SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2006
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD:
FROM: TO:
--------------- ----------------
COMMISSION FILE NUMBER: 0-16120
SECURITY FEDERAL CORPORATION
South Carolina 57-0858504
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
1705 WHISKEY ROAD, AIKEN, SOUTH CAROLINA 29801
(Address of Principal Executive Office) (Zip code)
(803) 641-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "large
accelerated filer" and "accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filed [ ] Accelerated filer[ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (defined in
Rule 12b-2 of the Exchange Act).
YES NO X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
CLASS: OUTSTANDING SHARES AT: SHARES:
--------------- ---------------------- -------------
Common Stock, par January 31, 2007 2,609,601
value $0.01 per share
INDEX
==============================================================================
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at December 31, 2006
and March 31, 2006 1
Consolidated Statements of Income for the Three and
Nine Months Ended December 31, 2006 and 2005 2
Consolidated Statements of Shareholders' Equity and
Comprehensive Income at December 31, 2005 and 2006 4
Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 2006 and 2005 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 28
==============================================================================
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 1A. Risk Factors 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5 Other Information 29
Item 6. Exhibits 30
Signatures 31
==============================================================================
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information is included in the consolidated financial statements and related
notes.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 2006 March 31, 2006
-------------------- ----------------
Assets: (Unaudited) (Audited)
Cash And Cash Equivalents $ 10,694,191 $ 14,351,208
Investment And Mortgage-Backed
Securities:
Available For Sale: (Amortized cost
of $180,261,315
at December 31,
2006 and
$166,808,236 at
March 31, 2006) 178,496,125 163,445,066
Held To Maturity: (Fair value of
$65,028,212 at
December 31,
2006 and
$73,084,450 at
March 31, 2006) 65,980,541 74,987,805
-------------------- ----------------
Total Investment And Mortgage-Backed
Securities 244,476,666 238,432,871
-------------------- ----------------
Loans Receivable, Net:
Held For Sale 4,548,662 1,320,644
Held For Investment:(Net of allowance
of $7,133,315 at
December 31, 2006
and $6,704,734 at
March 31, 2006) 416,934,692 373,788,432
-------------------- ----------------
Total Loans Receivable, Net 421,483,354 375,109,076
-------------------- ----------------
Accrued Interest Receivable:
Loans 1,484,714 1,096,014
Mortgage-Backed Securities 546,965 508,432
Investments 1,081,033 945,620
Premises And Equipment, Net 14,597,007 11,662,976
Federal Home Loan Bank Stock, At Cost 7,933,400 7,149,800
Bank Owned Life Insurance 5,721,583 5,000,001
Repossessed Assets Acquired In
Settlement Of Loans - 91,022
Goodwill 1,197,954 -
Other Assets 5,407,999 4,330,795
-------------------- ----------------
Total Assets $ 714,624,866 $ 658,677,815
==================== ================
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $ 507,562,059 $ 479,229,339
Advances From Federal Home Loan
Bank 148,353,041 131,363,000
Other Borrowed Money 6,862,120 7,289,773
Advance Payments By Borrowers For
Taxes And Insurance 299,780 501,998
Mandatorily Redeemable Financial
Instrument 1,417,312 -
Junior Subordinated Debentures 5,155,000 -
Other Liabilities 3,407,746 2,691,946
-------------------- ----------------
Total Liabilities $ 673,057,058 $ 621,076,056
-------------------- ----------------
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 - 2,635,942 And Outstanding
Shares - 2,616,077 At December 31,
2006 And 2,558,234 And 2,537,378
At March 31, 2006 25,794 25,582
Additional Paid-In Capital 4,801,947 4,404,110
Treasury Stock, (At Cost, 19,865 and
11,312 Shares, Respectively) (437,055) (238,656)
Indirect Guarantee Of Employee Stock
Ownership Trust Debt - (215,503)
Accumulated Other Comprehensive Loss (1,095,078) (2,086,509)
Retained Earnings, Substantially
Restricted 38,272,200 35,712,735
-------------------- ----------------
Total Shareholders' Equity $ 41,567,808 $ 37,601,759
-------------------- ----------------
Total Liabilities And Shareholders'
Equity $ 714,624,866 $ 658,677,815
==================== ================
See accompanying notes to consolidated financial statements.
1
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended December 31,
---------------------------------
2006 2005
-------------- ------------
Interest Income:
Loans $ 7,986,476 $ 6,017,333
Mortgage-Backed Securities 1,456,544 1,333,025
Investment Securities 1,314,913 962,379
Other 29,551 10,835
-------------- ------------
Total Interest Income 10,787,484 8,323,572
-------------- ------------
Interest Expense:
NOW And Money Market Accounts 1,684,765 1,358,825
Passbook Accounts 41,189 43,143
Certificate Accounts 2,846,184 1,523,634
Advances And Other Borrowed Money 1,715,572 1,186,344
Junior Subordinated Debentures 91,983 -
-------------- ------------
Total Interest Expense 6,379,693 4,111,946
-------------- ------------
Net Interest Income 4,407,791 4,211,626
Provision For Loan Losses 150,000 165,000
-------------- ------------
Net Interest Income After Provision For
Loan Losses 4,257,791 4,046,626
-------------- ------------
Other Income:
Gain On Sale Of Loans 88,137 121,138
Service Fees On Deposit Accounts 296,135 303,173
Income From Cash Value Of Life Insurance 62,037 -
Commissions On Insurance 198,772 6,966
Other Agency Income 46,494 -
Trust Income 110,211 81,579
Other 212,558 147,867
-------------- ------------
Total Other Income 1,014,344 660,723
-------------- ------------
General And Administrative Expenses:
Salaries And Employee Benefits 2,361,104 1,847,482
Occupancy 359,530 331,501
Advertising 98,672 44,402
Depreciation And Maintenance Of Equipment 300,211 274,324
FDIC Insurance Premiums 4,624 14,561
Other 692,571 692,196
-------------- ------------
Total General And Administrative Expenses 3,816,712 3,204,466
-------------- ------------
Income Before Income Taxes 1,455,423 1,502,883
Provision For Income Taxes 478,638 544,908
-------------- ------------
Net Income $ 976,785 $ 957,975
============== ============
Basic Net Income Per Common Share $ 0.37 $ 0.38
============== ============
Diluted Net Income Per Common Share $ 0.37 $ 0.37
============== ============
Cash Dividend Per Share On Common Stock $ 0.06 $ 0.04
============== ============
Basic Weighted Average Shares Outstanding 2,617,037 2,536,304
============== ============
Diluted Weighted Average Shares Outstanding 2,625,945 2,570,767
============== ============
See accompanying notes to consolidated financial statements.
2
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Nine Months Ended December 31,
-------------------------------
2006 2005
------------- --------------
Interest Income:
Loans $ 22,679,587 $ 16,906,298
Mortgage-Backed Securities 4,223,959 4,084,033
Investment Securities 3,646,142 2,634,484
Other 62,023 47,122
------------- --------------
Total Interest Income 30,611,711 23,671,937
------------- --------------
Interest Expense:
NOW And Money Market Accounts 4,982,221 3,905,361
Passbook Accounts 125,095 132,262
Certificate Accounts 7,437,930 4,077,011
Advances And Other Borrowed Money 4,690,964 3,270,366
Junior Subordinated Debentures 101,985 -
------------- --------------
Total Interest Expense 17,338,195 11,385,000
------------- --------------
Net Interest Income 13,273,516 12,286,937
Provision For Loan Losses 450,000 495,000
------------- --------------
Net Interest Income After Provision
For Loan Losses 12,823,516 11,791,937
------------- --------------
Other Income:
Gain On Sale of Investments - 48,962
Gain On Sale Of Loans 295,390 374,701
Service Fees On Deposit Accounts 865,638 875,237
Income From Cash Value Of Life Insurance 180,582 -
Commissions On Insurance 413,407 15,870
Other Agency Income 140,802 -
Trust Income 327,767 260,172
Other 539,354 424,079
------------- --------------
Total Other Income 2,762,940 1,999,021
------------- --------------
General And Administrative Expenses:
Salaries And Employee Benefits 6,789,633 5,443,785
Occupancy 1,027,793 962,678
Advertising 234,622 113,392
Depreciation And Maintenance Of Equipment 908,006 784,443
FDIC Insurance Premiums 33,586 43,247
Other 1,995,577 2,024,699
------------- --------------
Total General And Administrative Expenses 10,989,217 9,372,244
------------- --------------
Income Before Income Taxes 4,597,239 4,418,714
Provision For Income Taxes 1,571,083 1,581,817
------------- --------------
Net Income $ 3,026,156 $ 2,836,897
============= ==============
Basic Net Income Per Common Share $ 1.17 $ 1.12
============= ==============
Diluted Net Income Per Common Share $ 1.16 $ 1.11
============= ==============
Cash Dividend Per Share On Common Stock $ 0.18 $ 0.12
============= ==============
Basic Weighted Average Shares Outstanding 2,588,864 2,531,885
============= ==============
Diluted Weighted Average Shares Outstanding 2,600,966 2,565,949
============= ==============
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,
2005 $ 25,438 $4,181,804 $(165,089) $(276,217) $ (961,504) $32,306,633 $35,111,065
Net Income - - - - - 2,836,897 2,836,897
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding Losses
On Securities Available
For Sale - - - - (865,866) - (865,866)
Plus Reclassification
Adjustments For Gains
Included In Net Income - - - - (30,356) - (30,356)
Comprehensive Income - - - - - - 1,940,675
Purchase Of Treasury Stock
At Cost, 1,635 shares - - (35,167) - - - (35,167)
Exercise Of Stock Options 126 192,318 - - - - 192,444
Decrease In Indirect Guarantee
Of ESOP Debt - - - 60,714 - - 60,714
Cash Dividends - - - - - (304,832) (304,832)
-------- ---------- ------- --------- ----------- ----------- -----------
Balance At December 31,
2005 $ 25,564 $4,374,122 $(200,256) $(215,503) $(1,857,726) $34,838,698 $36,964,899
======== ========== ======= ========= =========== =========== ===========
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,
2006 $ 25,582 $4,404,110 $(238,656) $(215,503) $(2,086,509) $35,712,735 $ 37,601,759
Net Income - - - - - 3,026,156 3,026,156
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding Gains
On Securities Available
For Sale - - - - 991,431 - 991,431
Comprehensive Income - - - - - - 4,017,587
Purchase Of Treasury Stock
At Cost, 8,553 shares - - (198,399) - - - (198,399)
Decrease In Indirect Guarantee
Of ESOP Debt - - - 215,503 - - 215,503
Exercise Of Stock Options 212 393,033 - - - - 393,245
Stock Compensation Expense - 4,804 - - - - 4,804
Cash Dividends - - - - - (466,691) (466,691)
-------- ---------- --------- -------- ----------- ----------- ------------
Balance At December 31,
2006 $ 25,794 $4,801,947 $(437,055) $ - $(1,095,078) $38,272,200 $ 41,567,808
======== ========== ========= ======== =========== =========== ============
See accompanying notes to consolidated financial statements.
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended December 31,
-----------------------------------
2006 2005
--------------- --------------
Cash Flows From Operating Activities:
Net Income $ 3,026,156 $ 2,836,897
Adjustments To Reconcile Net Income
To Net Cash Provided (Used) By
Operating Activities:
Depreciation And Amortization Expense 745,479 731,381
Amortization Of Intangible Assets 45,000 -
Stock Option Compensation Expense 4,804 -
Discount Accretion And Premium Amortization 321,311 762,876
Provisions For Losses On Loans And Real Estate 450,000 495,000
Gain On Sale Of Loans (295,390) (374,701)
Gain On Sale Of Mortgage Backed Securities
Available For Sale - (48,962)
Loss (Gain) On Sale Of Real Estate (48,678) 21,416
Amortization Of Deferred Fees On Loans (227,638) (139,852)
Loss on Disposition of Premises and Equipment 215 4,469
Proceeds From Sale Of Loans Held For Sale 17,846,130 24,294,189
Origination Of Loans For Sale (20,778,758) (22,355,760)
(Increase) Decrease In Accrued Interest
Receivable:
Loans (388,700) (236,254)
Mortgage-Backed Securities (38,533) 46,878
Investments (135,413) (51,709)
Increase (Decrease) In Advance Payments
By Borrowers (202,218) 150,219
Other, Net (578,090) 674,086
--------------- --------------
Net Cash Provided (Used) By Operating
Activities (254,323) 6,810,173
--------------- --------------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Available For Sale 27,419,083 39,543,268
Principal Repayments On Mortgage-Backed
Securities Held To Maturity - 10,407
Purchase Of Investment Securities Available
For Sale (18,941,966) (20,046,195)
Purchase Of Mortgage-Backed Securities
Available For Sale (26,982,890) (24,569,383)
Maturities Of Investment Securities
Available For Sale 4,738,645 4,674,853
Maturities of Investment Securities
Held To Maturity 9,000,000 1,000,000
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 (5,482,400) (4,697,800)
Redemption Of FHLB Stock 4,698,800 3,848,400
Increase In Loans To Customers (43,368,622) (40,527,093)
Proceeds From Sale Of Repossessed Assets 139,700 96,499
Purchase And Improvement Of Premises And
Equipment (3,679,725) (2,323,574)
Purchase Of Bank Owned Life Insurance (721,582) -
--------------- --------------
Net Cash Used By Investing Activities (53,180,957) (38,943,608)
--------------- --------------
Cash Flows From Financing Activities:
Increase In Deposit Accounts 28,332,720 19,885,007
Proceeds From FHLB Advances 222,223,450 181,395,000
Repayment Of FHLB Advances (205,233,409) (160,920,000)
Net (Repayments) Proceeds Of Other
Borrowings (427,653) 466,778
Proceeds From Junior Subordinated
Debentures 5,155,000 -
Dividends To Shareholders (466,691) (304,832)
Purchase Of Treasury Stock (198,399) (35,167)
Proceeds From Exercise of Stock Options 393,245 192,444
--------------- --------------
Net Cash Provided By Financing Activities 49,778,263 40,679,230
--------------- --------------
(Continued)
5
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended December 31,
-----------------------------------
2006 2005
--------------- --------------
(Decrease) Increase In Cash And Cash
Equivalents (3,657,017) 8,545,795
Cash And Cash Equivalents At Beginning
Of Period 14,351,208 7,916,488
---------------- --------------
Cash And Cash Equivalents At End Of Period $ 10,694,191 $ 16,462,283
================ ==============
Supplemental Disclosure Of Cash Flows
Information:
Cash Paid During The Period For Interest $ 16,896,006 $ 11,161,678
Cash Paid During The Period For Income
Taxes $ 1,117,000 $ 1,742,825
Additions To Repossessed Acquired Through
Foreclosure $ - $ 210,785
Decrease (Increase) In Unrealized Net
Loss On Securities Available For Sale,
Net Of Taxes $ 991,431 $ (896,222)
Issuance Of A Mandatorily Redeemable
Financial Instrument Through The
Issuance Of Common Stock 1,417,312 -
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") 2006 Annual Report to Shareholders when reviewing interim financial
statements. The results of operations for the nine month period ended
December 31, 2006 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. 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 our financial statements. Our significant accounting
policies are described in the footnotes to the audited consolidated financial
statements at March 31, 2006 included in our 2006 Annual Report to
Stockholders, which was filed as an exhibit to our Annual Report on Form 10-K
for the year ended March 31, 2006. Certain accounting policies involve
significant judgments 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.
The Company believes the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates used in
preparation of the 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.
7
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
3. Critical Accounting Policies, continued
The Company values impaired loans at the loan's fair value if it is probable
that the Company will be unable to collect all amounts due according to the
terms of the loan agreement at the present value of expected cash flows, the
market price of the loan, if available, or the value of the underlying
collateral. Expected cash flows are required to be discounted at the loan's
effective interest rate. When the ultimate collectibility of an impaired
loan's principal is in doubt, wholly or partially, all cash receipts are
applied to principal. When this doubt does not exist, cash receipts are
applied under the contractual terms of the loan agreement first to interest
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.
4. Acquisition
On June 30, 2006, the Company completed the acquisition of the insurance and
premium finance businesses of Collier-Jennings Financial Corporation and it
subsidiaries Collier-Jennings, Inc., The Auto Insurance Store, Inc., and
Collier-Jennings Premium Pay Plans, Inc (the "Collier-Jennings Companies").
The purpose of the acquisition was to expand the insurance services and
increase non-interest income. The shareholder of the Collier-Jennings
Companies received $180,000 in cash and 54,512 shares of the Company's common
stock valued at $26 per share for an approximate purchase price of $1,597,312.
The Company will release the shares to the shareholder of the Collier-Jennings
Companies over a three-year period. The stock is mandatorily redeemable by
the shareholder of Collier-Jennings Companies at his option in cumulative
increments of 20% per year for a five-year period at the greater of $26 per
share or one and one-half times the book value of the Company's stock. A
summary of the purchase price of the transaction is as follows:
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at June 30, 2006, the date of acquisition,
including subsequent adjustments to the allocation of the purchase price.
Cash And Cash Equivalents $ 43,192
Accounts Receivable 784,247
Premises And Equipment 41,696
Other Assets 56,289
Intangible Assets 600,000
Goodwill 1,197,954
--------------
Total Assets Acquired 2,723,378
--------------
Notes Payable 386,185
Other Liabilities 739,881
Total Liabilities Assumed 1,126,066
--------------
Net Assets Acquired $ 1,597,312
==============
5. 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.
8
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
5. Earnings Per Share, Continued
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
For the Quarter Ended
----------------------------------------------
December 31, 2006
----------------------------------------------
Income
(Numerator) Shares
Amount (Denominator) Per Share
---------- ------------- ---------
Basic EPS $ 976,785 2,617,037 $ 0.37
Effect of Diluted
Securities:
Stock Options - 8,908 -
---------- ------------- ---------
Diluted EPS $ 976,785 2,625,945 $ 0.37
========== ============= =========
For the Quarter Ended
----------------------------------------------
December 31, 2005
----------------------------------------------
Income
(Numerator) Shares
Amount (Denominator) Per Share
---------- ------------- ---------
Basic EPS $ 957,975 2,536,304 $ 0.38
Effect of Diluted
Securities:
Stock Options - 24,919 (.007)
ESOP - 9,544 (.003)
---------- ------------- ---------
Diluted EPS $ 957,975 2,570,767 $ 0.37
========== ============= =========
For the Nine Months Ended
----------------------------------------------
December 31, 2006
----------------------------------------------
Income
(Numerator) Shares
Amount (Denominator) Per Share
---------- ------------- ---------
Basic EPS $3,026,156 2,588,864 $ 1.17
Effect of Diluted
Securities:
Stock Options - 12,102 (.01)
---------- ------------- ---------
Diluted EPS $3,026,156 2,600,966 $ 1.16
========== ============= =========
For the Nine Months Ended
----------------------------------------------
December 31, 2005
----------------------------------------------
Income
(Numerator) Shares
Amount (Denominator) Per Share
---------- ------------- ---------
Basic EPS $2,836,897 2,531,885 $ 1.12
Effect of Diluted
Securities:
Stock Options - 24,471 (0.007)
ESOP - 9,593 (0.003)
---------- ------------- ---------
Diluted EPS $2,836,897 2,565,949 $ 1.11
========== ============= =========
9
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
6. Stock-Based Compensation
On April 1, 2006, the Company adopted the fair value recognition provisions of
Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 123R, "Accounting for Stock-Based
Compensation," to account for compensation costs under its stock option plans.
The Company previously utilized the intrinsic value method under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees (as
amended)" ("APB 25"). Under the intrinsic value method prescribed by APB 25,
no compensation costs were recognized for the Company's stock options because
the option exercise price in its plans equals the market price on the date of
grant. Prior to January 1, 2006, the Company only disclosed the pro forma
effects on net income and earnings per share as if the fair value recognition
provisions of SFAS 123R had been utilized.
In adopting SFAS No. 123, the Company elected to use the modified prospective
method to account for the transition from the intrinsic value method to the
fair value recognition method. Under the modified prospective method,
compensation cost is recognized from the adoption date forward for all new
stock options granted and for any outstanding unvested awards as if the fair
value method had been applied to those awards as of the date of grant. The
following table illustrates the effect on net income and earnings per share as
if the fair value based method had been applied to all outstanding and
unvested awards in each period.
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------- ----------------------
2006 2005 2006 2005
--------- --------- ---------- ----------
Net income, as reported $ 976,785 $ 957,975 $3,026,156 $2,836,897
Add: Stock-based compensation
expense included in reported
net income, net of related
tax effects 2,883 - 4,804 -
Deduct: Stock-based compensation
expense determined under fair
market value based method on
all awards, net of related
tax effects (2,883) (30,570) (4,804) (91,710)
--------- --------- ---------- ----------
Pro forma net income including
stock-based compensation cost
based on fair-value method $ 976,785 $ 927,405 $3,026,156 $2,745,187
========= ========= ========== ==========
Earnings per share:
Basic - as reported $ 0.37 $ 0.38 $ 1.17 $ 1.12
Basic - pro forma $ 0.37 $ 0.37 $ 1.17 $ 1.08
Diluted - as reported $ 0.37 $ 0.37 $ 1.17 $ 1.11
Diluted - pro forma $ 0.37 $ 0.36 $ 1.17 $ 1.07
The following is a summary of the activity under the Company's incentive stock
option plan.
Three Months Ended Nine Months Ended
December 31, 2006 December 31, 2006
--------------------- -----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------------------- -----------------------
Balance, Beginning of
Period/Year 111,446 $ 20.19 118,046 $ 19.50
Options granted - - 13,500 23.03
Options exercised 3,596 11.79 23,196 16.95
Options forfeited 6,750 18.90 7,250 19.27
-------- --------
Balance, December 31, 2006 101,100 $ 20.58 101,100 $ 20.58
======== ========
Options Exercisable 87,600 $ 20.20 87,600 $ 20.20
======== ========
Options Available For Grant 57,500 57,500
======== ========
10
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
6. Stock-Based Compensation, Continued
The following table summarizes the stock-based awards granted by the Company,
the fair market value of each award granted as estimated on the date of grant
using the Black-Scholes option-pricing model, and the weighted average
assumptions used for such grants for the periods indicated
For Awards For Awards
Granted During Granted During
The Three Month The Nine Month
Period Ended Period Ended
December 31, December 31,
-------------------- -------------------
2006 2005 2006 2005
--------- ------- ------- --------
Awards granted - - 13,500 -
Dividend Yield - - 1.03% -
Expected Volatility - - 30.21% -
Risk-free interest rate - - 4.36% -
Expected life - - 9.01 -
At December 31, 2006, the Company had the following options outstanding:
Outstanding
Grant Date Options Option Price Expiration Date
------------- -------------- ----------------- -------------------
10/19/99 30,600 $16.67 9/30/05 to 9/30/09
9/1/03 3,000 $24.00 8/31/13
12/1/03 3,000 $23.65 11/30/13
1/01/04 7,000 $24.22 12/31/13
3/8/04 13,000 $21.43 2/28/14
6/7/04 2,000 $24.00 5/31/14
1/1/05 21,000 $20.55 12/31/14
1/1/05 2,000 $22.61 12/31/15
1/1/06 6,000 $23.91 12/31/16
8/24/06 13,500 $23.03 8/24/16
11
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
7. Accounting and Reporting Changes
The following is a summary of recent authoritative pronouncements that could
impact the accounting, reporting, and / or disclosure of financial information
by the Company.
In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments-an amendment of FASB Statements No. 133 and 140." This
Statement amends SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," and SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." This Statement
resolves issues addressed in SFAS No. 133 Implementation Issue No. D1,
"Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets." SFAS No. 155 permits fair value re-measurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest only-strips and principal-only
strips are not subject to the requirements of Statement 133, establishes a
requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation,
clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives, and amends Statement 140 to eliminate the
prohibition on a qualifying special purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative financial instrument. SFAS No. 155 is effective for all financial
instruments acquired or issued after the beginning of an entity's first fiscal
year that begins after September 15, 2006. The Company does not believe that
the adoption of SFAS No. 155 will have a material impact on its financial
position, results of operations and cash flows.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets-an amendment of FASB Statement No. 140." This Statement
amends FASB No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," with respect to the accounting for
separately recognized servicing assets and servicing liabilities. SFAS No. 156
requires an entity to recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into
a servicing contract; requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if practicable;
permits an entity to choose its subsequent measurement methods for each class
of separately recognized servicing assets and servicing liabilities; at its
initial adoption, permits a one-time reclassification of available-for-sale
securities to trading securities by entities with recognized servicing rights,
without calling into question the treatment of other available-for-sale
securities under Statement 115, provided that the available-for-sale
securities are identified in some manner as offsetting the entity's exposure
to changes in fair value of servicing assets or servicing liabilities that a
servicer elects to subsequently measure at fair value; and requires separate
presentation of servicing assets and servicing liabilities subsequently
measured at fair value in the statement of financial position and additional
disclosures for all separately recognized servicing assets and servicing
liabilities. An entity should adopt SFAS No. 156 as of the beginning of its
first fiscal year that begins after September 15, 2006. The Company does not
believe the adoption of SFAS No. 156 will have a material impact on its
financial position, results of operations and cash flows.
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"),
"Accounting for Uncertainty in Income Taxes". FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in enterprises' financial
statements in accordance with FASB Statement No. 109, "Accounting for Income
Taxes". FIN 48 prescribes a recognition threshold and measurement attributable
for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides guidance
on de-recognition, classification, interest and penalties, accounting in
interim periods, disclosures and transitions. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The Company is currently analyzing
the effects of FIN 48.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
SFAS 157 defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about
fair value measurements. This standard does not require any new fair value
measurements, but rather eliminates inconsistencies found in various prior
pronouncements. SFAS 157 is effective for the Company on January 1, 2008 and
is not expected to have a significant impact on the Company's financial
statements.
12
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
7. Accounting and Reporting Changes, Continued
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans," which amends SFAS No.
87 and SFAS No. 106 to require recognition of the over-funded or under-funded
status of pension and other postretirement benefit plans on the balance sheet.
Under SFAS No. 158, gains and losses, prior service costs and credits, and any
remaining transition amounts under SFAS No. 87 and SFAS No. 106 that have not
yet been recognized through net periodic benefit cost will be recognized in
accumulated other comprehensive income, net of tax effects, until they are
amortized as a component of net periodic cost. The measurement date the date
at which the benefit obligation and plan assets are measured is required to
be the company's fiscal year end. SFAS No. 158 is effective for publicly held
companies for fiscal years ending after December 15, 2006, except for the
measurement date provisions, which are effective for fiscal years ending after
December 15, 2008. The Company does not have a defined benefit pension plan.
Therefore SFAS No. 158 will not impact the Company's financial condition or
results of operations.
In September, 2006, The FASB ratified the consensuses reached by the FASB's
Emerging Issues Task Force ("EITF") relating to EITF 06-4 "Accounting for the
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements". EITF 06-4 addresses employer
accounting for endorsement split-dollar life insurance arrangements that
provide a benefit to an employee that extends to postretirement periods should
recognize a liability for future benefits in accordance with SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," or
Accounting Principles Board ("APB") Opinion No. 12, "Omnibus Opinion 1967".
EITF 06-4 is effective for fiscal years beginning after December 15, 2006.
Entities should recognize the effects of applying EITF 06-4 through either (a)
a change in accounting principle through a cumulative-effect adjustment to
retained earnings or to other components of equity or net assets in the
statement of financial position as of the beginning of the year of adoption or
(b) a change in accounting principle through retrospective application to all
prior periods. The Company does not believe the adoption of EITF 06-4 will
have a material impact on its financial position, results of operations and
cash flows.
In September 2006, the FASB ratified the consensus reached related to EITF
06-5, "Accounting for Purchases of Life Insurance Determining the Amount That
Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4,
Accounting for Purchases of Life Insurance." EITF 06-5 states that a
policyholder should consider any additional amounts included in the
contractual terms of the insurance policy other than the cash surrender value
in determining the amount that could be realized under the insurance contract.
EITF 06-5 also states that a policyholder should determine the amount that
could be realized under the life insurance contract assuming the surrender of
an individual-life by individual-life policy (or certificate by certificate in
a group policy). EITF 06-5 is effective for fiscal years beginning after
December 15, 2006. The Company does not believe the adoption of EITF 06-5
will have a material impact on its financial position, results of operations
and cash flows.
In September 2006, the SEC issued Staff Accounting Bulleting No. 108 ("SAB
108"). SAB 108 provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a potential current year misstatement. Prior to SAB 108, companies
might evaluate the materiality of financial statement misstatements using
either the income statement or balance sheet approach, with the income
statement approach focusing on new misstatements added in the current year,
and the balance sheet approach focusing on the cumulative amount of
misstatement present in a company's balance sheet. Misstatements that would be
material under one approach could be viewed as immaterial under another
approach, and not be corrected. SAB 108 now requires that companies view
financial statement misstatements as material if they are material according
to either the income statement or balance sheet approach. The Company has
analyzed SAB 108 and determined that upon adoption it will have no impact on
the reported results of operations or financial conditions.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on
the Company's financial position, results of operations and cash flows.
13
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
8. Securities
Investment And Mortgage-Backed Securities, Available For Sale
- -------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities available for sale are as
follows:
Gross Gross
December 31, 2006 Amortized Unrealized Unrealized
- ------------------ Cost Gains Losses Fair Value
------------ ---------- ---------- -----------
US Government and
Agency Obligations $ 42,681,560 $ 14,079 $ 188,673 $ 42,506,966
Mortgage-Backed
Securities 137,476,817 169,149 1,760,907 135,885,059
Equity Securities 102,938 1,162 - 104,100
------------ --------- ---------- ------------
Total $180,261,315 $ 184,390 $1,949,580 $178,496,125
============ ========= ========== ============
March 31, 2006
- --------------
US Government and
Agency Obligations $ 28,466,546 $ - $ 311,234 $ 28,155,312
Mortgage-Backed
Securities 138,238,752 126,648 3,178,584 135,186,816
Equity Securities 102,938 - - 102,938
------------ --------- ---------- ------------
Total $166,808,236 $ 126,648 $3,489,818 $163,445,066
============ ========= ========== ============
Investment and Mortgage-Backed Securities, Held to Maturity
- -----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities held to maturity are as
follows:
Gross Gross
December 31, 2006 Amortized Unrealized Unrealized
- ----------------- Cost Gains Losses Fair Value
------------ ---------- ---------- ------------
US Government and
Agency Obligations $ 65,980,541 $ 12,820 $ 965,149 $ 65,028,212
============ ========== ========== ============
March 31, 2006
- --------------
US Government and ------------ ---------- ---------- ------------
Agency Obligations $ 74,987,805 $ - $1,903,355 $ 73,084,450
============ ========== ========== ============
14
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
9. Loans Receivable, Net
Loans receivable, net, at December 31, 2006 and March 31, 2006 consisted of
the following:
December 31, 2006 March 31, 2006
--------------------- -----------------
Residential Real Estate $ 126,507,744 $ 122,026,298
Consumer 64,814,782 58,612,669
Commercial Business & Real Estate 238,785,530 209,214,332
Loans Held For Sale 4,548,662 1,320,644
434,656,718 391,173,943
--------------------- -----------------
Less:
Allowance For Possible Loan Loss 7,133,315 6,704,734
Loans In Process 5,776,071 9,185,133
Deferred Loan Fees 263,978 175,000
13,173,364 16,064,867
--------------------- -----------------
$ 421,483,354 $ 375,109,076
===================== =================
15
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Safe Harbor Statement
Certain matters in this Quarterly Report on Form 10-Q for the quarter ended
December 31, 2006 constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements relate to, among others, expectations of the business environment
in which the Company operates, projections of future performance, perceived
opportunities in the market, potential future credit experience, and
statements regarding the Company's mission and vision. These forward-looking
statements are based upon current management expectations, and may, therefore,
involve risks and uncertainties. The Company's actual results, performance,
or achievements may differ materially from those suggested, expressed, or
implied by forward-looking statements as a result of a wide range of factors
including, but not limited to, the general business environment, interest
rates, the South Carolina real estate market, the demand for loans,
competitive conditions between banks and non-bank financial services
providers, regulatory changes, and other risks detailed in the Company's
reports filed with the Securities and Exchange Commission, including the
Annual Report on Form 10-K for the fiscal year ended March 31, 2006.
Forward-looking statements are effective only as of the date that they are
made and the Company assumes no obligation to update this information
Comparison Of Financial Condition At December 31, 2006 and March 31, 2006
General - Total assets increased $55.9 million or 8.5% to $714.6 million at
December 31, 2006 from $658.7 million at March 31, 2006. The primary reason
for the growth in total assets was a $46.4 million or 12.4% increase in net
loans receivable to $421.5 million. For the nine months ended December 31,
2006, the demand for loans was funded with decreased cash and cash equivalents
of $3.7 million or 25.5%, increased deposits of $28.3 million or 5.9% and
advances from the Federal Home Loan Bank ("FHLB") of $17.0 million or 12.9%.
Assets - The increases and decreases in total assets were primarily
concentrated in the following asset categories:
Increase (Decrease)
December 31, March 31, --------------------
2006 2006 Amount Percent
----------- ----------- ----------- -------
Cash And Cash Equivalents $10,694,191 $14,351,208 $(3,657,017) (25.5)%
Investment And Mortgage-
Backed Securities
Available For Sale 178,496,125 163,445,066 15,051,059 9.2
Investment And Mortgage-
Backed Securities Held
To Maturity 65,980,541 74,987,805 (9,007,264) (12.0)
Loan Receivable, Net 421,483,354 375,109,076 46,374,278 12.4
Premises And Equipment, Net 14,597,007 11,662,976 2,934,031 25.2
FHLB Stock, At Cost 7,933,400 7,149,800 783,600 11.0
Bank Owned Life Insurance 5,721,583 5,000,001 721,582 14.4
Goodwill 1,197,954 - 1,197,954 100.0
Other Assets 5,407,999 4,330,795 1,077,204 24.9
Cash and cash equivalents decreased $3.7 million to $10.7 million at December
31, 2006 from $14.4 million at March 31, 2006. The reason for the decrease is
the Company used cash and cash equivalents to fund loans.
Investments and mortgage-backed securities increased $6.0 million or 2.5% to
$244.5 million at December 31, 2006 from $238.4 million at March 31, 2006.
The increase in investments and mortgage-backed securities is attributable to
purchases and an increase in market value on mortgage-backed securities and
investments.
16
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Loans receivable, net increased $46.4 million or 12.4% to $421.5 million at
December 31, 2006 from $375.1 million at March 31, 2006. Residential real
estate loans increased $4.5 million to $126.5 million at December 31, 2006
from $122.0 million at March 31, 2006. Consumer loans increased $6.2 million
to $64.8 million at December 31, 2006 from $58.6 million at March 31, 2006.
The increase in consumer loans is attributable to a special rate promotion
that was being advertised in print media. Commercial business and real estate
loans increased $29.6 million to $238.8 million at December 31, 2006 from
$209.2 million at March 31, 2006. The increase in commercial loans was
attributable to the Company's continued focus on originating this type of
loan. Loans held for sale increased $3.2 million to $4.5 million at December
31, 2006 from $1.3 million at March 31, 2006. The increase is attributable to
the lag between the time a mortgage loan is originated and sold to an
investor.
Premises and equipment, net increased $2.9 million to $14.6 million at
December 31, 2006 from $11.7 million at March 31, 2006. The majority of the
increase is for furniture and equipment for our main office and the
acquisition of land in Ballentine, South Carolina and northeast Richland
County for future branch offices.
FHLB stock, at cost, increased $784,000 to $7.9 million at December 31, 2006
from $7.1 million at March 31, 2006. The increase is attributable to a FHLB
requirement that the Company maintain stock equal to 0.20% of total assets at
December 31, 2006 plus a transaction component, which equals 4.5% of
outstanding advances (borrowings) from the FHLB of Atlanta.
Bank owned life insurance increased $722,000 to $5.7 million at December 31,
2006 from $5.0 million at March 31, 2006. The Company purchased additional
life insurance to provide key man life insurance for additional officers and
the cash surrender value continues to increase.
Goodwill was $1.2 million at December 31, 2006 compared to zero at March 31,
2006. Goodwill is related to the acquisition of the Collier-Jennings
Companies.
Other assets increased $1.1 to $5.4 million at December 31, 2006 from $4.3
million at March 31, 2006. The majority of the increase is the result of the
acquisition of the Collier-Jennings Companies. Accounts receivable,
intangible assets-net associated with the acquisition of the Collier-Jennings
Companies are included in other assets.
Liabilities
Deposit Accounts
Balance
-------------------
December 31, 2006 March 31, 2006 Increase (Decrease)
----------------- ------------------ -------------------
Weighted Weighted
Balance Rate Balance Rate Amount Percent
------------ ---- ------------ ---- ----------- -------
Demand Accounts:
Checking $100,787,190 0.80% $105,347,713 0.97% $(4,560,523) (4.3)%
Money Market 142,821,464 4.15 151,494,548 3.50 (8,673,084) (5.7)
Regular Savings 16,097,801 0.98 17,795,109 0.98 (1,697,308) (9.5)
------------ ---- ------------ ---- ----------- ------
Total 259,706,455 2.65 274,637,370 2.36 (14,930,915) (5.4)
------------ ---- ------------ ---- ----------- ------
Certificate Accounts
0.00 - 1.99% - 59,797 (59,797) (100.0)
2.00 - 2.99% 1,938,491 26,836,415 (24,897,924) (92.8)
3.00 - 3.99% 34,825,565 72,831,817 (38,006,252) (52.2)
4.00 - 4.99% 57,365,265 94,240,989 (36,875,724) (39.1)
5.00 - 5.99% 153,726,283 10,622,951 143,103,332 1,447.1
------------ ---- ------------ ---- ----------- ------
Total 247,855,604 4.92 204,591,969 3.98 43,263,635 21.2
------------ ---- ------------ ---- ----------- ------
Total Deposits $507,562,059 3.76% $479,229,339 3.05% $28,332,720 5.9%
============ ==== ============ ==== =========== ======
17
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Advances From FHLB - FHLB advances are summarized by year of maturity and
weighted average interest rate in the table below:
Balance
--------------------
December 31, 2006 March 31, 2006 Increase (Decrease)
------------------ ------------------ --------------------
Fiscal Year Due: Balance Rate Balance Rate Balance Percent
------------ ---- ------------ ---- ------------ -------
2007 10,000,000 4.07% 18,000,000 2.83% $ (8,000,000) (44.4)%
2008 10,000,000 4.31 5,000,000 3.09 5,000,000 100.0
2009 25,000,000 4.76 20,000,000 3.28 5,000,000 25.0
2010 5,000,000 3.09 5,000,000 3.09 - -
2011 10,000,000 4.76 20,000,000 4.37 (10,000,000) (50.0)
Thereafter 88,353,041 4.22 63,363,000 4.04 24,990,041 39.4
------------ ------------ ----------- -----
Total Advances $148,353,041 4.31% $131,363,000 3.74% $16,990,041 12.9%
============ ============ =========== =====
These advances are secured by a blanket collateral agreement with the FHLB by
pledging the Bank's portfolio of residential first mortgage loans and
investment securities with approximate amortized cost and fair value of $80.8
million and $79.6 million at December 31, 2006. Advances are subject to
prepayment penalties.
The following table shows callable FHLB advances as of the dates indicated.
These advances are also included in the above table. All callable advances
are callable at the option of the FHLB. If an advance is called, the Bank has
the option to payoff the advance without penalty, re-borrow funds on different
terms, or convert the advance to a three-month floating rate advance tied to
LIBOR.
As of December 31, 2006
- --------------------------------------------------------------------------------------------------
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
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 3.330 1 Time Call 04/16/08
09/16/04 09/16/09 5,000,000 3.090 1 Time Call 09/17/07
06/24/05 06/24/15 5,000,000 3.710 1 Time Call 06/24/10
07/22/05 07/22/15 5,000,000 3.790 1 Time Call 07/22/08
11/10/05 11/10/15 5,000,000 4.400 1 Time Call 11/10/09
11/23/05 11/23/15 5,000,000 3.933 Multi-Call 11/23/07 and quarterly thereafter
11/29/05 11/29/13 5,000,000 4.320 1 Time Call 05/29/09
12/14/05 12/14/11 5,000,000 4.640 1 Time Call 09/14/09
01/12/06 01/12/16 5,000,000 4.450 1 Time Call 01/12/11
03/01/06 03/03/14 5,000,000 4.720 1 Time Call 03/03/10
03/24/06 03/24/16 5,000,000 4.120 Multi-Call 03/26/07 and quarterly thereafter
03/24/06 03/25/13 5,000,000 4.580 1 Time Call 03/25/08
04/21/06 04/22/13 5,000,000 4.530 Multi-Call 04/23/07 and quarterly thereafter
06/02/06 06/02/16 5,000,000 5.160 1 Time Call 06/02/11
07/11/06 07/11/08 5,000,000 4.800 Multi-Call 07/11/08 and quarterly thereafter
10/25/06 12/25/11 5,000,000 4.830 1 Time Call 10/27/08
11/29/06 11/29/16 5,000,000 4.025 Multi-Call 11/29/07
18
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
As of March 31, 2006
- --------------------------------------------------------------------------------------------------
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
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 3.330 1 Time Call 04/16/08
09/16/04 09/16/09 5,000,000 3.090 1 Time Call 09/17/07
06/24/05 06/24/15 5,000,000 3.710 1 Time Call 06/24/10
06/24/05 06/24/10 5,000,000 4.092 1 Time Call 06/24/06
07/22/05 07/22/15 5,000,000 3.790 1 Time Call 07/22/08
10/21/05 10/21/10 5,000,000 3.864 1 Time Call 10/23/06
11/10/05 11/10/15 5,000,000 4.400 1 Time Call 11/10/09
11/23/05 11/23/15 5,000,000 3.933 Multi-Call 11/23/07 and quarterly thereafter
11/29/05 11/29/13 5,000,000 4.320 1 Time Call 05/29/09
12/14/05 12/14/11 5,000,000 4.640 1 Time Call 09/14/09
01/12/06 01/12/16 5,000,000 4.450 1 Time Call 01/12/11
03/24/06 03/24/16 5,000,000 4.120 Multi-Call 03/26/07 and quarterly thereafter
03/24/06 03/25/13 5,000,000 4.580 1 Time Call 03/25/08
03/01/06 03/03/14 5,000,000 4.720% 1 Time Call 03/03/10
Mandatorily Redeemable Financial Instrument - On June 30, 2006, the Company
recorded a $1.4 million mandatorily redeemable financial instrument as a
result of the acquisition of the Collier-Jennings Companies. See Note 4,
"Acquisition". The shareholder of Collier-Jennings Companies received cash
and was issued stock in the Company to settle the acquisition. The Company
will release the shares to the shareholder of Collier-Jennings Companies over
a three-year period. The stock is mandatorily redeemable by the shareholder
of Collier-Jennings Companies in cumulative increments of 20% per year for a
five-year period at the greater of $26 per share or one and one-half times the
book value of the Company's stock.
Junior Subordinated Debentures - On September 21, 2006, Security Federal
Statutory Trust (the "Trust"), a wholly-owned subsidiary of the Company,
issued and sold fixed and floating rate capital securities of the Trust (the
"Capital Securities"), which are reported on the consolidated balance sheet as
junior subordinated debentures, generating proceeds of $5.0 million. The Trust
loaned these proceeds to the Company to use for general corporate purposes,
primarily to provide capital to the Bank. The debentures qualify as Tier 1
capital under Federal Reserve Board guidelines.
The Capital Securities accrue and pay distributions annually at a rate per
annum equal to a blended rate of 6.97% at December 31, 2006. One-half of the
Capital Securities issued in the transaction has a fixed rate of 6.88% and the
remaining half has a floating rate of three-month LIBOR plus 170 basis points,
which was 7.06% at December 31, 2006. The distribution rate payable on the
Capital Securities is cumulative and payable quarterly in arrears. The Company
has the right, subject to events of default, to defer payments of interest on
the Capital Securities for a period not to exceed 20 consecutive quarterly
periods, provided that no extension period may extend beyond the maturity date
of December 15, 2036. The Company has no current intention to exercise its
right to defer payments of interest on the Capital Securities.
The Capital Securities mature or are mandatorily redeemable upon maturity on
December 15, 2036, and or upon earlier optional redemption as provided in the
indenture. The Company has the right to redeem the Capital Securities in whole
or in part, on or after September 15, 2011. The Company may also redeem the
capital securities prior to such dates upon occurrence of specified conditions
and the payment of a redemption premium
Equity - Shareholders' equity increased $4.0 million or 10.6% to $41.6 million
at December 31, 2006 from $37.6 million at March 31, 2006. The employee stock
ownership trust of the Company paid $216,000 of principal on the employee
stock ownership plan loan during the nine-month period. Accumulated Other
Comprehensive Loss, net of tax, decreased $991,000 to $1.1 million during the
nine months ended December 31, 2006. The Company's net income for the
nine-month period was $3.0 million. The Board of Directors of the Company
declared the 62nd, 63rd, and 64th consecutive quarterly dividend, which was
$.06 per share, in April, July, and October 2006, which totaled $467,000.
Book value per share was $15.89 at December 31, 2006 compared to $14.82 at
March 31, 2006.
19
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER
31,2006 AND 2005
- ------------------------------------------------------------------------------
Net Income - Net income increased $19,000 or 2.0% to $977,000 for the three
months ended December 31, 2006 compared to $958,000 for the three months ended
December 31, 2005. The primary reason for the increased earnings was
increases in net interest income and non-interest income and a decrease in
provision for income taxes offset partially by an increase in non-interest
expenses.
Net Interest Income - Net interest income increased $196,000 or 4.7% to $4.4
million during the three months ended December 31, 2006, compared to $4.2
million for the same period in 2005, as a result of an increase in interest
income offset in part by an increase in interest expense. During the three
months ended December 31, 2006, average interest earning assets increased
$73.0 million to $670.6 million while average interest-bearing liabilities
increased $76.5 million to $621.5 million. The interest rate spread decreased
19 basis points to 2.33% during the three months ended December 31, 2006
compared to the same period in 2005.
The Company's net interest margin was 2.63% and 2.78% for the quarters ended
December 31, 2006 and 2005, respectively.
Interest Income - Total interest income increased $2.5 million or 29.6% to
$10.8 million during the three months ended December 31, 2006 from $8.3
million for the same period in 2005. Total interest income on loans increased
$2.0 million or 32.7% to $8.0 million during the three months ended December
31, 2006 as a result of the average loan portfolio balance increasing $70.3
million and the yield in the loan portfolio increasing 79 basis points.
Interest income from mortgage-backed securities increased $124,000 or 9.3% as
a result of an increase in yield offset partially by a $13.5 million decrease
in the average balance of the portfolio. Interest income from investment
securities increased $353,000 or 36.6% as a result of an increase in the yield
and average balance of the investment securities portfolio.
The following table compares detailed average balances, associated yields, and
the resulting changes in interest income for the three months ended December
31, 2006 and 2005:
Three Months Ended December 31,
-----------------------------------------------
2006 2005
---------------- ---------------
Increase/
(Decrease)
In Interest
And
Dividend
Average Average Income
Balance Yield Balance Yield From 2005
------------ ----- ------------ ----- ----------
Loans Receivable, Net $419,446,443 7.62% $349,191,412 6.83% $1,969,143
Mortgage-Backed
Securities 132,975,594 4.38 146,468,249 3.64 123,519
Investments 115,919,130 4.43 100,926,978 3.75 352,534
Overnight Time 2,080,466 5.15 941,216 4.60 15,951
Security Federal
Statutory Trust 155,000 6.98 - - 2,765
------------ ---- ------------ ---- ----------
Total Interest-
Earning Assets $670,576,633 6.43% $597,527,855 5.54% $2,463,912
============ ==== ============ ==== ==========
Interest Expense - Total interest expense increased $2.3 million or 55.2% to
$6.4 million during the three months ended December 31, 2006 compared to $4.1
million for the same period one-year earlier. The increase in total interest
expense is attributable to the increases in short-term interest rates,
interest-bearing deposits, and borrowings. Interest expense on deposits
increased $1.6 million or 56.3% during the period as average interest bearing
deposits grew $49.2 million compared to the average balance in the three
months ended December 31, 2005 while the cost of deposits increased 112 basis
points. Interest expense on advances and other borrowings increased $529,000
or 44.6% as the cost of debt outstanding increased 85 basis points during the
2006 period compared to 2005 while average total borrowings outstanding
increased approximately $22.1 million. Interest expense on junior
subordinated debentures was $92,000 for the three months ended December 31,
2006 compared to zero for the same period one year ago. The junior
subordinated debentures are the result of the Company's $5.0 million trust
preferred securities offering.
20
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
The following table compares detailed average balances, cost of funds, and the
resulting changes in interest expense for the three months ended December 31,
2006 and 2005:
Three Months Ended December 31,
-----------------------------------------------------
2006 2005
------------------ -------------------
Increase/
(Decrease)
In Interest
Average Average Expense
Balance Yield Balance Yield From 2005
------------ ----- ------------ ----- ----------
Now And Money Market
Accounts $207,023,453 3.26% $219,249,269 2.48% $ 325,940
Passbook Accounts 16,683,742 0.99 17,474,460 0.99 (1,954)
Certificates Accounts 236,810,841 4.81 174,577,508 3.49 1,322,550
FHLB Advances And Other
Borrowed Money 155,837,665 4.40 133,752,546 3.55 529,228
Junior Subordinated
Debentures 5,155,000 6.98 - - 91,983
Total Interest-Bearing ------------ ---- ------------ ---- ----------
Liabilities $621,510,701 4.10% $545,053,783 3.02% $2,267,747
============ ==== ============ ==== ==========
Provision for Loan Losses - The amount of the provision is determined by
management's on-going monthly analysis of the loan portfolio. Management uses
three methods to measure the estimate of the adequacy of the allowance for
loan losses. These methods incorporate percentage of classified loans,
five-year averages of historical loan losses in each loan category and current
economic trends, and the assignment of percentage targets of reserves in each
loan category. Management has used all three methods for the past seven
fiscal years.
The Bank's provision for loan losses was $150,000 during the three months
ended December 31, 2006 compared to $165,000 for the quarter ended December
31, 2005. The $15,000 or 9.1% decrease reflects the Company's current credit
quality and reduction in classified assets, impaired loans and net
charge-offs. The following table details selected activity associated with
the allowance for loan losses for the three months ended December 31, 2006 and
2005.
December 31, 2006 December 31, 2005
----------------- -----------------
Beginning Balance $ 6,994,623 $ 6,532,667
Provision 150,000 165,000
Charge-offs (35,912) (142,533)
Recoveries 24,604 15,797
---------------- ----------------
Ending Balance $ 7,133,315 $ 6,570,931
================ ================
Allowance For Loan Losses As A
Percentage Of Gross Loans Receivable
And Loans Held For Sale At The End Of
The Period 1.66% 1.82%
Allowance For Loan Losses As A
Percentage Of Impaired Loans At The
End Of The Period 451.86% 489.06%
Impaired Loans 1,578,672 1,343,591
Nonaccrual Loans And 90 Days Or More
Past Due Loans As A Percentage Of
Gross Loans Receivable And Loans Held
For Sale At The End Of The Period 0.25% 0.46%
Loans Receivable, Net $ 421,483,354 $ 355,286,567
21
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Non-Interest Income - Non-interest income increased $354,000 or 53.5% to $1.0
million for the three months ended December 31, 2006 from $661,000 for the
same period one year ago. The following table provides a detailed analysis of
the changes in the components of non-interest income:
Three Months
Ended December 31, Increase/(Decrease)
------------------ ------------------
2006 2005 Amounts Percent
------ ------ ------- -------
Gain On Sale Of Loans 88,137 121,138 (33,001) (27.2)%
Service Fees On Deposit Accounts 296,135 303,173 (7,038) (2.3)
Income From Cash Value Of
Life Insurance 62,037 - 62,037 100.0
Commissions On Insurance 198,772 6,966 191,806 2,753.5
Other Agency Income 46,494 - 46,494 100.0
Trust Income 110,211 81,579 28,632 35.1
Other 212,558 147,867 64,691 43.8
---------- -------- --------- -----
Total non-interest income $1,014,344 $660,723 $ 353,621 53.5%
========== ======== ========= =====
Income from cash value of life insurance was $62,000 for the three months
ended December 31, 2006 compared to no income during the same period one year
ago. This increase is the result of the Company's purchase of bank owned life
insurance for certain officers of the Company. Commissions on insurance and
other agency income increased $192,000 as a result of the Collier-Jennings
Companies acquisition. Other miscellaneous income including credit life
insurance commissions, safe deposit rental income, annuity and stock brokerage
commissions, trust fees, and other miscellaneous fees, increased $64,000 to
$213,000 during the three months ended December 31, 2006 compared to the same
period one year ago.
Non-Interest Expense - Non-interest expense increased $612,000 or 19.1% to
$3.8 million for the three months ended December 31, 2006 from $3.2 million
for the same period one year ago. The following table provides a detailed
analysis of the changes in the components of non-interest expense:
Three Months
Ended December 31, Increase/(Decrease)
------------------ ------------------
2006 2005 Amounts Percent
------ ------ ------- -------
Salaries And Employee Benefits $2,361,104 $1,847,482 $ 513,622 27.8%
Occupancy 359,530 331,501 28,029 8.5
Advertising 98,672 44,402 54,270 122.2
Depreciation And Maintenance
Of Equipment 300,211 274,324 25,887 9.4
FDIC Insurance Premiums 4,624 14,561 (9,937) (68.2)
Other 692,571 692,196 375 0.1
---------- ---------- --------- -----
Total Non-Interest Expenses $3,816,712 $3,204,466 $ 612,246 19.1%
========== ========== ========= =====
Salary and employee benefits increased $514,000 to $2.4 million for the three
months ended December 31, 2006 from $1.8 million for the same period one year
ago. The majority of the increase is the result of hiring additional staff to
handle the Company's growth and increased regulatory reporting requirements
and integrating the Collier-Jennings Companies' employees. Advertising
expense increased $54,000 to $99,000 for the three months ended December 31,
2006 from $44,000 for the same period one year ago. The increase is
attributable to the Company using more print media advertising to attract
deposits and consumer loans.
Provision For Income Taxes - Provision for income taxes decreased $66,000 or
12.2% to $479,000 for the three months ended December 31, 2006 from $545,000
for the same period one year ago. Income before income taxes was $1.5 million
for the three months ended December 31, 2006 and 2005, respectively. The
Company's combined federal and state effective income tax rate for the current
quarter was 33.0% compared to 36.3% for the same quarter one year ago.
22
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31,
2006 AND 2005
- -----------------------------------------------------------------------------
Net Income - Net income increased $189,000 or 6.7% to $3.0 million for the
nine months ended December 31, 2006 compared to $2.8 million for the nine
months ended December 31, 2005. The primary reason for the increased earnings
was an increase in net interest income and non-interest income offset
partially by an increase in non-interest expenses.
Net Interest Income - Net interest income increased $987,000 or 8.0% to $13.3
million during the nine months ended December 31, 2006, compared to $12.3
million for the same period in 2005, as a result of an increase in interest
income offset in part by an increase in interest expense. Average interest
earning assets increased $63.7 million to $649.9 million while average
interest-bearing liabilities increased $66.6 million to $601.5 million. The
interest rate spread decreased seven basis points to 2.44% during the nine
months ended December 31, 2006 compared to the same period in 2005.
The Company's net interest margin decreased four basis points to 2.72% for the
nine months ended December 31, 2006 from 2.76% for the same period last year.
Interest Income - Total interest income increased $6.9 million or 29.3% to
$30.6 million during the nine months ended December 31, 2006 from $23.7
million for the same period in 2006. Total interest income on loans increased
$5.8 million or 34.2% to $22.7 million during the nine months ended December
31, 2006 as a result of the average loan portfolio balance increasing $66.3
million and the yield in the loan portfolio increasing 87 basis points.
Interest income from mortgage-backed securities increased $140,000 or 3.4% as
a result of an increase in the yield in the mortgage-backed portfolio despite
a decrease in the average balance of the portfolio of $19.5 million. Interest
income from investment securities increased $1.0 million or 38.4% as a result
of an increase in the yield and average balance of the investment securities
portfolio.
The following table compares detailed average balances, associated yields, and
the resulting changes in interest income for the nine months ended December
31, 2006 and 2005:
Nine Months Ended December 31,
-----------------------------------------------------
2006 2005
------------------ -------------------
Increase/
(Decrease)
In Interest
And
Dividend
Average Average Income
Balance Yield Balance Yield From 2005
------------ ----- ------------ ----- ----------
Loans Receivable, Net $402,113,832 7.52% $335,809,808 6.65% $5,773,289
Mortgage-Backed
Securities 133,593,423 4.22 153,107,695 3.56 139,926
Investments 112,544,965 4.32 95,390,254 3.68 1,011,658
Overnight Time 1,561,374 5.03 1,871,946 3.36 11,835
Security Federal
Statutory Trust 58,550 6.98 - - 3,066
Total Interest-Earning ------------ ---- ------------ ---- ----------
Assets $649,872,144 6.28% $586,179,703 5.35% $6,939,774
============ ==== ============ ==== ==========
23
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Interest Expense - Total interest expense increased $6.0 million or 52.3% to
$17.3 million during the nine months ended December 31, 2006 compared to $11.4
million for the same period one year earlier. The increase in total interest
expense is attributable to the increases in short-term interest rates, and the
increase in the amount of interest-bearing deposits, and borrowings. Interest
expense on deposits increased $4.4 million or 54.6% during the period as
average interest bearing deposits grew $39.1 million compared to the average
balance in the nine months ended December 31, 2005 while the cost of interest
bearing deposits increased 109 basis points. Interest expense on advances and
other borrowings increased $1.4 million or 43.4% as the cost of debt
outstanding increased 68 basis points during the nine months ended December
31, 2006 compared to the same period in 2005 while average total borrowings
outstanding increased approximately $25.5 million. Interest expense on junior
subordinated debentures was $102,000 for the nine months ended December 31,
2006 compared to zero for the same period one year ago. The junior
subordinated debentures are the result of the Company's $5.0 million trust
preferred securities offering.
The following table compares detailed average balances, cost of funds, and the
resulting changes in interest expense for the nine months ended December 31,
2006 and 2005:
Nine Months Ended December 31,
-----------------------------------------------------
2006 2005
------------------ -------------------
Increase/
(Decrease)
In Interest
Average Average Expense
Balance Yield Balance Yield From 2005
------------ ----- ------------ ----- ----------
Now And Money Market
Accounts $210,937,813 3.15% $225,023,479 2.42% $1,076,860
Passbook Accounts 16,926,574 0.99 17,892,564 0.99 (7,167)
Certificates Accounts 222,170,422 4.46 167,980,767 3.10 3,360,919
FHLB Advances And Other
Borrowed Money 149,495,522 4.19 124,007,336 3.51 1,420,598
Junior Subordinated
Debentures 1,947,000 6.98 - - 101,985
Total Interest-Bearing ------------ ---- ------------ ---- ----------
Liabilities $601,477,331 3.84% $534,904,146 2.84% $5,953,195
============ ==== ============ ==== ==========
24
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Provision for Loan Losses - The amount of the provision is determined by
management's on-going monthly analysis of the loan portfolio. Management uses
three methods to measure the estimate of the adequacy of the allowance for
loan losses. These methods incorporate percentage of classified loans,
five-year averages of historical loan losses in each loan category and current
economic trends, and the assignment of percentage targets of reserves in each
loan category. Management has used all three methods for the past seven
fiscal years.
The Bank's provision for loan losses was $450,000 during the nine months ended
December 31, 2006 compared to $495,000 for the nine months ended December 31,
2005. The $45,000 or 9.1% decrease reflects the Company's current credit
quality and reduction in classified assets, impaired loans and net
charge-offs. The following table details selected activity associated with
the allowance for loan losses for the nine months ended December 31, 2006 and
2005
December 31, 2006 December 31, 2005
----------------- -----------------
Beginning Balance $ 6,704,734 $ 6,284,055
Provision 450,000 495,000
Charge-offs (111,191) (263,752)
Recoveries 89,772 55,628
----------------- -----------------
Ending Balance $ 7,133,315 $ 6,570,931
================= =================
Allowance For Loan Losses As A
Percentage Of Gross Loans Receivable
And Loans Held For Sale At The End
Of The Period 1.66% 1.82%
Allowance For Loan Losses As A
Percentage Of Impaired Loans At
The End Of The Period 451.86% 489.06%
Impaired Loans 1,578,672 1,343,591
Nonaccrual Loans And 90 Days Or
More Past Due Loans As A Percentage
Of Gross Loans Receivable And Loans
Held For Sale At The End Of The
Period 0.51% 0.46%
Loans Receivable, Net $ 421,483,354 $ 355,286,567
Non-Interest Income - Non-interest income increased $764,000 or 38.2% to $2.8
million for the nine months ended December 31, 2006 from $2.0 million for the
same period one year ago. The following table provides a detailed analysis of
the changes in the components of non-interest income:
Nine Months Ended Increase/
December 31, (Decrease)
---------------------- -------------------
2006 2005 Amounts Percent
---------- ---------- --------- --------
Gain On Sale Of Investments, Net $ - $ 48,962 $ (48,962) (100.0)%
Gain On Sale Of Loans 295,390 374,701 (79,311) (21.2)
Service Fees On Deposit Accounts 865,638 875,237 (9,599) (1.1)
Income From Cash Value Of
Life Insurance 180,582 - 180,582 100.0
Commissions On Insurance 413,407 15,870 397,537 2,505.0
Other Agency Income 140,802 - 140,802 100.0
Trust Income 327,767 260,172 67,595 26.0
Other 539,354 424,079 115,275 27.2
---------- ---------- --------- ------
Total non-interest income $2,762,940 $1,999,021 $ 763,919 38.2%
========== ========== ========= ======
Income from cash value of life insurance was $181,000 for the nine months
ended December 31, 2006 compared to no income during the same period one year
ago. This increase is the result of the Company purchasing bank owned life
insurance for certain officers of the Company. Commissions on insurance and
other agency income increased $398,000 as a result of the Collier-Jennings
Companies acquisition. Other miscellaneous income including credit life
insurance commissions, safe deposit rental income, annuity and stock brokerage
commissions, and other miscellaneous fees, increased $115,000 to $539,000
during the nine months ended December 31, 2006 compared to the same period one
year ago.
25
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Non-Interest Expense - Non-interest expense increased $1.6 million or 17.3% to
$11.0 million for the nine months ended December 31, 2006 from $9.4 million
for the same period one year ago. The following table provides a detailed
analysis of the changes in the components of non-interest expense:
Nine Months Ended Increase/
December 31, (Decrease)
----------------------- ---------------------
2006 2005 Amounts Percent
----------- ---------- ---------- ---------
Salaries And Employee Benefits $ 6,789,633 $5,443,785 $1,345,848 24.7%
Occupancy 1,027,793 962,678 65,115 6.8
Advertising 234,622 113,392 121,230 106.9
Depreciation And Maintenance
Of Equipment 908,006 784,443 123,563 15.8
FDIC Insurance Premiums 33,586 43,247 (9,661) (22.3)
Other 1,995,577 2,024,699 (29,122) (1.4)
----------- ---------- ---------- ---------
Total Non-Interest Expenses $10,989,217 $9,372,244 1,616,973 17.3%
=========== ========== ========= =========
Salary and employee benefits increased $1.4 to $6.8 million for the nine
months ended December 31, 2006 from $5.4 million for the same period one year
ago. The majority of the increase is the result of hiring additional staff to
handle the Company's growth and increased regulatory reporting requirements
and integrating the Collier-Jennings Companies' employees. Advertising
expense increased $121,000 to $235,000 for the nine months ended December 31,
2006 from $114,000 for the same period one year ago. The increase is
attributable to the Company using more print media advertising to attract
deposits and consumer loans.
Provision For Income Taxes - Provision for income taxes decreased $11,000 or
0.7% to $1.6 million for the nine months ended December 31, 2006 from $1.6
million for the same period one year ago. Income before income taxes was $4.6
million for the nine months ended December 31, 2006 compared to $4.4 million
for the nine months ended December 31, 2005. The Company's combined federal
and state effective income tax rate for the nine months ended December 31,
2006 was 34.2% compared to 35.8% for the same period one year ago.
Liquidity Commitments, Capital Resources , and Impact of Inflation and
Changing Prices
Liquidity - The Company actively analyzes and manages the Bank's liquidity
with the objective of maintaining an adequate level of liquidity and to ensure
the availability of sufficient cash flows to support loan growth, fund deposit
withdrawals, fund operations, and satisfy other financial commitments. See
the "Consolidated Statements of Cash Flows" contained in Item 1 Financial
Statements, herein.
The primary sources of funds are customer deposits, loan repayments, loan
sales, maturing investment securities, and advances from the FHLB. The
sources of funds, together with retained earnings and equity, are used to make
loans, acquire investment securities and other assets, and fund continuing
operations. While maturities and the scheduled amortization of loans are a
predictable source of funds, deposit flows and mortgage repayments are greatly
influenced by the level of interest rates, economic conditions, and
competition. Management believes that the Company's current liquidity
position and its forecasted operating results are sufficient to fund all of
its existing commitments.
During the nine months ended December 31, 2006 loan disbursements exceeded
loan repayments resulting in a $46.4 million or 12.4% increase in total net
loans receivable. During the nine months ended December 31, 2006, deposits
increased $28.3 million and FHLB advances increased $17.0 million. The Bank
had $65.9 million in additional borrowing capacity at the FHLB at the end of
the period. At December 31, 2006, the Bank had $225.1 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.
The Company has plans to expand its branch network, which could cause earnings
to level off or decline for a period of time. The leveling off or decline in
earnings will be attributed the lag that exists from the time a branch is
built to when it becomes profitable. In the next twelve months, we anticipate
investing $5.0 to $6.0 million in land, buildings, and equipment. In the next
twenty-four months, we anticipate investing $8.0 to $10.0 million in land,
buildings, and equipment. The anticipated costs could be affected by
increased construction costs, weather delays, and/or other uncertainties.
26
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Off-Balance Sheet Commitments - The Company is a party to financial
instruments with off-balance sheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments
generally include commitments to originate mortgage, commercial and consumer
loans, and involve to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet. The Company's
maximum exposure to credit loss in the event of nonperformance by the borrower
is represented by the contractual amount of those instruments. Since some
commitments may expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company uses the
same credit policies in making commitments as it does for on-balance sheet
instruments. Collateral is not required to support commitments.
The following table sets forth the length of time until maturity for unused
commitments to extend credit and standby letters of credit at December 31,
2006.
After
After One Three Greater
Within Through Through Than
(Dollars One Three Twelve Within One
in thousands) Month Months Months One Year Year Total
------ ------ ------ -------- ------- ------
Unused lines
of credit $5,864 $ 4,375 $33,151 $ 43,390 $35,794 $79,184
Standby letters
of credit - 46 448 494 - 494
------ ------- ------- -------- ------- -------
Total $5,864 $ 4,421 $33,599 $ 43,884 $35,794 $79,678
====== ======= ======= ======== ======= =======
27
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 manage 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 nine months ended December 31, 2006, 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 2.44%. For the year ended March 31,
2006, the interest rate spread was 2.48%. The interest rate spread decreased
due to the rates paid on deposits outpacing the rates received on loans. The
rate differential was offset partially by 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 at December 31, 2006 the Company's disclosure controls and
procedures were effective in ensuring that the information required to be
disclosed by the Company in the reports it files or submits under the Act is
(i) accumulated and communicated to the Company's management (including the
Chief Executive Officer and Chief Financial Officer) in a timely manner, and
(ii) recorded, processed, summarized and reported within the time period
specified in the Securities and Exchange Commission's rules and forms.
(b) Changes in Internal Controls: In the quarter ended December 31, 2006, 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.
28
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 1A Risk Factors
------------
There have been no material changes in the risk factors previously
disclosed in the Company's Annual Report on Form 10-K for the year
ended March 31, 2006.
Item 2 Unregistered sales of Equity Securities and Use Of Proceeds
-----------------------------------------------------------
(c) Total
Number of (d)Maximum
Shares Number of
Purchased Shares that
(a) Total as Part of- May Yet Be
Number of (b)Average Publicly Purchased
Shares Price Paid Announced Under the
Period Purchased Per Share Program Program
October 1-
October 31, 2006 - - - 111,088
November 1 -
November 30, 2006 438 $23.75 438 110,650
December 1 -
December 31, 2006 4,515 23.25 4,515 106,135
-----------------------------------------------------
Total 4,953 $23.29 4,953 106,135
=====================================================
In May 2004, the Company's Board of Directors authorized a 5% repurchase plan,
or 126,000 shares of the Company's outstanding common stock. As of December
31, 2006, 19,865 shares have been repurchased under this program. The Company
repurchased 4,953 shares of its outstanding Common Stock during the three
months ended December 31, 2006.
Item 3 Defaults Upon Senior Securities
-------------------------------
None
Item 4 Submission Of Matters To A Vote Of Security Holders
---------------------------------------------------
None
Item 5 Other Information
-----------------
None
29
Security Federal Corporation and Subsidiaries
Part II: Other Information, Continued
Item 6 Exhibits
--------
3.1 Articles Of Incorporation, as amended (1)
3.2 Bylaws (2)
4 Instruments defining the rights of security holders, including
indentures (3)
10.1 Executive Compensation Plans and Arrangements
10.2 1993 Salary Continuation Agreements (4)
10.3 Amendment One to 1993 Salary Continuation Agreement (5)
10.4 Form of 2006 Salary Continuation Agreement(6)
10.4 1999 Stock Option Plan (2)
10.5 1987 Stock Option Plan (4)
10.6 2002 Stock Option Plan (7)
10.7 2004 Employee Stock Purchase Plan (8)
10.8 Incentive Compensation Plan (4)
10.9 Form of Security Federal Bank Salary Continuation Agreement (9)
10.10 Form of Security Federal Split Dollar Agreement (9)
14 Code of Ethics (10)
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 on June 26, 1998, as an exhibit to the Company's Proxy Statement
and incorporated herein by reference.
(2) Filed on March 2, 2000, as an exhibit to the Company's Registration
Statement on Form S-8 and incorporated herein by reference.
(3) Filed on August 12, 1987, as an exhibit to the Company's Registration
Statement on Form 8-A and incorporated herein by reference.
(4) Filed on June 28, 1993, as an exhibit to the Company's Annual Report
on Form 10-KSB and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarter ended September 30, 1993 and incorporated herein by
reference.
(6) Filed on May 24, 2006 as an exhibit to the Company's Current Report on
Form 8-K dated May 18, 2006 and incorporated herein by reference.
(7) Filed on June 19, 2002, as an exhibit to the Company's Proxy Statement
and incorporated herein by reference.
(8) Filed on June 18, 2004, as an exhibit to the Company's Proxy Statement
and incorporated herein by reference.
(9) Filed on May 24, 2006 as an exhibit to the Current Report on Form 8-K
and incorporated herein by reference.
(10) Filed on June 29, 2006 as an exhibit to the Company's Annual Report on
Form 10-K and incorporated herein by reference.
30
Security Federal Corporation and Subsidiaries
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: February 13, 2007 By:/s/Timothy W. Simmons
---------------------- ---------------------------------
Timothy W. Simmons
President
Duly Authorized Representative
Date: February 13, 2007 By:/s/Roy G. Lindburg
---------------------- ---------------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
31
EXHIBIT 31.1
Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
32
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: February 13, 2007
/s/ Timothy W. Simmons
--------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
33
EXHIBIT 31.2
Certification of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
34
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: February 13, 2007
/s/ Roy G. Lindburg
--------------------------------
Roy G. Lindburg
Chief Financial Officer
35
EXHIBIT 32
Certification Pursuant to Section 906 of the Sarbanes Oxley Act
36
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: February 13, 2007
37