SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
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 And 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 by check mark whether the registrant is a shell corporation (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 October 31, 2005 2,535,176
value $0.01 per share
INDEX
- ----------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at September 30, 1
2005 and March 31, 2005
Consolidated Statement of Income for the Three 2
and Six Months Ended September 30, 2005 and 2004
Consolidated Statements of Shareholders' Equity and 4
Comprehensive Income at September 30, 2004 and 2005
Consolidated Statements of Cash Flows for the Six 5
Months Ended September 30, 2005 and 2004
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market 19
Risk
Item 4. Controls and Procedures 19
- -----------------------------------------------------------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 21
Signatures 22
- -----------------------------------------------------------------------------
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information is included in the consolidated financial statements and related
notes.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets
September 30, March 31,
2005 2005
------------- ------------
Assets: (Unaudited) (Audited)
Cash And Cash Equivalents $ 11,734,768 $ 7,916,488
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized cost of
$166,124,010 at September 30, 2005 and
$166,364,642 at March 31, 2005) 164,815,710 164,814,819
Held To Maturity: (Fair value of
$75,100,110 at September 30, 2005
and $74,770,902 at March 31, 2005) 75,996,110 76,260,904
------------- -------------
Total Investment And Mortgage-Backed
Securities 240,811,820 241,075,723
------------- -------------
Loans Receivable, Net:
Held For Sale 1,738,872 2,277,762
Held For Investment:(Net of allowance of
$6,532,667 at September 30, 2005 and
$6,284,055 at March 31, 2005) 338,032,685 314,611,373
------------- -------------
Total Loans Receivable, Net 339,771,557 316,889,135
------------- -------------
Accrued Interest Receivable:
Loans 1,009,041 901,872
Mortgage-Backed Securities 526,997 555,933
Investments 865,139 721,744
Premises And Equipment, Net 8,664,918 7,914,043
Federal Home Loan Bank Stock, At Cost 6,402,200 6,234,500
Repossessed Assets Acquired In
Settlement Of Loans 24,370 53,000
Other Assets 3,735,595 3,716,035
------------- -------------
Total Assets $ 613,546,405 $ 585,978,473
============= =============
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $ 449,667,396 $ 430,287,391
Advances From Federal Home Loan Bank 116,938,000 112,038,000
Other Borrowed Money 6,102,477 5,594,157
Advance Payments By Borrowers
For Taxes And Insurance 743,637 417,410
Other Liabilities 2,948,284 2,530,450
------------- -------------
Total Liabilities 576,399,794 550,867,408
------------- -------------
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 -
2,544,888 And Outstanding Shares -
2,535,632 At September 30, 2005 And
2,543,838 And 2,522,127 At March 31, 2005 25,549 25,438
Additional Paid-In Capital 4,365,897 4,181,804
Treasury Stock, (At Cost, 9,712 and
8,077 Shares, Respectively) (200,256) (165,089)
Indirect Guarantee Of Employee Stock
Ownership Trust Debt (215,503) (276,217)
Accumulated Other Comprehensive
Income (Loss) (811,669) (961,504)
Retained Earnings, Substantially
Restricted 33,982,593 32,306,633
------------- -------------
Total Shareholders' Equity 37,146,611 35,111,065
------------- -------------
Total Liabilities And Shareholders'
Equity $ 613,546,405 $ 585,978,473
============= =============
See accompanying notes to consolidated financial statements.
1
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended September 30,
---------------------------------
2005 2004
--------------- -------------
Interest Income:
Loans $ 5,603,084 $ 4,016,449
Mortgage-Backed Securities 1,357,721 1,890,851
Investment Securities 852,548 328,646
Other 22,060 6,129
--------------- -------------
Total Interest Income 7,835,413 6,242,075
--------------- -------------
Interest Expense:
NOW And Money Market Accounts 1,293,353 968,523
Passbook Accounts 44,920 43,569
Certificate Accounts 1,340,794 851,749
Advances And Other Borrowed Money 1,104,785 1,016,367
--------------- -------------
Total Interest Expense 3,783,852 2,880,208
--------------- -------------
Net Interest Income 4,051,561 3,361,867
Provision For Loan Losses 165,000 195,000
Net Interest Income After Provision --------------- -------------
For Loan Losses 3,886,561 3,166,867
--------------- -------------
Other Income:
Net Gain On Sale Of Investments 31,422 -
Gain On Sale Of Loans 118,253 116,398
Loan Servicing Fees 52,191 43,469
Service Fees On Deposit Accounts 288,867 311,684
Other 257,949 252,857
--------------- -------------
Total Other Income 748,682 724,408
--------------- -------------
General And Administrative Expenses:
Salaries And Employee Benefits 1,835,356 1,586,088
Occupancy 319,330 269,173
Advertising 43,521 42,903
Depreciation And Maintenance Of Equipment 258,318 261,098
FDIC Insurance Premiums 14,167 14,192
Other 700,962 537,910
--------------- -------------
Total General And Administrative Expenses 3,171,654 2,711,364
--------------- -------------
Income Before Income Taxes 1,463,589 1,179,911
Provision For Income Taxes 513,909 379,905
--------------- -------------
Net Income $ 949,680 $ 800,006
=============== =============
Basic Net Income Per Common Share $ 0.38 $ 0.32
=============== =============
Diluted Net Income Per Common Share $ 0.37 $ 0.31
=============== =============
Cash Dividend Per Share On Common Stock $ 0.04 $ 0.03
=============== =============
Basic Weighted Average Shares Outstanding 2,527,533 2,519,627
=============== =============
Diluted Weighted Average Shares Outstanding 2,585,543 2,555,774
=============== =============
See accompanying notes to consolidated financial statements.
2
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Six Months Ended September 30,
--------------------------------
2005 2004
-------------- -------------
Interest Income:
Loans $ 10,788,206 $ 7,851,710
Mortgage-Backed Securities 2,751,008 2,769,212
Investment Securities 1,672,105 1,651,924
Other 36,287 12,729
-------------- -------------
Total Interest Income 15,247,606 12,285,575
-------------- -------------
Interest Expense:
NOW And Money Market Accounts 2,546,536 1,863,136
Passbook Accounts 89,119 86,968
Certificate Accounts 2,553,377 1,622,617
Advances And Other Borrowed Money 2,084,022 1,903,137
-------------- -------------
Total Interest Expense 7,273,054 5,475,858
-------------- -------------
Net Interest Income 7,974,552 6,809,717
Provision For Loan Losses 330,000 390,000
-------------- -------------
Net Interest Income After Provision For
Loan Losses 7,644,552 6,419,717
-------------- -------------
Other Income:
Net Gain On Sale Of Investments 48,962 -
Gain On Sale Of Loans 253,563 238,823
Loan Servicing Fees 100,759 87,106
Service Fees On Deposit Accounts 572,064 625,364
Other 463,709 432,070
-------------- -------------
Total Other Income 1,439,057 1,383,363
-------------- -------------
General And Administrative Expenses:
Salaries And Employee Benefits 3,596,303 3,184,913
Occupancy 631,177 523,708
Advertising 68,990 74,525
Depreciation And Maintenance Of Equipment 510,119 537,022
FDIC Insurance Premiums 28,686 28,897
Other 1,332,503 1,056,077
-------------- -------------
Total General And Administrative Expenses 6,167,778 5,405,142
-------------- -------------
Income Before Income Taxes 2,915,831 2,397,938
Provision For Income Taxes 1,036,909 795,905
-------------- -------------
Net Income $ 1,878,922 $ 1,602,033
============== =============
Basic Net Income Per Common Share $ 0.74 $ 0.64
============== =============
Diluted Net Income Per Common Share $ 0.73 $ 0.63
============== =============
Cash Dividend Per Share On Common Stock $ 0.08 $ 0.04
============== =============
Basic Weighted Average Shares Outstanding 2,528,961 2,521,144
============== =============
Diluted Weighted Average Shares Outstanding 2,570,874 2,559,333
============== =============
See accompanying notes to consolidated financial statements.
3
Security Federal Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Unaudited)
Accumulated
Indirect Other
Additional Guarantee Comprehen-
Common Paid-In Treasury of sive Income Retained
Stock Capital Stock ESOP Debt (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 - - - - - 1,602,033 1,602,033
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Losses
On Securities Available
For Sale - - - - (482,057) - (482,057)
----------
Comprehensive Income - - - - - - 1,119,976
Decrease In Indirect
Guarantee Of ESOP Debt - - - 60,755 - - 60,755
Exercise Of Stock Options 60 109,920 - - - - 109,980
Cash Dividends - - - - - (126,664) (126,664)
-------- ---------- -------- --------- ---------- ----------- -----------
Balance At September 30,
2004 $ 25,393 $4,123,594 $ - $(276,217) $ 207,698 $30,555,494 $34,635,762
Accumulated
Indirect Other
Additional Guarantee Comprehen-
Common Paid-In Treasury of sive Income Retained
Stock Capital Stock ESOP Debt (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 - - - - - 1,878,922 1,878,922
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Gains
On Securities Available
For Sale - - - - 119,479 - 119,479
Plus Reclassification
Adjustments For Gains
Included In Net Income - - - - 30,356 - 30,356
-----------
Comprehensive Income - - - - - - 2,028,757
Purchase Of Treasury Stock
At Cost, 1,635 shares (35,167) - - - (35,167)
Exercise Of Stock Options 111 184,093 - - - - 184,204
Decrease In Indirect Guarantee
Of ESOP Debt - - - 60,714 - - 60,714
Cash Dividends - - - - - (202,962) (202,962)
------- ---------- --------- --------- --------- ----------- -----------
Balance At September 30,
2005 $25,549 $4,365,897 $(200,256) $(215,503) $(811,669) $33,982,593 $37,146,611
See accompanying notes to consolidated financial statements.
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended September 30,
-------------------------------
2005 2004
--------------- ------------
Cash Flows From Operating Activities:
Net Income $ 1,878,922 $ 1,602,033
Adjustments To Reconcile Net Income To
Net Cash Provided By Operating Activities:
Depreciation Expense 483,323 430,528
Discount Accretion And Premium
Amortization 539,604 627,920
Provisions For Losses On Loans And
Real Estate 330,000 390,000
Gain On Sale Of Loans (253,563) (238,823)
Gain On Sale Of Mortgage Backed
Securities Available For Sale (48,962) -
Loss (Gain) On Sale Of Real Estate 23,466 (31,773)
Amortization Of Deferred Fees On Loans (99,944) (99,639)
Proceeds From Sale Of Loans Held For Sale 16,079,996 13,442,690
Origination Of Loans For Sale (15,287,543) (13,087,306)
(Increase) Decrease In Accrued Interest
Receivable:
Loans (107,169) 42,509
Mortgage-Backed Securities 28,936 (24,523)
Investments (143,395) 41,849
Increase In Advance Payments By Borrowers 326,227 305,851
Loss (Gain) On Disposition of Premises
and Equipment 806 (3,325)
Other, Net 367,310 (935,431)
--------------- ------------
Net Cash Provided (Used) By Operating Activities 4,118,014 2,462,560
--------------- ------------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Available For Sale 26,938,831 26,013,326
Principal Repayments On Mortgage-Backed
Securities Held To Maturity 10,407 71,484
Purchase Of Investment Securities
Available For Sale (16,065,257) -
Purchase Of Investment Securities
Held To Maturity - (11,991,800)
Purchase Of Mortgage-Backed Securities
Available For Sale (19,373,356) (37,197,817)
Maturities Of Investment Securities
Available For Sale 4,457,139 9,000,000
Maturities Of Investment Securities
Held To Maturity - 12,000,000
Proceeds From Sale Of Mortgage-Backed
Securities Available For Sale 3,797,360 -
Proceeds From Sale Of Mortgage-Backed
Securities Held To Maturity 249,650 -
Purchase Of FHLB Stock (2,307,100) (2,132,500)
Redemption Of FHLB Stock 2,139,400 1,981,100
(Increase) Decrease In Loans To Customers (23,722,352) (19,957,332)
Proceeds From Sale Of Repossessed Assets 76,148 171,539
Purchase And Improvement Of Premises
And Equipment (1,235,004) (1,699,450)
Proceeds from Sale of Premises
And Equipment - 3,325
--------------- ------------
Net Cash Used By Investing Activities (25,034,134) (23,738,125)
--------------- ------------
Cash Flows From Financing Activities:
Increase In Deposit Accounts 19,380,005 18,823,965
Proceeds From FHLB Advances 81,095,000 68,328,000
Repayment Of FHLB Advances (76,195,000) (64,183,000)
Net Proceeds Of Other Borrowings 508,320 437,731
Dividends To Shareholders (202,962) (126,664)
Purchase Of Treasury Stock (35,167) -
Proceeds From Exercise of Stock Options 184,204 109,980
--------------- ------------
Net Cash Provided By Financing Activities 24,734,400 23,390,012
--------------- ------------
(Continued)
5
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended September 30,
-------------------------------
2005 2004
--------------- --------------
Net Increase In Cash And Cash Equivalents 3,818,280 2,114,447
Cash And Cash Equivalents At Beginning
Of Period 7,916,488 6,749,211
--------------- --------------
Cash And Cash Equivalents At End Of Period $ 11,734,768 $ 8,863,658
=============== ==============
Supplemental Disclosure Of Cash Flows
Information:
Cash Paid During The Period For Interest $ 7,206,369 $ 5,453,627
Cash Paid During The Period For Income Taxes $ 698,195 $ 1,257,012
Additions To Repossessed Acquired Through
Foreclosure $ 70,984 $ 185,897
Decrease In Unrealized Net Loss (Gain)
On Securities Available For Sale,
Net Of Taxes $ 149,835 $ (482,057)
See accompanying notes to consolidated financial statements.
6
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and accounting principles generally
accepted in the United States of America; therefore, they do not include all
disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows. Such statements are unaudited but, in
the opinion of management, reflect all adjustments, which are of a normal
recurring nature and necessary for a fair presentation of results for the
selected interim periods. Users of financial information produced for interim
periods are encouraged to refer to the footnotes contained in the audited
financial statements appearing in Security Federal Corporation's (the
"Company") 2005 Annual Report to Shareholders when reviewing interim financial
statements. The results of operations for the six-month period ended
September 30, 2005 are not necessarily indicative of the results that may be
expected for the entire fiscal year. This Quarterly Report on Form 10-Q
contains certain forward-looking statements with respect to the financial
condition, results of operations, and business of the Company. 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 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 the year ended March 31,
2002 and began operation during the December 2001 quarter. SFINS is an
insurance agency offering business, health, home and life insurance. SFINV
engages primarily in investment brokerage services. SFT offers trust,
financial planning and financial management services. SFSC is currently
inactive.
3. Loans Receivable, Net
Loans receivable, net, at September 30, 2005 and March 31, 2005 consisted of
the following:
Loans held for sale were $1,738,872 and $2,227,762 at September 30, 2005 and
March 31, 2005, respectively.
September 30, March 31,
2005 2005
Loans Held For Investment: ------------ ------------
Residential Real Estate $120,157,704 $122,622,347
Consumer 54,416,383 50,844,192
Commercial Business And Real Estate 180,272,816 162,217,200
------------ ------------
354,846,903 335,683,739
------------ ------------
Less:
Allowance For Possible Loan Loss 6,532,667 6,284,055
Loans In Process 10,130,038 14,626,913
Deferred Loan Fees 151,513 161,398
------------ ------------
16,814,218 21,072,366
------------ ------------
$338,032,685 $314,611,373
============ ============
The following is a reconciliation of the allowance for loan losses for the six
months ending:
September 30, September 30,
2005 2004
------------ ------------
Beginning Balance $ 6,284,055 $ 5,763,935
Provision 330,000 390,000
Charge-offs (121,220) (190,831)
Recoveries 39,832 120,042
------------ ------------
Ending Balance $ 6,532,667 $ 6,083,146
============ ============
7
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
4. Securities
Investment and Mortgage-Backed Securities, Held to Maturity
- -----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities held to maturity are as
follows:
Gross Gross
September 30, 2005 Amortized Unrealized Unrealized
- ------------------ Cost Gains Losses Fair Value
------------ ---------- ---------- ------------
US Government And
Agency Obligations $ 75,996,110 $ 310 $ 896,310 $ 75,100,110
============ ========== ========== ============
March 31, 2005
- --------------
US Government And
Agency Obligations $ 76,000,847 $ - $1,504,761 $ 74,496,086
Mortgage-Backed
Securities 260,057 14,759 - 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
September 30, 2005 Amortized Unrealized Unrealized
- ------------------ Cost Gains Losses Fair Value
------------ ---------- ----------- -------------
US Government And
Agency Obligations $ 16,972,389 $ 579 $ 75,779 $ 16,897,189
Mortgage-Backed
Securities 149,048,683 339,732 1,572,832 147,815,583
Stock 102,938 - - 102,938
------------ ---------- ----------- -------------
Total $166,124,010 $ 340,311 $ 1,648,611 $ 164,815,710
============ ========== =========== =============
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
============ ========== =========== =============
During the quarter ended September 30, 2005, three mortgage-backed securities
classified as held to maturity were sold. All three securities have paid down
at least 90% therefore meeting the intent requirement of Statement of
Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain
Investment in Debt and Equity Securities." Proceeds from the sales totaled
$250,000.
8
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
5. Deposit Accounts
A summary of deposit accounts by type with weighted average rates is as
follows:
September 30, 2005 March 31, 2005
-------------------- ------------------
Balance Rate Balance Rate
Demand Accounts: -------------------- ------------------
Checking $ 100,529,798 0.64% $ 88,169,885 0.65%
Money Market 161,145,403 2.97% 164,088,081 2.57%
Regular Savings 17,448,054 0.98% 17,743,659 0.98%
------------- ------------
Total Demand Accounts 279,123,255 2.01% 270,001,625 1.84%
------------- ------------
Certificate Accounts:
0-4.99% 160,780,091 150,486,280
5.00-6.99% 9,764,050 9,799,486
------------- ------------
Total Certificate Accounts 170,544,141 3.32% 160,285,766 2.92%
------------- ------------
Total Deposit Accounts $ 449,667,396 2.00% $430,287,391 2.24%
============= ============
6. Advances From Federal Home Loan Bank ("FHLB")
FHLB advances are summarized by year of maturity and weighted average interest
rate in the table below:
September 30, 2005 March 31, 2005
------------------- ------------------
Balance Rate Balance Rate
Fiscal Year Due: ------------------- ------------------
2006 $ 35,575,000 4.43% $ 40,675,000 4.09%
2007 18,000,000 2.83% 18,000,000 2.83%
2008 5,000,000 3.09% 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 28,363,000 3.40% 13,363,000 3.21%
------------ ------------
Total Advances $116,938,000 3.52% $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 $56.2 million in investment securities at September 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 September 30, 2005
- -----------------------------------------------------------------------------------------------------------
Borrow Date Maturity Date Amount Int. Rate Type Call Dates
- ----------- ------------- ---------- --------- ----------- ---------------------------------
<s> <c> <c> <c> <c> <c>
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
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 3.1816% 1 Time Call 06/26/06
07/22/05 07/22/15 5,000,000 3.79% 1 Time Call 07/22/08
9
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
As of March 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 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
7. Regulatory Matters
The following table reconciles the Bank's shareholders' equity to its various
regulatory capital positions:
September 30, March 31,
2005 2005
(In Thousands)
---------------------------------
Bank's Shareholders' Equity $ 36,724 $ 34,690
Unrealized Loss (Gain) On Available
For Sale Of Securities, Net Of Tax 812 962
Reduction For Goodwill And Other
Intangibles - -
------------- ------------
Tangible Capital 37,536 35,652
Qualifying Core Deposits And
Intangible Assets - -
------------- ------------
Core Capital 37,536 35,652
Supplemental Capital 4,512 4,236
Assets Required To Be Deducted (10) (30)
------------- ------------
Risk-Based Capital $ 42,038 $ 39,858
============= ============
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at September 30, 2005:
(Dollars in Thousands)
----------------------------------------------------------------------------------
Amt. Required % Required Actual Amt. Actual % Excess Amt. Excess %
----------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
Tangible Capital $ 12,287 2.0% $ 37,536 6.11% $ 25,249 4.11%
Tier 1 Leverage
(Core) Capital 24,573 4.0% 37,536 6.11% 12,963 2.11%
Total Risk-Based
Capital 28,892 8.0% 42,038 11.64% 13,146 3.64%
Tier 1 Risk-Based
(Core) Capital 14,437 4.0% 37,536 10.40% 23,099 6.40%
8. Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with 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.
10
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
For the Quarter Ended
--------------------------------------------------------
September 30, 2005
--------------------------------------------------------
Income
(Numerator) Amount Shares (Denominator) Per Share
------------------ -------------------- -----------
Basic EPS $ 949,680 2,527,533 $ 0.38
Effect of Diluted
Securities:
Stock Options - 48,466 (0.008)
ESOP - 9,544 (0.002)
----------------- -------------------- -----------
Diluted EPS $ 949,680 2,585,543 $ 0.37
================= ==================== ===========
For the Quarter Ended
--------------------------------------------------------
September 30, 2004
--------------------------------------------------------
Income
(Numerator) Amount Shares (Denominator) Per Share
------------------ -------------------- -----------
Basic EPS $ 800,006 2,519,627 $ 0.32
Effect of Diluted
Securities:
Stock Options - 22,417 (0.006)
ESOP - 13,730 (0.004)
----------------- ------------------- -----------
Diluted EPS $ 800,006 2,555,774 $ 0.31
================= =================== ===========
For the Six Months Ended
--------------------------------------------------------
September 30, 2005
--------------------------------------------------------
Income
(Numerator) Amount Shares (Denominator) Per Share
------------------ -------------------- -----------
Basic EPS $ 1,878,922 2,528,961 $ 0.74
Effect of Diluted
Securities:
Stock Options - 30,670 (0.007)
ESOP - 11,243 (0.003)
----------------- ------------------- -----------
Diluted EPS $ 1,878,922 2,570,874 $ 0.73
================= =================== ===========
For the Six Months Ended
--------------------------------------------------------
September 30, 2004
--------------------------------------------------------
Income
(Numerator) Amount Shares (Denominator) Per Share
------------------ -------------------- -----------
Basic EPS $ 1,602,033 2,521,114 $ 0.64
Effect of Diluted
Securities:
Stock Options - 26,009 (0.007)
ESOP - 12,210 (0.003)
----------------- ------------------- -----------
Diluted EPS $ 1,602,033 2,559,333 $ 0.63
================== =================== ===========
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 the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," had been applied to
stock-based employee compensation for the six months and three months ended
September 30, 2005 and 2004, respectively.
Three Months Ended Six Months Ended
September 30, September 30,
2005 2004 2005 2004
--------- --------- ---------- ----------
Net income, as reported $ 949,680 $ 800,006 $1,878,922 $1,602,033
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) $ (61,140) $ (114,248)
Net Income, Pro Forma $ 919,110 $ 742,882 $1,817,782 $1,487,785
Basic earnings share:
As Reported $ 0.38 $ 0.32 $ 0.74 $ 0.64
Pro Forma $ 0.36 $ 0.30 $ 0.72 $ 0.59
Diluted earnings share:
As reported $ 0.37 $ 0.31 $ 0.73 $ 0.63
Pro forma $ 0.36 $ 0.29 $ 0.71 $ 0.58
12
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Changes in Financial Condition
Total assets of the Company increased $27.6 million or 4.7% to $613.5 million
during the six months ended September 30, 2005 primarily as a result of an
increase of $3.8 million or 48.2% in cash and cash equivalents and an increase
of $22.9 million or 7.2% in net loans receivable.
Residential real estate loans, net of loans in process, increased $2.0 million
or 1.9% during the six months ended September 30, 2005, commercial loans
increased $18.1 million or 11.1%, while consumer loans increased $3.6 million
or 7.0%. Loans held for sale decreased $489,000 or 21.9% during the same
period.
Repossessed assets decreased $29,000 to $24,000 during the six months ended
September 30, 2005.
Non-accrual loans totaled $1.2 million at September 30, 2005 compared to $2.4
million at March 31, 2005. The decrease in non- accrual loans is attributable
to collection efforts. The Bank classifies all loans as non-accrual when they
become 90 days or more delinquent. At September 30, 2005, the Bank held $1.4
million 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 September 30, 2005, the Bank had six loans
totaling $425,000 in TDR's compared to six loans totaling $434,000 at March
31, 2005. Included in the six loans is a consumer loan TDR of $13,000 secured
by a second mortgage on a residential dwelling, which was over 60 days
delinquent as of September 30, 2005. The other five TDR's consisted of a
commercial loan TDR of $204,000 secured by equipment, two consumer loans
totaling $137,000 secured by residential dwellings, a $18,000 unsecured
commercial loan, and a $54,000 commercial loan secured by two rental
properties, all of which were current as of September 30, 2005.
Deposits increased $19.4 million or 4.5% to $449.7 million during the six
months ended September 30, 2005 as a result of competitive rates offered by
the Bank. FHLB advances increased $4.9 million or 4.4% to $116.9 million
during the same period. Other borrowings, consisting of commercial repurchase
sweep accounts, increased $508,000 or 9.1% to $6.1 million during the
six-month period.
The Board of Directors of the Company declared the 58th and 59th consecutive
quarterly dividend of $.04 and $.04 per share, in April and July 2005,
respectively, which totaled $203,000. The employee stock ownership trust paid
$61,000 of principal on the employee stock ownership plan loan during the
six-month period. Unrealized net losses on securities available for sale, net
of tax, decreased $150,000 during the six months ended September 30, 2005 as a
result of slight decrease in interest rates. The Company's net income for the
six-month period was $1.9 million. These items, in total, increased
shareholders' equity by $2.0 million or 5.8% during the six months ended
September 30, 2005. Book value per share was $14.59 at September 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 six months ended September 30,
2005, loan disbursements exceeded loan repayments resulting in a $22.9
million or 7.2% increase in total net loans receivable.
Deposits and other borrowings are also an important source of funds for the
Company. During the six months ended September 30, 2005, deposits increased
$19.4 million and FHLB advances increased $4.9 million. The Bank had $67.1
million in additional borrowing capacity at the FHLB at the end of the period.
At September 30, 2005, the Bank had $123.4 million of certificates of deposit
maturing within one year. Based on previous experience, the Bank anticipates
a significant portion of these certificates will be renewed.
13
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources, Continued
Through its operations, the Bank has made contractual commitments to extend
credit in the ordinary course of its business activities. These commitments
are legally binding agreements to lend money to the Bank's customers at
predetermined interest rates for a specified period of time. At September 30,
2005, the Bank had $29.7 million in unused consumer lines of credit, including
home equity lines and unsecured lines. The Bank also had $32.9 million in
unused commercial lines of credit and $1.1 million in letters of credit
committed to customers. The majority of the $63.7 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 reviewing them based on
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 as a result of increases in purchases of
mortgage-backed and investment securities. The cash flows from financing
activities have had a trend of increased inflows as a result of increases in
FHLB advances. 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
The Company has adopted various accounting policies, which govern the
application of accounting principles generally accepted in the United States
in the preparation of the Company's Consolidated Financial Statements. The
Company's significant accounting policies are described in the footnotes to
the audited Consolidated Financial Statements included in its Annual Report on
Form 10-K for the year ended March 31, 2005. Certain accounting policies
involve significant judgments and assumptions by management, which have a
material impact on the carrying value of certain assets and liabilities.
Management considers these accounting policies to be critical accounting
policies. The judgments and assumptions used by management are based on
historical experience and other factors, which management believes to be
reasonable under the circumstances. Because of the nature of the judgments
and assumptions made by management, actual results could differ from these
judgments and estimates, which could have a material impact on the Company's
carrying values of assets and liabilities and results of operations.
The allowance for loan losses is a critical accounting policy that requires
the most significant judgements and estimates used in preparation of the
Company's consolidated financial statements. The Company provides for loan
losses using the allowance method. Accordingly, all loan losses are charged
to the related allowance and all recoveries are credited to the allowance for
loan losses. Additions to the allowance for loan losses are provided by
charges to operations based on various factors, which, in Management's
judgment, deserve current recognition in estimating possible losses. Such
factors considered by Management include the fair value of the underlying
collateral, stated guarantees by the borrow, if applicable, the borrower's
ability to repay from other economic resources, growth and composition of the
loan portfolios, the relationship of the allowance for loan losses to the
outstanding loans, loss experience, delinquency trends, and general economic
conditions. Management evaluates the carrying value of the loans periodically
and the allowance is adjusted accordingly. While Management uses the best
information available to make evaluations, future adjustments may be necessary
if economic conditions differ substantially from the assumptions used in
making these evaluations. Allowance for loan losses are subject to periodic
evaluations by various authorities and may be subject to adjustments based
upon the information that is available at the time of their examination.
The Company values impaired loans at the loan's fair value if it is probable
that the Company will be unable to collect all amounts due according to the
terms of the loan agreement at the present value of expected cash flows, the
market price of the loan, if available, or the value of the underlying
collateral. Expected cash flows are required to be discounted at the loan's
effective interest rate. When the ultimate collectibility of an impaired
loan's principal is in doubt, wholly or partially, all cash receipts are
applied to principal. When this doubt does not exist, cash receipts are
applied under the contractual terms of the loan agreement first to interest
then to principal. Once the recorded principal balance has been reduced to
zero, future cash receipts are applied to interest income to the extent that
any interest has been foregone. Further cash receipts are recorded as
recoveries of any amounts previously charged off.
14
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Accounting and Reporting Changes
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.
15
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 discussions of changes in
interest rates.
16
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
- -------------------------------------------------------------------
Net Income
Net income was $950,000 for the three months ended September 30, 2005,
representing an increase in earnings of $150,000 or 18.7% from $800,000 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 $690,000 or 20.5% to $4.1 million during the
three months ended September 30, 2005 as a result of an increase in interest
income offset in part by an increase in interest expense. Average interest
earning assets increased $49.7 million while average interest-bearing
liabilities increased $41.4 million. The interest rate spread increased 20
basis points to 2.52% during the three months ended September 30, 2005
compared to the same period in 2004.
Interest income on loans increased $1.6 million or 39.5% to $5.6 million
during the three months ended September 30, 2005 as a result of the average
loan portfolio balance increasing by $57.0 million and the yield in the loan
portfolio increasing 82 basis points. Because of a 16 basis point increase in
the yield in the investment portfolio, interest income from investment,
mortgage-backed, and other securities increased $6,700 or 0.3% despite a
decrease in the average balance of the investment portfolio of $11.5 million.
Total interest income increased $1.6 million or 25.5% to $7.8 million for the
three months ended September 30, 2005 from $6.2 million for the same period in
2004.
Total interest expense increased $904,000 or 31.4% to $3.8 million during the
three months ended September 30, 2005 compared to $2.9 million for the same
period one-year earlier. Interest expense on deposits increased $815,000 or
43.7% during the period as average interest bearing deposits grew $29.5
million compared to the average balance in the three months ended September
30, 2004 while the cost of deposits increased 66 basis points. Interest
expense on advances and other borrowings increased $88,000 or 8.7% as the cost
of debt outstanding decreased 6 basis points during the 2005 period compared
to 2004 while average total borrowings outstanding increased approximately
$11.9 million.
Provision for Loan Losses
The Bank's provision for loan losses was $165,000 during the three months
ended September 30, 2005 compared to $195,000 for the quarter ended September
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 $1.2 million at September 30, 2005 compared
to $2.4 million at March 31, 2005. The decrease in non-accrual loans is a
result of collection efforts. The ratio of allowance for loan losses to the
Company's total loans was 1.89% at September 30, 2005 compared to 1.94% at
March 31, 2005. Net charge-offs were $60,000 during the three months ended
September 30, 2005 compared to $33,000 during the same period in 2004.
Other Income
Total other income increased $24,000 or 3.4% to $749,000 during the three
months ended September 30, 2005 compared to $724,000 for the same period a
year ago, primarily as a result of an increase in net gain on sale of
investments. Gain on sale of loans increased $1,900 or 1.6% to $118,000
during the period as the origination and sale of fixed rate mortgages
increased. Loan servicing fees increased $8,700 or 20.1% to $52,000 while
service fees on deposit accounts decreased $23,000 or 7.3% to $289,000. 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
$5,100 or 2.0% to $258,000 during the three months ended September 30, 2005
compared to $253,000 for the same period last year.
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 SEPTEMBER 30, 2005, CONTINUED
- ------------------------------------------------------------------------------
General and Administrative Expenses
General and administrative expenses increased $460,000 or 17.0% to $3.2
million during the three months ended September 30, 2005 compared to $2.7
million for the same period in 2004. Salaries and employee benefits expense
increased $249,000 or 15.7%. Occupancy expense increased $50,000 or 18.6%
primarily as a result of branch renovations, additional office space being
rented and increases in landscaping costs. Advertising expense increased $600
to $44,000. Depreciation and maintenance of equipment expense decreased
$2,800 or 1.1% to $258,000 during the quarterly period. FDIC insurance
premiums remained the same at $14,000 during the quarters ended September 2005
and 2004. Other miscellaneous expense, consisting of legal, professional, and
consulting expenses, stationery and office supplies, and other sundry
expenses, increased $163,000 or 30.3% to $701,000 for the three months ended
September 30, 2005 compared to the three months ended September 30, 2004.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2005
- -----------------------------------------------------------------
Net Income
Net income was $1.9 million for the six months ended September 30, 2005,
representing an increase in earnings of $277,000 or 17.3% from $1.6 million
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 $1.2 million or 17.1% to $8.0 million during the
six months ended September 30, 2005 as a result of an increase in interest
income offset in part by an increase in interest expense. Average interest
earning assets increased $50.5 million while average interest-bearing
liabilities increased $42.8 million. The interest rate spread increased 12
basis points to 2.51% during the six months ended September 30, 2005 compared
to the same period in 2004.
Interest income on loans increased $2.9 million or 37.4% to $10.8 million
during the six months ended September 30, 2005 as a result of the average loan
portfolio balance increasing by $63.0 million and the yield in the loan
portfolio increasing 66 basis points. Because of a 19 basis point increase in
the yield in the investment portfolio, interest income from investment,
mortgage-backed, and other securities increased $26,000 or 0.6% despite a
decrease in the average balance of the investment portfolio of $12.5 million.
Total interest income increased $2.9 million or 24.1% to $15.2
million for the six months ended September 30, 2005 from $12.3 million for the
same period in 2004.
Total interest expense increased $1.8 million or 32.8% to $7.3 million during
the six months ended September 30, 2005 compared to $5.5 million for the same
period one-year earlier. Interest expense on deposits increased $1.6 million
or 45.2% during the period as average interest bearing deposits grew $33.2
million compared to the average balance in the six months ended September 30,
2004 while the cost of deposits increased 64 basis points. Interest expense
on advances and other borrowings increased $181,000 or 9.5% as the cost of
debt outstanding increased 2 basis points during the 2005 period compared to
2004 while average total borrowings outstanding increased approximately $9.6
million.
Provision for Loan Losses
The Bank's provision for loan losses was $330,000 during the six months ended
September 30, 2005 compared to $390,000 for the quarter ended September 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 $1.2 million at September 30, 2005 compared
to $2.4 million at March 31, 2005. The decrease in non-accrual loans is a
result of collection efforts. The ratio of allowance for loan losses to the
Company's total loans was 1.89% at September 30, 2005 compared to 1.94 % at
March 31, 2005. Net charge-offs were $82,388 during the six months ended
September 30, 2005 compared to $71,000 during the same period in 2004.
18
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2005, CONTINUED
- ----------------------------------------------------------------------------
Other Income
Total other income increased $56,000 or 4.0% to $1.4 million during the six
months ended September 30, 2005 compared to the same period a year ago,
primarily as a result of an increase in net gain on sale of investments. Gain
on sale of loans increased $15,000 or 6.2% to $254,000 during the period as
the origination and sale of fixed rate mortgages increased. Loan servicing
fees increased $14,000 or 15.7% to $101, 000 while service fees on deposit
accounts decreased $53,000 or 8.5% to $572,000. 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 $32,000 or 7.3% to $464,000
during the six months ended September 30, 2005.
General and Administrative Expenses
General and administrative expenses increased $763,000 or 14.1% to $6.2
million during the six months ended September 30, 2005 compared to $5.4
million for the same period in 2004. Salaries and employee benefits expense
increased $411,000 or 12.9% to $3.6 million. Occupancy expense increased
$107,000 or 20.5% to $631,000 primarily as a result of branch renovations,
additional office space being rented and increases in landscaping costs.
Advertising expense decreased $5,500 or 7.4% to $69,000. Depreciation and
maintenance of equipment expense decreased $27,000 or 5.0% to $510,000 during
the six month period compared to $537,000 for the same period last year. FDIC
insurance premiums remained the same during the six months ended September 30,
2005 and 2004. Other miscellaneous expense, consisting of legal,
professional, and consulting expenses, stationery and office supplies, and
other sundry expenses, increased $276,000 or 26.2% to $1.3 million for the six
months ended September 30, 2005 compared to $1.1 million for the six months
ended September 30, 2004.
19
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.
For the three and six month periods ended September 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 2.52% and
2.51%, respectively. As of the year ended March 31, 2005, the interest rate
spread was 2.45%. The interest rate spread increased as a result of 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
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.
In the quarter ended September 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.
While the Company believes the present design of its disclosure controls and
procedures is effective to achieve its goal, future events affecting its
business may cause the Company to modify its disclosure controls and
procedures. The Company does not expect that its disclosure controls and
procedures and internal control over financial reporting will prevent all
error and fraud. A control procedure, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
in controls or procedures can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any control procedure is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls become inadequate because of
changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control procedure, misstatements due to error or fraud may
occur and not be detected.
20
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
- --------------- --------- --------- ---------- --------------
July 1 - July 31, 2005 135 $21.50 135 124,665 (1)
August 1 - August 30, 2005 300 $22.00 300 124,365
September 1 - September
30, 2005 - - - -
Total 435 $21.84 435 124,365
(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 September 30, 2005, 1,635 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
---------------------------------------------------
The election of directors was presented for vote to the shareholders
at the Annual Meeting held July 21, 2005. Votes for Harry O. Weeks,
Jr. were as follows: 1,897,350 votes for, 19,301 withheld. Votes
for Robert E. Alexander were as follows: 1,897,350 votes for, 19,301
votes withheld. Votes for William Clyburn were as follows:
1,890,797 votes for, 25,854 votes withheld. Votes for Roy G.
Lindburg were as follows: 1,894,951 for, 21,700 votes withheld.
Directors continuing in office are T. Clifton Weeks, Timothy W.
Simmons, G.L. Toole, III, Robert E. Johnson, Thomas L. Moore, and J.
Chris Verenes.
Item 5 Other Information
-----------------
None
Item 6 Exhibits
--------
(a) Exhibits:
3.1 Articles Of Incorporation (1)
3.2 Articles Of Amendment, Dated August 28, 1998, To Articles Of
Incorporation
3.3 Bylaws (2)
10.1 Executive Compensation Plans And Arrangements:
10.2 Salary Continuation Agreements (3)
10.3 Amendment One To Salary Continuation Agreements (4)
10.4 Stock Option Plan (3)
10.5 1999 Stock Option Plan (5)
10.6 2002 Stock Option Plan (6)
10.7 Form of Incentive Stock Option Award Agreement
21
Security Federal Corporation and Subsidiaries
Part II: Other Information, Continued
10.8 Form of Non-Qualified Stock Option Award Agreement
10.9 Incentive Compensation Plan (3)
31.1 Certification of the Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act.
31.2 Certification of the Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act.
32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act.
(1) Filed as an exhibit to the Company's June 23, 1998 proxy statement and
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Form 8-K filed September 1, 1998
and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the year ended March 31, 1993 and incorporated herein by reference.
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended December 30, 1993 and incorporated herein by
reference.
(5) Filed as an exhibit to the Company's Registration Statement on Form S-8
filed March 2, 2002 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's June 19, 2002 proxy statement and
incorporated herein by reference.
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: November 9, 2005 By:/s/Timothy W. Simmons
-------------------------------
Timothy W. Simmons
President
Duly Authorized Representative
Date: November 9, 2005 By:/s/Roy R. Lindburg
-------------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
22
Exhibit 10.7
Form of Incentive Stock Option Award Agreement
23
STOCK OPTION AGREEMENT
FOR INCENTIVE STOCK OPTIONS
PURSUANT TO THE
SECURITY FEDERAL CORPORATION
2002 STOCK OPTION PLAN
OPTION for a total of ________________ Shares of common stock, par value
$0.01 per share, of SECURITY FEDERAL CORPORATION (the "Company"), which Option
is intended to qualify as an Incentive Stock Option under Section 422 of the
Internal Revenue Code of 1986, as amended, is hereby granted to ______ (the
"Optionee") at an exercise price determined as provided in, and in all
respects subject to, the terms, definitions and provisions of the 2002 Stock
Option Plan (the "Plan") adopted by the Company, which is incorporated by
reference herein, receipt of which is hereby acknowledged.
1. Exercise Price. This Option shall be exercisable at $_______ for
each Share, being no less than 100 percent of the fair market value of the
common stock of the Company as determined pursuant to the Plan.
2. Exercise of Option.
(a) Vesting. This Option shall be exercisable as follows:
Years of Employment Percent
After Grant Date Exercisable
------------------ ------------
5 20
6 40
7 60
8 80
9 100
(b) Method of Exercise. The notice of exercise of this Option
shall be in the form prescribed by the Committee referred to in Section 3 of
the Plan. The date of exercise is the date on which such notice is received
by the Company. Such notice shall be accompanied by payment in full of the
Exercise Price for the Option Shares to be purchased upon such exercise.
Payment shall be made (i) in cash, which may be in the form of a check, money
order, cashier's check or certified check, payable to the Company, or (ii) by
delivering shares of Common Stock already owned by the Optionee having a
Market Value equal to the Exercise Price, or (iii) a combination of cash and
such shares. Promptly after such payment, subject to any withholding that may
be owed by the Optionee, the Company shall issue and deliver to the Optionee
or other person exercising this Option a certificate or certificates
representing the shares of Common Stock so purchased, registered in the name
of the Optionee (or such other person), or, upon request, in the name of the
Optionee (or such other person) and in the name of another in such form of
joint ownership as requested by the Optionee (or such other person) pursuant
to applicable law.
3. Nontransferability of Option. Except as otherwise provided in the
Plan, this Option may not be transferred in any manner otherwise than by will
or the laws of descent or distribution and may be exercised during the
lifetime of the Optionee only by the Optionee. The terms of this Option shall
be binding upon the executors, administrators, heirs, successors and assigns
of the Optionee.
4. Term of Option. Subject to Section 2(a) of this Agreement, this
Option is exercisable through and including the tenth anniversary of the date
of grant; provided, however, that this Option may be exercised during such
term only in accordance with the Plan and this Agreement.
5. Termination of Service or Death of the Optionee. Except as provided
in this Section 5 and Section 6, notwithstanding any other provision of this
Option to the contrary, this Option shall be exercisable only if the Optionee
has not incurred a Termination of Service at the time of such exercise.
24
If the Optionee incurs a Termination of Service for any reason excluding
death and Termination of Service for Cause, the Optionee may, but only within
the period of three months (or one year in the case of disability, as defined
in Section 22(e)(3) of the Code) immediately succeeding such Termination of
Service and in no event after the Expiration Date, exercise this Option to the
extent the Optionee was entitled to exercise this Option on the date of
Termination of Service. If the Optionee incurs a Termination of Service for
Cause, all rights under this Option shall expire immediately upon the giving
to the Optionee of notice of such termination.
In the event of the death of the Optionee prior to the Optionee's
Termination of Service or during the three-month period referred to in the
immediately preceding paragraph, the person or persons to whom the Option has
been transferred by will or by the laws of descent and distribution may, but
only to the extent the Optionee was entitled to exercise this Option on the
date of the Optionee's death, exercise this Option at any time within one year
following the death of the Optionee, but in no event after the Expiration
Date. Following the death of the Optionee, the Committee may, in its sole
discretion, as an alternative means of settlement of this Option, elect to pay
to the person to whom this Option is transferred by will or by the laws of
descent and distribution, the amount by which the Market Value per share of
Common Stock on the date of exercise of this Option shall exceed the Exercise
Price per Option Share, multiplied by the number of Option Shares with respect
to which this Option is properly exercised. Any such settlement of this
Option shall be considered an exercise of this Option for all purposes of this
Option and of the Plan.
6. Plan and Plan Interpretations as Controlling. This Option and the
terms and conditions herein set forth are subject in all respects to the terms
and conditions of the Plan, which are controlling. All determinations and
interpretations made in the discretion of the Committee shall be final and
conclusive upon the Optionee or his legal representatives with regard to any
question arising hereunder or under the Plan.
7. Optionee Service. Nothing in this Option shall limit the right of
the Company or any of its Affiliates to terminate the Optionee's service as a
director, emeritus director, or employee, or otherwise impose upon the Company
or any of its Affiliates any obligation to employ or accept the services of
the Optionee.
Optionee
-----------------------------------
By:
--------------------------------
For the Board of Directors
Date of Grant Attest: (Seal)
---------------- ---------------------------
25
Exhibit 10.8
Form of Non-Qualified Stock Option Award Agreement
26
STOCK OPTION AGREEMENT
FOR NON-QUALIFIED STOCK OPTIONS
PURSUANT TO THE
SECURITY FEDERAL CORPORATION
2002 STOCK OPTION PLAN
NON-QUALIFIED STOCK OPTION for a total of _____ Shares of common stock,
par value $0.01 per share, of SECURITY FEDERAL CORPORATION. (the "Company"),
is hereby granted to _________________ (the "Optionee") at an exercise price
determined as provided in, and in all respects subject to, the terms,
definitions and provisions of the 2002 Stock Option Plan (the "Plan") adopted
by the Company, which is incorporated by reference herein, receipt of which is
hereby acknowledged.
1. Exercise Price. This Non-Qualified Stock Option shall be
exercisable at $____ for each Share, being no less than 100 percent of the
fair market value of the common stock of the Company as determined pursuant to
the Plan.
2. Exercise of Option.
(a) Vesting. This Non-Qualified Stock Option shall be exercisable
as follows:
Years of Service Percent
After Grant Date Exercisable
------------------- --------------
5 20
6 40
7 60
8 80
9 100
(b) Method of Exercise. This Non-Qualified Stock Option shall be
exercisable by a written notice which shall:
(i) State the election to exercise the Non-Qualified Stock
Option, the number of Shares with respect to which it is being exercised, the
person in whose name the stock certificate or certificates for such Shares is
to be registered, his address and Social Security Number (or if more than one,
the names, addresses and Social Security Numbers of such persons);
(ii) Be signed by the person or persons entitled to exercise the
Non-Qualified Stock Option and, if the Non-Qualified Stock Option is being
exercised by any person or persons other than the Optionee, be accompanied by
proof, satisfactory to counsel for the Company, of the right of such person or
persons to exercise the Non-Qualified Stock Option; and
(iii) Be in writing and delivered in person or by certified mail
to the Treasurer of the Company or any other person designated by the Stock
Option Committee of the Company.
Payment of the purchase price of any Shares with respect to
which the Non-Qualified Stock Option is being exercised shall
be by certified or bank cashier's or teller's check or as
otherwise provided by the Plan. The certificate or
certificates for Shares as to which the Non-Qualified Stock
Option shall be exercised shall be registered in the name of
the person or persons designated by the Optionee.
(c) Restrictions on exercise. This Non-Qualified Stock Option may
not be exercised if the issuance of the Shares upon such
exercise would constitute a violation of any applicable
federal or state securities or other law or valid regulation.
As a condition to the Optionee's exercise of this option, the
Company may require the person exercising this option to make
27
any representation and warranty to the Company as may be
required by any applicable law or regulation.
3. Nontransferability of Non-Qualified Stock Option. Except as
otherwise provided in the Plan, this Non-Qualified Stock Option may not be
transferred in any manner otherwise than by will or the laws of descent or
distribution and may be exercised during the lifetime of the Optionee only by
the Optionee. The terms of this Non-Qualified Stock Option shall be binding
upon the executors, administrators, heirs, successors and assigns of the
Optionee.
4. Term of Non-Qualified Stock Option. Subject to Section 2(a) of this
Agreement, this Non-Qualified Stock Option is exercisable through and
including the tenth anniversary of the date of grant; provided, however, that
this Non-Qualified Stock Option may be exercised during such term only in
accordance with the Plan and this Agreement.
5. Plan and Plan Interpretations as Controlling. This Non-Qualified
Stock Option and the terms and conditions herein set forth are subject in all
respects to the terms and conditions of the Plan, which are controlling. All
determinations and interpretations made in the discretion of the Committee
shall be final and conclusive upon the Optionee or his legal representatives
with regard to any question arising hereunder or under the Plan.
6. Optionee Service. Nothing in this Non-Qualified Stock Option shall
limit the right of the Company or any of its Affiliates to terminate the
Optionee's service as a director, emeritus director, or employee, or otherwise
impose upon the Company or any of its Affiliates any obligation to employ or
accept the services of the Optionee.
Optionee
-----------------------------------
By:
--------------------------------
For the Board of Directors
Date of Grant Attest: (Seal)
---------------- ---------------------------
28
EXHIBIT 31.1
Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
29
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: November 9, 2005
/s/Timothy W. Simmons
----------------------------
Timothy W. Simmons
President and Chief Executive Officer
30
EXHIBIT 31.2
Certification of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
31
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: November 9, 2005
/s/Roy G. Lindburg
--------------------------
Roy G. Lindburg
Chief Financial Officer
32
EXHIBIT 32
Certification Pursuant to Section 906 of the Sarbanes Oxley Act
33
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF SECURITY FEDERAL CORPORATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and in connection with this Quarterly Report on Form 10-Q that:
1. the report fully complies with the requirements of Section 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all
material respects, the company's financial condition and results of
operations.
/s/Timothy W. Simmons /s/Roy G. Lindburg
- ------------------------------ ---------------------------
Timothy W. Simmons Roy G. Lindburg
Chief Executive Officer Chief Financial Officer
Dated: November 9, 2005.
34