made on
terms that are comparable to those which would be made with unaffiliated
persons.
(15) Security Federal Corporation Condensed Financial Statements (Parent
-------------------------------------------------------------------
Company Only)
------------
The following is condensed financial information of Security Federal
Corporation (Parent Company only). The primary asset is its investment in
the Bank subsidiary and the principal source of income for the Company is
equity in undistributed earnings from the Bank.
Condensed Balance Sheet Data
At March 31,
--------------------------
2004 2003
----------- -----------
Assets:
Cash $ 956,582 $ 146,206
Investment In Security Federal Bank 32,829,876 30,324,359
Income Tax Receivable From Bank 31,538 33,181
----------- -----------
Total Assets $33,817,996 $30,503,746
=========== ===========
Liability And Shareholders' Equity:
Accounts Payable $ 9,109 $ 19,108
Indirect Guarantee of ESOP Debt 336,972 444,685
Shareholders' Equity 33,471,915 30,039,953
----------- -----------
Total Liabilities And Shareholders'
Equity $33,817,996 $30,503,746
=========== ===========
Condensed Statements of Income Data
For the Years Ended March 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
Income:
Equity In Earnings Of Security
Federal Bank $4,260,347 $3,232,989 $2,510,729
Miscellaneous Income 10,000 - 406
---------- ---------- ----------
4,270,347 3,232,989 2,511,135
Expenses:
Other Expenses 7,184 1,828 1,549
---------- ---------- ----------
Net Income $4,263,163 $3,231,161 $2,509,586
========== ========== ==========
46
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(15) Security Federal Corporation Condensed Financial Statements (Parent
-------------------------------------------------------------------
Company Only), Continued
------------------------
Condensed Statements of Cash Flow Data
For the Years Ended March 31,
--------------------------------------
2004 2003 2002
---------- ---------- ----------
Operating Activities:
Net Income $ 4,263,163 $ 3,231,161 $ 2,509,586
Adjustments To Reconcile Net Income
To Net Cash Provided By (Used In)
Operating Activities:
Equity In Earnings Of Security
Federal Bank (4,260,347) (3,232,989) (2,510,729)
Equity In Earnings (Loss) Of Real
Estate Partnership - - -
Recovery of Previously Recognized
Loss - - -
(Increase) Decrease In Income Taxes
Receivable And Other Assets 1,644 (1,123) (700)
Decrease In Accounts Payable (10,000) (2,936) -
----------- ----------- -----------
Net Cash Provided By (Used In)
Operating Activities (5,540) (5,887) (1,843)
----------- ----------- -----------
Investing Activities:
Dividend Received From Security
Federal Bank $ 1,000,000 - -
----------- ----------- -----------
Net Cash Provided By Investing
Activities $ 1,000,000 - -
----------- ----------- -----------
Financing Activities:
Exercise of Stock Options 18,479 18,496 -
Purchase of Fractional Shares Due
To Stock Split - (122) -
Dividends Paid (202,563) (151,677) (134,740)
----------- ----------- -----------
Net Cash Provided By (Used In)
Financing Activities (184,084) (133,303) (134,740)
Net Increase (Decrease) In Cash 810,376 (139,190) (136,583)
Cash At Beginning Of Year 146,206 285,396 421,979
----------- ----------- -----------
Cash At End Of Year $ 956,582 $ 146,206 $ 285,396
=========== =========== ===========
(16) Carrying Amounts and Fair Value of Financial Instruments
--------------------------------------------------------
The carrying amounts and fair value of financial instruments are
summarized below:
At March 31,
---------------------------------------------
2004 2003
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- --------- ----------
(In Thousands)
Financial Assets:
Cash And Cash Equivalents $ 6,749 $ 6,749 $ 8,239 $ 8,239
Investment And Mortgage-Back
Securities $244,604 $246,098 $179,788 $182,190
Loans Receivable, Net $259,895 $260,042 $243,156 $250,022
Federal Home Loan Bank Stock $ 4,817 $ 4,817 $ 2,859 $ 2,859
Financial Liabilities:
Deposits:
Checking, Savings, and
Money Market Accounts $256,692 $256,692 $201,374 $201,374
Certificate Accounts $132,900 $117,389 $157,100 $160,818
Advances From Federal Home
Loan Bank $ 96,336 $104,653 $ 49,772 $ 51,792
Other Borrowed Money $ 5,477 $ 5,477 $ 4,193 $ 4,193
47
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(16) Carrying Amounts and Fair Value of Financial Instruments, Continued
-------------------------------------------------------------------
At March 31, 2004, the Bank had $54.9 million of off-balance sheet
financial commitments. These commitments are to originate loans and
unused consumer lines of credit and credit card lines. Because these
obligations are based on current market rates, if funded, the original
principal is considered to be a reasonable estimate of fair value.
Fair value estimates are made at a specific point in time, based on
relevant market data and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale the Bank's entire holdings of a particular
financial instrument. Because no active market exists for a significant
portion of the Bank's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current
economic conditions, current interest rates and prepayment trends, risk
characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in any of these assumptions used in calculating fair
value would also significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Bank has
significant assets and liabilities that are not considered financial
assets or liabilities including deposit franchise values, loan servicing
portfolios, deferred tax liabilities, and premises and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of these estimates. The
values used are provided from the Office of Thrift Supervison's interest
rate risk model.
The Company has used management's best estimate of fair value on the above
assumptions. Thus, the fair values presented may not be the amounts,
which could be realized, in an immediate sale or settlement of the
instrument. In addition, any income taxes or other expenses that would be
incurred in an actual sale or settlement are not taken into consideration
in the fair value presented.
48
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(17) Quarterly Financial Data (Unaudited)
-----------------------------------
Unaudited condensed financial data by quarter for fiscal year 2004 and
2003 is as follows (amounts, except per share data, in thousands):
Quarter ended
-----------------------------------------------------------
2003-2004 June 30, 2003 Sept. 30, 2003 Dec. 31, 2003 Mar. 31, 2004
------------- -------------- ------------- -------------
Interest Income $ 5,614 $ 5,504 $ 5,883 $ 6,010
Interest Expense 2,388 2,298 2,413 2,507
---------- ---------- ---------- ----------
Net Interest
Income 3,226 3,206 3,470 3,503
Provision for Loan
Losses 300 300 300 300
---------- ---------- ---------- ----------
Net Interest Income
after Provision
for Loan Losses 2,926 2,906 3,170 3,203
Non-interest Income 1,200 1,059 796 2,180
Non-interest Expense 2,649 2,577 2,560 2,938
---------- ---------- ---------- ----------
Income before
Income Tax 1,477 1,388 1,406 2,445
Provision for
Income taxes 554 498 503 897
---------- ---------- ---------- ----------
Net Income $ 923 $ 890 $ 903 $ 1,548
========== ========== ========== ==========
Basic Net Income
per Common Share $ 0.37 $ 0.35 $ 0.36 $ 0.62
========== ========== ========== ==========
Diluted Net Income
per Common Share $ 0.36 $ 0.35 $ 0.35 $ 0.60
========== ========== ========== ==========
Basic Weighted
Average Shares
Outstanding 2,510,526 2,512,600 2,513,958 2,516,191
========== ========== ========== ==========
Diluted Weighted
Average Shares
Outstanding 2,558,299 2,568,601 2,561,891 2,554,050
========== ========== ========== ==========
Quarter ended
-----------------------------------------------------------
2002-2003 June 30, 2002 Sept. 30, 2002 Dec. 31, 2002 Mar. 31, 2003
------------- -------------- ------------- -------------
Interest Income $ 6,002 $ 6,001 $ 5,972 $ 5,685
Interest Expense 2,512 2,538 2,547 2,419
---------- ---------- ---------- ----------
Net Interest
Income 3,490 3,463 3,425 3,266
Provision for Loan
Losses 450 450 450 450
---------- ---------- ---------- ----------
Net Interest Income
after Provision
for Loan Losses 3,040 3,013 2,975 2,816
Noninterest Income 799 882 1,108 1,022
Noninterest Expense 2,684 2,579 2,597 2,623
---------- ---------- ---------- ----------
Income before
Income Tax 1,155 1,316 1,486 1,215
Provision for Income
taxes 438 502 559 442
---------- ---------- ---------- ----------
Net Income $ 717 $ 814 $ 927 $ 773
========== ========== ========== ==========
Basic Net Income
per Common Share $ 0.29 $ 0.32 $ 0.37 $ 0.31
========== ========== ========== ==========
Diluted Net Income
per $ 0.28 $ 0.32 $ 0.36 $ 0.30
========== ========== ========== ==========
Basic Weighted
Average Shares
Outstanding 2,507,573 2,509,707 2,509,484 2,508,331
========== ========== ========== ==========
Diluted Weighted
Average Shares
Outstanding 2,564,795 2,565,969 2,559,299 2,555,176
========== ========== ========== ==========
49
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
SHAREHOLDERS INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held at 2:00 p.m., Thursday, July
22, 2004 at the City of Aiken Municipal Conference Center, 215 The Alley,
Aiken, SC.
STOCK LISTING
The Company's stock is traded on the Over-The-Counter-Bulleting Board under
the symbol "SFDL". The stock began trading on the Bulletin Board in October
2003.
PRICE RANGE OF COMMON STOCK
The table below shows the range of high and low bid prices. These prices
represent actual transactions and do not include retail markups, markdowns or
commissions. Market makers include Sterne, Agee, and Leach, Inc., Trident
Securities, Inc., A.G. Edwards and Sons, Inc., Hill, Thompson, and Magid, and
Monroe Securities, Inc.
Quarter Ending High Low
-------------- ------- -------
06-30-02 $ 24.00 $ 21.67
09-30-02 $ 22.99 $ 22.11
12-31-02 $ 22.31 $ 21.33
03-31-03 $ 21.33 $ 20.00
06-30-03 $ 20.98 $ 20.98
09-30-03 $ 24.50 $ 22.25
12-31-03 $ 25.50 $ 23.25
03-31-04 $ 25.40 $ 19.75
The prices in the table above are adjusted for a 3-for-2 stock split which
occurred in the fiscal year ended March 31, 2003.
As of March 31, 2004, the Company had approximately 475 shareholders and
2,533,291 outstanding shares of common stock.
DIVIDENDS
The first quarterly dividend on the stock was paid to shareholders on March
15, 1991. Dividends will be paid upon the determination of the Board of
Directors that such payment is consistent with the long-term interest of the
Company. The factors affecting this determination include the Company's
current and projected earnings, operating results, financial condition,
regulatory restrictions, future growth plans, and other relevant factors. The
Company declared and paid dividends of $0.0133 per share for each of the four
quarters of the fiscal year ended March 31, 2002. In fiscal year ended March
31, 2003, the Company paid cash dividends of $0.0133 for the first three
quarters of the fiscal year. After the 3-for-2 stock split which occurred
during the quarter ended March 31, 2003, the Company paid $0.02 per share cash
dividend for that quarter. The cash dividends are stated on a post split
basis. The Company paid $0.02 per share cash dividends for each of the
quarters during fiscal 2003-2004.
The ability of the Company to pay dividends depends primarily on the ability
of the Bank to pay dividends to the Company. The Bank may not declare or pay
a cash dividend on its stock or repurchase shares of its stock if the offset
thereof would be to cause its regulatory capital to be reduced below the
amount required for the liquidation account or to meet applicable regulatory
capital requirements. Pursuant to the OTS regulations, Tier 1 Associations
(associations that before and after the proposed distribution meet or exceed
their fully phased-in capital requirements) may make capital distributions
during any calendar year equal to 100% of net income for the year-to-date plus
50% of the amount by which the association's total capital exceeds its fully
phased-in capital requirement as measured at the beginning of the capital
year. However, a Tier 1 Association deemed to be in need of more than normal
supervision by the OTS may be downgraded to a Tier 2 or Tier 3 Association as
a result of such a determination. The Bank is also required to give the OTS
30 days notice prior to the declaration of a dividend. Unlike the Bank, there
is no regulatory restriction on the payment of dividends by the Company.
However, it is subject to the requirements of South Carolina. South Carolina
generally prohibits the Company from paying dividends if, after giving effect
to a proposed dividend: (1) the Company would be unable to pay its debts as
they become due in the normal course of business, or (2) the Company's total
assets would be less than its total liabilities plus the sum that would be
needed to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those receiving the dividend. The
ability of the Company to pay dividends depends primarily on the ability of
the Bank to pay dividends to the Company.
50
SHAREHOLDER INFORMATION
ANNUAL AND OTHER REPORTS
The Company is required to file an annual report on Form 10-K for its fiscal
year ended March 31, 2004 with the Securities and Exchange Commission. Copies
of Form 10-K, Security Federal Corporation's annual report, and the Company's
quarterly reports may be obtained from and inquiries may be addressed to Mrs.
Ruth L. Vance of Security Federal Corporation.
GENERAL INQUIRIES TRANSFER AGENT SPECIAL COUNSEL
Mrs. Ruth L. Vance Security Federal Breyer & Associates, PC
Security Federal Corporation Suite 785
Corp. 1705 Whiskey Road, S 8180 Greensboro Drive
1705 Whiskey Road, S P.O. Box 810 McLean, VA 22102
P.O. Box 810 Aiken, SC 29802-0810
Aiken, SC 29802-0810
Phone: 803-641-3000
Toll free: 866-581-3000
INDEPENDENT AUDITORS
Elliott Davis, LLC
211 York Street, N.E.
Suite One
P.O. Box 930
Aiken, SC 29802-0930
51
BOARD OF DIRECTORS
T. Clifton Weeks Sen. Thomas L. Moore Harry O. Weeks, Jr.
Chairman President Business Dev. Executive
Security Federal Corporation Boiler Efficiency, Inc. Hutson-Etherredge Co.
Aiken, SC Clearwater, SC Aiken, SC
Dr. Robert E. Alexander Timothy W. Simmons J. Chris Verenes
Chancellor Emeritus President/CEO President
Univ. of SC at Aiken Security Federal Corp. Security Federal Bank
Aiken, SC Aiken, SC Aiken, SC
Hon. William Clyburn G. L. Toole, III
Advisor for Community Attorney-At-Law
Alliances Aiken, SC
WSRC
Aiken, SC
Directors Emeriti:
Walter E. Brooker, Sr.
President, Brooker's Inc.
Denmark, SC
Robert E. Johnson
Corporate Secretary
Attorney-At-Law (Retired)
Aiken, SC
52
BANK ADVISORY BOARDS
NORTH AUGUSTA
P. Richard Borden Rev. G.L. Brightharp Helen H. Butler
Owner Owner Retired Banker
Borden Pest Control G.L. Brightharp & Sons Mortuary North Augusta, SC
North Augusta, SC North Augusta, SC
Sen. Thomas L. Moore John P. Potter
President Director of Finance
Boiler Efficiency, Inc. City of North Augusta
Clearwater, SC North Augusta, SC
WAGENER
M. Judson Busbee Chad G. Ingram Mary T. Lybrand Michael L. Miller
Owner Vice President Retired Banker Anesthesiologist
Busbee Hardware New World Enterprises Wagener, SC Palmetto Health
Wagener, SC Wagener, SC Richland Memorial
Hospital
Columbia, SC
Richard H. Sumpter
Retired Educator
Wagener, SC
MIDLAND VALLEY
Charles A. Hilton Rev. Nathaniel Irvin, Sr. Gloria Busch-Johnson
General Manager Pastor Consultant
Breezy Hill Old Storm Branch Aiken, SC
Water& Sewer Baptist Baptist Church
Graniteville, SC Clearwater, SC
Sen. Thomas L. Moore Glenda K. Napier Carlton B. Shealy
President Co-Owner Owner
Boiler Efficiency, Inc. Napier Funeral Home C. Shealy Realty Builders &
Clearwater, SC Graniteville, SC Developers
North Augusta, SC
WEST COLUMBIA
Eleanor Powell Clark Dr. G. Tripp Jones L. Ed Kirkland, Jr.
Owner/Operator Physician Owner/Agent
B & E Enterprises Inc. SC Oncology Associates L. Ed Kirkland & Co., LLC
dba McDonald's West Columbia, SC Columbia, SC
Columbia, SC
Dianne Light Donald T. Martin Sandra Dooley Parker
Owner Controller, CPA Attorney
Diane's on Devine Nexsen, Pruet, Jacobs Dooley, Dooley, Spence,
& Dipmato's Deli & Pollard, LLP Parker & Hipp, PA
Columbia, SC West Columbia, SC Lexington, SC
L. Todd Sease Sen. Nikki G. Setzler Jan Hook-Stamps
Partner Sr. Partner Owner
Jumper, Carter, Sease Setzler & Scott, PA Southern Anesthesia &
Architects, PA Law Firm Surgical Co.
Columbia, SC West Columbia, SC West Columbia, SC
53
MANAGEMENT TEAM
T. Clifton Weeks Chairman of Security Federal Corporation
Timothy W. Simmons Chairman and Chief Executive Officer
G. L. Toole, III Vice President
Robert E. Johnson Corporate Secretary
J. Chris Verenes President
Roy G. Lindburg Treasurer and Chief Financial Officer
Floyd J. Blackmon Senior Vice President and Chief Operations Officer
Francis M. Thomas, Jr. Senior Vice President - Aiken Area Executive
Marian A. Shapiro Senior Vice President - Midlands Area Executive
Sandra M. Bartlett Vice President - Human Resources
Kathryn Y. Carr Vice President - Special Assets
Carol P. McCleskey Vice President and Branch Coordinator
Harley G. Henkes Internal Auditor and Compliance/Security Officer
Gabriele C. Dukes Vice President - Financial Counseling/Community
Development
Rodney K. Ingle Vice President - Business Development/Commercial Loans
Joseph C. Taylor Vice President - Operations Officer
Audrey Varn Vice President - Trust Administration
Janice S. Hauerwas Vice President - Mortgage Loan Originator
Gregory D. Warfield Vice President - Mortgage Loan Originator
James E. Bristow Vice President - Business Development/Commercial Loans
Lawrence M. Moran Vice President - Business Development/Commercial Loans
Paul T. Rideout Vice President - Business Development/Commercial Loans
Etta A. Petroff Assistant Vice President - Mortgage Loan Production/
Secondary Marketing
Ruth L. Vance Assistant Secretary and Assistant Vice President
Margaret A. Hurt Assistant Treasurer - Accounting
Laura B. Conway Assistant Vice President - Operations
Kathi J. Snipes Assistant Vice President - Financial Counseling
Patricia B. Moseley Assistant Vice President - Loan and Credit Card
Servicing
Ann C. Johnson Assistant Vice President - Purchasing and Facilities
Management
Elsie K. Dicks Assistant Vice President - Credit Administration
Barbara J. Davis Assistant Vice President - Mortgage Loan Underwriter
S. Kevin Price Assistant Vice President - Community Development
Jason S. Redd Assistant Vice President - Trust, Investment &
Insurance
BRANCH LOCATIONS
Whiskey Road, Aiken, SC
Dana S. Hall, Assistant Vice President/Manager
North Augusta, SC
S. Elaine Ivey, Assistant Vice President/Manager
Laurens Street, Aiken, SC
Vicky W. Moseley, Assistant Vice President/Manager
Richland Avenue, Aiken, SC
Nicole W. Simmons, Assistant Vice President/Manager
Wal-Mart, Aiken, SC
Tonya Key, Manager
Graniteville, SC
Kathy S. Williamson, Assistant Vice President/Manager
Langley, SC
Pat W. Guglieri, Assistant Vice President/Manager
Clearwater, SC
Gail W. Dotson, Assistant Vice President/Manager
Wagener, SC
Sharon M. Swift, Assistant Vice President/Manager
West Columbia, SC
Mary B. Clark, Assistant Vice President/Manager
Lexington, SC
Geena B. Copeland, Assistant Vice President/Manager
54
SECURITY FEDERAL TRUST, INC.
offers expert administrative, investment, record-keeping and fiduciary
services.
SECURITY FEDERAL INSURANCE, INC.
offers a complete range of insurance from the best underwriters in the
industry to provide property and casualty, life, disability, group health and
long term care insurance coverage.
SECURITY FEDERAL INVESTMENTS, INC.
offers advice-driven, personalized investment services to help customers
achieve their financial goals.
55
Exhibit 21
Subsidiaries of the Registrant
State of Percentage
Parent Subsidiary Incorporation of Ownership
- ------ ---------- ------------- ------------
Security Federal
Corporation Security Federal Bank United States 100%
Security Federal Security Federal
Bank Insurance South Carolina 100%
Security Federal
Investments South Carolina 100%
Security Federal Trust South Carolina 100%
Security Financial South Carolina 100%
Services Corporation
Exhibit 23
Consent of Elliott Davis, LLC
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------
The Board of Directors
Security Federal Corporation
We consent to incorporation by reference in the Registration Statements
on Form S-8 (Nos. 333-102337 and 333-31500) of our report dated April 30,
2004, relating to the consolidated balance sheet of Security Federal
Corporation and subsidiaries as of March 31, 2004 and the related consolidated
statements of income, shareholders' equity and cash flows for the year then
ended, which report appears in the March 31, 2004 Annual Report on Form 10-K,
and Amendment No. 1 on Form 10-K/A.
/s/Elliott Davis, LLC
Columbia, South Carolina
September 1, 2004
Exhibit 31.1
Certification Required
by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934
I, Timothy W. Simmons, certify that:
1. I have reviewed this annual report on Form 10-K 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 periods 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
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 26, 2004
/s/ Timothy W. Simmons
--------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
Exhibit 31.2
Certification Required
by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934
I, Roy G. Lindburg, certify that:
1. I have reviewed this annual report on Form 10-K 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 periods 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
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 26, 2004
/s/ Roy G. Lindburg
--------------------------------------
Roy G. Lindburg
Treasurer and Chief Financial Officer
Exhibit 32
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 Annual Report on Form
10-K, that:
1. the report fully complies with the requirements of Sections 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
President and Chief Executive Officer Treasurer and Chief Financial Officer
Dated: August 26, 2004