SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD:
FROM: TO:
------------------ -------------------
COMMISSION FILE NUMBER: 0-16120
SECURITY FEDERAL CORPORATION
South Carolina 57-0858504
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1705 WHISKEY ROAD, AIKEN, SOUTH CAROLINA 29801
(Address of Principal Executive Office) (Zip code)
(803) 641-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
-------- ---------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
-------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
CLASS: OUTSTANDING SHARES AT: SHARES:
-------------------- ---------------------- -----------
Common Stock, par
value $0.01 per share October 31, 2004 2,539,891
INDEX
- ------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at September 30, 2004
and March 31, 2004 1
Consolidated Statement of Income for the Three and Six
Months Ended September 30, 2004 and 2003 2
Consolidated Statements of Shareholders' Equity and
Comprehensive Income at September 30, 2003and 2004 4
Consolidated Statements of Cash Flows for the Six Months
Ended September 30, 2004 and 2003 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 19
Item 4. Controls and Procedures 19
- ------------------------------------------------------------------------------
PART II. OTHER INFORMATION
Other Information 20
Signatures 21
- ------------------------------------------------------------------------------
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information is included in the consolidated financial statements and related
notes.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets
September 30, 2004 March 31, 2004
------------------ --------------
Assets: (Unaudited) (Audited)
Cash And Cash Equivalents $ 8,863,658 $ 6,749,211
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized cost
of $174,857,857 at September 30, 2004
and $173,300,028 at March 31, 2004) 175,192,638 174,411,819
Held To Maturity: (Fair value of
$71,147,966 at September 30, 2004 and
$71,686,256 at March 31, 2004) 71,222,565 71,303,507
------------ ------------
Total Investment And Mortgage-Backed
Securities 246,415,203 245,715,326
------------ ------------
Loans Receivable, Net:
Held For Sale 1,587,308 1,703,869
Held For Investment: (Net of allowance
of $6,083,146 at September 30, 2004 and
$5,763,935 at March 31, 2004) 277,671,865 258,190,791
------------ ------------
Total Loans Receivable, Net 279,259,173 259,894,660
------------ ------------
Accrued Interest Receivable:
Loans 860,080 902,589
Mortgage-Backed Securities 574,064 549,541
Investments 736,876 778,725
Premises And Equipment, Net 7,831,656 6,562,734
Federal Home Loan Bank Stock, At Cost 4,968,200 4,816,800
Repossessed Assets Acquired In Settlement
Of Loans 97,000 50,869
Other Assets 3,164,259 1,984,598
------------ ------------
Total Assets $552,770,169 $528,005,053
============ ============
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $408,416,610 $389,592,645
Advances From Federal Home Loan Bank 100,481,000 96,336,000
Other Borrowed Money 5,914,754 5,477,023
Advance Payments By Borrowers For Taxes
And Insurance 623,272 317,421
Other Liabilities 2,698,571 2,810,049
------------ ------------
Total Liabilities $518,134,207 $494,533,138
------------ ------------
Shareholders' Equity:
Serial Preferred Stock, $.01 Par Value;
Authorized Shares - 200,000; Issued
And Outstanding Shares - None $ - $ -
Common Stock, $.01 Par Value; Authorized
Shares 5,000,000; Issued - 2,539,291
And Outstanding Shares - 2,525,562 At
September 30, 2004 And 2,533,291 And
2,516,191 At March 31, 2004 25,393 25,333
Additional Paid-In Capital 4,123,594 4,013,674
Indirect Guarantee Of Employee Stock
Ownership Trust Debt (276,217) (336,972)
Accumulated Other Comprehensive Income
(Loss) 207,698 689,755
Retained Earnings, Substantially Restricted 30,555,494 29,080,125
------------ ------------
Total Shareholders' Equity $ 34,635,962 $ 33,471,915
------------ ------------
Total Liabilities And Shareholders' Equity $552,770,169 $528,005,053
============ ============
See accompanying notes to consolidated financial statements.
1
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended September 30,
--------------------------------
2004 2003
-------------- --------------
Interest Income:
Loans $ 4,016,449 $ 3,860,169
Mortgage-Backed Securities 1,890,851 961,039
Investment Securities 328,646 677,782
Other 6,129 4,813
----------- -----------
Total Interest Income 6,242,075 5,503,803
----------- -----------
Interest Expense:
NOW And Money Market Accounts 968,523 709,868
Passbook Accounts 43,569 43,322
Certificate Accounts 851,749 916,115
Advances And Other Borrowed Money 1,016,367 628,088
----------- -----------
Total Interest Expense 2,880,208 2,297,393
----------- -----------
Net Interest Income 3,361,867 3,206,410
Provision For Loan Losses 195,000 300,000
----------- -----------
Net Interest Income After Provision For
Loan Losses 3,166,867 2,906,410
----------- -----------
Other Income:
Gain On Sale Of Loans 116,398 413,685
Loan Servicing Fees 43,469 52,424
Service Fees On Deposit Accounts 311,684 339,684
Other 252,857 253,011
----------- -----------
Total Other Income 724,408 1,058,804
----------- -----------
General And Administrative Expenses:
Salaries And Employee Benefits 1,586,088 1,428,376
Occupancy 269,173 237,859
Advertising 42,903 77,648
Depreciation And Maintenance Of Equipment 261,098 273,885
FDIC Insurance Premiums 14,192 14,072
Other 537,910 545,601
----------- -----------
Total General And Administrative Expenses 2,711,364 2,577,441
----------- -----------
Income Before Income Taxes 1,179,911 1,387,773
Provision For Income Taxes 379,905 497,912
----------- -----------
Net Income $ 800,006 $ 889,861
=========== ===========
Basic Net Income Per Common Share $ 0.32 $ 0.35
=========== ===========
Diluted Net Income Per Common Share $ 0.31 $ 0.35
=========== ===========
Cash Dividend Per Share On Common Stock $ 0.03 $ 0.02
=========== ===========
Basic Weighted Average Shares Outstanding 2,519,627 2,512,600
=========== ===========
Diluted Weighted Average Shares Outstanding 2,555,774 2,568,601
=========== ===========
See accompanying notes to consolidated financial statements.
2
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Six Months Ended September 30,
------------------------------
2004 2003
------------- ------------
Interest Income:
Loans $ 7,851,710 $ 7,815,674
Mortgage-Backed Securities 2,769,212 1,883,118
Investment Securities 1,651,924 1,409,165
Other 12,729 9,581
----------- -----------
Total Interest Income 12,285,575 11,117,538
----------- -----------
Interest Expense:
NOW And Money Market Accounts 1,863,136 1,374,260
Passbook Accounts 86,968 88,978
Certificate Accounts 1,622,617 1,973,215
Advances And Other Borrowed Money 1,903,137 1,249,071
----------- -----------
Total Interest Expense 5,475,858 4,685,524
----------- -----------
Net Interest Income 6,809,717 6,432,014
Provision For Loan Losses 390,000 600,000
----------- -----------
Net Interest Income After Provision For
Loan Losses 6,419,717 5,832,014
----------- -----------
Other Income:
Gain On Sale Of Loans 238,823 1,056,236
Loan Servicing Fees 87,106 101,611
Service Fees On Deposit Accounts 625,364 691,296
Other 432,070 410,225
----------- -----------
Total Other Income 1,383,363 2,259,368
----------- -----------
General And Administrative Expenses:
Salaries And Employee Benefits 3,184,913 3,041,032
Occupancy 523,708 456,919
Advertising 74,525 104,180
Depreciation And Maintenance Of Equipment 537,022 537,716
FDIC Insurance Premiums 28,897 27,667
Other 1,056,077 1,059,315
----------- -----------
Total General And Administrative Expenses 5,405,142 5,226,829
----------- -----------
Income Before Income Taxes 2,397,938 2,864,553
Provision For Income Taxes 795,905 1,052,033
----------- -----------
Net Income $ 1,602,033 $ 1,812,520
=========== ===========
Basic Net Income Per Common Share $ 0.64 $ 0.72
=========== ===========
Diluted Net Income Per Common Share $ 0.63 $ 0.71
=========== ===========
Cash Dividend Per Share On Common Stock $ 0.05 $ 0.04
=========== ===========
Basic Weighted Average Shares Outstanding 2,521,114 2,511,563
=========== ===========
Diluted Weighted Average Shares Outstanding 2,559,333 2,563,450
=========== ===========
See accompanying notes to consolidated financial statements.
3
Security Federal Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Unaudited)
Accumulated
Additional Indirect Other
Common Paid-In Guarantee of Comprehensive Retained
Stock Capital ESOP Debt Income (Loss) Earnings Total
------ ---------- ---------- ------------- ---------- ----------
<s> <c> <c> <c> <c> <c> <c>
Beginning Balance At
March 31, 2003 $25,298 $3,995,230 $(444,685) $ 1,444,585 $25,019,525 $30,039,953
Net Income - - - - 1,812,520 1,812,520
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Losses On Securities
Available For Sale - - - (1,280,584) - (1,280,584)
-----------
Comprehensive Income 531,936
Decrease In Indirect
Guarantee of ESOP Debt 107,713 - - 107,713
Exercise of Stock Options 19 10,214 10,233
Cash Dividends ($.04 per
share) - - - - (101,231) (101,231)
------- ---------- --------- ----------- ----------- -----------
Balance at
September 30, 2003 $25,317 $4,005,444 $(336,972) $ 164,001 $26,730,814 $30,588,604
======= ========== ========= =========== =========== ===========
Beginning Balance At
March 31, 2004 $25,333 $4,013,674 $(336,972) $ 689,755 $29,080,125 $33,471,915
Net Income - - - - 1,602,033 1,602,033
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Losses On Securities
Available For Sale - - - (482,057) - (482,057)
-----------
Comprehensive Income 1,119,976
Decrease In Indirect
Guarantee of ESOP Debt - - 60,755 - - 60,755
Exercise Of Stock Options 60 109,920 109,980
Cash Dividends ($.05 per
share) - - - - (126,664) (126,664)
------- ---------- --------- ----------- ----------- -----------
Balance at
September 30, 2004 $25,393 $4,123,594 $(276,217) $ 207,698 $30,555,494 $34,635,962
======= ========== ========= =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended September 30,
------------------------------
2004 2003
------------ -------------
Cash Flows From Operating Activities:
Net Income $ 1,602,033 $ 1,812,520
Adjustments To Reconcile Net Income To
Net Cash Provided By Operating Activities:
Depreciation Expense 430,528 404,527
Discount Accretion And Premium Amortization 627,920 371,748
Provisions For Losses On Loans And Real
Estate 390,000 600,000
Gain On Sale Of Loans (238,823) (1,056,236)
Gain On Sale Of Real Estate (31,773) (41,496)
Amortization Of Deferred Fees On Loans (99,639) (105,060)
Proceeds From Sale Of Loans Held For Sale 13,442,690 49,676,277
Origination Of Loans For Sale (13,087,306) (46,098,909)
(Increase) Decrease In Accrued Interest
Receivable:
Loans 42,509 69,283
Mortgage-Backed Securities (24,523) (78,466)
Investments 41,849 (26,551)
Increase In Advance Payments By Borrowers 305,851 286,090
Gain on Disposition of Premises and Equipment (3,325) (150)
Other, Net (935,431) (1,459,054)
------------ ------------
Net Cash Provided (Used) By Operating
Activities 2,462,560 4,354,523
------------ ------------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Available For Sale 26,013,326 34,006,208
Principal Repayments On Mortgage-Backed
Securities Held To Maturity 71,484 491,582
Purchase Of Investment Securities Held To
Maturity (11,991,800) (62,945,138)
Purchase Of Mortgage-Backed Securities
Available For Sale (37,197,817) (71,060,405)
Maturities Of Investment Securities
Available For Sale 9,000,000 26,214,104
Maturities of Investment Securities Held
To Maturity 12,000,000 22,030,331
Purchase Of FHLB Stock (2,132,500) (2,281,700)
Redemption Of FHLB Stock 1,981,100 1,351,300
(Increase) Decrease In Loans To Customers (19,957,332) 2,014,023
Proceeds From Sale Of Repossessed Assets 171,539 463,746
Purchase And Improvement Of Premises And
Equipment (1,699,450) (1,662,580)
Proceeds from Sale of Premises And Equipment 3,325 150
------------ ------------
Net Cash Used By Investing Activities (23,738,125) (51,378,379)
------------ ------------
Cash Flows From Financing Activities:
Increase In Deposit Accounts 18,823,965 25,451,829
Proceeds From FHLB Advances 68,328,000 89,875,000
Repayment Of FHLB Advances (64,183,000) (70,318,000)
Net Proceeds Of Other Borrowings 437,731 1,744,120
Dividends To Shareholders (126,664) (101,231)
Proceeds From Exercise of Stock Options 109,980 10,233
------------ ------------
Net Cash Provided By Financing Activities 23,390,012 46,661,951
------------ ------------
(Continued)
5
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended September 30,
------------------------------
2004 2003
------------ -------------
Net Increase In Cash And Cash Equivalents 2,114,447 (361,905)
Cash And Cash Equivalents At Beginning
Of Period 6,749,211 8,238,690
------------ ------------
Cash And Cash Equivalents At End Of Period $ 8,863,658 $ 7,876,785
============ ============
Supplemental Disclosure Of Cash Flows
Information:
Cash Paid During The Period For Interest $ 5,453,627 $ 4,824,535
Cash Paid During The Period For Income Taxes $ 1,257,012 $ 935,888
Additions To Repossessed Acquired Through
Foreclosure $ 185,897 $ 343,800
Increase (Decrease) In Unrealized Net Gain
On Securities Available For Sale,
Net Of Taxes $ (482,057) $ (1,280,584)
See accompanying notes to consolidated financial statements.
6
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and accounting principles generally
accepted in the United States of America; therefore, they do not include all
disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows. Such statements are unaudited but, in
the opinion of management, reflect all adjustments, which are of a normal
recurring nature and necessary for a fair presentation of results for the
selected interim periods. Users of financial information produced for interim
periods are encouraged to refer to the footnotes contained in the audited
financial statements appearing in our 2004 Annual Report to Shareholders when
reviewing interim financial statements. The results of operations for the
six-month period ended September 30, 2004 are not necessarily indicative of
the results that may be expected for the entire fiscal year. This Quarterly
Report on Form 10-Q contains certain forward-looking statements with respect
to the financial condition, results of operations, and business of Security
Federal Corporation. These forward-looking statements involve certain risks
and uncertainties. Factors that may cause actual results to differ materially
from those anticipated by such forward-looking statements include, but are not
limited to, changes in interest rates, the demand for loans, the regulatory
environment, general economic conditions and inflation, and the securities
markets. Management cautions readers of this Form 10-Q not to place undue
reliance on the forward-looking statements contained herein.
2. Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Security Federal Corporation (the "Company") and its wholly owned
subsidiary, Security Federal Bank (the "Bank"), and the Bank's wholly owned
subsidiaries, Security Federal Insurance, Inc. ("SFINS"), Security Federal
Investments, Inc. ("SFINV"), Security Federal Trust, Inc. ("SFT"), and
Security Financial Services Corporation ("SFSC"). The Bank is primarily
engaged in the business of accepting savings and demand deposits and
originating mortgage and other loans to individuals and small businesses for
various personal and commercial purposes. SFINS, SFINV, and SFT were formed
during fiscal 2002 and began operation during the December 2001 quarter.
SFINS is an insurance agency offering business, health, home and life
insurance. SFINV engages primarily in investment brokerage services. SFT
offers trust, financial planning and financial management services. SFSC is
currently inactive.
3. Loans Receivable, Net
Loans receivable, net, at September 30, 2004 and March 31, 2004 consisted of
the following:
Loans held for sale were $1,587,308 and $1,703,869 at September 30, 2004 and
March 31, 2004, respectively.
Loans Held For Investment: September 30, 2004 March 31, 2004
------------------ --------------
Residential Real Estate $ 117,324,774 $ 109,722,301
Consumer 48,381,215 45,641,450
Commercial Business & Real Estate 134,208,380 121,111,848
------------- -------------
299,914,369 276,475,599
------------- -------------
Less:
Allowance For Possible Loan Loss 6,083,146 5,763,935
Loans In Process 15,995,508 12,356,346
Deferred Loan Fees 163,850 164,527
------------- -------------
22,242,504 18,284,808
------------- -------------
$ 277,671,865 $ 258,190,791
============= =============
The following is a reconciliation of the allowance for loan losses for the six
months ending:
September 30, 2004 March 31, 2004
------------------ --------------
Beginning Balance $ 5,763,935 $ 4,911,224
Provision 390,000 600,000
Charge-offs (190,831) (238,893)
Recoveries 120,042 104,631
------------- -------------
Ending Balance $ 6,083,146 $ 5,376,962
============= =============
7
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
4. Securities
Investment and Mortgage-Backed Securities, Held to Maturity
- -----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities held to maturity are as
follows:
Gross Gross
September 30, 2004 Amortized Unrealized Unrealized
- ------------------ Cost Gains Losses Fair Value
--------- ---------- ---------- -----------
US Government and Agency
Obligations $70,944,225 $ 195,893 $ 290,327 $70,849,791
Mortgage-Backed
Securities 278,340 19,835 - 298,175
----------- --------- --------- -----------
Total $71,222,565 $ 215,728 $ 290,327 $71,147,966
=========== ========= ========= ===========
March 31, 2004
- --------------
US Government and Agency
Obligations $70,953,710 $ 448,405 $ 88,542 $71,313,573
Mortgage-Backed
Securities 349,797 22,886 - 372,683
----------- --------- --------- -----------
Total $71,303,507 $ 471,291 $ 88,542 $71,686,256
=========== ========= ========= ===========
Investment And Mortgage-Backed Securities, Available For Sale
- -------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities available for sale are as
follows:
Gross Gross
September 30, 2004 Amortized Unrealized Unrealized
- ------------------ Cost Gains Losses Fair Value
--------- ---------- ---------- -----------
US Government and Agency
Obligations $ 7,578,161 $ 67,307 $ - $ 7,645,468
Mortgage-Backed
Securities 167,279,696 1,060,936 793,462 167,547,170
------------ ---------- --------- ------------
Total $174,857,857 $1,128,243 $ 793,462 $175,192,638
============ ========== ========= ============
March 31, 2004
- --------------
US Government and Agency
Obligations $ 16,603,568 $ 296,338 $ - $ 16,899,906
Mortgage-Backed
Securities 156,696,460 1,437,219 621,766 157,511,913
------------ ---------- --------- ------------
Total $173,300,028 $1,733,557 $ 621,766 $174,411,819
============ ========== ========= ============
8
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
5. Deposit Accounts
A summary of deposit accounts by type with weighted average rates is as
follows:
September 30, 2004 March 31, 2004
-------------------- --------------------
Demand Accounts: Balance Rate Balance Rate
------------ ---- ------------ ----
Checking $ 80,738,953 0.53% $ 80,738,298 0.47%
Money Market 166,842,803 2.14% 158,587,076 1.97%
Regular Savings 17,538,212 0.99% 17,367,047 0.98%
------------ ------------
Total Demand Accounts 265,119,968 1.57% 256,692,421 1.43%
------------ ------------
Certificate Accounts:
0 - 4.99% 133,199,076 122,599,195
5.00 - 6.99% 10,097,566 10,301,029
------------ ------------
Total Certificate Accounts 143,296,642 2.52% 132,900,224 2.26%
------------ ------------
Total Deposit Accounts $408,416,610 1.90% $389,592,645 1.71%
============ ============
6. Advances From Federal Home Loan Bank ("FHLB")
FHLB advances are summarized by year of maturity and weighted average interest
rate in the table below:
September 30, 2004 March 31, 2004
-------------------- --------------------
Fiscal Year Due: Balance Rate Balance Rate
------------ ---- ------------ ----
2005 $ 6,118,000 5.74% $13,336,000 4.92%
2006 33,000,000 4.18% 33,000,000 4.09%
2007 13,000,000 2.61% 10,000,000 2.66%
2008 10,000,000 2.96% 10,000,000 2.96%
2009 20,000,000 2.80% 20,000,000 2.80%
Thereafter 18,363,000 3.18% 10,000,000 3.29%
------------ -----------
Total Advances $100,481,000 3.49% $96,336,000 3.59%
============ ===========
These advances are secured by a blanket collateral agreement with the FHLB by
pledging the Bank's portfolio of residential first mortgage loans and
approximately $52.4 million in investment securities at September 30, 2004.
Advances are subject to prepayment penalties.
The following table shows callable FHLB advances as of the dates indicated.
These advances are also included in the above table. All callable advances
are callable at the option of the FHLB. If an advance is called, the Bank has
the option to payoff the advance without penalty, re-borrow funds on different
terms, or convert the advance to a three-month floating rate advance tied to
LIBOR.
As of September 30, 2004
- -----------------------------------------------------------------------------------------------------------
Borrow Date Maturity Date Amount Int. Rate Type Call Dates
- ----------- ------------- ---------- --------- ----------- ---------------------------------
<s> <c> <c> <c> <c> <c>
11/10/00 11/10/05 $ 5,000,000 5.85% Multi-Call 11/10/04 and quarterly thereafter
09/04/02 09/04/07 5,000,000 2.82% 1 Time Call 09/06/05
11/07/02 11/07/12 5,000,000 3.354% 1 Time Call 11/07/07
10/24/03 10/24/08 10,000,000 2.705% Multi-call 10/24/06 and quarterly thereafter
12/10/03 12/10/08 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
04/16/04 04/16/14 3,000,000 3.33% 1 Time Call 04/16/08
09/16/04 09/16/09 5,000,000 3.09% 1 Time Call 09/17/07
9
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
As of March 31, 2004
- -----------------------------------------------------------------------------------------------------------
Borrow Date Maturity Date Amount Int. Rate Type Call Dates
- ----------- ------------- ---------- --------- ----------- ---------------------------------
<s> <c> <c> <c> <c> <c>
11/10/00 11/10/05 5,000,000 5.85% Multi-Call 05/10/04 and quarterly thereafter
09/04/02 09/04/07 5,000,000 2.82% 1 Time Call 09/06/05
11/07/02 11/07/12 5,000,000 3.35% 1 Time Call 11/07/07
03/10/03 03/10/06 5,000,000 1.15% Multi-Call 06/10/04 and quarterly thereafter
10/24/03 10/24/08 10,000,000 2.705% Multi-Call 10/24/06 and quarterly thereafter
12/10/03 12/10/08 5,000,000 2.16% Multi-Call 12/12/05 and quarterly thereafter
02/20/04 02/20/14 5,000,000 2.14 1 Time Call 02/20/09
7. Regulatory Matters
The following table reconciles the Bank's shareholders' equity to its various
regulatory capital positions:
September 30, 2004 March 31, 2004
------------------ --------------
(In Thousands)
Bank's Shareholders' Equity $ 33,953 $ 32,830
Unrealized Loss (Gain) On Available
For Sale Of Securities, Net Of Tax (208) (690)
Reduction For Goodwill And Other
Intangibles - -
-------- --------
Tangible Capital 33,745 32,140
Qualifying Core Deposits And Intangible
Assets - -
-------- --------
Core Capital 33,745 32,140
Supplemental Capital 3,702 3,412
Assets Required To Be Deducted (46) (54)
-------- --------
Risk-Based Capital $ 37,401 $ 35,498
======== ========
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at September 30, 2004:
(Dollars in Thousands)
----------------------------------------------------------------------------------
Amt. Required % Required Actual Amt. Actual % Excess Amt. Excess %
----------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
Tangible Capital $11,046 2.0% $33,745 6.11% $22,699 4.11%
Tier 1 Leverage (Core)
Capital 22,092 4.0% 33,745 6.11% 11,653 2.11%
Total Risk-Based Capital 23,690 8.0% 37,401 12.63% 13,711 4.63%
Tier 1 Risk-Based (Core)
Capital 11,840 4.0% 33,745 11.40% 21,905 7.40%
8. Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
SFAS No. 128 specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock such as options, warrants, convertible
securities or contingent stock agreements if those securities trade in a
public market.
This standard specifies computation and presentation requirements for both
basic EPS and, for entities with complex capital structures, diluted EPS.
Basic EPS is computed by dividing net income by the weighted average number of
common shares outstanding. Diluted EPS is similar to the computation of basic
EPS except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. The dilutive effect of options
outstanding under the Company's stock option plan is reflected in diluted
earnings per share by application of the treasury stock method.
10
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
For the Quarter Ended
--------------------------------------------------------
September 30, 2004
--------------------------------------------------------
Income
(Numerator) Amount Shares (Denominator) Per Share
------------------ -------------------- -----------
Basic EPS $ 800,006 2,519,627 $ 0.32
Effect of Diluted
Securities:
Stock Options - 22,417 (0.006)
ESOP - 13,730 (0.004)
---------- --------- -------
Diluted EPS $ 800,006 2,555,774 $ 0.31
========== ========= =======
For the Quarter Ended
--------------------------------------------------------
September 30, 2003
--------------------------------------------------------
Income
(Numerator) Amount Shares (Denominator) Per Share
------------------ -------------------- -----------
Basic EPS $ 889,861 2,512,600 $ 0.35
Effect of Diluted
Securities:
Stock Options - 38,090 -
ESOP - 17,911 -
---------- --------- -------
Diluted EPS $ 889,861 2,568,601 $ 0.35
========== ========= =======
For the Six Months Ended
--------------------------------------------------------
September 30, 2004
--------------------------------------------------------
Income
(Numerator) Amount Shares (Denominator) Per Share
------------------ -------------------- -----------
Basic EPS $1,602,033 2,521,114 $ 0.64
Effect of Diluted
Securities:
Stock Options - 26,009 (0.007)
ESOP - 12,210 (0.003)
---------- --------- -------
Diluted EPS $1,602,033 2,559,333 $ 0.63
========== ========= =======
For the Six Months Ended
--------------------------------------------------------
September 30, 2003
--------------------------------------------------------
Income
(Numerator) Amount Shares (Denominator) Per Share
------------------ -------------------- -----------
Basic EPS $1,812,520 2,511,563 $ 0.72
Effect of Diluted
Securities:
Stock Options - 33,238 (0.006)
ESOP - 18,649 (0.004)
---------- --------- -------
Diluted EPS $1,812,520 2,563,450 $ 0.71
========== ========= =======
11
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
9. Stock-Based Compensation
The Company has a stock-based employee compensation plan which is accounted
for under the recognition and measurement principles of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. No stock-based employee compensation cost is
reflected in net income, as all stock options granted under these plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share as if we had applied the fair value recognition provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation for the six months and three months ended September 30,
2004 and 2003, respectively.
Three Months Ended Six Months Ended
September 30, September 30,
------------------- -------------------
2004 2003 2004 2003
------- ------ ------ ------
Net income, as reported $ 800,006 $ 889,861 $1,602,033 $1,812,520
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effect $ (57,124) $ (65,114) $ (114,248) $ (130,228)
Net Income, Pro Forma $ 742,882 $ 824,747 $1,487,785 $1,682,292
Basic earnings share:
As Reported $ .32 $ .35 $ .64 $ .72
Pro Forma $ .30 $ .33 $ .59 $ .67
Diluted earnings share:
As reported $ .31 $ .35 $ .63 $ .71
Pro forma $ .29 $ .33 $ .58 $ .66
12
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Changes in Financial Condition
Total assets of the Company increased $24.8 million or 4.7% during the six
months ended September 30, 2004 primarily as a result of an increase of $2.1
million or 31.3% in cash and cash equivalents and an increase of $19.4 million
or 7.5% increase in net loans receivable.
Residential real estate loans, net of loans in process, increased $4.0 million
or 4.1% during the six months ended September 30, 2004, commercial loans
increased $13.1 million or 10.8%, while consumer loans increased $2.7 million
or 6.0%. Loans held for sale decreased $117,000 or 6.9% during the same
period.
Repossessed assets increased $46,000 to $97,000 during the six months ended
September 30, 2004.
Non-accrual loans totaled $2.5 million at September 30, 2004 compared to $2.0
million at March 31, 2004. The Bank classifies all loans as non-accrual when
they become 90 days or more delinquent. At September 30, 2004, the Bank held
$1.3 million in impaired loans compared to $1.4 million at March 31, 2004.
The Bank includes troubled debt restructuring ("TDR") within the meaning of
SFAS No. 114 in impaired loans. At September 30, 2004, the Bank had six loans
totaling $445,000 in TDR's compared to seven loans totaling $646,000 at March
31, 2004. A commercial loan TDR of $212,000 secured by equipment, and a
$14,000 consumer loan TDR secured by a second mortgage on a residential
dwelling, were 30 days delinquent. The other four TDR's consisted of two
consumer loans totaling $141,000 secured by residential dwellings, a $21,000
unsecured commercial loan, and a $57,000 commercial loan secured by two rental
properties, all of which were current as of September 30, 2004.
Deposits increased $18.8 million or 4.8% to $408.4 million during the six
months ended September 30, 2004 as a result of competitive rates offered by
the Bank. FHLB advances increased $4.1 million or 4.3% to $100.5 million
during the same period. Other borrowings, consisting of commercial repurchase
sweep accounts, increased $438,000 or 8.0% to $5.9 million during the
six-month period.
The Board of Directors of the Company declared the 54th and 55th consecutive
quarterly dividend of $.02 and $.03 per share, in April and July 2004,
respectively, which totaled $127,000. The employee stock ownership trust of
the Company paid $61,000 of principal on the employee stock ownership plan
loan during the six-month period. Unrealized net gains on securities
available for sale, net of tax, decreased $482,000 during the six months ended
September 30, 2004 due to an increase in interest rates. The Company's net
income for the six-month period was $1.6 million. These items, in total,
increased shareholders' equity by $1.2 million or 3.5% during the six months
ended September 30, 2004. Book value per share was $13.71 at September 30,
2004 compared to $13.30 at March 31, 2004.
Liquidity and Capital Resources
In accordance with Office of Thrift Supervision ("OTS") regulations, the
Company is required to maintain sufficient liquidity to operate in a safe and
sound manner. The Company's current liquidity level is deemed adequate to
meet the requirements of normal operations, potential deposit outflows, and
loan demand while still allowing for optimal investment of funds and return on
assets.
Loan repayments and maturities of investments are a significant source of
funds, whereas loan disbursements and the purchase of investments are a
primary use of the Company's funds. During the six months ended September 30,
2004, loan disbursements exceeded loan repayments resulting in a $19.4
million or 7.5% increase in total net loans receivable.
Deposits and other borrowings are also an important source of funds for the
Company. During the six months ended September 30, 2004, deposits increased
$18.8 million and FHLB advances increased $4.1 million. The Bank had $65.3
million in additional borrowing capacity at the FHLB at the end of the period.
At September 30, 2004, the Bank had $82.7 million of certificates of deposit
maturing within one year. Based on previous experience, the Bank anticipates
a significant portion of these certificates will be renewed.
13
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources, Continued
Through its operations, the Bank has made contractual commitments to extend
credit in the ordinary course of its business activities. These commitments
are legally binding agreements to lend money to our customers at predetermined
interest rates for a specified period of time. At September 30, 2004, the
Bank had $26.7 million in unused consumer lines of credit, including home
equity lines and unsecured lines. The Bank also had $21.6 million in unused
commercial lines of credit and $682,000 in letters of credit committed to
customers. The majority of the $49.0 million will not be drawn at the same
time. The Bank evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary, by the Bank
upon extension of credit, is based on our credit evaluation of the borrower.
Collateral varies but may include accounts receivable, inventory, property,
plant and equipment, commercial and residential real estate. The Bank manages
the credit risk on these commitments by subjecting them to normal underwriting
and risk management processes.
Historically, the Company's cash flows from operating activities have been
relatively stable. The cash flow from investing activities have had a trend
of increasing outflows due to increases in purchases of mortgage-backed and
investment securities. The cash flows from financing activities have had a
trend of increased inflows as a result of increases in FHLB advances.
Management believes that the Company's liquidity will continue to be supported
by the Company's deposit base and borrowing capacity during the next year.
Critical Accounting Policies
We have adopted various accounting policies which govern the application of
accounting principles generally accepted in the United States in the
preparation of our financial statements. Our significant accounting policies
are described in the footnotes to the audited consolidated financial
statements at March 31, 2004 as filed in our annual report on Form 10-K.
Certain accounting policies involve significant judgements and assumptions by
us which have a material impact on the carrying value of certain assets and
liabilities. We consider these accounting policies to be critical accounting
policies. The judgments and assumptions we use are based on historical
experience and other factors, which we believe to be reasonable under the
circumstances. Because of the nature of the judgments and assumptions we
make, actual results could differ from these judgments and estimates which
could have a material impact on our carrying values of assets and liabilities
and our results of operations.
We believe the allowance for loan losses is a critical accounting policy that
requires the most significant judgements and estimates used in preparation of
our consolidated financial statements. The Company provides for loan losses
using the allowance method. Accordingly, all loan losses are charged to the
related allowance and all recoveries are credited to the allowance for loan
losses. Additions to the allowance for loan losses are provided by charges to
operations based on various factors, which, in Management's judgment, deserve
current recognition in estimating possible losses. Such factors considered by
Management include the fair value of the underlying collateral, stated
guarantees by the borrow, if applicable, the borrower's ability to repay from
other economic resources, growth and composition of the loan portfolios, the
relationship of the allowance for loan losses to the outstanding loans, loss
experience, delinquency trends, and general economic conditions. Management
evaluates the carrying value of the loans periodically and the allowance is
adjusted accordingly. While Management uses the best information available to
make evaluations, future adjustments may be necessary if economic conditions
differ substantially from the assumptions used in making these evaluations.
Allowance for loan losses are subject to periodic evaluations by various
authorities and may be subject to adjustments based upon the information that
is available at the time of their examination.
The Company values impaired loans at the loan's fair value if it is probable
that the Company will be unable to collect all amounts due according to the
terms of the loan agreement at the present value of expected cash flows, the
market price of the loan, if available, or the value of the underlying
collateral. Expected cash flows are required to be discounted at the loan's
effective interest rate. When the ultimate collectibility of an impaired
loan's principal is in doubt, wholly or partially, all cash receipts are
applied to principal. When this doubt does not exist, cash receipts are
applied under the contractual terms of the loan agreement first to interest
then to principal. Once the recorded principal balance has been reduced to
zero, future cash receipts are applied to interest income to the extent that
any interest has been foregone. Further cash receipts are recorded as
recoveries of any amounts previously charged off.
14
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Accounting and Reporting Changes
In November 2003, the Emerging Issues Task Force ("EITF") reached a consensus
that certain quantitative and qualitative disclosures should be required for
debt and marketable equity securities classified as available for sale or held
to maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the
balance sheet date but which other-than-temporary impairments has not been
recognized. Accordingly EITF issued EITF No. 03-1, "The Meaning of
Other-Than-Temporary Impairments and Its Application to Certain Investments."
The issue addresses the meaning of other-than-temporary impairments and its
application to investments classified as either available for sale or held to
maturity under SFAS No. 115 and provides guidance determining the amount of
impairment and additional quantitative and qualitative disclosures. The
guidance for determining the amount of impairment was scheduled to be
effective for periods ending after June 15, 2004, but has been delayed
indefinitely pending implementation guidance by the FASB. The disclosure
provisions of EITF No. 03-1 were effective for fiscal years ending after
December 15, 2003. Adopting the disclosure provisions of EITF No. 03-1 did
not have any impact on the Company's financial position or results of
operations.
In March 2004, the FASB issued an exposure draft on "Share-Based Payment".
The proposed Statement addresses the accounting for transactions in which an
enterprise receives employee services in exchange for a) equity instruments of
the enterprise or b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of the
such equity instruments. This proposed Statement would eliminate the ability
to account for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and generally would require
instead that such transactions be accounted for using a fair-value-based
method. This Statement, if approved, was scheduled to be effective for awards
that are granted, modified, or settled in fiscal years beginning after a)
December 15, 2004 for public entities and nonpublic entities that used the
fair-value-based method of accounting under the original provisions of
Statement 123 for recognition or pro forma disclosures purposes and b)
December 15, 2005 for all other nonpublic entities. On October 16, 2004, the
FASB delayed the effective date of this proposal by six months and anticipates
it will be effective by the third quarter of 2005. Retrospective application
of this Statement is not permitted. The adoption of this Statement, if
approved, could have an impact on the Company's financial position or results
of operations.
Other accounting standards that have been issued 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.
Impact of Inflation and Changing Prices
The consolidated financial statements, related notes, and other financial
information presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in relative purchasing power over time due to inflation.
Unlike industrial companies, substantially all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest
rates generally have a more significant impact on a financial institution's
performance than does inflation. See "Item 3. Quantitative and Qualitative
Disclosures about Market Risk" for additional discussions of changes in
interest rates.
15
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
- -------------------------------------------------------------------
Net Income
Net income was $800,000 for the three months ended September 30, 2004,
representing a decrease in earnings of $90,000 or 10.1% from $890,000 for the
same period in 2003. The primary reason for the decreased earnings was a
decrease in the gain on sale of mortgage loans offset partially by an increase
in net interest income and a decrease in the provision for loan losses.
Net Interest Income
Net interest income increased $155,000 or 4.9% to $3.4 million during the
three months ended September 30, 2004 as a result of an increase in interest
income offset in part by an increase in interest expense. Average interest
earning assets increased $81.9 million while average interest-bearing
liabilities increased $142.8 million. The interest rate spread decreased 31
basis points to 2.32% during the three months ended September 30, 2004
compared to the same period in 2003.
Interest income on loans increased $156,000 or 4.1% to $4.0 million during the
three months ended September 30, 2004 as a result of the average loan
portfolio balance increasing by $32.5 million despite the yield in the loan
portfolio decreasing 54 basis points Interest income from investment,
mortgage-backed, and other securities increased $582,000 or 35.4% as a result
of an increase in the average balance of the portfolio of $49.4 million and an
increase in the yield in the portfolio of 30 basis points. Total interest
income increased 738,000 or 13.4% to $6.2 million for the three months ended
September 30, 2004 from $5.5 million for the same period in 2003.
Total interest expense increased $583,000 or 25.4% to $2.9 million during the
three months ended September 30, 2004 compared to $2.3 million for the same
period one-year earlier. Interest expense on deposits increased $195,000 or
11.7% during the period as average interest bearing deposits grew $31.0
million compared to the average balance in the three months ended September
30, 2003 while the cost of deposits decreased 63 basis points. Interest
expense on advances and other borrowings increased $388,000 or 61.8% as the
cost of debt outstanding decreased 36 basis points during the 2004 period
compared to 2003 while average total borrowings outstanding increased
approximately $48.9 million.
Provision for Loan Losses
The Bank's provision for loan losses was $195,000 during the three months
ended September 30, 2004 compared to $300,000 for the quarter ended September
30, 2003. The amount of the provision is determined by management's on-going
monthly analysis of the loan portfolio. Non-accrual loans, which are loans
delinquent 90 days or more, were $2.5 million at September 30, 2004 compared
to $2.0 million at March 31, 2004. The ratio of allowance for loan losses to
the Company's total loans was 2.13% at September 30, 2004 compared to 2.17% at
March 31, 2004. Net charge-offs were $33,000 during the three months ended
September 30, 2004 compared to $46,000 during the same period in 2003.
Other Income
Total other income decreased $334,000 or 31.6% to $724,000 during the three
months ended September 30, 2004 compared to the same period a year ago,
primarily as a result of a decrease in the gain on sale of loans. Gain on
sale of loans decreased $297,000 or 71.9% to $116,000 during the period as the
origination and sale of fixed rate mortgages decreased. Loan servicing fees
decreased $9,000 to $43,000 while service fees on deposit accounts decreased
$28,000 or 8.2% to $312,000. Other miscellaneous income including credit life
insurance commissions, net gain on sale of repossessed assets, safe deposit
rental income, annuity and stock brokerage commissions, trust fees, and other
miscellaneous fees had no change during the three months ended September 30,
2004 compared to the same period last year.
16
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004, CONTINUED
- ------------------------------------------------------------------------------
General and Administrative Expenses
General and administrative expenses increased $134,000 or 5.2% to $2.7 million
during the three months ended September 30, 2004 compared to the same period
in 2003. Salaries and employee benefits expense increased $158,000 or 11.0%.
Occupancy expense increased $31,000 or 13.2% due primarily to the new
Lexington branch office, which opened in August 2003. Advertising expense
decreased $35,000 to $43,000. Depreciation and maintenance of equipment
expense decreased $13,000 or 4.7% during the quarterly period. FDIC insurance
premiums remained the same at $14,000 during the quarters ending September
2004 and 2003. Other miscellaneous expense, consisting of legal,
professional, and consulting expenses, stationery and office supplies, and
other sundry expenses, decreased $7,000 or 1.4% for the three months ended
September 30, 2004 compared to the three months ended September 30, 2003.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004
- -----------------------------------------------------------------
Net Income
Net income was $1.6 million for the six months ended September 30, 2004,
representing a decrease in earnings of $210,000 or 11.6% from $1.8 million for
the same period in 2003. The primary reason for the decreased earnings was a
decrease on the gain on sale of mortgage loans offset partially by an increase
in net interest income and a decrease in the provision for loan losses.
Net Interest Income
Net interest income increased $378,000 or 5.9% to $6.8 million during the six
months ended September 30, 2004 as a result of an increase in interest income
offset in part by an increase in interest expense. Average interest earning
assets increased $147.2 million while average interest-bearing liabilities
increased $139.4 million. The interest rate spread decreased 96 basis points
to 2.39% during the six months ended September 30, 2004 compared to the same
period in 2003.
Interest income on loans increased $36,000 to $7.9 million during the six
months ended September 30, 2004 as a result of the average loan portfolio
balance increasing by $31.0 million despite the yield in the loan portfolio
decreasing 146 basis points. Interest income from investment,
mortgage-backed, and other securities increased $1.1 million or 34.3% as a
result of an increase in the average balance of the portfolio of $116.2
million despite a decrease in the yield in the portfolio of 118 basis points.
Total interest income increased $1.2 million or 10.5% to $12.3 million for the
six months ended September 30, 2004 from $11.1 millionfor the same period in
2003.
Total interest expense increased $790,000 or 16.9% to $5.5 million during the
six months ended September 30, 2004 compared to $4.7 million for the same
period one-year earlier. Interest expense on deposits increased $136,000 or
4.0% during the period as average interest bearing deposits grew $72.03
million compared to the average balance in the six months ended September 30,
2003 while the cost of deposits decreased 70 basis points. Interest expense
on advances and other borrowings increased $654,000 or 52.4% as the cost of
debt outstanding decreased 182 basis points during the 2004 period compared to
2003 while average total borrowings outstanding increased approximately $67.4
million.
Provision for Loan Losses
The Bank's provision for loan losses was $390,000 during the six months ended
September 30, 2004 compared to $600,000 for the quarter ended September 30,
2003. The amount of the provision is determined by management's on-going
monthly analysis of the loan portfolio. Non-accrual loans, which are loans
delinquent 90 days or more, were $2.5 million at September 30, 2004 compared
to $2.0 million at March 31, 2004. The ratio of allowance for loan losses to
the Company's total loans was 2.13% at September 30, 2004 compared to 2.17% at
March 31, 2004. Net charge-offs were $71,000 during the six months ended
September 30, 2004 compared to $134,000 during the same period in 2003.
17
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2004, CONTINUED
- ----------------------------------------------------------------------------
Other Income
Total other income decreased $876,000 or 38.8% to $1.4 million during the six
months ended September 30, 2004 compared to the same period a year ago,
primarily as a result of a decrease in the gain on sale of loans. Gain on
sale of loans decreased $817,000 or 77.4% to $239,000 during the period as the
origination and sale of fixed rate mortgages decreased. Loan servicing fees
decreased $15,000 to $87,000 while service fees on deposit accounts decreased
$66,000 or 9.5% to $625,000. Other miscellaneous income including credit life
insurance commissions, net gain on sale of repossessed assets, safe deposit
rental income, annuity and stock brokerage commissions, trust fees, and other
miscellaneous fees increased $22,000 or 5.3% to $432,000 during the six months
ended September 30, 2004.
General and Administrative Expenses
General and administrative expenses increased $178,000 or 3.4% to $5.4 million
during the six months ended September 30, 2004 compared to the same period in
2003. Salaries and employee benefits expense increased $144,000 or 4.7%.
Occupancy expense increased $67,000 or 14.6% primarily attributable to the new
Lexington branch office, which opened in August 2003. Advertising expense
decreased $30,000 or 28.5% to $75,000. Depreciation and maintenance of
equipment expense decreased $1,000 during the six month period compared to the
same period last year. FDIC insurance premiums increased $1,000 or 4.5% to
$29,000. Other miscellaneous expense, consisting of legal, professional, and
consulting expenses, stationery and office supplies, and other sundry
expenses, decreased $3,000 or 0.3% for the six months ended September 30, 2004
compared to the three months ended September 30, 2003.
18
Security Federal Corporation and Subsidiaries
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, investment, deposit and borrowing activities.
Management actively monitors and manages its interest rate risk exposure.
Although the Company manages other risks such as credit quality and liquidity
risk in the normal course of business, management considers interest rate risk
to be its most significant market risk that could potentially have the largest
material effect on the Company's financial condition and results of
operations. Other types of market risks such as foreign currency exchange
rate risk and commodity price do not arise in the normal course of the
Company's business activities.
The Company's profitability is affected by fluctuations in the market interest
rate. Management's goal is to maintain a reasonable balance between exposure
to interest rate fluctuations and earnings. A sudden and substantial increase
or decrease in interest rates may adversely impact the Company's earnings to
the extent that the interest rates on interest-earning assets and
interest-bearing liabilities do not change at the same rate, to the same
extent or on the same basis. The Company monitors the impact of changes in
interest rates on its net interest income using a test that measures the
impact on net interest income and net portfolio value of an immediate change
in interest rates in 100 basis point increments and by measuring the Bank's
interest sensitivity gap ("Gap"). Net portfolio value is defined as the net
present value of assets, liabilities, and off-balance sheet contracts. Gap is
the amount of interest sensitive assets repricing or maturing over the next
twelve months compared to the amount of interest sensitive liabilities
maturing or repricing in the same time period. Recent net portfolio value
reports furnished by the OTS indicate that the Bank's interest rate risk
sensitivity has increased slightly over the past year. The Bank has rated
favorably compared to thrift peers concerning interest rate sensitivity.
For the three and six month periods ended September 30, 2004, the Bank's
interest rate spread, defined as the average yield on interest bearing assets
less the average rate paid on interest bearing liabilities was 2.32% and
2.39%, respectively. As of the year ended March 31, 2004, the interest rate
spread was 2.59%. The interest rate spread decreased due to interest bearing
liabilities, specifically certificates of deposits, re-pricing faster than
interest earning assets. If interest rates were to increase suddenly and
significantly, the Bank's net interest income and net interest spread would be
compressed significantly.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Sections 13a -
15(e) and 15d-15(e) of the Securities Exchange Act of 1934) was carried out
under the supervision and with the participation of the Company's Chief
Executive Officer, Chief Financial Officer and several other members of the
Company's senior management as of the end of the period covered by this
quarterly report. The Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures as
currently in effect are effective in ensuring that the information required to
be disclosed by the Company in the reports it files or submits under the Act
is (i) accumulated and communicated to the Company's management (including the
Chief Executive Officer and Chief Financial Officer) in a timely manner, and
(ii) recorded, processed, summarized and reported within the time period
specified in the Securities and Exchange Commission's rules and forms.
(b) Changes in Internal Controls: In the quarter ended September 30, 2004, the
Company did not make any significant changes in, nor take any corrective
actions regarding, its internal controls or other factors that could
significantly affect these controls.
19
Security Federal Corporation and Subsidiaries
Part II: Other Information
Item 1 - Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Company is a
party to legal proceedings in the ordinary course of business
wherein it enforces its security interest in mortgage loans it has
made.
Item 2 - Unregistered Sales of Equity Securities and Use Of Proceeds
-----------------------------------------------------------
Stock Repurchases. The Company did not repurchase any shares of its
outstanding Common Stock during the three months ended September 30,
2004. In addition, The Company has no publicly announced plans to
repurchase its common stock.
Item 3 - Defaults Upon Senior Securities
-------------------------------
None
Item 4 - Submission Of Matters To A Vote Of Security Holders
---------------------------------------------------
The election of directors was presented for vote to the shareholders
at the Annual Meeting held July 22, 2004. Votes for Gasper L. Toole
were as follows: 2,004,178 votes for, 12,600 withheld. Votes for
Thomas L. Moore were as follows: 2,006,578 votes for, 10,200 votes
withheld. Votes for J. Chris Verenes were as follows: 2,004,178
votes for, 12,600 votes withheld. Directors continuing in office
are T. Clifton Weeks, Timothy W. Simmons, Harry O. Weeks, Jr.,
Robert E. Alexander and William Clyburn.
Item 5 - Other Information
-----------------
None
Item 6 - Exhibits
--------
(a) Exhibits:
3.1 Articles Of Incorporation (1)
3.2 Articles Of Amendment, Dated August 28, 1998, To Articles Of
Incorporation
3.3 Bylaws (2)
10 Executive Compensation Plans And Arrangements:
Salary Continuation Agreements (3)
Amendment One To Salary Continuation Agreements (4)
Stock Option Plan (3)
1999 Stock Option Plan (5)
2002 Stock Option Plan (6)
Incentive Compensation Plan (3)
31.1 Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act.
31.2 Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act.
32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley
Act.
(1) Filed as an exhibit to the Company's June 23, 1998 proxy statement and
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Form 8-K filed September 1, 1998 and
incorporated herein by reference.
20
Security Federal Corporation and Subsidiaries
Exhibits, Continued
(3) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended March 31, 1993 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended December 30, 1993 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Registration Statement on Form S-8
filed March 2, 2002 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's June 19, 2002 proxy statement and
incorporated herein by reference.
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: November 10, 2004 By: /s/ Timothy W. Simmons
-------------------- ------------------------------
Timothy W. Simmons
President
Duly Authorized Representative
Date: November 10, 2005 By: /s/ Roy G. Lindburg
-------------------- ------------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
21
EXHIBIT 31.1
Certification of the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
22
Certification
I, Timothy W. Simmons, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control ver financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 10, 2004
/s/ Timothy W. Simmons
-------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
23
EXHIBIT 31.2
Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
24
Certification
I, Roy G. Lindburg, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control ver financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 10, 2004
/s/ Roy G. Lindburg
--------------------------------
Roy G. Lindburg
Chief Financial Officer
25
EXHIBIT 32
Certification Pursuant to Section 906 of the Sarbanes Oxley Act
26
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF SECURITY FEDERAL CORPORATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and in connection with this Quarterly Report on Form 10-Q that:
1. the report fully complies with the requirements of Section 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all
material respects, the company's financial condition and results of
operations.
/s/ Timothy W. Simmons /s/ Roy G. Lindburg
- ---------------------------- -----------------------------
Timothy W. Simmons Roy G. Lindburg
Chief Executive Officer Chief Financial Officer
Dated: November 10, 2004