SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
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
(Exact name of Registrant as specified in Its Charter)
South Carolina 57-0858504
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1705 WHISKEY ROAD, AIKEN, SOUTH CAROLINA 29801
(Address of Principal Executive Office)(Zip code)
(803) 641-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practical date.
CLASS: OUTSTANDING SHARES AT: SHARES:
-------------- ------------------------- -------------
Common Stock, July 31, 2005 2,535,626
par value $0.01
per share
INDEX
- ------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at June 30, 2005
and March 31, 2005 1
Consolidated Statements of Income for the Three
Months Ended June 30, 2005 and 2004 2
Consolidated Statements of Shareholders' Equity
and Comprehension Income at June 30, 2004 and 2005 3
Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2005 and 2004 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
- ------------------------------------------------------------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 18
Signatures 19
- ------------------------------------------------------------------------------
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information is included in the consolidated financial statements and related
notes.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets
June 30, 2005 March 31, 2005
------------ --------------
Assets: (Unaudited) (Audited)
Cash And Cash Equivalents $ 9,372,461 $7,916,488
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized cost of
$164,142,202 at June
30, 2005 and
$166,364,642 at March
31, 2005) 163,260,979 164,814,819
Held To Maturity: (Fair value of
$75,664,241 at June
30, 2005 and
$74,770,902 at
March 31, 2005) 76,254,861 76,260,904
------------ ------------
Total Investment And Mortgage-Backed
Securities 239,515,840 241,075,723
------------ ------------
Loans Receivable, Net:
Held For Sale 749,166 2,277,762
Held For Investment:(Net of allowance of
$6,428,900 at June
30, 2005 and
$6,284,055 at March
31, 2005) 332,969,214 314,611,373
------------ ------------
Total Loans Receivable, Net 333,718,380 316,889,135
------------ ------------
Accrued Interest Receivable:
Loans 910,356 901,872
Mortgage-Backed Securities 535,425 555,933
Investments 631,367 721,744
Premises And Equipment, Net 8,008,532 7,914,043
Federal Home Loan Bank Stock, At Cost 6,360,500 6,234,500
Repossessed Assets Acquired In Settlement
Of Loans 77,000 53,000
Other Assets 3,322,505 3,716,035
------------ ------------
Total Assets $602,452,366 $585,978,473
============ ============
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $441,205,337 $430,287,391
Advances From Federal Home Loan Bank 114,963,000 112,038,000
Other Borrowed Money 6,486,243 5,594,157
Advance Payments By Borrowers For Taxes
And Insurance 597,606 417,410
Other Liabilities 2,801,614 2,530,450
------------ ------------
Total Liabilities $566,053,800 $550,867,408
------------ ------------
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 - 2,544,438
And Outstanding Shares - 2,525,617 At
June 30, 2005 And 2,543,838 And
2,522,127 At March 31, 2005 25,444 25,438
Additional Paid-In Capital 4,191,800 4,181,804
Treasury Stock, (At Cost, 9,277
and 8,077 shares, respectively) (190,889) (165,089)
Indirect Guarantee Of Employee Stock
Ownership Trust Debt (215,503) (276,217)
Accumulated Other Comprehensive Income
(Loss) (546,712) (961,504)
Retained Earnings, Substantially Restricted 33,134,426 32,306,633
------------ ------------
Total Shareholders' Equity $ 36,398,566 $ 35,111,065
------------ ------------
Total Liabilities And Shareholders' Equity $602,452,366 $585,978,473
============ ============
See accompanying notes to consolidated financial statements.
1
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended June 30,
----------------------------
2005 2004
----------- -----------
Interest Income:
Loans $ 5,185,122 $ 3,835,261
Mortgage-Backed Securities 1,393,287 878,361
Investment Securities 819,557 1,323,278
Other 14,227 6,600
----------- -----------
Total Interest Income 7,412,193 6,043,500
----------- -----------
Interest Expense:
NOW And Money Market Accounts 1,253,183 894,613
Passbook Accounts 44,199 43,399
Certificate Accounts 1,212,583 770,868
Advances And Other Borrowed Money 979,237 886,770
----------- -----------
Total Interest Expense 3,489,202 2,595,650
----------- -----------
Net Interest Income 3,922,991 3,447,850
Provision For Loan Losses 165,000 195,000
----------- -----------
Net Interest Income After Provision
For Loan Losses 3,757,991 3,252,850
----------- -----------
Other Income:
Net Gain On Sale Of Investments 17,540 -
Gain On Sale Of Loans 135,310 122,425
Loan Servicing Fees 48,568 43,637
Service Fees On Deposit Accounts 283,197 313,680
Other 205,760 179,213
----------- -----------
Total Other Income 690,375 658,955
----------- -----------
General And Administrative Expenses:
Salaries And Employee Benefits 1,760,947 1,598,825
Occupancy 311,847 254,535
Advertising 25,469 31,622
Depreciation And Maintenance Of Equipment 251,801 275,924
FDIC Insurance Premiums 14,519 14,705
Other 631,541 518,167
----------- -----------
Total General And Administrative Expenses 2,996,124 2,693,778
----------- -----------
Income Before Income Taxes 1,452,242 1,218,027
Provision For Income Taxes 523,000 416,000
----------- -----------
Net Income $ 929,242 $ 802,027
=========== ===========
Basic Net Income Per Common Share $ 0.37 $ 0.32
=========== ===========
Diluted Net Income Per Common Share $ 0.36 $ 0.31
=========== ===========
Cash Dividend Per Share On Common Stock $ 0.04 $ 0.02
=========== ===========
Basic Weighted Average Shares Outstanding 2,530,389 2,522,600
=========== ===========
Diluted Weighted Average Shares Outstanding 2,556,205 2,562,892
=========== ===========
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 Treasury Guarantee of Comprehensive Retained
Stock Capital Stock ESOP Debt Income (Loss) Earnings Total
------ ---------- -------- ---------- ------------- ---------- ----------
<s> <c> <c> <c> <c> <c> <c> <c>
Balance At March 31,
2004 $ 25,333 $4,013,674 $ - $(336,972) $ 689,755 $29,080,125 $33,471,915
Net Income - - - - - 802,027 802,027
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Losses
On Securities Available
For Sale - - - - (2,222,875) - (2,222,875)
-----------
Comprehensive Income - - - - - - (1,420,848)
Decrease in Indirect
Guarantee Of ESOP Debt - - - 60,755 - - 60,755
Cash Dividends - - - - - (50,666) (50,666)
-------- ---------- ------- ---------- ----------- ----------- -----------
Balance At June 30, 2004 $ 25,333 $4,013,674 $ - $ (276,217) $(1,533,120) $29,831,486 $32,061,156
======== ========== ======= ========== =========== =========== ===========
Accumulated
Additional Indirect Other
Common Paid-In Treasury Guarantee of Comprehensive Retained
Stock Capital Stock ESOP Debt Income (Loss) Earnings Total
------ ---------- -------- ---------- ------------- ---------- ----------
<s> <c> <c> <c> <c> <c> <c> <c>
Balance At March 31,
2005 $ 25,438 $4,181,804 $(165,089) $(276,217) $ (961,504) $32,306,633 $35,111,065
Net Income - - - - - 929,242 929,242
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Gains
On Securities Available
For Sale - - - - 403,917 - 403,917
Plus Reclassification
Adjustments for Gains
Included in Net Income - - - - 10,875 - 10,875
-----------
Comprehensive Income - - - - - - 1,344,034
Purchase of Treasury Stock
At cost, 1,200 shares (25,800) (25,800)
Exercise of Stock Options 6 9,996 10,002
Decrease in Indirect Guarantee
Of ESOP Debt - - - 60,714 - - 60,714
Cash Dividends - - - - - (101,449) (101,449)
-------- ---------- --------- ---------- ---------- ----------- -----------
Balance At June 30, 2005 $ 25,444 $4,191,800 $(190,889) $ (215,503) $ (546,712) $33,134,426 $36,398,566
======== ========== ========= ========== ========== =========== ===========
See accompanying notes to consolidated financial statements.
3
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended June 30,
-----------------------------
2005 2004
----------- -----------
Cash Flows From Operating Activities:
Net Income $ 929,242 $ 802,027
Adjustments To Reconcile Net Income To
Net Cash Provided By Operating Activities:
Depreciation Expense 241,003 215,846
Discount Accretion And Premium
Amortization 259,436 313,403
Provisions For Losses On Loans And
Real Estate 165,000 195,000
Gain On Sale Of Loans (135,310) (122,425)
Gain On Sale Of Mortgage Backed
Securities Available For Sale (17,540) -
Loss On Sale Of Real Estate 14,230 -
Amortization Of Deferred Fees On Loans (48,034) (52,233)
Proceeds From Sale Of Loans Held For Sale 8,285,951 7,477,620
Origination Of Loans For Sale (6,622,045) (6,966,458)
(Increase) Decrease In Accrued Interest
Receivable:
Loans (8,484) 29,824
Mortgage-Backed Securities 20,508 (42,644)
Investments 90,377 (15,865)
Increase In Advance Payments By Borrowers 180,196 166,727
(Gain) on Disposition of Premises and
Equipment - (3,325)
Other, Net 471,610 (191,730)
----------- -----------
Net Cash Provided By Operating Activities 3,826,140 1,805,767
----------- -----------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Available For Sale 12,417,076 14,162,776
Principal Repayments On Mortgage-Backed
Securities Held To Maturity 5,230 8,284
Purchase Of Investment Securities
Available For Sale (8,998,000) -
Purchase Of Investment Securities Held
To Maturity - (11,991,800)
Purchase Of Mortgage-Backed Securities
Available For Sale (5,596,261) (30,243,147)
Proceeds From Sale Of Mortgage-Backed
Securities Available For Sale 1,968,194 -
Maturities Of Investment Securities
Available For Sale 2,190,338 4,000,000
Maturities of Investment Securities Held
To Maturity - 4,000,000
Purchase Of FHLB Stock (1,575,000) (1,320,000)
Redemption Of FHLB Stock 1,449,000 560,200
(Increase) Decrease In Loans To Customers (18,529,421) (5,205,349)
Proceeds From Sale Of Repossessed Assets 16,384 52,066
Purchase And Improvement Of Premises And
Equipment (335,492) (1,114,286)
Proceeds from Sale of Premises And
Equipment - 3,325
----------- -----------
Net Cash Used By Investing Activities (16,987,952) (27,087,931)
----------- -----------
Cash Flows From Financing Activities:
Increase In Deposit Accounts 10,917,946 12,562,407
Proceeds From FHLB Advances 48,195,000 40,863,000
Repayment Of FHLB Advances (45,270,000) (27,368,000)
Net Proceeds Of Other Borrowings 892,086 135,685
Dividends To Shareholders (101,449) (50,666)
Purchase Of Treasury Stock (25,800) -
Proceeds From Exercise of Stock Options 10,002 -
----------- -----------
Net Cash Provided By Financing Activities 14,617,785 26,142,426
----------- -----------
(Continued)
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited) Continued
Three Months Ended June 30,
-----------------------------
2005 2004
----------- -----------
Net Increase In Cash And Cash Equivalents 1,455,973 860,261
Cash And Cash Equivalents At Beginning
Of Period 7,916,488 6,749,211
----------- -----------
Cash And Cash Equivalents At End Of Period $ 9,372,461 $ 7,609,472
=========== ===========
Supplemental Disclosure Of Cash Flows
Information:
Cash Paid During The Period For Interest $ 3,442,441 $ 2,775,454
Cash Paid During The Period For Income Taxes $ 51,195 $ 338,532
Additions To Repossessed Assets Acquired
Through Foreclosure $ 54,614 $ 156,197
(Increase) Decrease In Accumulated Other
Comprehensive Loss, Net Of Taxes $ 414,792 $(2,222,875)
See accompanying notes to consolidated financial statements.
5
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and accounting principles generally
accepted in the United States of America; therefore, they do not include all
disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows. Such statements are unaudited but, in
the opinion of management, reflect all adjustments, which are of a normal
recurring nature and necessary for a fair presentation of results for the
selected interim periods. Users of financial information produced for interim
periods are encouraged to refer to the footnotes contained in the audited
financial statements appearing in our March 31, 2005 Annual Report to
Shareholders when reviewing interim financial statements. The results of
operations for the three-month period ended June 30, 2005 are not necessarily
indicative of the results that may be expected for the fiscal year ending
March 31, 2006. This Quarterly Report on Form 10-Q contains certain
forward-looking statements with respect to the financial condition, results of
operations, and business of Security Federal Corporation. These
forward-looking statements involve certain risks and uncertainties. Factors
that may cause actual results to differ materially from those anticipated by
such forward-looking statements include, but are not limited to, changes in
interest rates, the demand for loans, the regulatory environment, general
economic conditions and inflation, and the securities markets. Management
cautions readers of this Form 10-Q not to place undue reliance on the
forward-looking statements contained herein.
2. Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Security Federal Corporation (the "Company") and its wholly owned
subsidiary, Security Federal Bank (the "Bank"), and the Bank's wholly owned
subsidiaries, Security Federal Insurance, Inc. ("SFINS"), Security Federal
Investments, Inc. ("SFINV"), Security Federal Trust, Inc. ("SFT"), and
Security Financial Services Corporation ("SFSC"). The Bank is primarily
engaged in the business of accepting savings and demand deposits and
originating mortgage and other loans to individuals and small businesses for
various personal and commercial purposes. SFINS, SFINV, and SFT were formed
during fiscal 2002 and began operation during the December 2001 quarter.
SFINS is an insurance agency offering business, health, home and life
insurance. SFINV engages primarily in investment brokerage services. SFT
offers trust, financial planning and financial management services. SFSC is
currently inactive.
3. Loans Receivable, Net
Loans receivable, net, at June 30, 2005 and March 31, 2005 consisted of the
following:
June 30, 2005 March 31, 2005
Loans Held For Investment: ------------- -------------
Residential Real Estate $ 124,263,179 $ 122,622,347
Consumer 52,882,799 50,844,192
Commercial Business & Real Estate 175,775,823 162,217,200
------------- -------------
352,921,801 335,683,739
------------- -------------
Less:
Allowance For Possible Loan Loss 6,428,900 6,284,055
Loans In Process 13,362,785 14,626,913
Deferred Loan Fees 160,902 161,398
------------- -------------
19,952,587 21,072,366
------------- -------------
$ 332,969,214 $ 314,611,373
============= =============
Loans held for sale were $749,166 and $2,277,762 at June 30, 2005 and March
31, 2005, respectively.
The following is a reconciliation of the allowance for loan losses for the
three months ending:
June 30, 2005 June 30, 2004
------------- -------------
Beginning Balance $ 6,284,055 $ 5,763,935
Provision 165,000 195,000
Charge-offs (29,904) (119,198)
Recoveries 9,749 81,812
------------- -------------
Ending Balance $ 6,428,900 $ 5,921,549
============= =============
6
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
4. Securities
Investment and Mortgage-Backed Securities, Held to Maturity
- -----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities held to maturity are as
follows:
Gross Gross
June 30, 2005 Amortized Unrealized Unrealized
- ------------- Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
US Government and
Agency Obligations $76,000,034 $ 3,704 $ 609,268 $75,394,470
Mortgage-Backed
Securities 254,827 14,944 - 269,771
----------- ------- --------- -----------
Total $76,254,861 $18,648 $ 609,268 $75,664,241
=========== ======= ========= ===========
March 31, 2005
- --------------
US Government and Agency
Obligations $76,000,847 $ - $1,504,761 $74,496,086
Mortgage-Backed
Securities 260,057 4,759 - 274,816
----------- ------- ---------- -----------
Total $76,260,904 $14,759 $1,504,761 $74,770,902
=========== ======= ========== ===========
Investment And Mortgage-Backed Securities, Available For Sale
- -------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities available for sale are as
follows:
Gross Gross
June 30, 2005 Amortized Unrealized Unrealized
- ------------- Cost Gains Losses Fair Value
------------ -------- ---------- ------------
US Government and
Agency Obligations $ 12,276,772 $ 8,750 $ 26,790 $ 12,258,732
Mortgage-Backed
Securities 151,865,430 482,303 1,345,486 151,002,247
------------ -------- ---------- ------------
Total $164,142,202 $491,053 $1,372,276 $163,260,979
============ ======== ========== ============
March 31, 2005
- --------------
US Government and
Agency Obligations $ 5,469,678 $ 4,648 $ 19,063 $ 5,455,263
Mortgage-Backed
Securities 160,894,954 457,081 1,992,479 159,359,556
------------ -------- ---------- ------------
Total $166,364,632 $461,729 $2,011,542 $164,814,819
============ ======== ========== ============
7
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
5. Deposit Accounts
A summary of deposit accounts by type with weighted average rates is as
follows:
June 30, 2005 March 31, 2005
-------------------- -------------------
Demand Accounts: Balance Rate Balance Rate
-------------------- -------------------
Checking $ 91,936,911 0.93% $ 88,169,885 0.65%
Money Market 166,861,358 2.78% 164,088,081 2.57%
Regular Savings 18,665,607 0.98% 17,743,659 0.98%
------------ ------------
Total Demand Accounts 277,463,876 1.95% 270,001,625 1.84%
------------ ------------
Certificate Accounts:
0-4.99% 153,925,347 150,486,280
5.00-6.99% 9,816,114 9,799,486
------------ ------------
Total Certificate Accounts 163,741,461 3.10% 160,285,766 2.92%
------------ ------------
Total Deposit Accounts $441,205,337 2.38% $430,287,391 2.24%
============ ============
6. Advances From Federal Home Loan Bank
Federal Home Loan Bank ("FHLB") advances are summarized by year of maturity
and weighted average interest rate in the table below:
June 30, 2005 March 31, 2005
------------------ --------------------
Fiscal Year Due: Balance Rate Balance Rate
------------------ --------------------
2006 $ 33,600,000 4.39% $ 40,675,000 4.09%
2007 18,000,000 2.83% 18,000,000 2.83%
2008 10,000,000 2.96% 10,000,000 2.96%
2009 25,000,000 3.05% 25,000,000 3.05%
2010 5,000,000 3.09% 5,000,000 3.09%
Thereafter 23,363,000 3.21% 13,363,000 3.21%
Total Advances $114,963,000 3.44% $112,038,000 3.41%
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 $47.7 million in investment securities at June 30, 2005.
Advances are subject to prepayment penalties.
The following table shows callable FHLB advances as of the dates indicated.
These advances are also included in the above table. All callable advances
are callable at the option of the FHLB. If an advance is called, the Bank has
the option to payoff the advance without penalty, re-borrow funds on different
terms, or convert the advance to a three-month floating rate advance tied to
LIBOR.
As of June 30, 2005
- -----------------------------------------------------------------------------------------------------------
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 08/10/05 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 12/12/05 5,000,000 2.16% Multi-call 12/12/05 and quarterly thereafter
02/20/04 02/20/14 5,000,000 3.225% 1 Time Call 02/20/09
04/16/04 04/16/14 3,000,000 3.33% 1 Time Call 04/16/08
09/16/04 09/16/09 5,000,000 3.09% 1 Time Call 09/16/07
06/24/05 06/24/15 5,000,000 3.71% 1 Time Call 06/24/10
06/24/05 06/24/10 5,000,000 2.8144% 1 Time Call 06/26/06
8
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
As of March 31, 2005
- -----------------------------------------------------------------------------------------------------------
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 05/10/05 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 3.35% 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 2.14% 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
7. Regulatory Matters
The following table reconciles the Bank's shareholders' equity to its various
regulatory capital positions:
June 30, 2005 March 31, 2005
(Dollars in Thousands)
----------------------------------
Bank's Shareholders' Equity $36,035 $34,690
Unrealized Loss (Gain) On Available
For Sale Of Securities, Net Of Tax 546 962
Reduction For Goodwill And Other
Intangibles - -
-------- --------
Tangible Capital 36,581 35,652
Qualifying Core Deposits And
Intangible Assets - -
-------- --------
Core Capital 36,581 35,652
Supplemental Capital 4,421 4,236
Assets Required To Be Deducted (23) (30)
======= ========
Risk-Based Capital $40,979 $ 39,858
======= ========
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at June 30, 2005:
(Dollars in Thousands)
----------------------------------------------------------------------------------
Amt. Required % Required Actual Amt. Actual % Excess Amt. Excess %
----------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
Tangible Capital $ 12,073 2.0% $ 36,581 6.06% $ 24,508 4.06%
Tier 1 Leverage (Core)
Capital 24,146 4.0% 36,581 6.06% 12,435 2.06%
Total Risk-Based Capital 28,286 8.0% 40,979 11.59% 12,693 3.59%
Tier 1 Risk-Based (Core)
Capital 14,151 4.0% 36,581 10.34% 22,430 6.34%
8. Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
SFAS No. 128 specifies the computation, presentation and disclosure
requirements for EPS for entities with publicly held common stock or potential
common stock such as options, warrants, convertible securities or contingent
stock agreements if those securities trade in a public market.
This standard specifies computation and presentation requirements for both
basic EPS and, for entities with complex capital structures, diluted EPS.
Basic EPS is computed by dividing net income by the weighted average number of
common shares outstanding. Diluted EPS is similar to the computation of basic
EPS except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. The dilutive effect of options
outstanding under the Company's stock option plan is reflected in diluted
earnings per share by application of the treasury stock method.
9
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
For the Quarter Ended
--------------------------------------------------------
June 30, 2005
--------------------------------------------------------
Income
(Numerator) Amount Shares (Denominator) Per Share
------------------ -------------------- -----------
Basic EPS $ 929,242 2,530,389 $ 0.370
Effect of Diluted
Securities:
Stock Options - 20,227 (0.008)
ESOP - 5,589 (0.002)
---------- ----------- -------
Diluted EPS $ 929,242 2,556,205 $ 0.360
========== =========== =======
For the Quarter Ended
--------------------------------------------------------
June 30, 2004
--------------------------------------------------------
Income
(Numerator) Amount Shares (Denominator) Per Share
------------------ -------------------- -----------
Basic EPS $ 802,027 2,522,600 $ 0.320
Effect of Diluted
Securities:
Stock Options - 29,601 (0.007)
ESOP - 10,691 (0.003)
---------- ----------- -------
Diluted EPS $ 802,027 2,562,892 $ 0.310
========== =========== =======
9. Stock-Based Compensation
The Company has a stock-based employee compensation plan which is accounted
for under the recognition and measurement principles of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. No stock-based employee compensation cost is
reflected in net income, as all stock options granted under these plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share as if we had applied the fair value recognition provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation for the three months ended June 30, 2004 and 2003.
Three Months Ended
June 30,
2005 2004
-------- ---------
Net income, as reported $ 929,242 $ 802,027
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effect $ (30,570) $ (57,124)
Net Income, Pro Forma $ 898,672 $ 744,903
Basic earnings share:
As Reported $ 0.37 $ 0.32
Pro Forma $ 0.36 $ 0.30
Diluted earnings share:
As reported $ 0.36 $ 0.31
Pro forma $ 0.35 $ 0.29
10
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 $16.5 million or 2.8% during the three
months ended June 30, 2005 primarily as a result of an increase of $16.8
million or 5.3% in net loans receivable and a $1.5 million increase in cash
and cash equivalents, offset partially by a $1.6 million decrease in total
investment and mortgage-backed securities.
Residential real estate loans, net of loans in process, increased $2.9 million
or 2.7% during the three months ended June 30, 2005, commercial loans
increased $13.6 million or 8.4%, and consumer loans increased $2.0 million or
4.0%. Loans held for sale decreased $1.5 million to $749,000 during the same
period.
Repossessed assets increased $24,000 to $77,000 during the three months ended
June 30, 2005.
Non-accrual loans totaled $1.6 million at June 30, 2005 compared to $2.4
million at March 31, 2005. The Bank classifies all loans as non-accrual when
they become 90 days or more delinquent. At June 30, 2005, the Bank held
$870,000 in impaired loans compared to $1.2 million at March 31, 2005. The
Bank includes troubled debt restructuring ("TDR") within the meaning of SFAS
No. 114 in impaired loans. At June 30, 2005, the Bank had six loans totaling
$429,000 in TDRs compared to six loans totaling $434,000 at March 31, 2005.
One $13,000 consumer loan TDR secured by a second mortgage on a residential
dwelling, was 60 days delinquent. The other five TDRs, three consumer loans
totaling $342,000 secured by residential dwellings, a $19,000 unsecured
commercial loan, and a $55,000 commercial loan secured by two rental
properties, were current as of June 30, 2005.
Deposits increased $10.9 million or 2.5% during the three months ended June
30, 2005 as a result of competitive rates offered by the Bank. FHLB advances
increased $2.9 million or 2.6% to $115.0 million during the same period due to
an effort to lock in some longer term advances before interest rate increase
further. Other borrowings, consisting of commercial repurchase sweep
accounts, increased $892,000 or 16.0% to $6.5 million during the three-month
period.
The Board of Directors of the Company declared the 58th consecutive quarterly
dividend, which was $.04 per share, in April 2005, which totaled $101,000.
The employee stock ownership trust of the Company paid $61,000 of principal on
the employee stock ownership plan loan during the three-month period.
Accumulated Other Comprehensive Loss, net of tax, decreased $415,000 during
the three months ended June 30, 2005. The Company's net income for the
three-month period was $929,000. These items, in total, increased
shareholders' equity by $1.3 million or 3.7% during the three months ended
June 30, 2005. Book value per share was $14.41 at June 30, 2005 compared to
$13.92 at March 31, 2005.
Liquidity and Capital Resources
In accordance with Office of Thrift Supervision ("OTS") regulations, the
Company is required to maintain sufficient liquidity to operate in a safe and
sound manner. The Company's current liquidity level is deemed adequate to
meet the requirements of normal operations, potential deposit outflows, and
loan demand while still allowing for optimal investment of funds and return on
assets.
Loan repayments and maturities of investments are a significant source of
funds, whereas loan disbursements and the purchase of investments are a
primary use of the Company's funds. During the three months ended June 30,
2005, loan disbursements exceeded loan repayments resulting in a $16.8 million
or 5.3% increase in total net loans receivable.
Deposits and other borrowings are also an important source of funds for the
Company. During the three months ended June 30, 2005, deposits increased
$10.9 million and FHLB advances increased $2.9 million. The Bank had $65.6
million in additional borrowing capacity at the FHLB at the end of the period.
At June 30, 2005, the Bank had $108.6 million of certificates of deposit
maturing within one year. Based on previous experience, the Bank anticipates
a major portion of these certificates will be renewed.
11
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 customers at predetermined
interest rates for a specified period of time. At June 30, 2005, the Bank had
$28.9 million in unused consumer lines of credit, including home equity lines
and unsecured lines. The Bank also had $30.6 million in unused commercial
lines of credit and $1.1 million in letters of credit committed to customers.
The majority of the $60.6 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 a 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.
In recent quarters, the components of the Company's cash flow, operating
activities, investing activities, and financing activities, have been
relatively stable. Management believes that the Company's liquidity will
continue to be supported by the Company's deposit base, borrowing capacity,
and cash flow and maturities of investments 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, 2005 as filed on our Annual Report on Form 10-K.
Certain accounting policies involve significant judgements and assumptions by
management 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
and then to principal. Once the recorded principal balance has been reduced
to zero, future cash receipts are applied to interest income to the extent
that any interest has been foregone. Further cash receipts are recorded as
recoveries of any amounts previously charged off.
12
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
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 2005, the Securities and Exchange Commission's ("SEC") Office of the
Chief Accountant and its Division of Corporation Finance has released Staff
Accounting Bulletin ("SAB") No. 107 to provide guidance regarding the
application of Financial Accounting Standards Board ("FASB") Statement No. 123
(revised 2004), "Share-Based Payment." Statement No. 123(R) covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights,
and employee share purchase plans. SAB 107 provides interpretive guidance
related to the interaction between Statement No. 123(R) and certain SEC rules
and regulations, as well as the staff's views regarding the valuation of
share- based payment arrangements for public companies. SAB 107 also reminds
public companies of the importance of including disclosures within filings
made with the SEC relating to the accounting for share-based payment
transactions, particularly during the transition to Statement No. 123(R).
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 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 based on the fair
value of the assets exchanged. 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, 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 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 asset 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
Payments" ("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 their 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
payments 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 flow.
In March 2004, the SEC issued 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 the 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
provisions 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.
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 holders lack adequate decision-making ability. The consolidation
requirements of FIN No. 46(R) applied immediately to variable interest created
after January 31, 2003. The consolidation requirements applied to the
Company's existing variable entities in the first reporting ending after March
15, 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.
13
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 data but for which other-than-temporary impairments has not been
recognized. Accordingly the EITF issued EITF No. 03-1, "The Meaning of
Other-Than-Temporary Impairment 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 requirements of EITF No. 03-1 are
effective for financial statements for fiscal years ending after June 15,
2004. The effective date for the measurement and recognition guidance of EITF
No. 03-1 has 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 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
concurrent 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.
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 discussion of changes in
interest rates.
14
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 JUNE 30, 2005
- --------------------------------------------------------------
Net Income
Net income was $929,000 for the three months ended June 30, 2005, representing
an increase in earnings of $127,000 or 15.9% from $802,000 for the same period
in 2004. The primary reason for the increased earnings was an increase in net
interest income offset partially by an increase in general and administrative
expenses.
Net Interest Income
Net interest income increased $475,000 or 13.8% to $3.9 million during the
three months ended June 30, 2005, compared to the same period in 2004, as a
result of an increase in interest income offset in part by an increase in
interest expense. Average interest earning assets increased $51.2 million
while average interest-bearing liabilities increased $44.3 million. The
interest rate spread increased 4 basis points to 2.50% during the three months
ended June 30, 2005 compared to the same period in 2004.
Interest income on loans increased $1.3 million or 35.2% to $5.2 million
during the three months ended June 30, 2005 as a result of the average loan
portfolio balance increasing $64.8 million and the yield in the loan portfolio
increasing 49 basis points. Interest income from investment, mortgage-backed,
and other securities increased $19,000 or 0.9% due to an increase in the yield
in the investment portfolio of 19 basis points despite a decrease in the
average balance of the portfolio of $13.5 million. Total interest income
increased $1.4 million or 22.7% to $7.4 million for the three months ended
June 30, 2005 from $6.0 million for the same period in 2004.
Total interest expense increased $894,000 or 34.4% to $3.5 million during the
three months ended June 30, 2005 compared to $2.6 million for the same period
one-year earlier. Interest expense on deposits increased $801,000 or 46.9%
during the period as average interest bearing deposits grew $36.9 million
compared to the average balance in the three months ended June 30, 2004 while
the cost of deposits increased 50 basis points. Interest expense on advances
and other borrowings increased $92,000 or 10.4% as the cost of debt
outstanding increased 11 basis points during the 2005 period compared to 2004
while average total borrowings outstanding increased approximately $1.8
million.
Provision for Loan Losses
The Bank's provision for loan losses was $165,000 during the three months
ended June 30, 2005 compared to $195,000 for the quarter ended June 30, 2004.
The amount of the provision is determined by management's on-going monthly
analysis of the loan portfolio. Non-accrual loans, which are loans delinquent
90 days or more, were $1.6 million at June 30, 2005 compared to $2.4 million
at March 31, 2005 and $2.3 million at June 30, 2004. The ratio of allowance
for loan losses to the Company's total loans was 1.89% at June 30, 2005
compared to 1.94% at March 31, 2005. Net charge-offs were $21,000 during the
three months ended June 30, 2005 compared to $37,000 during the same period in
2004.
Other Income
Total other income increased $31,000 or 4.8% to $690,000 during the three
months ended June 30, 2005 compared to the same period a year ago. Net gain
on sale of investments was $18,000 during the quarter ended June 30, 2005,
while there were no gains for the same period in 2004. Gain on sale of loans
increased $13,000 or 10.5% to $135,000, loan servicing fees increased $5,000
to $49,000, and service fees on deposit accounts decreased $30,000 or 9.7% to
$283,000 as a result of an increase in the average rate used to offset
commercial analysis charges on business demand accounts. 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 $27,000 or
14.8% to $206,000 during the three months ended June 30, 2005, compared to the
same period last year.
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 JUNE 30, 2005, CONTINUED
- -------------------------------------------------------------------------
General and Administrative Expenses
General and administrative expenses increased $302,000 or 11.2% to $3.0
million during the three months ended June 30, 2005 compared to the same
period in 2004 due primarily to an increase in salaries and employee benefits
expense. Salaries and employee benefits expense increased $162,000 or 10.1%
due to the hiring of additional lending officers and lending personnel in
addition to normal annual increases. Occupancy expense increased $57,000 or
22.5% due primarily to the renovation of some branch offices. Advertising
expense decreased $6,000 to $26,000, depreciation and maintenance of equipment
expense decreased $24,000 or 8.7%, and FDIC insurance premiums remained
constant at $15,000 for both periods. Other miscellaneous expense, consisting
of legal, professional, and consulting expenses, stationery and office
supplies, and other sundry expenses, increased $113,000 or 21.9% to $632,000
due to increased legal and consulting expense for the preparation of complying
with the Sarbanes-Oxley Act for the three months ended June 30, 2005 compared
to the three months ended June 30, 2004.
16
Security Federal Corporation and Subsidiaries
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, investment, deposit and borrowing activities.
Management actively monitors and manages its interest rate risk exposure.
Although the Company manages other risks such as credit quality and liquidity
risk in the normal course of business, management considers interest rate risk
to be its most significant market risk that could potentially have the largest
material effect on the Company's financial condition and results of
operations. Other types of market risks such as foreign currency exchange
rate risk and commodity price do not arise in the normal course of the
Company's business activities.
The Company's profitability is affected by fluctuations in the market interest
rate. Management's goal is to maintain a reasonable balance between exposure
to interest rate fluctuations and earnings. A sudden and substantial increase
or decrease in interest rates may adversely impact the Company's earnings to
the extent that the interest rates on interest-earning assets and
interest-bearing liabilities do not change at the same rate, to the same
extent or on the same basis. The Company monitors the impact of changes in
interest rates on its net interest income using a test that measures the
impact on net interest income and net portfolio value of an immediate change
in interest rates in 100 basis point increments and by measuring the Bank's
interest sensitivity gap ("Gap"). Net portfolio value is defined as the net
present value of assets, liabilities, and off-balance sheet contracts. Gap is
the amount of interest sensitive assets repricing or maturing over the next
twelve months compared to the amount of interest sensitive liabilities
maturing or repricing in the same time period. Recent net portfolio value
reports furnished by the OTS indicate that the Bank's interest rate risk
sensitivity has increased slightly over the past year. The Bank has rated
favorably compared to thrift peers concerning interest rate sensitivity.
For the three month period ended June 30, 2005, 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 2.50%. As of the year
ended March 31, 2005, the interest rate spread was 2.45%. The interest rate
spread increased due to the growth of loan receivables. Loan receivables
earn a higher yield than investment securities. However, if interest rates
were to increase suddenly and significantly, the Bank's net interest income
and net interest spread would be compressed.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Rule 13a - 15(e)
of the Securities Exchange Act of 1934 ("Act")) was carried out under the
supervision and with the participation of the Company's Chief Executive
Officer, Chief Financial Officer and several other members of the Company's
senior management as of the end of the period covered by this quarterly
report. The Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures as currently
in effect are effective in ensuring that the information required to be
disclosed by the Company in the reports it files or submits under the Act is
(i) accumulated and communicated to the Company's management (including the
Chief Executive Officer and Chief Financial Officer) in a timely manner, and
(ii) recorded, processed, summarized and reported within the time period
specified in the Securities and Exchange Commission's rules and forms.
(b) Changes in Internal Controls: In the quarter ended June 30, 2005, the
Company did not make any significant changes in, nor take any corrective
actions regarding, its internal controls or other factors that could
significantly affect these controls.
17
Security Federal Corporation and Subsidiaries
Part II: Other Information
Item 1 Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Company is a
party to legal proceedings in the ordinary course of business wherein
it enforces its security interest in mortgage loans it has made.
Item 2 Unregistered sales of Equity Securities and Use Of Proceeds
-----------------------------------------------------------
(c)Total No.
of Shares
Purchased as (d)Maximum No.
(a)Total Part of of Shares
No. of (b)Average Publicly that May Yet
Shares Price Paid Announced Be Purchased
Period Purchased per Share Plan(1) Under the Plan
- --------------- --------- --------- ---------- --------------
April 1-April 30, 2005 - - - 117,923 (1)
May 1-May 31, 2005 - - - 117,923
June 1-June 30, 2005 1,200 $21.50 1,200 116,723
Total 1,200 $21.50 1,200 116,723
(1) On May 17, 2005, the Company's Board of Directors authorized a 5%
repurchase plan, or 126,000 shares of the Company's outstanding common stock.
As of June 30, 2005, 9,277 shares have been repurchased under this program.
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)
3.3 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.
18
Security Federal Corporation and Subsidiaries
Exhibits, Continued
(1) Filed as Exhibit B to the Company's June 23, 1998 proxy statement and
incorporated herein by reference.
(2) Filed as Exhibit 3.2 to the Company's Form 8-K filed September 1, 1998
and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the year ended March 31, 1993 and incorporated herein by reference.
(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: August 12, 2005 By:/s/Timothy W. Simmons
--------------------- --------------------------------
Timothy W. Simmons
President
Duly Authorized Representative
Date: August 12, 2005 By:/s/Roy G. Lindburg
--------------------- --------------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
19
EXHIBIT 31.1
Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
20
Certification
I, Timothy W. Simmons, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures as of
the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 12, 2005
/s/Timothy W. Simmons
---------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
21
EXHIBIT 31.2
Certification of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
22
Certification
I, Roy G. Lindburg, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures as of
the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 12, 2005
/s/Roy G. Lindburg
-----------------------------------
Roy G. Lindburg
Chief Financial Officer
23
EXHIBIT 32
Certification Pursuant to Section 906 of the Sarbanes Oxley Act
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF SECURITY FEDERAL CORPORATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and in connection with this Quarterly Report on Form 10-Q that:
1. the report fully complies with the requirements of Section 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all
material respects, the financial condition and results of operations
of Security Federal Corporation.
/s/Timothy W. Simmons /s/Roy G. Lindburg
- ---------------------------- -----------------------------
Timothy W. Simmons Roy G. Lindburg
Chief Executive Officer Chief Financial Officer
Dated: August 12, 2005