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 DECEMBER 31, 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 January 31, 2005 2,543,838
value $0.01 per share
INDEX
- ------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at December 31, 2004 and
March 31, 2004 1
Consolidated Statement of Income for the Three and Nine
Months Ended December 31, 2004 and 2003 2
Consolidated Statements of Shareholders' Equity and
Comprehensive Income at December 31, 2003 and 2004 4
Consolidated Statements of Cash Flows for the Nine Months
Ended December 31, 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 21
Item 4. Controls and Procedures 21
- ------------------------------------------------------------------------------
PART II. OTHER INFORMATION
Other Information 22
Signatures 23
- ------------------------------------------------------------------------------
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
December 31, 2004 March 31, 2004
----------------- --------------
Assets: (Unaudited) (Audited)
Cash And Cash Equivalents $ 7,036,530 $ 6,749,211
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized cost of
$174,288,404 at
December 31, 2004 and
$173,300,028 at March
31, 2004) 173,925,479 174,411,819
Held To Maturity: (Fair value of
$73,792,272 at December
31, 2004 and $71,686,256
at March 31, 2004) 74,272,590 71,303,507
------------ ------------
Total Investment And Mortgage-Backed
Securities 248,198,069 245,715,326
------------ ------------
Loans Receivable, Net:
Held For Sale 1,423,111 1,703,869
Held For Investment: (Net of allowance of
$6,252,695 at December
31, 2004 and
$5,763,935 at March 31,
2004) 293,949,326 258,190,791
------------ ------------
Total Loans Receivable, Net 295,372,437 259,894,660
------------ ------------
Accrued Interest Receivable:
Loans 878,776 902,589
Mortgage-Backed Securities 574,445 549,541
Investments 633,552 778,725
Premises And Equipment, Net 7,877,246 6,562,734
Federal Home Loan Bank Stock, At Cost 6,024,800 4,816,800
Repossessed Assets Acquired In Settlement
Of Loans 127,500 50,869
Other Assets 3,359,747 1,984,598
------------ ------------
Total Assets $570,083,102 $528,005,053
============ ============
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $416,165,386 $389,592,645
Advances From Federal Home Loan Bank 110,413,000 96,336,000
Other Borrowed Money 5,287,565 5,477,023
Advance Payments By Borrowers For Taxes
And Insurance 239,801 317,421
Other Liabilities 2,880,388 2,810,049
------------ ------------
Total Liabilities $534,986,140 $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 - 2,543,838
And Outstanding Shares - 2,530,109 At
December 31, 2004 And 2,533,291 And
2,516,191 At March 31, 2004 25,438 25,333
Additional Paid-In Capital 4,181,804 4,013,674
Indirect Guarantee Of Employee Stock
Ownership Trust Debt (276,217) (336,972)
Accumulated Other Comprehensive Income (Loss) (225,158) 689,755
Retained Earnings, Substantially Restricted 31,391,095 29,080,125
------------ ------------
Total Shareholders' Equity $ 35,096,962 $ 33,471,915
------------ ------------
Total Liabilities And Shareholders' Equity $570,083,102 $528,005,053
============ ============
See accompanying notes to consolidated financial statements.
1
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended December 31,
-------------------------------
2004 2003
-------------- -------------
Interest Income:
Loans $ 4,306,895 $ 3,794,651
Mortgage-Backed Securities 1,401,716 1,274,626
Investment Securities 756,877 812,525
Other 5,851 1,703
----------- -----------
Total Interest Income 6,471,339 5,883,505
----------- -----------
Interest Expense:
NOW And Money Market Accounts 1,032,212 827,316
Passbook Accounts 42,547 44,357
Certificate Accounts 937,371 787,075
Advances And Other Borrowed Money 913,355 754,555
----------- -----------
Total Interest Expense 2,925,485 2,413,303
----------- -----------
Net Interest Income 3,545,854 3,470,202
Provision For Loan Losses 195,000 300,000
----------- -----------
Net Interest Income After Provision For
Loan Losses 3,350,854 3,170,202
----------- -----------
Other Income:
Gain On Sale Of Loans 88,265 199,880
Loan Servicing Fees 47,997 58,556
Service Fees On Deposit Accounts 327,062 338,147
Other 242,996 199,266
----------- -----------
Total Other Income 706,320 795,849
----------- -----------
General And Administrative Expenses:
Salaries And Employee Benefits 1,444,615 1,443,495
Occupancy 268,749 239,619
Advertising 53,785 73,418
Depreciation And Maintenance Of Equipment 244,000 270,464
FDIC Insurance Premiums 14,444 13,507
Other 686,852 519,497
----------- -----------
Total General And Administrative Expenses 2,712,445 2,560,000
----------- -----------
Income Before Income Taxes 1,344,729 1,406,051
Provision For Income Taxes 432,878 502,979
----------- -----------
Net Income $ 911,851 $ 903,072
=========== ===========
Basic Net Income Per Common Share $ 0.36 $ 0.36
=========== ===========
Diluted Net Income Per Common Share $ 0.36 $ 0.35
=========== ===========
Cash Dividend Per Share On Common Stock $ 0.03 $ 0.02
=========== ===========
Basic Weighted Average Shares Outstanding 2,527,661 2,513,958
=========== ===========
Diluted Weighted Average Shares Outstanding 2,556,839 2,561,891
=========== ===========
See accompanying notes to consolidated financial statements.
2
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Nine Months Ended December 31,
-------------------------------
2004 2003
-------------- -------------
Interest Income:
Loans $12,158,605 $11,610,325
Mortgage-Backed Securities 4,170,928 3,157,744
Investment Securities 2,408,801 2,221,690
Other 18,580 11,284
----------- -----------
Total Interest Income 18,756,914 17,001,043
----------- -----------
Interest Expense:
NOW And Money Market Accounts 2,895,348 2,201,576
Passbook Accounts 129,515 133,335
Certificate Accounts 2,559,988 2,760,290
Advances And Other Borrowed Money 2,816,492 2,003,626
----------- -----------
Total Interest Expense 8,401,343 7,098,827
----------- -----------
Net Interest Income 10,355,571 9,902,216
Provision For Loan Losses 585,000 900,000
----------- -----------
Net Interest Income After Provision For
Loan Losses 9,770,571 9,002,216
----------- -----------
Other Income:
Gain On Sale Of Loans 327,088 1,256,116
Loan Servicing Fees 135,103 160,167
Service Fees On Deposit Accounts 952,426 1,029,443
Other 675,066 609,491
----------- -----------
Total Other Income 2,089,683 3,055,217
----------- -----------
General And Administrative Expenses:
Salaries And Employee Benefits 4,629,528 4,484,527
Occupancy 792,457 696,538
Advertising 128,310 177,598
Depreciation And Maintenance Of Equipment 781,022 808,180
FDIC Insurance Premiums 43,341 41,174
Other 1,742,929 1,578,812
----------- -----------
Total General And Administrative Expenses 8,117,587 7,786,829
----------- -----------
Income Before Income Taxes 3,742,667 4,270,604
Provision For Income Taxes 1,228,783 1,555,012
----------- -----------
Net Income $ 2,513,884 $ 2,715,592
=========== ===========
Basic Net Income Per Common Share $ 1.00 $ 1.08
=========== ===========
Diluted Net Income Per Common Share $ 0.98 $ 1.06
=========== ===========
Cash Dividend Per Share On Common Stock $ 0.08 $ 0.06
=========== ===========
Basic Weighted Average Shares Outstanding 2,523,296 2,512,361
=========== ===========
Diluted Weighted Average Shares Outstanding 2,558,502 2,562,930
=========== ===========
See accompanying notes to consolidated financial statements.
2
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 $30,039,953
Net Income - - - - 2,715,592 2,715,592
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Losses On Securities
Available For Sale - - - (1,165,376) - (1,165,376)
-----------
Comprehensive Income 1,550,216
Decrease In Indirect
Guarantee of ESOP
Debt 107,713 - - 107,713
Exercise of Stock
Options 35 18,444 18,479
Cash Dividends ($.06 per
share) - - - - (151,887) (151,887)
------- ---------- --------- ----------- ----------- -----------
Balance at
December 31, 2003 $25,333 $4,013,674 $(336,972) $ 279,209 $27,583,230 $31,564,474
======= ========== ========= =========== =========== ===========
Beginning Balance At
March 31, 2004 $25,333 $4,013,674 $(336,972) $ 689,755 $29,080,125 $33,471,915
Net Income - - - - 2,513,884 2,513,884
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Losses On Securities
Available For Sale - - - (914,913) - (914,913)
-----------
Comprehensive Income 1,598,971
Decrease In Indirect
Guarantee of ESOP
Debt - - 60,755 - - 60,755
Exercise Of Stock
Options 105 168,130 168,235
Cash Dividends ($.08 per
share) - - - - (202,914) (202,914)
------- ---------- --------- ----------- ----------- -----------
Balance at
December 31, 2004 $25,438 $4,181,804 $(276,217) $ (225,158) $31,391,095 $35,096,962
======= ========== ========= =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended December 31,
-------------------------------
2004 2003
-------------- --------------
Cash Flows From Operating Activities:
Net Income $ 2,513,884 $ 2,715,592
Adjustments To Reconcile Net Income To Net
Cash Provided By Operating Activities:
Depreciation Expense 630,742 625,502
Discount Accretion And Premium Amortization 929,109 709,295
Provisions For Losses On Loans And Real Estate 585,000 900,000
Gain On Sale Of Loans (327,088) (1,256,116)
Gain On Sale Of Real Estate (53,661) (58,201)
Amortization Of Deferred Fees On Loans (143,244) (149,489)
Proceeds From Sale Of Loans Held For Sale 19,590,174 59,591,842
Origination Of Loans For Sale (18,982,328) (55,352,760)
(Increase) Decrease In Accrued Interest
Receivable:
Loans 23,813 51,680
Mortgage-Backed Securities (24,904) (115,954)
Investments 145,173 (184,036)
Increase In Advance Payments By Borrowers (77,620) (109,709)
Gain on Disposition of Premises and Equipment (3,525) (1,170)
Other, Net (684,252) (338,539)
------------- -------------
Net Cash Provided By Operating Activities 4,121,273 7,027,937
------------- -------------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Available For Sale 37,602,571 45,511,172
Principal Repayments On Mortgage-Backed
Securities Held To Maturity 79,558 529,398
Purchase Of Investment Securities Held To
Maturity (22,042,025) (79,886,945)
Purchase Of Mortgage-Backed Securities Available
For Sale (49,526,672) (97,688,197)
Maturities Of Investment Securities Available
For Sale 10,000,000 31,156,545
Maturities of Investment Securities Held To
Maturity 19,000,000 30,030,331
Purchase Of FHLB Stock (3,910,900) (4,104,300)
Redemption Of FHLB Stock 2,702,900 2,037,300
Increase In Loans To Customers (36,558,688) (14,840,622)
Proceeds From Sale Of Repossessed Assets 335,427 560,451
Purchase And Improvement Of Premises And
Equipment (1,945,254) (2,042,042)
Proceeds from Sale of Premises And Equipment 3,525 1,170
------------- -------------
Net Cash Used By Investing Activities (44,259,558) (88,735,739)
------------- -------------
Cash Flows From Financing Activities:
Increase In Deposit Accounts 26,572,741 30,568,759
Proceeds From FHLB Advances 100,943,000 168,550,000
Repayment Of FHLB Advances (86,866,000) (119,411,000)
Net (Repayments) Proceeds Of Other Borrowings (189,458) 1,778,879
Dividends To Shareholders (202,914) (151,887)
Proceeds From Exercise of Stock Options 168,235 18,479
------------- -------------
Net Cash Provided By Financing Activities 40,425,604 81,353,230
------------- -------------
(Continued)
5
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended December 31,
-------------------------------
2004 2003
-------------- --------------
Net Increase (Decrease) In Cash And Cash
Equivalents 287,319 (354,572)
Cash And Cash Equivalents At Beginning Of
Period 6,749,211 8,238,690
------------- -------------
Cash And Cash Equivalents At End Of Period $ 7,036,530 $ 7,884,118
============= =============
Supplemental Disclosure Of Cash Flows
Information:
Cash Paid During The Period For Interest $ 8,322,953 $ 7,206,265
Cash Paid During The Period For Income Taxes $ 1,699,012 $ 1,514,888
Additions To Repossessed Acquired Through
Foreclosure $ 358,397 $ 528,049
Increase (Decrease) In Unrealized Net Gain On
Securities Available For Sale, Net Of Taxes $ (914,913) $ (1,165,376)
See accompanying notes to consolidated financial statements.
6
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The unaudited interim condensed consolidated financial statements included
herein reflect all adjustments which are, in the opinion of management,
necessary to present a fair statement of the results of operations for the
interim periods presented. All such adjustments are of a normal, recurring
nature. The balance sheet data at December 31, 2004 is derived from the
audited consolidated financial statements of Security Federal Corporation (the
"Company"). Certain information and note disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC")
with respect to interim financial reporting. It is recommended that these
unaudited interim condensed consolidated financial statements be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended March 31, 2004 (SEC File No. 0-16120). Certain amounts in the prior
periods' financial statements have been reclassified to conform to the current
period's presentation. The results of operations for the quarter ended
December 31, 2004 are not necessarily indicative of results for the fiscal
year ending March 31, 2005.
2. Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of 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
operations 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 December 31, 2004 and March 31, 2004 consisted of
the following:
Loans held for sale were $1,423,111 and $1,703,869 at December 31, 2004 and
March 31, 2004, respectively.
December 31, 2004 March 31, 2004
Loans Held For Investment: ----------------- --------------
Residential Real Estate $118,741,172 $109,722,301
Consumer 50,102,209 45,641,450
Commercial Business & Real Estate 145,306,816 121,111,848
------------ ------------
314,150,197 276,475,599
------------ ------------
Less:
Allowance For Possible Loan Loss 6,252,695 5,763,935
Loans In Process 13,789,555 12,356,346
Deferred Loan Fees 158,621 164,527
------------ ------------
20,200,871 18,284,808
------------ ------------
$293,949,326 $258,190,791
============ ============
The following is a reconciliation of the allowance for loan losses for the
nine months ending:
December 31, 2004 December 31, 2003
----------------- -----------------
Beginning Balance $ 5,763,935 $ 4,911,224
Provision 585,000 900,000
Charge-offs (229,538) (374,341)
Recoveries 133,298 136,533
----------- -----------
Ending Balance $ 6,252,695 $ 5,573,416
=========== ===========
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
December 31, 2004 Amortized Unrealized Unrealized
- ------------------ Cost Gains Losses Fair Value
--------- ---------- ---------- -----------
US Government and Agency
Obligations $74,002,324 $ 68,195 $566,027 $73,504,492
Mortgage-Backed
Securities 270,266 17,514 - 287,780
----------- -------- -------- -----------
Total $74,272,590 $ 85,709 $566,027 $73,792,272
=========== ======== ======== ===========
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
December 31, 2004 Amortized Unrealized Unrealized
- ------------------ Cost Gains Losses Fair Value
--------- ---------- ---------- -----------
US Government and Agency
Obligations $ 6,568,945 $ 19,972 $ - $ 6,588,917
Mortgage-Backed
Securities 167,719,459 739,620 1,122,517 167,336,562
------------ ---------- ---------- ------------
Total $174,288,404 $ 759,592 $1,122,517 $173,925,479
============ ========== ========== ============
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:
December 31, 2004 March 31, 2004
------------------- -------------------
Demand Accounts: Balance Rate Balance Rate
------------ ---- ------------ ----
Checking $ 84,825,419 0.54% $ 80,738,298 0.47%
Money Market 171,164,079 2.14% 158,587,076 1.97%
Regular Savings 16,850,470 0.98% 17,367,047 0.98%
------------ ------------
Total Demand Accounts 272,839,968 1.57% 256,692,421 1.43%
------------ ------------
Certificate Accounts:
0 - 4.99% 133,242,497 122,599,195
5.00 - 6.99% 10,082,921 10,301,029
------------ ------------
Total Certificate Accounts 143,325,418 2.68% 132,900,224 2.26%
------------ ------------
Total Deposit Accounts $416,165,386 1.95% $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:
December 31, 2004 March 31, 2004
------------------- -------------------
Fiscal Year Due: Balance Rate Balance Rate
------------ ---- ------------ ----
2005 $ 16,050,000 3.73% $ 13,336,000 4.92%
2006 33,000,000 4.19% 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 $110,413,000 3.41% $ 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 $45.3 million in investment securities at December 31, 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 December 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 02/10/05 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:
December 31, 2004 March 31, 2004
(In Thousands)
-----------------------------------
Bank's Shareholders' Equity $ 34,432 $ 32,830
Unrealized Loss (Gain) On Available For
Sale Of Securities, Net Of Tax 225 (690)
Reduction For Goodwill And Other Intangibles - -
-------- --------
Tangible Capital 34,657 32,140
Qualifying Core Deposits And Intangible Assets - -
-------- --------
Core Capital 34,657 32,140
Supplemental Capital 3,965 3,412
Assets Required To Be Deducted (35) (54)
-------- --------
Risk-Based Capital $ 38,587 $ 35,498
======== ========
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at December 31, 2004:
(Dollars in Thousands)
----------------------------------------------------------------------------------
Amt. Required % Required Actual Amt. Actual % Excess Amt. Excess %
----------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
Tangible Capital $ 11,400 2.0% $ 34,657 6.08% $ 23,257 4.08%
Tier 1 Leverage (Core)
Capital 22,800 4.0% 34,657 6.08% 11,857 2.08%
Total Risk-Based Capital 25,386 8.0% 38,587 12.16% 13,201 4.16%
Tier 1 Risk-Based (Core)
Capital 12,683 4.0% 34,657 10.93% 21,974 6.93%
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
--------------------------------------------------------
December 31, 2004
--------------------------------------------------------
Income
(Numerator) Amount Shares (Denominator) Per Share
------------------ -------------------- -----------
Basic EPS $ 911,851 2,527,661 $ 0.36
Effect of Diluted
Securities:
Stock Options - 15,449 -
ESOP - 13,729 -
----------- --------- -------
Diluted EPS $ 911,851 2,556,839 $ 0.36
=========== ========= =======
For the Quarter Ended
--------------------------------------------------------
December 31, 2003
--------------------------------------------------------
Income
(Numerator) Amount Shares (Denominator) Per Share
------------------ -------------------- -----------
Basic EPS $ 903,072 2,513,958 $ 0.36
Effect of Diluted
Securities:
Stock Options - 29,542 (0.006)
ESOP - 18,391 (0.004)
----------- --------- -------
Diluted EPS $ 903,072 2,561,891 $ 0.35
=========== ========= =======
For the Nine Months Ended
--------------------------------------------------------
December 31, 2004
--------------------------------------------------------
Income
(Numerator) Amount Shares (Denominator) Per Share
------------------ -------------------- -----------
Basic EPS $ 2,513,884 2,523,296 $ 1.00
Effect of Diluted
Securities:
Stock Options - 22,490 (0.013)
ESOP - 12,716 (0.007)
----------- --------- -------
Diluted EPS $ 2,513,884 2,558,502 $ 0.98
=========== ========= =======
For the Nine Months Ended
--------------------------------------------------------
December 31, 2003
--------------------------------------------------------
Income
(Numerator) Amount Shares (Denominator) Per Share
------------------ -------------------- -----------
Basic EPS $ 2,715,592 2,512,361 $ 1.08
Effect of Diluted
Securities:
Stock Options - 32,006 (0.013)
ESOP - 18,563 (0.007)
----------- --------- -------
Diluted EPS $ 2,715,592 2,562,930 $ 1.06
=========== ========= =======
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 three months and nine months ended December 31,
2004 and 2003, respectively.
Three Months Ended Nine Months Ended
December 31, December 31,
2004 2003 2004 2003
-------- --------- --------- --------
Net income, as reported $911,851 $903,072 $2,513,884 $2,715,592
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) $ (171,372) $ (195,342)
Net Income, Pro Forma $854,727 $837,958 $2,342,512 $2,520,250
Basic earnings share:
As Reported $ .36 $ .36 $ 1.00 $ 1.08
Pro Forma $ .34 $ .33 $ .93 $ 1.00
Diluted earnings share:
As reported $ .36 $ .35 $ .98 $ 1.06
Pro forma $ .33 $ .33 $ .92 $ .98
12
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Highlights
Total assets of the Company increased $42.1 million or 8.0% from $528.0
million to $570.1 million during the nine months ended December 31, 2004
primarily as a result of an increase of $2.5 million or 1.0% in total
investment securities and an increase of $35.5 million or 13.7% in net loans
receivable.
Residential real estate loans, net of loans in process, increased $7.6 million
or 7.8% during the nine months ended December 31, 2004, commercial loans
increased $24.2 million or 20.0%, while consumer loans increased $4.5 million
or 9.8%. Loans held for sale decreased $281,000 or 16.5% during the same
period.
Repossessed assets increased $77,000 to $128,000 during the nine months ended
December 31, 2004.
Non-accrual loans totaled $2.3 million at December 31, 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 December 31, 2004, the Bank held
$1.2 million in impaired loans compared to $1.4 million at March 31, 2004.
The Bank includes troubled debt restructuring ("TDR") within the meaning of
SFAS No. 114, in impaired loans. At December 31, 2004, the Bank had six loans
totaling $440,000 in TDR's compared to seven loans totaling $646,000 at March
31, 2004. A commercial loan TDR of $211,000 secured by equipment, and a
$13,000 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 $139,000 secured by residential dwellings, a $21,000
unsecured commercial loan, and a $56,000 commercial loan secured by two rental
properties, all of which were current as of December 31, 2004.
Deposits increased $26.6 million or 6.8% to $416.2 million during the nine
months ended December 31, 2004 as a result of competitive rates offered by the
Bank. FHLB advances increased $14.1 million or 14.6% to $110.4 million
during the same period. Other borrowings, consisting of commercial repurchase
sweep accounts, decreased $189,000 or 3.5% to $5.3 million during the
nine-month period.
The Board of Directors of the Company declared the 54th, 55th, and 56th
consecutive quarterly dividend of $0.02, $0.03, $0.03 per share, in April,
July, and October 2004, respectively, which totaled $203,000. The employee
stock ownership trust of the Company paid $61,000 of principal on the employee
stock ownership plan loan during the nine-month period. Unrealized net gains
on securities available for sale, net of tax, decreased $915,000 during the
nine months ended December 31, 2004 due to an increase in interest rates. The
Company's net income for the nine-month period ended December 31, 2004 was
$2.5 million. These items, in total, increased shareholders' equity by $1.6
million or 4.9% during the nine months ended December 31, 2004. Book value
per share was $13.87 at December 31, 2004 compared to $13.30 at March 31,
2004.
Forward-Looking Statements
Certain matters in this Quarterly Report on Form 10-Q for the quarter ended
December 31, 2004 constitute forward-looking statements within the meaning of
the Private Securities Litigation Act of 1995. These forward-looking
statements relate to, among others, expectations of the business environment
in which the Company operates, projections of future performance, perceived
opportunities in the market, potential future credit experience, and
statements regarding the Company's mission and vision. These forward-looking
statements are based upon current management expectations, and may, therefore,
involve risks and uncertainties. The Company's actual results, performance,
or achievements may differ materially from those suggested, expressed, or
implied by forward-looking statements as a result of a wide range of factors
including, but not limited to, the general business environment, interest
rates, the demand for loans, competitive conditions between banks and non-bank
financial services providers, regulatory changes, and other risks detailed in
the Company's reports filed with the Securities and Exchange Commission,
including the Annual Report on Form 10-K for the fiscal year ended March 31,
2004. Forward-looking statements are effective only as of the date that they
are made and the Company assumes no obligation to update this information.
13
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 nine months ended December 31,
2004, loan disbursements exceeded loan repayments resulting in a $35.5
million or 13.7% increase in total net loans receivable.
Deposits and other borrowings are also an important source of funds for the
Company. During the nine months ended December 31, 2004, deposits increased
$26.6 million and FHLB advances increased $14.1 million. The Bank had $60.6
million in additional borrowing capacity at the FHLB at the end of the period.
At December 31, 2004, the Bank had $87.6 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.
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 December 31, 2004, the Bank
had $27.2 million in unused consumer lines of credit, including home equity
lines and unsecured lines. The Bank also had $30.3 million in unused
commercial lines of credit and $813,000 in letters of credit committed to
customers. The majority of the $58.3 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 judgments 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.
14
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Critical Accounting Policies, Continued
We believe the allowance for loan losses is a critical accounting policy that
requires the most significant judgments 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 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 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.
Accounting and Reporting Changes
The following is a summary of recent authoritative pronouncements that affect
accounting, reporting, and disclosure of financial information by the Company.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," which amends
and clarifies accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and loan commitments that relate to the
origination of mortgage loans held for sale, and for hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 149 clarifies under what circumstances a contract with an initial net
investment meets the characteristics of a derivative, clarifies when a
derivative contains a financing component, amends the definition of an
underlying to conform it to a language used in FASB Interpretation ("FIN") No.
45, and amends certain other existing pronouncements. The pronouncement was
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," which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
SFAS No. 150 requires an issuer to classify certain financial instruments that
include certain obligations, such as mandatory redemption, repurchase of the
issuer's equity, or settlement by issuing equity, previously classified as
equity, as liabilities or assets in some circumstances. SFAS No. 150 was
generally effective for financial instruments entered into or modified after
May 31, 2003, and otherwise was effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities which are subject to
the provisions of SFAS No. 150 for the first fiscal period beginning after
December 15, 2003. The adoption of SFAS No. 150 did not have any impact on
the financial condition or operating results of the Company.
15
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Accounting and Reporting Changes, Continued
In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary
Assets, an amendment of APB Opinion Mo. 29, Accounting for Nonmonetary
Transactions." The amendments made by SFAS No. 153 are based on the principle
that exchanges of nonmonetary assets should be measured on the fair value of
the assets exchanges. Further, the amendments eliminate the narrow exception
for nonmonetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of nonmonetary assets that do not have
commercial substance. Previously, Accounting Principles Board ("APB") Opinion
No. 29 required that the accounting for an exchange of a productive asset for
a similar productive asset or an equivalent interest in the same productive
asset should be based on the recorded amount of the asset or an equivalent
interest in the same or similar productive asset should be based on the
recorded amount of the asset relinquished. APB Opinion No. 29 provided an
exception to its basic measurement principle (fair value) for exchanges of
similar productive assets. SFAS No. 153 is effective for nonmonetary assets
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this
statement shall be applied prospectively. The adoption of this statement is
not expected to have a material impact on the financial condition or operating
results of the Company.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123 (R)"). SFAS No. 123(R) will require companies to
measure all employee stock-based compensation awards using a fair value method
and record such expense in its financial statements. In addition, the
adoption of SFAS No. 123(R) requires additional accounting and disclosure
related to the income tax and cash flow effects resulting from share based
payment arrangements. SFAS No. 123(R) is effective beginning as of the first
interim or annual reporting period beginning after June 15, 2005. The Company
is currently evaluating the impact that the adoption of SFAS No. 123(R) will
have on its financial position, results of operations and cash flows. The
cumulative effect of adoption, if any, will be measured and recognized in the
statement of operations on the date of adoption.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 elaborates on the
disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees and warranties that
it has issued. FIN 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. The initial recognition requirement of FIN No. 45 were
effective for guarantees issued or modified after December 31, 2002. The
disclosure requirements were effective for financial statements for periods
ending after December 15, 2002. The adoption of FIN No. 45 did not have a
material impact on the Company's financial position or results of operations.
In December 2003, the FASB Issued Fin No. 46 (revised), "Consolidation of
Variable Interest Entities" ("FIN No. 46(R)"), which addresses consolidation
by business enterprises of variable interest entities. FIN No. 46(R) 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(R) also requires disclosure about variable interest
entities that a company is not required to consolidate, but in which it has a
significant variable interest. FIN No. 46(R) 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(R) applied immediately to variable
interest entities created after January 31, 2003. The consolidation
requirements applied to the Company's existing variable interest entities in
the first reporting period ending March 31, 2004. Certain of the disclosure
requirements applied to all financial statements issued after December 31,
2003, regardless of when the variable interest entity was established. The
adoption of FIN No. 46(R) did not have any impact on the Company's financial
position or results of operations.
16
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Accounting and Reporting Changes, Continued
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."
This 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 on quantitative and
qualitative disclosures. The disclosure requirement of EITF No. 03-1 are
effective for annual financial statements for fiscal years ending after June
15, 2004. The effective date for the measurement and recognition of EITF No.
03-1 had been delayed. The FASB staff has issued a proposed Board-directed
FASB Staff Position ("FSP"), FSP EITF 03-1-a, "Implementation Guidance for the
Application of Paragraph 16 of Issue No. 03-1." The proposed FSP would
provide implementation guidance with respect to debt securities that are
impaired solely due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairments under the measurement and recognition
requirements of EITF No. 03-1. The delay of the effective date for the
measurement and recognition requirements of EITF No. 03-1 will be superseded
with the final issuance of FSP EITF 03-1-a. 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 Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") No. 105, "Application of Accounting Principles to
Loan Commitments," to inform registrants of the Staff's view that the fair
value of the recorded loan commitments should not consider the expected future
cash flows related to the associated servicing of the future loan. The
provisions of SAB No. 105 must be applied to loan commitments accounted for as
derivatives that are entered into after March 31, 2004. The Staff will not
object to the application of existing accounting practices to loan commitments
accounted for as derivatives that are entered into on or before March 31,
2004, with appropriate disclosures. The Company adopted the provision of SAB
No. 105 on April 1, 2004. The adoption of SAB No. 105 did not have a material
impact on the Company's financial condition 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2004
- ------------------------------------------------------------------
Net Income
Net income was $912,000 for the three months ended December 31, 2004,
representing an increase in earnings of $9,000 or 1.0% from $903,000 for the
same period in 2003. The primary reasons for the increased earnings were an
increase in net interest income and a decrease in the provision for loan
losses offset partially by a decrease in the gain on sale of mortgage loans
and an increase in general and administrative expenses.
17
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 DECEMBER 31, 2004, CONTINUED
- -----------------------------------------------------------------------------
Net Interest Income
Net interest income increased $76,000 or 2.2% to $3.5 million during the three
months ended December 31, 2004 as a result of an increase in interest income
offset in part by an increase in interest expense. Average interest earning
assets increased $50.0 million while average interest-bearing liabilities
increased $45.6 million. The interest rate spread decreased 22 basis points
to 2.42% during the three months ended December 31, 2004 compared to the same
period in 2003.
Interest income on loans increased $512,000 or 13.5% to $4.3 million during
the three months ended December 31, 2004 as a result of the average loan
portfolio balance increasing by $39.8 million despite the yield in the loan
portfolio decreasing 14 basis points. Interest income from investment,
mortgage-backed, and other securities increased $76,000 or 3.6% as a result of
an increase in the average balance of the portfolio of $10.2 million while the
yield in the portfolio decreased slightly by 2 basis points. Total interest
income increased $588,000 or 10.0% to $6.5 million for the three months ended
December 31, 2004 from $5.9 million for the same period in 2003.
Total interest expense increased $512,000 or 21.2% to $2.9 million during the
three months ended December 31, 2004 compared to $2.4 million for the same
period one-year earlier. Interest expense on deposits increased $353,000 or
21.3% during the period as average interest bearing deposits grew $25.1
million compared to the average balance in the three months ended December 31,
2003 while the cost of deposits increased 54 basis points. Interest expense
on advances and other borrowings increased $159,000 or 21.1% as the cost of
debt outstanding decreased 7 basis points during the 2004 period compared to
2003 while average total borrowings outstanding increased approximately $20.4
million.
Provision for Loan Losses
The Bank's provision for loan losses was $195,000 during the three months
ended December 31, 2004 compared to $300,000 for the quarter ended December
31, 2003. The amount of the provision is determined by management's on-going
monthly analysis of the loan portfolio. Non-accrual loans, which are loans
delinquent 90 days or more, were $2.3 million at December 31, 2004 compared to
$2.0 million at March 31, 2004. The ratio of allowance for loan losses to the
Company's total loans was 2.07% at December 31, 2004 compared to 2.17% at
March 31, 2004. Net charge-offs were $25,000 during the three months ended
December 31, 2004 compared to $104,000 during the same period in 2003.
Other Income
Total other income decreased $90,000 or 11.3% to $706,000 during the three
months ended December 31, 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 $112,000 or 55.8% to $88,000 during the period as the
origination and sale of fixed rate mortgages decreased. Loan servicing fees
decreased $11,000 to $48,000 while service fees on deposit accounts decreased
$11,000 or 3.3% to $327,000. 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 $44,000 or 22.0% during the three months ended
December 31, 2004 compared to the same period last year.
General and Administrative Expenses
General and administrative expenses increased $152,000 or 6.0% to $2.7 million
during the three months ended December 31, 2004 compared to the same period in
2003. Salaries and employee benefits expense increased only $1,000 or 0.1%,
while occupancy expense increased $29,000 or 12.2%. Advertising expense
decreased $20,000 to $54,000. Depreciation and maintenance of equipment
expense decreased $26,000 or 9.8% during the quarterly period. FDIC insurance
premiums remained the same at $14,000 during the quarters ending December 2004
and 2003. Other miscellaneous expense, consisting of legal, professional, and
consulting expenses, stationery and office supplies, and other sundry
expenses, increased $167,000 or 32.2% for the three months ended December 31,
2004 compared to the three months ended December 31, 2003 due primarily to an
accrual of legal and contingency expenses related to the actions of a former
employee.
18
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2004
- -----------------------------------------------------------------
Net Income
Net income was $2.5 million for the nine months ended December 31, 2004,
representing a decrease in earnings of $202,000 or 7.4% from $2.7 million for
the same period in 2003. The primary reason for the decreased earnings was a
decrease in the gain on sale of mortgage loans and an increase in general and
administrative expenses 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 $453,000 or 4.6% to $10.4 million during the
nine months ended December 31, 2004 as a result of an increase in interest
income offset in part by an increase in interest expense. Average interest
earning assets increased $84.7 million while average interest-bearing
liabilities increased $71.4 million. The interest rate spread decreased 36
basis points to 2.31% during the nine months ended December 31, 2004 compared
to the same period in 2003.
Interest income on loans increased $548,000 to $12.2 million during the nine
months ended December 31, 2004 as a result of the average loan portfolio
balance increasing by $42.1 million despite the yield in the loan portfolio
decreasing 69 basis points. Interest income from investment, mortgage-backed,
and other securities increased $1.2 million or 22.4% as a result of an
increase in the average balance of the portfolio of $14.4 million while the
yield in the portfolio increased 7 basis points. Total interest income
increased $1.8 million or 10.3% to $18.8 million for the nine months ended
December 31, 2004 from $17.0 million for the same period in 2003.
Total interest expense increased $1.3 million or 18.4% to $8.4 million during
the nine months ended December 31, 2004 compared to $7.1 million for the same
period one-year earlier. Interest expense on deposits increased $490,000 or
9.6% during the period as average interest bearing deposits grew $32.1 million
compared to the average balance in the nine months ended December 31, 2003
while the cost of deposits remained at 1.95%. Interest expense on advances
and other borrowings increased $813,000 or 40.6% as the average total
borrowings outstanding increased approximately $39.3 million while the cost of
debt outstanding decreased 39 basis points during the nine months ended
December 31, 2004.
Provision for Loan Losses
The Bank's provision for loan losses was $585,000 during the nine months ended
December 31, 2004 compared to $900,000 for the nine months ended December 31,
2003. The amount of the provision is determined by management's on-going
monthly analysis of the loan portfolio. Non-accrual loans, which are loans
delinquent 90 days or more, were $2.3 million at December 31, 2004 compared to
$2.0 million at March 31, 2004. The ratio of allowance for loan losses to the
Company's total loans was 2.07% at December 31, 2004 compared to 2.17% at
March 31, 2004. Net charge-offs were $96,000 during the nine months ended
December 31, 2004 compared to $238,000 during the same period in 2003.
Other Income
Total other income decreased $966,000 or 31.6% to $2.1 million during the nine
months ended December 31, 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 $929,000 or 74.0% to $327,000 during the period as the
origination and sale of fixed rate mortgages decreased. Loan servicing fees
decreased $25,000 to $135,000 while service fees on deposit accounts decreased
$77,000 or 7.5% to $952,000. 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 $66,000 or 10.8% to $675,000 during the nine
months ended December 31, 2004.
19
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2004, CONTINUED
- ----------------------------------------------------------------------------
General and Administrative Expenses
General and administrative expenses increased $331,000 or 4.3% to $8.1 million
during the nine months ended December 31, 2004 compared to the same period in
2003. Salaries and employee benefits expense increased $145,000 or 3.2%.
Occupancy expense increased $96,000 or 13.8% primarily attributable to the new
Lexington branch office, which opened in August 2003. Advertising expense
decreased $49,000 or 27.8% to $128,000. Depreciation and maintenance of
equipment expense decreased $27,000 during the nine month period compared to
the same period last year. FDIC insurance premiums increased $2,000 or 5.3%
to $43,000. Other miscellaneous expense, consisting of legal, professional,
and consulting expenses, stationery and office supplies, and other sundry
expenses, increased $164,000 or 10.4% for the nine months ended December 31,
2004 compared to the nine months ended December 31, 2003 due to the accruing
of legal and contingency expense related to the actions of a former employee.
20
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 nine month periods ended December 31, 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 2.42% and
2.31%, 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 December 31, 2004, the
Company did not make any significant changes in, nor take any corrective
actions regarding, its internal controls or other factors that could
materially affect these controls.
21
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 December 31,
2004. In May 2004, the Company announced the authorization to
purchase up to 50% of its outstanding shares, or approximately
126,000 shares, subject to market conditions.
Item 3 Defaults Upon Senior Securities
-------------------------------
None
Item 4 Submission Of Matters To A Vote Of Security Holders
---------------------------------------------------
None
Item 5 Other Information
-----------------
None
Item 6 Exhibits
--------
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.
22
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: February 10, 2005 By: /s/ Timothy W. Simmons
------------------- --------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
Principal Executive Officer
Date: February 10, 2005 By: /s/ Roy G. Lindburg
------------------- --------------------------------------
Roy G. Lindburg
Treasurer/CFO
Principal Financial and
Accounting Officer
23
EXHIBIT 31.1
Certification of the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
24
Certification
I, Timothy W. Simmons, President and Chief Executive Officer of Security
Federal Corporation, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: February 10, 2005
/s/ Timothy W. Simmons
-------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
25
EXHIBIT 31.2
Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
26
Certification
I, Roy G. Lindburg, Chief Financial Officer of Security Federal Corporation,
certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: February 10, 2005
/s/ Roy G. Lindburg
-------------------------------------
Roy G. Lindburg
Chief Financial Officer
27
EXHIBIT 32
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF SECURITY FEDERAL CORPORATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and in connection with this Quarterly Report on Form 10-Q that:
1. the report fully complies with the requirements of Section 13(a)
and 15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all
material respects, the company's financial condition and results of
operations.
/s/ Timothy W. Simmons /s/ Roy G. Lindburg
- --------------------------------- ---------------------------------
Timothy W. Simmons Roy G. Lindburg
Chief Executive Officer Chief Financial Officer
Dated: February 10, 2005