UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2007 OR
[ ] 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
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(Exact Name of Registrant as Specified in its Charter)
South Carolina 57-08580504
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
238 Richland Avenue West, Aiken, South Carolina 29801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 641-3000
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Securities registered pursuant to Section 12(b)
of the Act: None
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Securities registered pursuant to Section 12(g)
of the Act: Common Stock, par value
$0.01 per share
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(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. YES NO X
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 of Section 15(d) of the Act. YES NO X
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer X
--- --- ---
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
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As of June 19, 2007, there were issued and outstanding 2,609,474 shares of
the registrant's Common Stock, which are traded on the over-the-counter market
through the OTC "Electronic Bulletin Board" under the symbol "SFDL." The
aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the bid and asked price of
such stock as of September 30, 2006, was $42.4 million. (The exclusion from
such amount of the market value of the shares owned by any person shall not be
deemed an admission by the registrant that such person is an affiliate of the
registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the
Fiscal Year Ended March 31, 2007. (Parts I and II)
2. Portions of the Registrant's Proxy Statement for the 2007 Annual Meeting
of Stockholders. (Part III)
PART I
Item 1. Business
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Security Federal Corporation
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Security Federal Corporation (the "Company") was incorporated under the
laws of the State of Delaware in July 1987 for the purpose of becoming the
savings and loan holding company for Security Federal Bank ("Security
Federal" or the "Bank") upon the Bank's conversion from mutual to the stock
form (the "Conversion"). Effective August 17, 1998, the Company changed its
state of incorporation from Delaware to South Carolina.
As a South Carolina corporation, the Company is authorized to engage in
any activity permitted by South Carolina General Corporation Law. The Company
is a unitary savings and loan holding company. Through the unitary holding
company structure, it is possible to expand the size and scope of the
financial services offered beyond those currently offered by the Bank. The
holding company structure also provides the Company with greater flexibility
than the Bank would have to diversify its business activities, through
existing or newly formed subsidiaries, or through acquisitions or mergers of
stock thrift institutions as well as other companies. There are no current
arrangements, understandings or agreements regarding any such acquisition.
Future activities of the Company, other than the continuing operations of
Security Federal, will be funded through dividends from Security Federal and
through borrowings from third parties. See "Regulation Savings and Loan
Holding Company Regulation" and "Taxation." Activities of the Company may also
be funded through sales of additional securities or income generated by other
activities of the Company. At this time, there are no plans regarding sales
of additional securities or other activities.
At March 31, 2007, the Company had assets of approximately $738.1
million, deposits of approximately $523.7 million and shareholders' equity of
approximately $42.7 million.
The executive office of the Company is located at 238 Richland Avenue
West, Aiken, South Carolina 29801, and its telephone number is (803) 641-3000.
Security Federal Bank
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General. Security Federal is a federally chartered stock savings bank
headquartered in Aiken, South Carolina. Security Federal, with 11 branch
offices in Aiken and Lexington Counties, was originally chartered under the
name Aiken Building and Loan Association on March 27, 1922. It received its
federal charter and changed its name to Security Federal Savings and Loan
Association of Aiken on March 7, 1962, and later changed its name to Security
Federal Savings Bank of South Carolina, on November 11, 1986. Effective April
8, 1996, the Bank changed its name to Security Federal Bank. The Bank
converted from the mutual to the stock form of organization on October 30,
1987.
In October 1993, Security Federal increased its branch network to nine
offices with the completion of its acquisition of four former NationsBank of
South Carolina, N.A. branches located in Aiken County. In February 1996,
Security Federal opened a new branch office in the Aiken Wal-Mart Superstore.
The Bank opened a branch in West Columbia, Lexington County, South Carolina,
in December 2000, which provided the Bank with the opportunity to expand its
market area. In August 2003, the Bank opened a new branch in Lexington, South
Carolina. During February 2004, the Bank completed the sale of its Denmark,
South Carolina branch office to South Carolina Bank and Trust, N.A. of
Orangeburg, South Carolina. In January 2006, the Bank closed its branch in
the Aiken Wal-Mart Superstore and replaced it with a free standing branch on
an out parcel in the Aiken Exchange Shopping Center.
The principal business of Security Federal is accepting deposits from the
general public and originating mortgage loans to enable borrowers to purchase
or refinance one- to four-family residential real estate. The Bank also makes
multi-family residential and commercial real estate loans, consumer loans,
commercial loans, as well as construction loans on single family residences,
multi-family dwellings and commercial real estate, and loans for the
acquisition, development and construction of residential subdivisions and
commercial projects. Additional financial services are provided by three of
the Bank's wholly owned subsidiaries, Security Federal Insurance, Inc.,
Security Federal Investments, Inc. and Security Federal Trust, Inc.
2
Security Federal's income is derived primarily from interest and fees
earned in connection with its lending activities, and its principal expenses
are interest paid on savings deposits and borrowings and operating expenses.
Completion of Acquisition
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The Company completed its acquisition of the insurance and premium
finance businesses of Collier Jennings Financial Corporation and its
subsidiaries, Collier-Jennings, Inc., The Auto Insurance Store, Inc., and
Collier-Jennings Premium Pay Plans, Inc. (the "Collier-Jennings Companies"),
effective as of June 30, 2006. Collier Jennings Financial Corporation is held
as a subsidiary of Security Federal Insurance, Inc., a subsidiary of the Bank.
Selected Consolidated Financial Information
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This information is incorporated by reference to page 7 of the 2007
Annual Report to Stockholders ("Annual Report").
Yields Earned and Rates Paid
- ----------------------------
This information is incorporated by reference to page 15 of the Annual
Report.
Rate/Volume Analysis
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This information is incorporated by reference to page 14 of the Annual
Report.
Lending Activities
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General. The primary source of revenue for the Bank is interest and fee
income from lending activities. One of the principal lending activities of
the Bank is making conventional first mortgage real estate loans to enable
borrowers to purchase or refinance one- to four-family residential real
property. The Bank also makes multi-family residential and commercial real
estate and consumer and commercial loans. The Bank continues to emphasize the
origination of adjustable rate residential mortgage loans, subject to market
conditions, for retention in its portfolio. In addition, the Bank originates
construction loans on single family residences, multi-family dwellings and
commercial real estate, and loans for the acquisition, development and
construction of residential subdivisions and commercial projects.
Residential adjustable rate mortgage loans ("ARMs") constituted
approximately 25.6% of the Bank's total outstanding loan portfolio at March
31, 2007.
The loan-to-value ratio, maturity and other provisions of loans made by
the Bank reflect its policy of making the maximum loan permissible consistent
with applicable regulations, established lending policies and market
conditions. The Bank requires title insurance (or acceptable legal opinions
on smaller loans secured by real estate) and fire insurance, and flood
insurance where applicable, on loans secured by improved real estate.
3
Loan Portfolio Composition. The following table sets forth information concerning the composition of
the Bank's loan portfolio in dollar amounts and in percentages by type of loan, and presents a
reconciliation of total loans receivable before net items.
At March 31,
---------------------------------------------------------------------------------------
2007 2006 2005 2004 2003
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
TYPE OF LOAN:
- -------------
Fixed rate loans
- ----------------
Residential real
estate.......... $ 11,620 2.6% $ 11,594 3.0% $ 31,336 9.3% $ 43,911 15.8% $ 43,091 16.8%
Commercial business
and commercial
real estate..... 126,987 28.2 99,446 25.4 77,202 22.8 62,799 22.6 53,509 20.8
Consumer......... 37,123 8.2 32,342 8.3 27,047 8.0 26,508 9.5 30,165 11.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total fixed
rate loans.... 175,730 39.0 143,382 36.7 135,585 40.1 133,218 47.9 126,765 49.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Adjustable rate loans
- ---------------------
Residential real
estate.......... 115,422 25.6 111,753 28.6 93,564 27.7 67,516 24.3 60,528 23.5
Commercial business
and commercial
real estate..... 132,221 29.4 109,768 28.0 85,015 25.2 58,313 20.9 53,488 20.8
Consumer......... 26,687 5.9 26,271 6.7 23,797 7.0 19,133 6.9 16,429 6.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total adjustable
rate loans.... 274,330 61.0 247,792 63.3 202,376 59.9 144,962 52.1 130,445 50.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans.... 450,060 100.0% 391,174 100.0% 337,961 100.0% 278,180 100.0% 257,210 100.0%
===== ===== ===== ===== =====
Less
- ----
Loans in
process......... 6,443 9,185 14,627 12,356 8,991
Deferred fees
and discounts... 281 175 161 165 152
Allowance for
loan losses..... 7,297 6,705 6,284 5,764 4,911
-------- -------- -------- -------- --------
Total loans
receivable.... $436,039 $375,109 $316,889 $259,895 $243,156
======== ======== ======== ======== ========
The total amount of loans due after March 31, 2008, which have predetermined or fixed interest rates is
$141.7 million, while the total amount of loans due after that date which have floating or adjustable
interest rates is $166.3 million.
4
The following table sets forth information concerning the composition of the Bank's loan portfolio in
dollar amounts and in percentages by type of loan, and presents a reconciliation of total loans receivable
before net items.
At March 31,
---------------------------------------------------------------------------------------
2007 2006 2005 2004 2003
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
TYPE OF LOAN:
- -------------
Real Estate Loans:
Residential real
estate.......... $109,532 24.3% $ 99,561 25.4% $105,516 31.2% $ 95,863 34.5% $ 86,707 33.7%
Residential
construction.... 17,510 3.9 23,786 6.1 19,384 5.8 15,564 5.6 16,912 6.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real
estate loans... 127,042 28.2 123,347 31.5 124,900 37.0 111,427 40.1 103,619 40.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Commercial business
and commercial
real estate...... 259,208 57.6 209,214 53.5 162,217 48.0 121,112 43.5 106,997 41.6
Consumer loans:
Deposit account.. 1,647 0.4 1,180 0.3 1,145 0.3 1,383 0.5 1,726 0.7
Home equity
lines........... 20,086 4.4 20,059 5.1 16,918 5.0 13,694 4.9 13,140 5.1
Consumer first and
second
mortgages....... 22,868 5.1 22,144 5.7 22,327 6.6 15,080 5.4 18,551 7.2
Premium finance.. 892 0.2 -- -- -- -- -- -- -- --
Other............ 18,317 4.1 15,230 3.9 10,454 3.1 15,484 5.6 13,177 5.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer
loans.......... 63,810 14.2 58,613 15.0 50,844 15.0 45,641 16.4 46,594 18.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans..... 450,060 100.0% 391,174 100.0% 337,961 100.0% 278,180 100.0% 257,210 100.0%
===== ===== ===== ===== =====
Less:
Loans in
process.......... 6,443 9,185 14,627 12,356 8,991
Deferred fees
and discounts.... 281 175 161 165 152
Allowance for loan
losses........... 7,297 6,705 6,284 5,764 4,911
-------- -------- -------- -------- --------
Total loans
receivable...... $436,039 $375,109 $316,889 $259,895 $243,156
======== ======== ======== ======== ========
5
The following schedule illustrates the maturities of Security Federal's
loan portfolio at March 31, 2007. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period when the
contract is due. This schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
At March 31, 2007
------------------------------------------------
Commercial
Business and
Residential Commercial
Real Estate Consumer Real Estate Total
------------ ------------ ----------- --------
(In Thousands)
Six months or less (1)....... $ 7,867 $ 6,088 $ 70,316 $ 84,271
Over six months to one year.. 5,361 3,174 42,840 51,375
Over one year to three years. 884 9,385 62,850 73,119
Three to five years.......... 368 11,922 54,659 66,949
Over five to ten years....... 2,187 10,507 15,324 28,018
Over ten years............... 103,932 22,734 13,219 139,885
-------- --------- -------- --------
Total (2)................... $120,599 $ 63,810 $259,208 $443,616
======== ========= ======== ========
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(1) Includes demand loans, loans having no stated maturity, overdraft loans
and equity line of credit loans.
(2) Loan amounts are net of undisbursed funds for loans in process of $6.4
million.
Loan Originations, Purchases and Sales. The following table shows the
loan origination, purchase, sale and repayment activities of the Bank for the
periods indicated.
Year Ended March 31,
--------------------------------------------
2007 2006 2005 2004 2003
------- ------- ------- ------ -------
(In Thousands)
Originated:
Adjustable rate - residential
real estate.................... $ 40,380 $ 45,259 $ 43,578 $ 47,263 $ 45,260
Fixed rate - residential real
estate (1)..................... 30,542 28,946 41,746 73,291 92,388
Consumer........................ 34,748 33,621 29,290 26,829 25,439
Commercial business and
commercial real estate......... 283,749 198,360 134,439 91,562 64,097
-------- -------- -------- -------- --------
Total consumer/commercial
business real estate.......... 318,497 231,981 163,729 118,391 89,536
-------- -------- -------- -------- --------
Total loans originated...... $389,419 $306,186 $249,053 $238,945 $227,184
======== ======== ======== ======== ========
Purchased....................... $ 10,200 $ 5,060 $ 6,536 $ 3,500 $ --
Acquired in acquisition of
Collier Jennings Financial
Corporation.................... 708 -- -- -- --
Less:
Sold:
Fixed rate - residential real
estate........................ $ 30,333 $ 29,903 $ 25,957 $ 63,497 $ 80,345
Fixed rate - commercial real
estate........................ 8,106 -- -- -- --
Adjustable rate - commercial
real estate................... 3,240 2,300 -- -- --
Principal repayments............ 299,763 225,830 169,851 157,979 139,108
Increase (decrease) in other
items, net..................... (2,044) (5,007) 2,787 4,230 (1,106)
Net increase.................... $ 60,929 $ 58,220 $ 56,994 $ 16,739 $ 8,837
- ---------
(1) Includes newly originated fixed rate loans held for sale and
construction/permanent loans converted to fixed rate loans and sold.
In addition to interest earned on loans, the Bank receives loan
origination fees or "points" for originating loans. Loan points are a
percentage of the principal amount of the mortgage loan which are charged to
the borrower for the
6
creation of the loan. The Bank's loan origination fees are generally 1% on
conventional residential mortgages, and 0.25% to 1% on commercial real estate
loans and commercial business loans. The total fee income (including amounts
amortized to income as yield adjustments) for the fiscal year ended March 31,
2007 was $1.2 million.
Loan origination and commitment fees are volatile sources of income.
These fees vary with the volume and type of loans and commitments made and
purchased and with competitive conditions in mortgage markets, which in turn
are governed by the demand for and availability of money.
The following table shows deferred mortgage loan origination fees
recognized as income by the Bank expressed as a percentage of the dollar
amount of total mortgage loans originated (and retained in the Bank's
portfolio) and purchased during the periods indicated and the dollar amount of
deferred loan origination fees at the end of each respective period.
At or For the Year Ended March 31,
------------------------------------
2007 2006 2005
--------- -------- --------
(Dollars in Thousands)
Net deferred mortgage loan
origination fees earned during
the period (1)..................... $173 $170 $185
Mortgage loan origination fees
earned as a percentage of total
portfolio mortgage loans originated
during the period.................. 0.4% 0.4% 0.4%
Net deferred mortgage loan origination
fees in loan portfolio at end of
period............................. $114 $175 $161
___________
(1) Includes amounts amortized to interest income as yield adjustments; does
not include fees earned on loans sold.
The Bank also receives other fees and charges related to existing loans,
conversion fees, assumption fees, late charges and other fees collected in
connection with a change in borrower or other loan modifications.
Security Federal currently sells substantially all conforming fixed rate
loans with terms of 15 years or greater in the secondary mortgage market.
These loans are sold in order to provide a source of funds and as one of the
strategies available to close the gap between the maturities of the Bank's
interest-earning assets and interest-bearing liabilities. Currently, most
fixed rate, long-term mortgage loans are being originated based on Federal
National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage
Corporation ("Freddie Mac") underwriting standards.
Secondary market sales have been made primarily to Freddie Mac, or other
banks or investors. Freddie Mac is a quasi-governmental agency that purchases
residential mortgage loans from federally insured financial institutions and
certain other lenders. All loans sold to Freddie Mac are without recourse to
Security Federal and generally all other loans sold to other investors are
without recourse. For the past few years, substantially all loans have been
sold on a service released basis.
In fiscal 2007, Security Federal sold $30.3 million in fixed rate
residential loans on a service released basis on the secondary market. Loans
closed but not yet settled with Freddie Mac or other investors, are carried in
the Bank's "loans held for sale" portfolio. At March 31, 2007, the Bank had
$1.5 million of loans held for sale. These loans are fixed rate residential
loans that have been originated in the Bank's name and have closed. Virtually
all of these loans have commitments to be purchased by investors and the
majority of these loans were locked in by price with the investors on the same
day or shortly thereafter that the loan was locked in with the Bank's
customers. Therefore, these loans present very little market risk for the
Bank. The Bank usually delivers to and receives funding from the investor
within 30 days. Security Federal originates all of its loans held for sale on
a "best efforts" basis. Best efforts means that the Bank suffers no penalty
if it is unable to deliver a loan to a potential investor.
The Bank also originates and holds adjustable and fixed rate construction
loans. The construction loans are for one year terms. At March 31, 2007, the
Bank held $17.5 million, or 3.9% of the total loan portfolio, in construction
7
loans to individuals in its residential portfolio. At March 31, 2007, the
Bank also held approximately $7.7 million in longer term fixed rate
residential mortgage loans. These loans, which were 1.7% of the entire loan
portfolio at March 31, 2007, had converted from ARM loans to fixed rate loans
during the previous 60 months, and had remaining maturities of 10 to 29 years.
The Bank no longer originates ARM loans with conversion features nor has any
loans in its portfolio with conversion features.
Loan Solicitation and Processing. The Bank actively solicits mortgage
loan applications from existing customers, real estate agents, builders, real
estate developers and others. The Bank also receives mortgage loan
applications as a result of customer referrals and from walk-in customers.
Detailed loan applications are obtained to determine the borrower's
creditworthiness and ability to repay. The more significant items on loan
applications are verified through the use of credit reports, financial
statements and confirmations. After analysis of the loan application and
property or collateral involved, including an appraisal of the property
(residential appraisals are obtained through independent fee appraisers), the
lending decision is made in accordance with the underwriting guidelines of the
Bank. These guidelines are generally consistent with Freddie Mac and Fannie
Mae guidelines for residential real estate loans. With respect to commercial
real estate loans, the Bank also reviews the capital adequacy of the business,
the income potential of the property, the ability of the borrower to repay the
loan and honor its other obligations, and general economic and industry
conditions.
Upon receipt of a loan application and all required related information
from a prospective borrower, the loan application is submitted for approval or
rejection. The residential mortgage loan underwriters approve loans which
meet Freddie Mac and Fannie Mae underwriting requirements, not to exceed
$417,000 per loan, Federal Housing Administration ("FHA") loans not to exceed
$200,161 and Veterans' Administration ("VA") loans not to exceed $417,000.
The Chairman of the Company, the Chief Executive Officer of the Bank, or the
President of the Bank individually have the authority to approve loans of
$300,000 or less, except as set forth above for conforming conventionally
underwritten, single family mortgage loans, which are approved by the
underwriters. The two Executive Vice Presidents/Lending have the authority
to approve loans up to $250,000. Loans in excess of $300,000 up to $350,000
require the approval of any two of the Chairman of the Company, the Chief
Executive Officer of the Bank, the President of the Bank or either of the two
Executive Vice Presidents/Lending. Commercial, consumer and all non-
conforming real estate loans in excess of $350,000 up to $500,000 require
approval of any two of the Chairman of the Company, the Chief Executive
Officer of the Bank, or the President of the Bank, and any loan in an amount
in excess of $500,000 must be approved by the Bank's Executive Committee,
which operates as the Bank's Loan Committee. The loan approval limits shown
are the aggregate of all loans to any one borrower or entity, not including
loans that are the borrower's primary residence, and are conventionally
underwritten.
The general policy of Security Federal is to issue loan commitments to
qualified borrowers for a specified time period. These commitments are
generally for a period of 45 days or less. With management approval,
commitments may be extended for a longer period. As of March 31, 2007,
Security Federal had no residential mortgage loan commitments for portfolio
loans issued (excluding undisbursed portions of construction loans in
process). Security Federal had outstanding commitments available on retail
lines of credit (including home equity and other consumer loans) totaling
$33.0 million as of March 31, 2007. See Note 16 of the Notes to Consolidated
Financial Statements contained in the Annual Report.
Permanent Residential Mortgage Lending. Permanent residential real estate
mortgage loans constituted approximately 24.3% of the Bank's total outstanding
loan portfolio at March 31, 2007.
Security Federal offers a variety of ARMs which offer adjustable rates of
interest, payments, loan balances or terms to maturity which vary according to
specified indices. The Bank's ARMs generally have a loan term of 15 to 30
years with initial rate adjustments every one, three, five or seven years
during the term of the loan. After the initial rate adjustment, the loan rate
then adjusts annually. Most of the Bank's ARMs contain a 200 basis point
limit as to the maximum amount of change in the interest rate at any
adjustment period and a 500 or 600 basis point limit over the life of the
loan. The Bank generally originates ARMs to hold in its portfolio. These
loans are generally made consistent with Freddie Mac and Fannie Mae
guidelines. At March 31, 2007, residential ARMs totaled $115.4 million, or
25.6%
8
of the Bank's loan portfolio. For the year ended March 31, 2007, the Bank
originated $70.9 million in residential real estate loans, 56.9% of which had
adjustable rates of interest.
There are unquantifiable risks resulting from possible increased costs to
the borrower as a result of periodic repricing. Despite the benefits of ARMs
to the Bank's asset/liability management program, these loans also pose
potential additional risks, primarily because as interest rates rise, the
underlying payment by the borrower rises, increasing the potential for
default. At the same time, marketability of the underlying property may be
adversely affected by higher interest rates.
When making a one- to four-family residential mortgage loan, the Bank
evaluates both the borrower's creditworthiness and his or her general ability
to make principal and interest payments, and the value of the property that
will secure the loan. The Bank generally makes loans on one- to four-family
residential properties in amounts of 95% or less of the appraised value
thereof. Where loans are made in amounts which exceed 80% of the appraised
value of the underlying real estate, the Bank's general policy is to require
private mortgage insurance on the portion of the loan in excess of 80% of the
appraised value. In general, the Bank restricts its residential lending to
South Carolina and the nearby Augusta, Georgia market.
The Bank also provides construction financing for single family dwellings
to owner-occupants. Construction loans are generally made for periods of six
months to one year with either adjustable or fixed rates. At March 31, 2007,
residential construction loans on one- to four-family dwellings to
owner-occupants totaled $17.5 million, or 3.9%, of the Bank's loan portfolio.
On loans of this type, the Bank seeks to evaluate the financial condition and
prior performance of the builder, as well as the borrower's creditworthiness
and his or her general ability to make principal and interest payments, and
the value of the property that will secure the loan. On construction loans
offered to individuals (non-builders), the Bank offers a
construction/permanent loan. The construction portion of the loan has an
adjustable rate (typically prime) or a fixed rate (typically prime plus 0.25%)
during the construction period. After construction, the loan then
automatically converts to an ARM loan. The borrower also has the option,
after the construction period only, to convert the loan to a fixed rate loan
which the Bank then sells on the secondary market immediately on a service
released basis.
Commercial Business and Commercial Real Estate Loans. The commercial
business and commercial real estate loans originated by the Bank are primarily
secured by business properties, churches, income property developments,
undeveloped land, business equipment, furniture and fixtures, inventory and
receivables. At March 31, 2007, the Bank had approximately $259.2 million, or
57.6%, of the Bank's total loan portfolio, in commercial business and
commercial real estate loans. Approximately $174.9 million, or 67.5% of these
loans were secured primarily by real estate at March 31, 2007. Included in
these loans is approximately $26.9 million in loans for the construction of
single family dwellings to builders with a term of typically one year. Not
included in these loans are approximately $15.9 million in acquisition and
development loans with terms of typically two to three years. Loans secured
by commercial real estate are typically written for terms of 10 to 20 years.
Commercial loans not secured by real estate are typically based on terms of
three to 60 months. Fixed rate loans typically balloon at the end of three to
seven years. Adjustable rate loans are usually tied to the prime interest
rate or LIBOR as quoted in the Wall Street Journal, and adjust daily, monthly
or annually. Some adjustable rate loans have interest rate caps, although
most of these loans have a five year balloon.
Commercial business and commercial real estate lending entails significant
additional credit risk when compared to residential lending. Commercial loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience of these loans is typically dependent upon
the successful operation of the business or real estate project. These risks
can be significantly affected by supply and demand conditions in the market
for office and retail space, condominiums and apartments, and by adverse
conditions in the local economy. Although commercial loans generally involve
more risk than residential loans, they also typically provide a greater yield
and are more sensitive to changes in interest rates.
The Bank's underwriting standards for commercial business and commercial
real estate lending include a determination of the borrower's current
financial condition, ability to pay, past earnings and payment history. In
addition, the current financial condition and payment history of all
principals are reviewed. Typically, the Bank requires the principal or owners
of a business to guarantee all loans made to their business by the Bank.
Although the
9
creditworthiness of the business and its principals is of primary
consideration, the underwriting process also includes a comparison of the
value of the security, if any, in relation to the proposed loan amount.
Properties securing commercial loans originated by the Bank are generally
appraised at the time of the loan by appraisers designated by the Bank.
Although the Bank is permitted to invest in loans up to 100% of the appraised
value of a property on a commercial loan, the Bank currently seeks to invest
in loans with a loan to value ratio of 75% to 85%.
At March 31, 2007, the Bank did not have any commercial business or
commercial real estate loans to one borrower in excess of $7.0 million.
Federal law restricts the Bank's permissible lending limits to one borrower to
the greater of $500,000 or 15% of unimpaired capital and surplus. The Bank
has only infrequently made loans to one borrower equal to the amount federal
law allows, or approximately $7.7 million as calculated at March 31, 2007.
Consumer Loans. The Bank originates consumer loans for any personal,
family or household purpose, including the financing of home improvements,
loans to individuals for residential lots for a future home, automobiles,
boats, mobile homes, recreational vehicles and education. The Bank also makes
consumer first and second mortgage loans secured by residences. These loans
typically do not qualify for sale in the secondary market, but are generally
not considered sub-prime lending. In addition, the Bank has expanded its home
equity lending program. Home equity loans are secured by mortgage lines on
the borrower's principal or second residence. At March 31, 2007, the Bank had
$20.1 million of home equity lines of credit outstanding and $26.5 million of
additional commitments of home equity lines of credit. The Bank also makes
secured and unsecured lines of credit available. Although consumer loans
involve a higher level of risk than one- to four-family residential mortgage
loans, they generally provide higher yields and have shorter terms to maturity
than one- to four-family residential mortgage loans. At March 31, 2007, the
Bank had total consumer loans of $63.8 million, or 14.2% of the Bank's loan
portfolio.
The Bank's underwriting standards for consumer loans include a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income is determined
by verification of gross monthly income from primary employment, and from any
verifiable secondary income. Although creditworthiness of the applicant is of
primary consideration, the underwriting process also includes a comparison of
the value of the security, if any, in relation to the proposed loan amount.
The Bank also has a credit card program. As of March 31, 2007, the Bank
had issued 2,960 Visa credit cards with total approved credit lines of $5.2
million, of which $1.6 million was outstanding.
Loan Delinquencies and Defaults
- -------------------------------
General. The Bank's collection procedures provide that when a real estate
loan is approximately 20 days past due, the borrower is contacted by mail and
payment is requested. If the delinquency continues, subsequent efforts are
made to contact the delinquent borrower and establish a program to bring the
loan current. In certain instances, the Bank may modify the loan or grant a
limited moratorium on loan payments to enable the borrower to reorganize his
financial affairs. If the loan continues in a delinquent status for 60 days
or more, the Bank generally initiates foreclosure proceedings after the
customer has been notified by certified mail. At March 31, 2007, the Bank had
property acquired as the result of foreclosures and other property repossessed
classified as repossessed assets valued at $25,000.
10
Delinquent Loans. The following table sets forth information concerning
delinquent loans at March 31, 2007. The amounts presented represent the total
remaining principal balances of the delinquent loans (before specific reserves
for losses), rather than the actual payment amounts which are overdue.
Real Estate Non-Real Estate
-------------------------------- ---------------------------------
Commercial
Residential Commercial Consumer Business
--------------- -------------- -------------- ----------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ -------
(Dollars in Thousands, number of loans are actual)
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Loans delinquent for:
30 - 59 days............ 13 $1,378 14 $4,893 62 $1,186 6 $ 71
60 - 89 days............ 5 621 4 1,001 9 97 1 30
90 days and over........ 7 353 7 547 7 142 1 13
------ ------ ------ ----
Total delinquent loans.. 25 $2,352 25 $6,441 78 $1,425 8 $114
====== ====== ====== ====
Classified Assets. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered to be of
lesser quality as "substandard," "doubtful" or "loss" assets. The regulations
require savings associations to classify their own assets and to establish
prudent general allowances for loan losses for assets classified "substandard"
or "doubtful." For the portion of assets classified as "loss," an institution
is required to either establish specific allowances of 100% of the amount
classified or charge off such amount. In addition, the Office of Thrift
Supervision ("OTS") may require the establishment of a general allowance for
losses based on assets classified as "substandard" and "doubtful" or based on
the general quality of the asset portfolio of an association. See "Regulation
- - Federal Regulation of Savings Institutions."Assets which do not currently
expose the savings association to sufficient risk to warrant classification in
one of the aforementioned categories but possess potential weaknesses are
designated "special mention" by management.
At March 31, 2007, approximately $10.8 million of the Bank's loans were
classified "substandard" compared to $14.1 million at March 31, 2006. In
fiscal 2005, the Bank began applying stricter standards in securitizing its
loan portfolio for classification purposes in conjunction with the formation
of a Credit Administration Department. At March 31, 2007, $2.3 million were
classified as "special mention" compared to $5.6 million at March 31, 2006.
The Bank had no loans classified as "doubtful" or "loss" at March 31, 2007.
As of March 31, 2007, there were loans totaling $204,000 which were troubled
debt restructurings within the meaning of Statement of Financial Accounting
Standard ("SFAS") No. 15. The Bank's policy is to classify all troubled debt
restructurings as substandard. The Bank's classification of assets is
consistent with OTS regulatory classifications.
Non-performing Assets. Loans are placed on non-accrual status when the
collection of principal and/or interest becomes doubtful. In addition, all
loans are placed on non-accrual status when the loan becomes 90 days or more
contractually delinquent. All consumer loans more than 90 days delinquent are
charged against the consumer loan allowance for loan losses unless there is
adequate collateral which is in the process of being repossessed or foreclosed
on. At March 31, 2007, the Bank did not have any troubled debt restructurings
which involve forgiving a portion of interest or principal on any loans or
making loans at a rate materially less than market rate. Other loans of
concern are those loans (not delinquent more than 60 days) that management has
determined need to be closely monitored as the potential exists for increased
risk on these loans in the future. Nonperforming loans are reviewed monthly
on a loan by loan basis. Charge-offs, whether partial or in full, associated
with these loans will vary based on estimates of recovery for each loan.
11
The following table sets forth the amounts and categories of risk elements
in the Bank's loan portfolio.
At March 31,
----------------------------------------------
2007 2006 2005 2004 2003
------ ------ ------ ------ ------
(Dollars in Thousands)
Loans Delinquent 60 to
89 Days:
Residential................ $ 621 $ 182 $ 73 $ 72 $ 45
Consumer................... 97 5 13 73 435
Commercial business and
real estate............... 1,031 420 13 88 311
------ ------ ------ ------ ------
Total..................... $1,749 $ 607 $ 99 $ 233 $ 791
====== ====== ====== ====== ======
Total as a percentage of
total assets............. 0.24% 0.09% 0.02% 0.04% 0.18%
Non-Accruing Loans Delinquent
90 Days or More:
Residential................ $ 353 $ 412 $ 569 $ 559 $ 585
Consumer................... 142 133 140 243 229
Commercial business and
real estate............... 560 646 1,721 1,242 226
------ ------ ------ ------ ------
Total..................... $1,055 $1,191 $2,430 $2,044 $1,040
====== ====== ====== ====== ======
Total as a percentage of
total assets............. 0.14% 0.18% 0.42% 0.39% 0.23%
Troubled debt
restructurings............. $ 203 $ 418 $ 434 $ 646(1) $ 674(2)
Repossessed assets.......... $ 25 $ 91 $ 53 $ 51 $ 151
Allowance for loan losses... $7,297 $6,705 $6,284 $5,764 $4,911
- ------------
(1) $201,000 of troubled debt restructurings are included in non-accruing
loans.
(2) $210,000 of troubled debt restructurings are included in non-accruing
loans.
For the fiscal year ended March 31, 2007, the interest income which would
have been recognized with respect to non-accruing loans, had such loans been
current in accordance with their original terms and with respect to troubled
debt restructurings, had such loans been current in accordance with their
original terms, totaled $107,000 compared to $111,000 for the year ended March
31, 2006.
At March 31, 2007, non-accruing loans totaled $1.1 million, compared to
$1.2 million and $2.4 million at March 31, 2006 and 2005, respectively.
Included in non-accruing loans at March 31, 2007 were seven residential real
estate loans totaling $353,000, eight commercial loans totaling $560,000 and
seven consumer loans totaling $142,000. Of the seven consumer loans on
non-accrual status at fiscal year end, no loan exceeded $50,000. Of the eight
commercial loans on non-accrual status at fiscal year end, no loan exceeded
$350,000.
The Bank had five loans totaling $204,000 at fiscal year end which were
troubled debt restructurings compared to six loans of $418,000 at March 31,
2007. The five troubled debt restructurings were two consumer loans totaling
$129,000 secured by residential dwellings, a $10,000 consumer loan secured by
a second mortgage on a residence, a $52,000 commercial loan secured by two
rental properties, and a $12,000 unsecured commercial loan. The $10,000
consumer loan was 30 days delinquent at March 31, 2007. The remaining four
loans were current at March 31, 2007.
At March 31, 2007, repossessed assets had an outstanding carrying value of
$25,000 and consisted of a single family dwelling.
Provision for Losses on Loans and Repossessed Assets. Security Federal
recognizes that it will experience credit losses during the course of making
loans and that the risk of loss will vary with, among other things, the type
of loan being made, the creditworthiness of the borrower over the term of the
loan and, in the case of a secured loan, the quality of the underlying
security for the loan. The Bank seeks to establish and maintain sufficient
reserves for estimated losses on specifically identified loans and real estate
where such losses can be estimated. Additionally, general reserves for
estimated possible losses are established on specified portions of the Bank's
portfolio such as consumer loans and higher risk residential construction
mortgage loans based on management's estimate of the potential loss for loans
which
12
normally can be classified as higher risk. Specific and general reserves are
based on, among other criteria (1) the risk characteristics of the loan
portfolio, (2) current economic conditions on a local as well as a statewide
basis, (3) actual losses experienced historically and (4) the level of
reserves for possible losses in the future. Additionally, the Bank maintains
a reserve for uncollected interest on loans 90 days or more past due.
At March 31, 2007, total reserves relating to loans were $7.3 million. In
determining the adequacy of the reserve for loan losses, management reviews
past experience of loan charge-offs, the level of past due and non-accrual
loans, the size and mix of the portfolio, general economic conditions in the
market area, and individual loans to identify potential credit problems.
Commercial business, commercial real estate and consumer loans have increased
to $323.0 million, or 71.8% of the Bank's total loan portfolio at March 31,
2007, and it is anticipated there will be a continued emphasis on this type of
credit. Although commercial and consumer loans carry a higher level of credit
risk than conventional residential mortgage loans, the level of reserves
reflects management's continuing evaluation of this risk based on upon the
Bank's past loss experience. At fiscal year end, the Bank's ratio of loans
delinquent more than 60 days to total assets was 0.38%. These delinquent
loans are considered to be well secured and are in the process of collection.
Management uses four methods or calculations to estimate the adequacy of the
reserve using the factors mentioned above. The reserve is management's best
estimate for the reserve. There can be no guarantee that the estimate is
adequate or accurate. Management believes that reserves for loan losses are
at a level adequate to provide for inherent loan losses. Although management
believes that it has considered all relevant factors in its estimation of
future losses, future adjustments to reserves may be necessary if conditions
change substantially from the assumptions used in making the original
estimations. Regulators will from time to time evaluate the allowance for
loan losses which is subject to adjustment based upon the information
available to the regulators at the time of their examinations.
Management believes the Bank has no undue concentration of loans in any
one particular industry. At March 31, 2007, the Bank had no allowance for
losses on real estate owned.
The following table sets forth an analysis of the Bank's allowance for
loan losses.
At March 31,
-------------------------------------------------
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
(Dollars in Thousands)
Balance at beginning of
year....................... $6,705 $6,284 $5,764 $4,911 $3,689
Allowance acquired in
acquisition................ 22 -- -- -- --
Provision charged to
operations................. 600 660 780 1,200 1,800
Charge-offs:
Residential real estate.... 9 25 29 38 17
Commercial business and
commercial real estate.... 16 159 257 164 299
Consumer................... 108 117 157 467 594
------ ------ ------ ------ ------
Total charge-offs......... 133 301 443 669 910
------ ------ ------ ------ ------
Recoveries:
Residential real estate.... -- 4 -- - --
Commercial business and
commercial real estate.... 23 33 112 16 40
Consumer................... 81 25 71 306 292
------ ------ ------ ------ ------
Total recoveries.......... 103 62 183 322 332
------ ------ ------ ------ ------
Balance at end of year...... $7,297 $6,705 $6,284 $5,764 $4,911
====== ====== ====== ====== ======
Ratio of net charge-offs
during the year to average
loans outstanding during
the year................... 0.01% 0.07% 0.09% 0.14% 0.24%
===== ===== ===== ===== =====
13
The distribution of the Bank's allowance for loan losses at the dates indicated is summarized in the
following table. The entire allowance is available to absorb losses from all loan categories.
At March 31,
----------------------------------------------------------------------------------
2007 2006 2005 2004 2003
-------------- ------------- ------------- ------------- -------------
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Residential........... $ 619 28.2% $ 568 31.5% $ 531 37.0% $ 500 40.1% $ 473 40.3%
Consumer.............. 3,339 14.2 3,068 15.0 2,876 15.0 2,632 16.4 2,219 18.1
Commercial business
and commercial
real estate.......... 3,339 57.6 3,069 53.5 2,877 48.0 2,632 43.5 2,219 41.6
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total................ $7,297 100.0% $6,705 100.0% $6,284 100.0% $5,764 100.0% $4,911 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Service Corporation
- -------------------
As a federally chartered savings bank, Security Federal is permitted by
OTS regulations to invest up to 3% of its assets in the stock of service
corporations, provided that any investment in excess of 2% of its assets must
be primarily for community, inner-city or community development purposes. At
March 31, 2007, Security Federal's net investment in its service corporations
(including loans to service corporations) totaled $2.6 million. In addition
to investments in service corporations, federal institutions are permitted to
invest an unlimited amount in operating subsidiaries engaged solely in
activities which a federal savings bank may engage in directly.
Security Federal Insurance, Inc. ("SFINS"), Security Federal Investments,
Inc. ("SFINV") and Security Federal Trust, Inc. ("SFT"). SFINS, SFINV and
SFT, wholly owned subsidiaries of the Bank, were formed during fiscal 2002 and
began operating during the December 2001 quarter. SFINS is an insurance
agency offering auto, business, health, home and life insurance, and premium
finance. SFINV offers mutual funds, annuities and discount brokerage
services. SFT offers a full range of trust and financial planning services.
The operations of SFINS, SFINV and SFT are included in the Company's
Consolidated Financial Statements.
Security Financial Services Corporation ("SFSC"). SFSC was incorporated
in 1975 as a wholly owned subsidiary of the Bank. Its primary activity was
investment brokerage services. SFSC is currently inactive.
Investment Activities
- ---------------------
Investment securities. The Bank has authority to invest in various types
of liquid assets, including U.S. Treasury obligations and securities of
various federal agencies, certificates of deposit at insured institutions,
bankers' acceptances and federal funds. The Bank may also invest a portion of
its assets in certain commercial paper and corporate debt securities. The
Bank is also authorized to invest in mutual funds whose assets conform to the
investments that a federal thrift institution is authorized to make directly.
There are various restrictions on the foregoing investments. For example, the
commercial paper must be appropriately rated by at least two nationally
recognized investment rating services and the corporate debt securities must
be appropriately rated by at least one such service. In addition, the average
maturity of an institution's portfolio of corporate debt securities may not,
at any one time, exceed six years, and the commercial paper must mature within
nine months of issuance. Furthermore, an institution's total investment in
the commercial paper and corporate debt securities of any one issuer may not
exceed 1% of the institution's assets except that an institution may invest 5%
of its assets in the shares of any appropriate mutual fund. See "Regulation
Federal Regulation of Savings Associations."
As a member of the Federal Home Loan Bank ("FHLB") System, Security
Federal must maintain minimum levels of investments that are liquid assets as
defined in Federal regulations. See "Regulation Federal Regulation of
Savings Institutions Federal Home Loan Bank System." Liquidity may increase
or decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans.
14
Historically, the Bank has maintained its liquid assets above the minimum
requirements imposed by OTS regulations and at a level believed adequate to
meet requirements of normal daily activities, repayment of maturing debt and
potential deposit outflows. Management regularly reviews and updates cash
flow projections to assure that adequate liquidity is provided.
The following table sets forth the composition of the Company's portfolio
of securities and other investments, not including mortgage-backed securities.
At March 31,
----------------------------
2007 2006 2005
-------- ------- --------
(In Thousands)
Interest bearing deposit at FHLB............. $ 1,795 $ 3,715 $ 164
-------- -------- --------
Total...................................... $ 1,795 $ 3,715 $ 164
======== ======== ========
Investment Securities:
Available for Sale:
FHLB securities............................ $ 38,373 $ 24,005 $ 4,970
Federal Farm Credit Bank securities........ 9,214 2,941 --
Fannie Mae bonds........................... 2,930 979 --
Freddie Mac bonds.......................... 64 230 485
Equity Securities.......................... 104 103 --
-------- -------- --------
Total securities available for sale....... 50,685 28,258 5,455
-------- -------- --------
Held to Maturity:
FHLB securities............................ 55,995 66,002 67,002
Federal Farm Credit Bank securities........ 7,989 8,986 8,999
-------- -------- --------
Total securities held to maturity......... 63,984 74,988 76,001
-------- -------- --------
Total securities (1)......................... 114,669 103,246 81,456
FHLB stock................................... 8,209 7,150 6,235
-------- -------- --------
Total securities and FHLB stock (1).......... $122,878 $110,396 $ 87,691
======== ======== ========
- -----------
(1) Does not include mortgage-backed securities.
At March 31, 2007, the Company did not have any investment securities
(exclusive of obligations of the U.S. Government and federal agencies) issued
by any one entity with a total book value in excess of 10% of stockholders'
equity.
FHLB securities, Federal Farm Credit Bank securities, Fannie Mae bonds and
Freddie Mac bonds are all securities that are issued by government sponsored
enterprises (GSEs). GSE securities are not backed by the full faith and
credit of the United States government.
15
The following table sets forth the maturities or repricing of investment
securities and FHLB stock at March 31, 2007, and the weighted average yields
of such securities and FHLB stock (calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security).
Callable securities are shown at their likely call dates based on current
interest rates. The table was prepared using amortized cost.
Maturing or Repricing
-------------------------------------------------------------
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
------------- ------------- ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
U.S. Government
sponsored
enterprises... $42,528 4.31% $63,991 4.73% $7,230 4.82% $ 945 5.06%
FHLB stock
(1)........... 8,209 5.90 - -- -- -- -- --
Other equity
securities.... 103 0.20 - -- -- -- -- --
------- ---- ------- ---- ------ ---- ----- ----
Total (2)..... $50,840 4.56% $63,991 4.73% $7,230 4.82% $ 945 5.06%
======= ==== ======= ==== ====== ==== ===== ====
- -----------
(1) FHLB stock has no stated maturity date.
(2) Excludes mortgage-backed securities and equity securities totaling
$136.2 million with a yield of 4.73%.
For information regarding the market value of the Bank's securities
portfolios, see Notes 3 and 4 of the Notes to Consolidated Financial
Statements contained in the Annual Report.
Mortgage-backed Securities. Security Federal has a portfolio of
mortgage-backed securities which it holds in both an available for sale and a
held to maturity portfolio. Mortgage-backed securities can serve as
collateral for borrowings and, through repayments, as a source of liquidity.
Under the Bank's risk-based capital requirement, mortgage-backed securities
have a risk weight of 20% (or 0% in the case of Government National Mortgage
Association ("Ginnie Mae") securities) in contrast to the 50% risk weight
carried by residential loans. See "Regulation."
The following table sets forth the composition of the mortgage-backed
securities available for sale portfolio at fair value at the dates indicated.
At March 31,
---------------------------
2007 2006 2005
------- -------- --------
(In Thousands)
Available for Sale:
Freddie Mac............................ $ 18,591 $ 21,196 $ 26,146
Fannie Mae............................. 67,675 74,498 81,492
Ginnie Mae............................. 48,815 39,493 51,722
-------- -------- --------
Total................................. $135,081 $135,187 $159,360
======== ======== ========
The following table sets forth the composition of the mortgage-backed
securities held to maturity portfolio at the dates indicated.
At March 31,
-----------------------------------
2007 2006 2005
---------- ---------- -----------
Book Value Book Value Book Value
---------- ---------- -----------
(In Thousands)
Held to Maturity
Freddie Mac........................... $ -- $ -- $260
========== ========== ===========
At March 31, 2007, the Company did not have any mortgage-backed securities
(exclusive of obligations of agencies of the U.S. Government) issued by any
one entity with a total book value in excess of 10% of stockholders equity.
16
Freddie Mac and Fannie Mae mortgage-backed securities are GSE issued
securities. GSE securities are not backed by the full faith and credit of the
United States government. Ginnie Mae mortgage-backed securities are backed by
the full faith and credit of the United States government.
For information regarding the market values of Security Federal's
mortgage-backed securities portfolio, see Notes 3 and 4 of the Notes to
Consolidated Financial Statements contained in the Annual Report.
The following table sets forth the final maturities or initial repricings,
whichever occurs first, and the weighted average yields of the mortgage-backed
securities at March 31, 2007. Not considered in the preparation of the table
below is the effect of scheduled payments or anticipated prepayments. The
table is prepared using amortized cost.
The Earliest of Maturing or Repricing March 31, 2007
-------------------------------------------------------------------- ---------------
Less Than 1 to 5 5 to 10 Over Balance
1 Year Years Years Ten Years Outstanding
-------------- -------------- -------------- -------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Fannie Mae....... $14,912 4.42% $25,004 4.36% $16,466 4.30% $12,040 5.17% $ 68,422 4.50%
Freddie Mac...... 184 4.30 9,963 3.90 3,962 4.31 4,837 5.06 18,946 4.29
Ginnie Mae....... 27,256 5.09 16,141 5.26 622 6.02 4,770 5.74 48,789 5.22
------- ---- ------- ---- ------- ---- ------- ---- -------- ----
Total............ $42,352 4.85% $51,108 4.56% $21,050 4.35% $21,647 5.27% $136,157 4.73%
======= ==== ======= ==== ======= ==== ======= ==== ======== ====
Sources of Funds
- ----------------
Deposit accounts have traditionally been a principal source of the Bank's
funds for use in lending and for other general business purposes. In addition
to deposits, the Bank derives funds from loan repayments, cash flows generated
from operations (including interest credited to deposit accounts), FHLB of
Atlanta advances, the sale of securities under agreements to repurchase, and
loan sales. Scheduled loan payments are a relatively stable source of funds
while deposit inflows and outflows and the related cost of such funds have
varied widely. FHLB of Atlanta advances and the sale of securities under
agreements to repurchase may be used on a short-term basis to compensate for
seasonal reductions in deposits or deposit inflows at less than projected
levels and may be used on a longer term basis in support of expanded lending
activities. The availability of funds from loan sales is influenced by
general interest rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the Annual Report.
Deposits. The Bank attracts both short-term and long-term deposits from
the general public by offering a wide assortment of account types and rates.
In recent years, market conditions have required the Bank to rely increasingly
on short-term accounts and other deposit alternatives that are more responsive
to market interest rates than the savings accounts and regulated fixed
interest rate, fixed-term certificates that were the Bank's primary source of
deposits before 1978. The Bank offers regular savings accounts, checking
accounts, various money market accounts, fixed interest rate certificates with
varying maturities, negotiated rate $100,000 or above jumbo certificates of
deposit ("Jumbo CDs") and individual retirement accounts.
At March 31, 2007, the Bank had no brokered deposits. In addition, the
Bank believes that, based on its experience over the past several years, its
savings and transaction accounts are stable sources of deposits.
17
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs for the periods indicated.
At March 31,
------------------------------------------------------
2007 2006 2005
---------------- ---------------- ----------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Interest Rate Range
- -------------------
for 2007:
---------
Savings accounts
0 % - 1.51%......... $ 17,459 3.3% $ 17,795 3.7% $ 17,744 4.1%
NOW and other
transaction
accounts
0% - 2.96%.......... 105,515 20.1 105,348 22.0 88,170 20.5
Money market funds
1.09% - 4.41%....... 145,492 27.8 151,494 31.6 164,088 38.1
-------- ----- -------- ----- -------- -----
Total non-
certificates...... $268,466 51.2% $274,637 57.3% $270,002 62.7%
======== ===== ======== ===== ======== =====
Certificates:
- -------------
0.00-1.99%........... $ - --% $ 60 --% $ 23,435 5.5%
2.00-2.99%........... 2,972 0.6 26,836 5.6 80,954 18.8
3.00-3.99%........... 36,045 6.9 72,832 15.2 37,001 8.6
4.00-4.99%........... 35,617 6.8 94,241 19.7 9,096 2.1
5.00-5.99%........... 180,638 34.5 10,623 2.2 9,796 2.3
6.00-6.99%........... -- -- - -- 3 --
-------- ----- -------- ----- -------- -----
Total
certificates...... 255,272 48.8 204,592 42.7 160,285 37.3
-------- ----- -------- ----- -------- -----
Total deposits..... $523,738 100.0% $479,229 100.0% $430,287 100.0%
======== ===== ======== ===== ======== =====
The Bank relies to a limited extent upon locally obtained Jumbo CDs to
maintain its deposit levels. At March 31, 2007, Jumbo CDs constituted 21.1%
of the Bank's total deposits. Security Federal has not relied heavily on
Jumbo CDs to manage interest rate sensitivity.
The following table sets forth the deposit flows at the Bank during the
periods indicated.
Years Ended March 31,
----------------------------------
2007 2006 2005
--------- --------- ---------
(Dollars in Thousands)
Opening balance................. $ 479,229 $ 430,287 $ 389,593
Net deposits.................... 44,509 48,942 40,694
Ending balance.................. 523,738 479,229 430,287
--------- --------- ---------
Net increase.................... $ 44,509 $ 48,942 $ 40,694
--------- --------- ---------
Percent increase................ 9.3% 11.4% 10.4%
========= ========= =========
18
The following table shows rate and maturity information for the Bank's
certificates of deposit as of March 31, 2007.
2.00- 3.00- 4.00- 5.00-
2.99% 3.99% 4.99% 5.99% Total
----- ----- ----- ----- -----
(In Thousands)
Certificate accounts
maturing in quarter ending:
June 30, 2007............... $2,467 $ 6,582 $ 9,189 $ 45,378 $ 63,616
September 30, 2007.......... 221 11,176 8,801 27,374 47,572
December 31, 2007........... 55 9,187 3,300 66,160 78,702
March 31, 2008.............. 36 2,930 7,353 35,743 46,062
June 30, 2008............... 111 2,329 2,828 650 5,918
September 30, 2008.......... 2 851 887 1,444 3,184
December 31, 2008........... 43 512 219 134 908
March 31, 2009.............. 20 736 84 41 881
June 30, 2009............... 17 759 53 57 886
September 30, 2009.......... -- 167 149 118 434
December 31, 2009........... -- 379 265 101 745
Thereafter.................. -- 437 2,489 3,438 6,364
------ ------- ------- -------- --------
Total...................... $2,972 $36,045 $35,617 $180,638 $255,272
====== ======= ======= ======== ========
The following table indicates the amount of the Bank's deposits of
$100,000 or more by time remaining until maturity at March 31, 2007.
Certificates Savings, NOW and
of Deposit Money Market Accounts
---------- ---------------------
(In Thousands)
Maturity Period
- ---------------
Three months or less............... $ 32,587 $104,994
Over three through six months...... 18,663 --
Over six through twelve months..... 52,275 --
Over twelve months................. 7,074 --
-------- --------
Total............................. $110,599 $104,994
======== ========
Borrowings
- ----------
As a member of the FHLB of Atlanta, the Bank is required to own capital
stock in the FHLB of Atlanta and is authorized to apply for advances from the
FHLB of Atlanta. Each FHLB credit program has its own interest rate, which
may be fixed or variable, and range of maturities. The FHLB of Atlanta may
prescribe the acceptable uses to which these advances may be put, as well as
limitations on the size of the advances and repayment provisions. See Note 10
of the Notes to Consolidated Financial Statements contained in the Annual
Report for information regarding the maturities and rate structure of the
Bank's FHLB advances. Federal law contains certain collateral requirements
for FHLB advances. See "Regulation - Federal Regulation of Savings
Institutions - Federal Home Loan Bank System."
At March 31, 2007, the Company had $5.2 million in junior subordinated
debentures. Half of the debentures have a fixed rate of 6.88%, which balloons
in September 2011. The other half of the debentures have a fixed rate that
floats quarterly at 170 basis points over the three-month LIBOR rate, or 7.06%
at March 31, 2007. The blended rate was 6.97% at March 31, 2007. The
debentures are callable by the Company in September 2011, and quarterly
thereafter, with a final maturity date of December 15, 2036. See Note 11 of
the Notes to Consolidated Financial Statements contained in the Annual Report
for more information.
19
The following table sets forth the maximum month-end balance and average
balance of FHLB advances, other borrowings and junior subordinated debentures
for the periods indicated.
Years Ended March 31,
--------------------------------
2007 2006 2005
-------- -------- ---------
(In Thousands)
Maximum Balance:
FHLB advances...................... $ 159,376 $ 132,513 $ 115,258
Other borrowings................... 8,088 7,290 5,915
Junior subordinated debentures..... 5,155 - --
Average Balance:
FHLB advances...................... $ 145,299 $ 121,526 $ 105,272
Other borrowings................... 7,080 6,201 5,488
Junior subordinated debentures..... 2,721 - --
At March 31, 2007, the Bank had $8.1 million in retail repurchase
agreements with an average rate of 4.41%. These repurchase agreements are
included in "Other Borrowings" in the consolidated financial statements and
the table above.
The following table sets forth information as to the Bank's borrowings and
the weighted average interest rates thereon at the dates indicated.
At March 31,
--------------------------------
2007 2006 2005
-------- -------- ---------
(Dollars in Thousands)
Balance:
FHLB advances.................... $153,049 $131,363 $112,038
Other borrowings................. 8,088 7,290 5,594
Junior subordinated debentures... 5,155 - --
Weighted Average Interest Rate at
Fiscal Year End:
FHLB advances.................... 4.36% 3.74% 3.41%
Other borrowings................. 4.41 4.43 2.54
Junior subordinated debentures... 6.97 - --
During Fiscal Year:
FHLB advances.................... 4.23% 3.55% 3.54%
Other borrowings................. 4.49 3.38 1.53
Junior subordinated debentures... 7.05 - --
Competition
- -----------
The Bank serves the counties of Aiken and Lexington, South Carolina
through its eleven branch offices located in Aiken, North Augusta,
Graniteville, Langley, Clearwater, Wagener, Lexington and West Columbia, South
Carolina. We are currently constructing a branch office in Columbia County,
Evans, Georgia, which is scheduled to open in December 2007.
Security Federal faces strong competition both in originating loans and in
attracting deposits. Competition in originating loans comes primarily from
other thrift institutions, commercial banks, mortgage bankers and credit
unions who also make loans in the Bank's market area. The Bank competes for
loans principally on the basis of the interest rates and loan fees it charges,
the types of loans it makes and the quality of services it provides to
borrowers.
The Bank faces substantial competition in attracting deposits from other
thrift institutions, commercial banks, money market and mutual funds, credit
unions and other investment vehicles. The ability of the Bank to attract and
retain
20
deposits depends on its ability to provide an investment opportunity that
satisfies the requirements of investors as to rate of return, liquidity, risk
and other factors. The Bank attracts a significant amount of deposits through
its branch offices primarily from the communities in which those branch
offices are located. Therefore, competition for those deposits is principally
from other thrift institutions and commercial banks located in the same
communities. The Bank competes for these deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges
at each.
The authority to offer money market deposits, and expanded lending and
other powers authorized for thrift institutions by federal law, have resulted
in increased competition for both deposits and loans between thrift
institutions and other financial institutions such as commercial banks and
credit unions.
Personnel
- ---------
At March 31, 2007, the Bank employed 184 full-time and 27 part-time
employees. The Bank employees are not represented by any collective
bargaining agreement. Management of the Bank considers its relations with its
employees to be good.
Executive Officers of the Registrant. The following table sets forth
information regarding the executive officers of the Company and the Bank.
Age at Position
March 31, -------------------------------------------
Name 2007 Company Bank
- ------------- ------------ -------------------- ---------------------
Timothy W. Simmons 61 President and Chief Chairman of the Board
Executive Officer and Chief Executive
Officer
T. Clifton Weeks 80 Chairman of the Board
Roy G. Lindburg 46 Treasurer and Chief Treasurer and Chief
Financial Officer Financial Officer
J. Chris Verenes 51 President
Biographical Information. The following is a description of the principal
occupation and employment of the executive officers of the Corporation and the
Bank during at least the past five years:
Timothy W. Simmons has been President of the Company since 1987 and Chief
Executive Officer since June 1994. Mr. Simmons was elected President and
Chief Operating Officer of the Bank in January 1987 and served in these
capacities from March 1987 to December 2001. In May 1988, Mr. Simmons became
Chief Executive Officer of the Bank and in January 2002, he was elected
Chairman of the Bank's Board of Directors.
T. Clifton Weeks has been Chairman of the Board of the Company since July
1987 and was Chief Executive Officer of the Company from July 1987 until June
1994. Mr. Weeks served as Chairman of the Board of the Bank from January 1987
until January 2002 and was Chief Executive Officer of the Bank from 1987 until
May 1988. Prior thereto, he served as President and Managing Officer of the
Bank beginning in 1958.
Roy G. Lindburg has been Chief Financial Officer of the Company and the
Bank since January 1995. He was named Executive Vice President in 2005.
J. Chris Verenes was elected President of the Bank effective January 26,
2004. Prior to that, he held a variety of management positions with
Washington Group International, an engineering and construction company that
manages and operates major government sites throughout the United States for
the Department of Energy. He was Director of Planning and Administration from
2001 to January 2004, Chief of Staff during 2001, Director of Strategic
Programs for the business unit from 2000 to 2001 and Deputy Manager of
Business from 1996 to 2000. Prior to his employment by Washington Group
International, Mr. Verenes served as Controller for Riegel Textile
Corporation, as Director of Control Data and Business and Technology Center,
and as Executive Director of the South Carolina Democratic Party.
21
REGULATION
The following is a brief description of certain laws and regulations which
are applicable to the Company and the Bank. The description of these laws and
regulations, as well as descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to the applicable laws and regulations.
Legislation is introduced from time to time in the United States Congress
that may affect our operations. In addition, the regulations governing us may
be amended from time to time by the OTS. Any such legislation or regulatory
changes in the future could adversely affect us. We cannot predict whether
any such changes may occur.
General
- -------
The Bank, as a federally-chartered savings institution, is subject to
extensive regulation, examination and supervision by the OTS, as its primary
federal regulator, and the FDIC, as its deposits insurer. The Bank is a
member of the FHLB System and its deposit accounts are insured up to
applicable limits by the Deposit Insurance Fund administered by the FDIC. The
Bank must file reports with the OTS and the FDIC concerning its activities and
financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of,
other financial institutions. There are periodic examinations by the OTS and,
under certain circumstances, the FDIC to evaluate the Bank's safety and
soundness and compliance with various regulatory requirements. This
regulatory structure is intended primarily for the protection of the insurance
fund and depositors. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such policies, whether
by the OTS, the FDIC or Congress, could have a material adverse impact on the
Company and the Bank and their operations. The Company, as a savings and loan
holding company, is required to file certain reports with, are subject to
examination by, and otherwise must comply with the rules and regulations of
the OTS. The Company is also subject to the rules and regulations of the SEC
under the federal securities laws. See "-- Savings and Loan Holding Company
Regulations."
Federal Regulation of Savings Institutions
- ------------------------------------------
Office of Thrift Supervision. The OTS has extensive authority over the
operations of savings institutions. As part of this authority, the Bank is
required to file periodic reports with the OTS and is subject to periodic
examinations by the OTS and the FDIC. The OTS also has extensive enforcement
authority over all savings institutions and their holding companies, including
the Bank and the Company. This enforcement authority includes, among other
things, the ability to assess civil money penalties, issue cease-and-desist or
removal orders and initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the
OTS. Except under certain circumstances, public disclosure of final
enforcement actions by the OTS is required.
In addition, the investment, lending and branching authority of the Bank
also are prescribed by federal laws, which prohibit the Bank from engaging in
any activities not permitted by these laws. For example, no savings
institution may invest in non-investment grade corporate debt securities. In
addition, the permissible level of investment by federal institutions in loans
secured by non-residential real property may not exceed 400% of total capital,
except with approval of the OTS. Federal savings institutions are also
generally authorized to branch nationwide. The Bank is in compliance with the
noted restrictions.
All savings institutions are required to pay assessments to the OTS to
fund the agency's operations. The general assessments, paid on a semi-annual
basis, are determined based on the savings institution's total assets,
including consolidated subsidiaries. The Bank's OTS assessment for the fiscal
year ended March 31, 2007 was $144,000.
The Bank's general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus).
At March 31, 2007, the Bank's lending limit under
22
this restriction was $7.7 million and, at that date, the Bank's largest single
loan to one borrower was $7.0 million, which was performing according to its
original terms.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution that fails to comply with these
standards must submit a compliance plan.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs that administer the home financing
credit function of savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of
the FHLB System. It makes loans or advances to members in accordance with
policies and procedures, established by the Board of Directors of the FHLB,
which are subject to the oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient
collateral as determined by the FHLB. In addition, all long-term advances are
required to provide funds for residential home financing. At March 31, 2007,
the Bank had $153.0 million of outstanding advances from the FHLB of Atlanta
under an available credit facility of $221.2 million, which is limited to
available collateral. See Business - Sources of Funds - Borrowings.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Atlanta. At March 31, 2007, the Bank had $8.2 million in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past two fiscal
years these dividends have averaged 5.14% and were 5.83% for the fiscal year
ended March 31, 2007.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low- and
moderately-priced housing programs through direct loans or interest subsidies
on advances targeted for community investment and low- and moderate-income
housing projects. These contributions have affected adversely the level of
FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of the Bank's FHLB stock may result in a
corresponding reduction in the Bank's capital.
Federal Deposit Insurance Corporation. The Bank's deposits are insured up
to applicable limits by the Deposit Insurance Fund of the FDIC. The Deposit
Insurance Fund is the successor to the Bank Insurance Fund and the Savings
Association Insurance Fund, which were merged effective March 31, 2006. As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a serious risk to
the insurance fund. The FDIC also has the authority to initiate enforcement
actions against savings institutions, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines
that the institution has engaged in unsafe or unsound practices or is in an
unsafe or unsound condition.
The FDIC recently amended its risk-based assessment system for 2007 to
implement authority granted by the Federal Deposit Insurance Reform Act of
2005, which was enacted in 2006 ("Reform Act"). Under the revised system,
insured institutions are assigned to one of four risk categories based on
supervisory evaluations, regulatory capital levels and certain other factors.
An institution's assessment rate depends upon the category to which it is
assigned. Risk category I, which contains the least risky depository
institutions, is expected to include more than 90% of all institutions.
Unlike the other categories, Risk Category I contains further risk
differentiation based on the FDIC's analysis of financial ratios, examination
component ratings and other information. Assessment rates are determined by
the FDIC and currently range from five to seven basis points for the
healthiest institutions (Risk Category I) to 43 basis points of assessable
deposits for the riskiest (Risk Category IV). The FDIC may adjust rates
uniformly from one quarter to the next, except that no single adjustment can
exceed three basis points. No institution may pay a dividend if in default of
the FDIC assessment.
The Reform Act also provided for a one-time credit for eligible
institutions based on their assessment base as of December 31, 1996. Subject
to certain limitations with respect to institutions that are exhibiting
weaknesses, credits can be used to offset assessments until exhausted. The
Bank's one-time credit is expected to be approximately $235,000.
23
The Reform Act also provided for the possibility that the FDIC may pay
dividends to insured institutions once the Deposit Insurance Fund reserve
ratio equals or exceeds 1.35% of estimated insured deposits.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation to recapitalize a predecessor deposit insurance fund. This
payment is established quarterly and during the calendar year ending March 31,
2007 averaged 1.22 basis points of assessable deposits.
The Reform Act provided the FDIC with authority to adjust the Deposit
Insurance Fund ratio to insured deposits within a range of 1.15% and 1.50%, in
contrast to the prior statutorily fixed ratio of 1.25%. The ratio, which is
viewed by the FDIC as the level that the fund should achieve, was established
by the agency at 1.25% for 2007.
The FDIC has authority to increase insurance assessments. A significant
increase in insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank. There can be no
prediction as to what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS.
Management of the Bank is not aware of any practice, condition or violation
that might lead to termination of the Bank's deposit insurance.
Capital Requirements. The OTS's capital regulations require federal
savings institutions to meet three minimum capital standards: a 1.5% tangible
capital to total assets ratio, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS examination rating system) and an
8% risk-based capital ratio. In addition, the prompt corrective action
standards discussed below also establish, in effect, a minimum 2% tangible
capital standard, a 4% leverage ratio (3% for institutions receiving the
highest rating on the CAMELS system) and, together with the risk-based capital
standard itself, a 4% Tier I risk-based capital standard. The OTS regulations
also require that, in meeting the tangible, leverage and risk-based capital
standards, institutions must generally deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank.
The risk-based capital standard requires federal savings institutions to
maintain Tier I (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, recourse obligations, residual
interests and direct credit substitutes, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the
risks believed inherent in the type of asset. Core (Tier I) capital is
defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships.
The components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets and up to
45% of unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The OTS also has authority to establish individual minimum capital
requirements in appropriate cases upon a determination that an institution's
capital level is or may become inadequate in light of the particular
circumstances. At March 31, 2007, the Bank met each of these capital
requirements. For additional information, see Note 13 of the Notes to
Consolidated Financial Statements included in the Annual Report.
Prompt Corrective Action. The OTS is required to take certain supervisory
actions against undercapitalized savings institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, an
institution that has a ratio of total capital to risk-weighted assets of less
than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than
4%, or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
"undercapitalized." An institution that has a total risk-based capital ratio
less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio that
is less than 3% is considered to
24
be "significantly undercapitalized" and an institution that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the OTS is required to
appoint a receiver or conservator for a savings institution that is
"critically undercapitalized." OTS regulations also require that a capital
restoration plan be filed with the OTS within 45 days of the date a savings
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. "Significantly undercapitalized" and "critically undercapitalized"
institutions are subject to more extensive mandatory regulatory actions. The
OTS also could take any one of a number of discretionary supervisory actions,
including the issuance of a capital directive and the replacement of senior
executive officers and directors.
At March 31, 2007, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS.
Qualified Thrift Lender Test. All savings institutions, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
institution to have at least 65% of its total assets, as defined by
regulation, in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. As an alternative, the savings
institution may maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code. Under either test, such
assets primarily consist of residential housing related loans and investments.
A savings institution that fails to meet the QTL is subject to certain
operating restrictions and may be required to convert to a national bank
charter. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered "qualified thrift
investments." As of March 31, 2007, the Bank maintained 91.2% of its portfolio
assets in qualified thrift investments and, therefore, met the qualified
thrift lender test.
Limitations on Capital Distributions. OTS regulations impose various
restrictions on savings institutions with respect to their ability to make
distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account. Generally, savings institutions, such as the Bank, that before and
after the proposed distribution are well-capitalized, may make capital
distributions during any calendar year equal to up to 100% of net income for
the year-to-date plus retained net income for the two preceding years.
However, an institution deemed to be in need of more than normal supervision
by the OTS may have its dividend authority restricted by the OTS. The Bank
may pay dividends to the Company in accordance with this general authority.
Savings institutions proposing to make any capital distribution need not
submit written notice to the OTS prior to such distribution unless they are a
subsidiary of a holding company or would not remain well-capitalized following
the distribution. Savings institutions that do not, or would not meet their
current minimum capital requirements following a proposed capital distribution
or propose to exceed these net income limitations, must obtain OTS approval
prior to making such distribution. The OTS may object to the distribution
during that 30-day period based on safety and soundness concerns. See "
Capital Requirements."
Activities of Savings Institutions and their Subsidiaries. When a savings
institution establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that it controls, the savings institution must
notify the FDIC and the OTS 30 days in advance and provide the information
each agency may, by regulation, require. Savings institutions also must
conduct the activities of subsidiaries in accordance with existing regulations
and orders.
The OTS may determine that the continuation by a savings institution of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the institution or is
inconsistent with sound banking practices or with the purposes of the Federal
Deposit Insurance Act. Based upon that determination, the FDIC or the OTS has
the authority to order the savings institution to divest itself of control of
the subsidiary. The FDIC also may determine by regulation or order that any
specific activity poses a serious threat to the Deposit Insurance Fund. If
so, it may require that no member of the Deposit Insurance Fund engage in that
activity directly.
25
Transactions with Affiliates. The Bank's authority to engage in
transactions with "affiliates" is limited by OTS regulations and by Sections
23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve
Board's Regulation W. The term "affiliates" for these purposes generally
means any company that controls or is under common control with an
institution. The Company and its non-savings institution subsidiaries are
affiliates of the Bank. In general, transactions with affiliates must be on
terms that are as favorable to the institution as comparable transactions with
non-affiliates. In addition, certain types of transactions are restricted to
an aggregate percentage of the institution's capital. Collateral in specified
amounts must usually be provided by affiliates in order to receive loans from
an institution. In addition, savings institutions are prohibited from lending
to any affiliate that is engaged in activities that are not permissible for
bank holding companies and no savings institution may purchase the securities
of any affiliate other than a subsidiary.
The Sarbanes-Oxley Act of 2002 generally prohibits a company from making
loans to its executive officers and directors. However, there is a specific
exception for loans by a depository institution to its executive officers and
directors in compliance with federal banking laws. Under such laws, the
Bank's authority to extend credit to executive officers, directors and 10%
stockholders ("insiders"), as well as entities such persons control, is
limited. The law restricts both the individual and aggregate amount of loans
the Bank may make to insiders based, in part, on the Bank's capital position
and requires certain Board approval procedures to be followed. Such loans
must be made on terms substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of repayment. There is
an exception for loans made pursuant to a benefit or compensation program that
is widely available to all employees of the institution and does not give
preference to insiders over other employees. There are additional
restrictions applicable to loans to executive officers.
Community Reinvestment Act. Under the Community Reinvestment Act, every
FDIC-insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
Community Reinvestment Act does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the Community
Reinvestment Act. The Community Reinvestment Act requires the OTS, in
connection with its examination of the Bank, to assess the institution's
record of meeting the credit needs of its community and to take such record
into account in its evaluation of certain applications, such as a merger or
the establishment of a branch, by the Bank. An unsatisfactory rating may be
used as the basis for the denial of an application by the OTS. Due to the
heightened attention being given to the Community Reinvestment Act in the past
few years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was examined for Community
Reinvestment Act compliance and received a rating of satisfactory in its
latest examination.
Affiliate Transactions. The Company and the Bank are separate and
distinct legal entities. Various legal limitations restrict the Bank from
lending or otherwise supplying funds to the Company, generally limiting any
single transaction to 10% of the Bank's capital and surplus and limiting all
such transactions to 20% of the Bank's capital and surplus. These
transactions also must be on terms and conditions consistent with safe and
sound banking practices that are substantially the same as those prevailing at
the time for transactions with unaffiliated companies.
Federally insured savings institutions are subject, with certain
exceptions, to certain restrictions on extensions of credit to their parent
holding companies or other affiliates, on investments in the stock or other
securities of affiliates and on the taking of such stock or securities as
collateral from any borrower. In addition, these institutions are prohibited
from engaging in certain tie-in arrangements in connection with any extension
of credit or the providing of any property or service.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring action against all
"institution-affiliated parties," including shareholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1.1 million
per day in especially egregious cases. The FDIC has the authority to
recommend to the Director of the OTS that enforcement action be taken with
respect to a
26
particular savings institution. If action is not taken by the Director, the
FDIC has authority to take such action under certain circumstances. Federal
law also establishes criminal penalties for certain violations.
Standards for Safety and Soundness. As required by statute, the federal
banking agencies have adopted Interagency Guidelines prescribing Standards for
Safety and Soundness. The guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address
problems at insured depository institutions before capital becomes impaired.
If the OTS determines that a savings institution fails to meet any standard
prescribed by the guidelines, it may require the institution to submit an
acceptable plan to achieve compliance with the standard.
Environmental Issues Associated with Real Estate Lending. The
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), a federal statute, generally imposes strict liability on all prior
and present "owners and operators" of sites containing hazardous waste.
However, Congress asked to protect secured creditors by providing that the
term "owner and operator" excludes a person whose ownership is limited to
protecting its security interest in the site. Since the enactment of the
CERCLA, this "secured creditor exemption" has been the subject of judicial
interpretations which have left open the possibility that lenders could be
liable for cleanup costs on contaminated property that they hold as collateral
for a loan.
To the extent that legal uncertainty exists in this area, all creditors,
including the Bank, that have made loans secured by properties with potential
hazardous waste contamination (such as petroleum contamination) could be
subject to liability for cleanup costs, which costs often substantially exceed
the value of the collateral property.
Privacy Standards. The Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 ("GLBA"), modernized the financial services industry
by establishing a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms and other financial
service providers. The Bank is subject to OTS regulations implementing the
privacy protection provisions of the GLBA. These regulations require the Bank
to disclose its privacy policy, including identifying with whom it shares
"non-public personal information," to customers at the time of establishing
the customer relationship and annually thereafter.
Anti-Money Laundering and Customer Identification. Congress enacted the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act") in
response to the terrorist events of September 11, 2001. The USA Patriot Act
gives the federal government new powers to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers, increased
information sharing, and broadened anti-money laundering requirements. In
March 2006, Congress re-enacted certain expiring provisions of the USA Patriot
Act.
Savings and Loan Holding Company Regulation
- -------------------------------------------
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight of the OTS. Accordingly, the Company is
required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
present a serious risk to the Bank.
Mergers and Acquisitions. The Company must obtain approval from the OTS
before acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company or acquiring such an
institution or holding company by merger, consolidation or purchase of its
assets. In evaluating an application for the Company to acquire control of a
savings institution, the OTS would consider the financial and managerial
resources and future prospects of the Company and the target institution, the
effect of the acquisition on the risk to the insurance fund, the convenience
and the needs of the community and competitive factors.
Activities Restrictions. The Company and its non-savings institution
subsidiaries are subject to statutory and regulatory restrictions on their
business activities specified by federal regulations, which include performing
services and holding properties used by a savings institution subsidiary,
activities authorized for savings and loan holding
27
companies as of March 5, 1987, and non-banking activities permissible for bank
holding companies pursuant to the Bank Holding Company Act of 1956 or
authorized for financial holding companies pursuant to the GLBA.
If the Bank fails the QTL test, the Company must, within one year of that
failure, register as, and will become subject to, the restrictions applicable
to bank holding companies. See " Federal Regulation of Savings Institutions
Qualified Thrift Lender Test."
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley Act") was signed into law in response to public concerns
regarding corporate accountability in connection with several accounting
scandals. The stated goals of the Sarbanes-Oxley Act are to increase
corporate responsibility, to provide for enhanced penalties for accounting and
auditing improprieties at publicly traded companies and to protect investors
by improving the accuracy and reliability of corporate disclosures pursuant to
the securities laws. The Sarbanes-Oxley Act generally applies to all
companies, both U.S. and non-U.S., that file or are required to file periodic
reports with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934, including the Company.
The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules, and required the SEC and
securities exchanges to adopt extensive additional disclosure, corporate
governance and related rules. The Sarbanes-Oxley Act represents significant
federal involvement in matters traditionally left to state regulatory systems,
such as the regulation of the accounting profession, and to state corporate
law, such as the relationship between a board of directors and management and
between a board of directors and its committees.
TAXATION
Federal Taxation
- ----------------
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income. The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on
the Bank's actual loss experience, or a percentage equal to 8% of the Bank's
taxable income, computed with certain modifications and reduced by the amount
of any permitted additions to the non-qualifying reserve. Due to the Bank's
loss experience, the Bank generally recognized a bad debt deduction equal to
8% of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new rules
eliminated the 8% of taxable income method for deducting additions to the tax
bad debt reserves for all thrifts for tax years beginning after December 31,
1995. These rules also required that all institutions recapture all or a
portion of their bad debt reserves added since the base year (last taxable
year beginning before January 1, 1988). The Bank has no post-1987 reserves
subject to recapture. For taxable years beginning after December 31, 1995,
the Bank's bad debt deduction has been determined under the experience method
using a formula based on actual bad debt experience over a period of years.
The unrecaptured base year reserves will not be subject to recapture as long
as the Bank continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to provisions
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Company, these distributions will be considered to
result in distributions from the balance of its bad debt reserve as of
December 31, 1987 (or a lesser amount if the Bank's loan portfolio decreased
since December 31, 1987) and then from the supplemental reserve for losses on
loans ("Excess Distributions"), and an amount based on the Excess
Distributions will be included
28
in the Bank's taxable income. Nondividend distributions include distributions
in excess of the Bank's current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of the Bank's current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not
be considered to result in a distribution from the Bank's bad debt reserve.
The amount of additional taxable income created from an Excess Distribution is
an amount that, when reduced by the tax attributable to the income, is equal
to the amount of the distribution. Thus, if, after the Conversion, the Bank
makes a "nondividend distribution," then approximately one and one-half times
the Excess Distribution would be includable in gross income for federal income
tax purposes, assuming a 34% corporate income tax rate (exclusive of state and
local taxes). See "Regulation Federal Regulation of Savings Institutions
Limitations on Capital Distributions" for limits on the payment of dividends
by the Bank. The Bank does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Bank, whether or
not an Alternative Minimum Tax is paid.
Dividends-Received Deduction. The Company may exclude from its income
100% of dividends received from the Bank as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
Audits. The Company, the Bank and its consolidated subsidiaries have been
audited or their books closed without audit by the IRS with respect to
consolidated federal income tax returns through March 31, 1999. See Note 12
of the Notes to Consolidated Financial Statements contained in the Annual
Report for additional information regarding income taxes.
State Taxation
- --------------
South Carolina has adopted the Internal Revenue Code as it relates to
savings banks, effective for taxable years beginning after December 31, 1986.
The Bank is subject to South Carolina income tax at the rate of 6%. The Bank
has not been audited by the State of South Carolina during the past five
years.
The Company's income tax returns have not been audited by federal or state
authorities within the last five years. For additional information regarding
income taxes, see Note 12 of the Notes to Consolidated Financial Statements
contained in the Annual Report.
Item 1A. Risk Factors.
An investment in our common stock involves various risks which are
particular to Security Federal Corporation, our industry, and our market area.
Before making an investment decision, you should carefully consider the risks
and uncertainties described below, together with all of the other information
included in this report. In addition to the risks and uncertainties described
below, other risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially and adversely affect our
business, financial condition and results of operations. The value or market
price of our common stock could decline due to any of these identified or
other risks, and you could lose all or part of your investment.
29
An economic downturn, especially one affecting Aiken and Lexington Counties in
South Carolina and surrounding areas, could reduce our customer base, our
level of deposits, demand for our financial products, and increase our
delinquency rates on loans.
Unlike larger national or other regional banks that are more
geographically diversified, we provide banking and financial services to
customers located primarily in two counties of South Carolina. Our success
depends on the growth in population, income levels, deposits, and housing
starts in our primary market area. If the communities in our market area do
not continue to expand, our business may not succeed. A local economic
downturn could adversely affect the real estate markets in the communities in
our market area, which would increase our loan losses on residential and
commercial real estate. In that case, our allowance for loan losses may not
be adequate, which would negatively impact our earnings. Further, a
significant decline in general economic conditions, caused by inflation,
recession, acts of terrorism, outbreak of hostilities or other international
or domestic occurrences, unemployment, changes in securities markets or other
factors could impact these state and local markets and, in turn, also have a
material adverse effect on our financial condition and results of operations.
Our loan portfolio in Lexington County and surrounding area is relatively
unseasoned. We also plan to build a branch office in Evans, Georgia, which is
another new lending area. We could experience higher than normal loan losses
in newer loan markets.
Although we have hired experienced lending officers in Lexington County,
that market area is relatively new to us. Many of our loans in that market
are acquisition and development loans and loans to builders for speculative
housing, which have a higher degree of risk than single family permanent
mortgage loans. Although we have not had increased delinquencies in that
market, we have not experienced an economic cycle of declining real estate
values in Lexington County. We also plan to enter the metro Augusta, Georgia
market by opening a branch in Evans, which will be a new market area for us.
We plan on hiring experienced lenders, although this may be difficult because
competition for experienced commercial lenders is fierce. Because these
market areas are new to us, we may experience increased loan losses that would
require additional reserves and which would negatively impact our earnings.
Fluctuations in interest rates could reduce our profitability and affect the
value of our assets.
Our profitability depends substantially upon our net interest income. Net
interest income is the difference between the interest earned on loans and
investments and interest paid on deposits and borrowings. Market interest
rates for loans and deposits are highly sensitive to competition for these
products. We expect that we will periodically experience imbalances in the
interest rate sensitivities of our assets and liabilities and the
relationships of various interest rates to each other. Over any period of
time, our interest-earning assets may be more sensitive to changes in market
interest rates than our interest-bearing liabilities, or vice versa. In
addition, the individual market interest rates underlying our loan and deposit
products may not change to the same degree over a given time period. In any
event, if market interest rates should move contrary to our position, our
earnings may be negatively affected. In addition, loan volume and quality and
deposit volume and mix can be affected by market interest rates. Changes in
levels of market interest rates could materially adversely affect our net
interest spread, asset quality, origination volume and overall profitability.
Interest rates have recently been at historically low levels. However,
since March 31, 2004, the U.S. Federal Reserve has increased its target for
the federal funds rate seventeen times, from 1.00% to 5.25%. While these
short-term market interest rates (which we use as a guide to price our
deposits) have increased, the pricing of our loans have more than offset the
rise in funding cost. In a sustained rising interest rate environment, the
asset yields are expected to closely match rising funding costs. A sustained
falling interest rate environment would negatively impact margins.
Opportunities to reduce non-maturity deposit rates become more difficult to
realize in a protracted decline in rates, while asset yields come under
constant pressure. We principally manage interest rate risk by managing our
volume and mix of our earning assets and funding liabilities. In a changing
interest rate environment, we may not be able to manage this risk effectively.
If we are unable to manage interest rate risk effectively, our business,
financial condition and results of operations could be materially harmed.
30
An inadequate allowance for loan losses would reduce our earnings.
We are exposed to the risk that our borrowers will be unable to repay
their loans according to their terms and that any collateral securing the
payment of their loans will not be sufficient to assure full repayment.
Credit losses are inherent in the lending business and could have a material
adverse effect on our operating results. Volatility and deterioration in the
economy may also increase our risk for credit losses. We evaluate the
collectibility of our loan portfolio and provide an allowance for loan losses
that we believe is adequate based upon such factors as:
* cash flow of the borrower and/or the project being financed;
* in the case of a collateralized loan, the changes and uncertainties
as to the future value of the collateral;
* the credit history of a particular borrower;
* changes in economic and industry conditions; and
* the duration of the loan.
If our evaluation is incorrect and borrower defaults cause losses
exceeding our allowance for loan losses, our earnings could be materially and
adversely affected. We cannot assure you that our allowance will be adequate
to cover loan losses inherent in our portfolio. We may experience losses in
our loan portfolio or perceive adverse trends that require us to significantly
increase our allowance for loan losses in the future, which would also reduce
our earnings. In addition, Security Federal Bank's regulators, as an integral
part of their examination process, may require us to make additional
provisions for loan losses.
Our funding sources may prove insufficient to replace deposits and support our
future growth.
We rely on customer deposits and advances from the FHLB of Atlanta and
other borrowings to fund our operations. Although we have historically been
able to replace maturing deposits and advances if desired, no assurance can be
given that we would be able to replace such funds in the future if our
financial condition or the financial condition of the FHLB or market
conditions were to change. Our financial flexibility will be severely
constrained if we are unable to maintain our access to funding or if adequate
financing is not available to accommodate future growth at acceptable interest
rates. Finally, if we are required to rely more heavily on more expensive
funding sources to support future growth, our revenues may not increase
proportionately to cover our costs. In this case, our profitability would be
adversely affected.
Competition with other financial institutions could adversely affect our
profitability.
The banking and financial services industry is very competitive. Legal
and regulatory developments have made it easier for new and sometimes
unregulated competitors to compete with us. Consolidation among financial
service providers has resulted in fewer very large national and regional
banking and financial institutions holding a large accumulation of assets.
These institutions generally have significantly greater resources, a wider
geographic presence or greater accessibility. Our competitors may be able to
offer more services, more favorable pricing or greater customer convenience
than we do. In addition, our competition has grown from new banks and other
financial services providers that target our existing or potential customers.
As consolidation continues among large banks, we expect additional
institutions to try to exploit our market.
Technological developments have allowed competitors, including some
non-depository institutions, to compete more effectively in local markets and
have expanded the range of financial products, services and capital available
to our target customers. If we are unable to implement, maintain and use such
technologies effectively, we may not be able to offer products or achieve
cost-efficiencies necessary to compete in our industry. In addition, some of
these competitors have fewer regulatory constraints and lower cost structures.
31
We are exposed to a failure or breach of our technology.
As a financial services company, we are heavily dependent on our core
processing system and computer networks to conduct our business. Although we
have policies and procedures designed to prevent or limit the effect of the
failure, interruption or security breach of our information systems, there can
be no assurance that any such failures, interruptions or security breaches
will not occur or, if they do occur, that they will be adequately addressed.
The occurrence of any failures, interruptions or security breaches of our
information systems could damage our reputation, result in a loss of customer
business, subject us to additional regulatory scrutiny, or expose us to civil
litigation and possible financial liability, any of which could have a
material adverse effect on our financial condition and results of operations.
Although we do our own core bank processing in-house, we rely on
third-party service providers for much of our communications, information,
operating and financial control systems technology. If any of our third-party
service providers experience financial, operational or technological
difficulties, or if there is any other disruption in our relationships with
them, we may be required to locate alternative sources of such services, and
we cannot assure that we could negotiate terms that are as favorable to us, or
could obtain services with similar functionality, as found in our existing
systems, without the need to expend substantial resources, if at all. Any of
these circumstances could have an adverse effect on our business.
Our ability to pay dividends is limited and we may be unable to pay future
dividends. This could lead to appreciation of our common stock price as the
sole return on an investor's investment.
Security Federal Corporation is a separate and distinct legal entity from
its subsidiaries. We receive substantially all of our revenue from dividends
from Security Federal Bank. These dividends are the principal source of funds
to pay dividends on our common stock and interest and principal on our debt.
Various federal and/or state laws and regulations limit the amount of
dividends that Security Federal Bank may pay us. Also, our right to
participate in a distribution of assets upon a subsidiary's liquidation or
reorganization is subject to the prior claims of the subsidiary's creditors.
In the event Security Federal Bank is unable to pay dividends to us, we may
not be able to service our debt, pay obligations or pay dividends on our
common stock. The inability to receive dividends from Security Federal Bank
could have a material adverse effect on our business, financial condition and
results of operations. Thus, no assurances can be made that we will continue
to increase or even pay our quarterly dividend.
We may need to raise capital to support our growth. We may not be able to
raise capital at the time we need it.
In order to sustain the high rate of growth we have experienced during the
past few years, we may need to raise additional capital in the near future.
Although there are various ways to raise capital, those methods may not be
available at the time we need to raise additional capital. In the event we
are unable to raise the capital we need, our growth, and future earnings,
would be curtailed.
The integration of the Collier Jennings Companies may be difficult, which
could have a negative impact on earnings.
We recently acquired the Collier Jennings Companies, a local insurance
agency. The integration of the Collier-Jennings Companies may be difficult
and may cause us not to realize expected revenue increases, cost savings,
increases in geographic or product presence, and/or other projected benefits
from the acquisition. The process of integrating operations could cause an
interruption of, or loss of momentum in, the activities of our business. The
diversion of management's attention and any delays or difficulties encountered
in connection with the acquisition could have an adverse effect on our
business and results of operations following the acquisition or otherwise
adversely affect our ability to achieve the anticipated benefits of the
acquisition.
We are subject to extensive regulation from numerous governmental agencies,
which could restrict our activities and impose financial requirements or
limitations on the conduct of our business.
We are subject to extensive federal and state regulation and supervision,
primarily through Security Federal Bank. Banking regulations are primarily
intended to protect depositors' funds, the federal deposit insurance fund and
32
the banking system as a whole, not shareholders. These regulations affect our
lending practices, capital structure, investment practices, dividend policy
and growth, among other things. Congress and federal regulatory agencies
continually review banking laws, regulations and policies for possible
changes. Changes to statutes, regulations or regulatory policies, including
changes in interpretation or implementation of statutes, regulations or
policies, could affect us in substantial and unpredictable ways. Such changes
could subject us to additional costs, limit the types of financial services
and products we may offer and/or increase the ability of non-banks to offer
competing financial services and products, among other things. Failure to
comply with laws, regulations or policies could result in sanctions by
regulatory agencies, civil money penalties and/or reputation damage, which
could have a material adverse effect on our business, financial condition and
results of operations. While we have policies and procedures designed to
prevent any such violations, there can be no assurance that such violations
will not occur.
We are dependent on key individuals, and the loss of one or more of these key
individuals could limit our growth and adversely affect earnings.
Timothy W. Simmons, our Chief Executive Officer, is a very experienced
banker and has long-standing ties to our community. The loss of Mr. Simmons,
or other key personnel, could have a negative impact on earnings. The
competition for seasoned, experienced, banking personnel is highly competitive
in South Carolina. The cost of attaining and retaining these individuals
could increase in the future, which would negatively impact our operations.
Our success depends on our ability to continue to attract, manage and retain
other qualified personnel as we grow. We cannot assure you that we will
continue to attract or retain such personnel.
Changes in accounting standards may affect our performance.
Our accounting policies and methods are fundamental to how we record and
report our financial condition and results of operations. From time to time
there are changes in the financial accounting and reporting standards that
govern the preparation of our financial statements. These changes can be
difficult to predict and can materially impact how we report and record our
financial condition and results of operations. In some cases, we could be
required to apply a new or revised standard retroactively, resulting in
restating prior period financial statements.
Our recent results may not be indicative of future results, and may not be an
adequate measure of the risk of investing in our stock.
We may not be able to sustain our historical growth rate or our recent
growth rates in loans and deposits. If we are unable to sustain our growth,
this would negatively affect our earnings and the value of our common stock.
Item 2. Properties
----------
At March 31, 2007, Security Federal owned the buildings and land for six
of its branch offices, and the operations center, leased the land and owned
the improvements thereon for two of its offices, and leased the remaining five
offices, including its main office. The Company also leased three offices for
Security Federal Insurance/Collier Jennings. The property related to the
offices owned by Security Federal had a depreciated cost (including land) of
approximately $5.8 million at March 31, 2007. At March 31, 2007, the
aggregate net book value of leasehold improvements (excluding furniture and
equipment) associated with leased premises was $2.9 million. In addition to
the properties related to current Company offices, Security Federal owned six
other properties at March 31, 2007. Three lots owned for future branch sites,
one in Aiken County, South Carolina, one in Lexington County, South Carolina,
and the other in Richland County, South Carolina, had a combined book value of
$2.2 million. Another property, in Columbia County, Georgia, which is
currently under construction for a future branch location in Evans, Georgia,
had a book value (construction in process and land) of approximately $1.9
million at March 31, 2007. The branch is expected to be open in December
2007. Another lot in Aiken County, to be used for a possible new Operations
Center, had a book value of $236,000. The other property consisting of land
and a building, located adjacent to the 1705 Whiskey Road office, is currently
leased and had a book value of approximately $202,000 at March 31, 2007. See
Note 6 of the Notes to Consolidated Financial Statements contained in the
Annual Report.
33
The following table sets forth the net book value of the offices owned
(including land) and leasehold
improvements on properties leased by Security Federal at March 31, 2007.
Lease Date
Expir- Facility Gross
Owned or ation Opened/ Square Net Book
Location Leased Date Acquired Footage Value
- ---------------------------- ------ ----- -------- ------- --------
Main Office:
238 Richland Avenue, W. Leased 2016 2006 3,840 $834,000
Aiken, South Carolina
Full Service Branch Offices
100 Laurens Street, N.W. Leased 2016 1959 3,840 838,000
Aiken, South Carolina
1705 Whiskey Road S. Owned N/A 1980 10,000 864,000
Aiken, South Carolina
313 East Martintown Road Owned (1) N/A 1973 4,356 567,000
North Augusta, South Carolina
1665 Richland Avenue, W. Owned N/A 1984 1,942 263,000
Aiken, South Carolina
Montgomery & Canal Streets Leased 2007 1993 (2) 3,576 246,000
Masonic Shopping Center
Graniteville, South Carolina
2812 Augusta Road Owned N/A 1993 (2) 2,509 97,000
Langley, South Carolina
Highway 125 and Highways 1 Leased 2008 1993 (2) 2,287 25,000
and 78
Midland Valley Shopping Center
Clearwater, South Carolina
118 Main Street North Owned N/A 1993 (2) 3,600 194,000
Wagener, South Carolina
1185 Sunset Boulevard Leased 2015 2000 10,000 610,000
West Columbia, South Carolina
2587 Whiskey Road Owned N/A 2006 4,000 1,555,000
Aiken, South Carolina
5446 Sunset Boulevard Owned (3) N/A 2003 9,200 1,527,000
Lexington, South Carolina
Operations Center:
871 East Pine Log Road Owned N/A 1988 10,000 752,000
Aiken, South Carolina
(table continued on the following page)
34
Lease Date
Expir- Facility Gross
Owned or ation Opened/ Square Net Book
Location Leased Date Acquired Footage Value
- ---------------------------- ------ ----- -------- ------- --------
Insurance Investments & Trust Leased 2016 2006 1,948 291,000
Offices
234 Richland Avenue, West
Aiken, South Carolina
Insurance Office & Insurance Leased 2011 2006 4,600 32,000
Operations Center
517-521 Belvedere Clearwater Road
North Augusta, South Carolina
Insurance Office Leased 2008 2006 1,500 --
1557 F. Gordon Highway
Augusta, Georgia
- -----------
(1) Security Federal has a lease on the land for trust of which expires in
2023, but has options through 2063.
(2) Represents acquisition date.
(3) Security Federal has a lease on the land for this office which expires in
2018, but has options through 2063.
Item 3. Legal Proceedings
-----------------
The Company is involved as plaintiff or defendant in various legal actions
arising in the course of its business. It is the opinion of management, after
consultation with counsel, that the resolution of these legal actions will not
have a material adverse effect on the Company's financial condition and
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended March 31, 2007.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
------------------------------------------------------------------
The information contained in the section captioned "Shareholders
Information Price Range of Common Stock" and " Dividends" in the Annual
Report is incorporated herein by reference.
Stock Repurchases. The following table sets forth the Company's
repurchases of its outstanding common stock during the fourth quarter of the
year ended March 31, 2007.
35
Total Number
of Shares Maximum
Purchased as Number
Total Part of of Shares that
Number of Average Publicly May Yet Be
Shares Price Paid Announced Purchased
Period Purchased per Share Plans Under the Plans
- ---------------- ----------- ------------ ------------ -----------------
January 1 -
January 31...... 6,476 $23.79 6,476 99,659
February 1 -
February 28..... -- -- -- --
March 1 -
March 31........ 2,485 24.15 2,485 97,174
------- ------- ------- -------
Total............ 8,961 $23.89 8,961 97,174
======= ======= ======= =======
These stock repurchases are being conducted pursuant to a repurchase
program announced by the Company in May 2004, for the purchase of up to 5% of
its outstanding shares, or approximately 126,000 shares, subject to market
conditions.
Equity Compensation Plan Information. The equity compensation plan
information presented under subparagraph (d) in Part III, Item 12 of this
report is incorporated herein by reference.
Performance Graph. The following graph compares the cumulative total
shareholder return on the Company's Common Stock with the cumulative total
return on the NASDAQ Composite Index and a peer group of the SNL All Thrift
Index. Total return assumes the reinvestment of all dividends and that the
value of Common Stock and each index was $100 on March 31, 2002.
[PERFORMANCE GRAPH APPEARS HERE]
Period Ending
------------------------------------------------------------
Index 03/31/02 03/31/03 03/31/04 03/31/05 03/31/06 03/31/07
- ---------------- ---------- -------- -------- -------- -------- --------
Security Federal
Corporation $100.00 93.49 97.54 107.38 113.99 117.53
NASDAQ Composite 100.00 72.68 108.07 108.34 126.79 131.23
SNL Thrift Index 100.00 111.47 165.58 162.76 183.33 193.84
36
Item 6. Selected Financial Data
-----------------------
The information contained in the section captioned "Selected Consolidated
Financial and Other Data" in the Annual Report is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Market risk is the risk of loss from adverse changes in market prices and
rates. Our market risk arises principally from interest rate risk inherent in
our lending, investing, deposit and borrowings activities. Management
actively monitors and manages its interest rate risk exposure. In addition to
other risks that we manage in the normal course of business, such as credit
quality and liquidity, management considers interest rate risk to be a
significant market risk that could have a potentially have a material effect
on our financial condition and result of operations. The information
contained in the section captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operations Asset and Liability
Management" in the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Report of Independent and Registered Accounting Firm*
Consolidated Balance Sheets, March 31, 2007 and 2006*
Consolidated Statements of Income For the Years Ended March 31, 2007, 2006
and 2005*
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income For the Years Ended March 31, 2007, 2006 and 2005*
Consolidated Statements of Cash Flows For the Years Ended March 31, 2007,
2006 and 2005* Notes to Consolidated Financial Statements*
Quarterly Financial Data (unaudited)*
* Contained in the Annual Report filed as an exhibit hereto and
incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
---------------------------------------------------------------
None.
Item 9A. Controls and Procedures
-----------------------
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of
the Company's disclosure controls and procedures (as defined in Section
13a-15(e) of the Securities Exchange Act of 1934 (the "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
report. The Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures as currently
in effect are effective in ensuring that the information required to be
disclosed by the Company in the reports it files or submits under the Act is
(i) accumulated and communicated to the Company's management (including the
Chief Executive Officer and Chief Financial Officer) in a timely manner, and
(ii) recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
(b) Changes in Internal Controls: In the year ended March 31, 2007, 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.
37
Item 9B. Other Information
-----------------
There was no information to be disclosed by the Company in a report on
Form 8-K during the fourth quarter of fiscal 2007 that was not so disclosed.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
------------------------------------------------------
The information contained under the section captioned " Proposal 1 -
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
For information regarding the executive officers of the Company and the
Bank, see the information contained herein under the section captioned "Item
1. Business - Personnel - Executive Officers of the Registrant."
Audit Committee Financial Expert. The Audit Committee of the Company is
composed of Directors Harry O. Weeks (Chairperson), Clyburn and Moore. Each
member of the Audit Committee is "independent" as defined in the Nasdaq Stock
Market listing standards. The Board of Directors has determined there is no
"audit committee financial expert" as defined by the SEC. The Board believes
that the current members of the Audit Committee are qualified to serve based
on their collective experience and background. Each member of the Audit
Committee is independent as that term is used in Rule 10A-3 of the Exchange
Act.
Code of Ethics. The Board of Directors has adopted a Code of Ethics for
the Company's officers (including its senior financial officers), directors
and employees. The Code is applicable to the Company's principal executive
officer and senior financial officers, and requires individuals to maintain
the highest standards of professional conduct. A copy of the Code of Ethics
was filed as and exhibit to the Company's Annual Report on Form 10-K for the
year ended March 31, 2006. The Company has not made the Code of Ethics
available on its website. The Company will provide a copy of the Code of
Ethics free of charge upon request. Requests should be made to: Secretary,
Security Federal Corporation, P.O. Box 810, Aiken, South Carolina 29802.
Compliance with Section 16(a) of the Exchange Act. The information
contained under the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance" is included in the Company's Proxy Statement and is
incorporated herein by reference.
Item 11. Executive Compensation
----------------------
The information contained in the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners.
The information contained in the section captioned "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is
incorporated herein by reference.
(b) Security Ownership of Management.
The information contained in the section captioned "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is
incorporated herein by reference.
38
(c) Changes In Control
The Company is not aware of any arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the Company.
(d) Equity Compensation Plan Information
The following table sets forth certain information with respect to
securities to be issued under the Company's equity compensation plans as of
March 31, 2007.
(c)
Number of
securities
remaining
(a) available for
Number of future issuance
securities (b) under equity
to be issued Weighted-average compensation
upon exercise of exercise price plans (excluding
outstanding of outstanding securities
options, warrants options, warrants reflected in
Plan category and rights and rights column (a))
- -------------------- ----------------- ----------------- ------------------
Equity compensation
plans approved
by security holders:
1999 Stock Option
Plan............ 63,600 $19.75 12,750
2002 Stock Option
Plan............ 22,000 21.29 10,250
2006 Stock Option
Plan............ 14,000 23.06 36,000
Equity compensation
plans not approved by
security holders: N/A N/A N/A
----------------- ----------------- ------------------
Total.......... 99,600 $20.55 59,000
================= ================= ==================
Item 13. Certain Relationships and Related Transactions, and Director
Independence
------------------------------------------------------------
Related Transactions. The information contained in the section captioned
"Meetings and Committees of the Board of Directors and Corporate Governance
Matters - Corporate Governance - Related Party Transactions" in the Proxy
Statement is incorporated herein by reference.
Director Independence. The information contained in the section captioned
"Meetings and Committees of the Board of Directors and Corporate Governance
Matters - Corporate Governance - Director Independence" in the Proxy Statement
is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
--------------------------------------
The information contained under the section captioned "Auditor " is
included in the Company's Proxy Statement and is incorporated herein by
reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
------------------------------------------
(a) 1. Financial Statements.
---------------------
For a list of the financial statements filed as part of this
report see Part II Item 8.
39
2. Financial Statement Schedules.
------------------------------
All schedules have been omitted as the required information is either
inapplicable or contained in the Consolidated Financial Statements or
related Notes contained in the Annual Report filed as an exhibit hereto.
3. 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 1993 Salary Continuation Agreements (4)
10.2 Amendment One to 1993 Salary Continuation Agreements (5)
10.3 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)
13 Annual Report to Stockholders
14 Code of Ethics (9)
21 Subsidiaries of Registrant
23 Consent of Elliott Davis, LLC
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
32 Certification of Chief Executive Officer and Chief Financial
Officer 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 June 29, 2006, as an exhibit to the Company's Annual
Report on Form 10-K and incorporated herein by reference.
40
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: June 26, 2007 By: /s/Timothy W. Simmons
--------------------------------------
Timothy W. Simmons
President, Chief Executive Officer and
Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/Timothy W. Simmons June 26, 2007
------------------------------------
Timothy W. Simmons
President, Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/Roy G. Lindburg
------------------------------------ June 26, 2007
Roy G. Lindburg
Treasurer, Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
By: /s/T.Clifton Weeks June 26, 2007
------------------------------------
T. Clifton Weeks
Chairman of the Board and Director
By:/s/J. Chris Verenes June 26, 2007
-------------------------------------
J. Chris Verenes
President of the Bank and Director of
the Company and the Bank
By:/s/Gasper L. Toole III June 26, 2007
-------------------------------------
Gasper L. Toole III
Director
By:/s/Harry O. Weeks Jr. June 26, 2007
-------------------------------------
Harry O. Weeks Jr.
Director
By:/s/Robert E. Alexander June 26, 2007
-------------------------------------
Robert E. Alexander
Director
By:/s/Thomas L. Moore June 26, 2007
-------------------------------------
Thomas L. Moore
Director
By:/s/William Clyburn June 26, 2007
-------------------------------------
William Clyburn
Director
INDEX TO EXHIBITS
Exhibit Number
- --------------
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Elliott Davis, LLC
31.1 Certification of Chief Executive Officer of Security Federal
Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of Chief Financial Officer of Security Federal
Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Certification of Chief Executive Officer and Chief Financial
Officer of Security Federal Corporation Pursuant to Section 906
of the Sarbanes-Oxley Act
Exhibit 13
Annual Report to Stockholders
ANNUAL REPORT 2007
SECURITY FEDERAL CORPORATION
==============================================================================
MARCH 31, 2007
LETTER TO SHAREHOLDERS
Fellow Shareholders:
In keeping with our conservative but steady growth strategy, Security Federal
Corporation, holding company of Security Federal Bank, is pleased to announce
an increase in earnings for the year ending March 31, 2007. The Company
reported net income of $4.1 million or $1.59 per share (basic) for the year
ending March 31, 2007, an8.2% increase from net income of $3.8 million or
$1.51 per share (basic) for the year ending March 31, 2006. The increase in
net income is a result of a $1.5million increase in net interest income and a
$1.2million increase in non-interest income offset partially by a $2.1 million
increase in general and administrative expenses for the year ending March 31,
2007 when compared to the year ending March 31, 2006.
Total assets at March 31, 2007 were $738.1 million compared to $658.7 million
at March 31, 2006, an increase of 12.1% for the year. Net loans receivable
increased $60.9million or 16.2% to $436.0million at March 31, 2007 from$375.1
million at March 31, 2006. Total deposits were $523.7 million at March 31,
2007 compared to $479.2million at March 31, 2006, an increase of 9.3%. Federal
Home Loan Bank Advances, debentures and other borrowings increased
$27.6million or 20.0% to $166.3million at March 31, 2007 from $138.7 million
at March 31, 2006.
We are pleased to announce that a quarterly dividend of $.07 per share will be
paid on or about June 15, 2007 to shareholders of records as of May 31, 2007.
This is a $.01 increase over the previous quarter and is the sixty-sixth
consecutive quarterly dividend to shareholders since the Bank's conversion in
October of 1987 from a mutual to a stock form of ownership. The dividend was
declared as a result of the Bank's continued profitability.
Security Federal Bank has eleven full service branches located in Aiken,
Clearwater, Graniteville, Langley, Lexington, North Augusta, Wagener, and West
Columbia, South Carolina. Additional financial services are offered through
the Bank's three wholly owned subsidiaries, Security Federal Insurance,
Security Federal Investments, and Security Federal Trust.
Sincerely, Sincerely,
/s/T. Clifton Weeks /s/Timothy W. Simmons
T. Clifton Weeks Timothy W. Simmons
Chairman President & Chief Executive Officer
CONTENTS:
2 Letter to Shareholders
3 Laying the Groundwork
4-6 Financial Highlights
7 Selected Consolidated Financial & Other Data
8 Management's Discussion and Analysis of Financial Condition & Results of
Operations
23 Report of Elliott Davis, LLC, Independent Auditors
24 Consolidated Balance Sheets
25 Consolidated Statements of Income
26 Consolidated Statements of Shareholders' Equity Comprehensive Income
27 Consolidated Statements of Cash Flows
29 Notes to Consolidated Financial Statements
58 Shareholders Information
60 Security Federal Bank Board of Directors
61 Bank Advisory Boards
62 Management Team & Branch Locations
63 Our Locations
2
GROUNDWORK IS BEING LAID FOR THE FUTURE
J. Chris Verenes, President, Security Federal Bank
Branch Investment
While Security Federal is number one in deposits in Aiken County, expanding
into other markets is in our long-term best interest. As a result, we have
branched out into the Midlands' market with the addition of our West Columbia
and Lexington branches. We are currently renovating a building in the Vista
area of downtown Columbia that will open in the fall of this year.
Additionally, we have purchased lots in two of the fastest growing markets in
the Midlands Richland Northeast and Ballentine. These new locations will
begin to provide us with a branch network system in the Midlands which is
important to fully servicing the regional shopping patterns of Midlands'
residents.
We plan to open our first Georgia branch in the fast growing Augusta Evans
market in December of this year. We will be relocating our Clearwater branch
in the next 18 months to a more favorable location that will allow us to
better serve our customers. Expansion of our branch network will pressure our
short-term earnings but improve our performance over the long-term.
Financial Services Investment
In order to diversify our sources of revenue, we continue to build our
Financial Services' subsidiaries. Our Trust and Investment subsidiaries are
establishing an outstanding reputation and continue to grow. Last year, we
merged with the Collier Jennings Insurance Agency and the integration is going
well. This merger enables us to provide automobile insurance, homeowners
insurance and premium financing, in addition to life insurance.
Investments for the Long-Term
During the past year, we continued to make significant capital investments,
increase dividends and repurchase our stock while growing our earnings 8.2%.
We are pleased with the steady and consistent growth of Security Federal, but
must not lose sight of the need to competitively position the corporation for
the next ten years. While there is a tendency for corporations to make
short-term decisions focused on quarterly results, Security Federal has
historically displayed the patience to make sound decisions based on the
long-term interest of our customers, employees and stockholders. We will
continue to patiently balance our near-term needs and goals in tandem with the
necessary long-term investments that we believe are critical to Security
Federal's future success. This philosophy should continue to serve us well
just as it has since we were founded in 1922.
3
FINANCIAL HIGHLIGHTS
Years Ended March 31st
2007 2006
Net Income 4,127,000 3,813,000
Earnings Per Share - Basic 1.59 1.51
Book Value Per Share 16.36 14.82
Total Interest Income 42,098,000 32,617,000
Total Interest Expense 23,933,000 15,969,000
Net Interest Income Before
Provision For Loan Losses 18,165,000 16,648,000
Provision For Loan Losses 600,000 660,000
Net Interest Income After
Provision For Loan Losses 17,565,000 15,988,000
Net Interest Margin 2.76% 2.79%
Total Loans Originated 379,593,000 301,832,000
Adjustable Rate Loans As A Percentage
of Total Gross Loans 61.0% 63.3%
4
Financial Highlights
- ------------------------------------------------------------------------------
2007 2006 2005 2004 2003
------ ------ ------ ------ ------
Net Income (In Thousands) $4,127 $3,813 $3,505 $4,263* $3,231
*Includes the sale of the Denmark branch.
2007 2006 2005 2004 2003
------ ------ ------ ------ ------
Total Assets (In Millions) $ 738 $ 659 $ 586 $ 528 $ 445
2007 2006 2005 2004 2003
------ ------ ------ ------ ------
Return on Equity 10.24% 10.27% 10.28% 13.67% 11.37%
Allowance for Loan Losses (1) 2007 2006 2005 2004 2003
------ ------ ------ ------ ------
1.65% 1.76% 1.94% 2.17% 1.98%
(1) Allowance for losses as a percentage of total loans.
5
Financial Highlights
- ------------------------------------------------------------------------------
2007 2006 2005 2004 2003
------ ------ ------ ------ ------
Book Value Per Share $16.36 $14.82 $13.92 $13.30 $11.98
2007 2006 2005 2004 2003
------ ------ ------ ------ ------
Earnings Per Share - Basic $1.59 $1.51 $1.39 $1.70 $1.29
Security Federal Corporation Stock Prices (at March 31st of each year)
2007 2006 2005 2004 2003 2002 2001
- ------ ------ ------ ------ ------ ------ ------
24.75 24.25 23.00 21.00 20.26 21.67 20.00
2000 1999 1998 1997 1996 1995 1994
- ------ ------ ------ ------ ------ ------ ------
18.00 15.00 7.33 5.17 4.54 3.65 3.37
1993 1992 1991 1990 1989 1988
- ------ ------ ------ ------ ------- ------
2.75 2.54 2.46 2.40 1.83 1.75
6
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Selected Consolidated Financial and Other Data
At Or For The Year Ended March 31,
--------------------------------------------------
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
Balance Sheet Data (Dollars In Thousands, Except Per Share Data)
- -----------------------
Total Assets $738,110 $658,678 $585,978 $528,005 $444,904
Cash And Cash
Equivalents 13,438 14,351 7,916 6,749 8,239
Investment And Mortgage-
Backed Securities 249,750 238,433 241,076 245,715 182,117
Total Loans Receivable,
Net (1) 436,038 375,109 316,889 259,895 243,156
Deposits 523,738 479,229 430,287 389,593 358,474
Advances From Federal
Home Loan Bank 153,049 131,363 112,038 96,336 49,772
Total Shareholders'
Equity 42,693 37,602 35,111 33,472 30,040
Income Data
- -----------------------
Total Interest Income 42,098 32,617 25,770 23,011 23,660
Total Interest Expense 23,933 15,969 11,525 9,606 10,016
-------- -------- -------- -------- --------
Net Interest Income 18,165 16,648 14,245 13,405 13,644
Provision For Loan
Losses 600 660 780 1,200 1,800
-------- -------- -------- -------- --------
Net Interest Income
After Provision For
Loan Losses 17,565 15,988 13,465 12,205 11,844
Other Income(2) 3,861 2,840 2,524 5,235 3,811
General And
Administrative Expense 15,157 13,027 10,773 10,725 10,483
Income Taxes 2,142 1,778 1,711 2,452 1,941
-------- -------- -------- -------- --------
Net Income $ 4,127 $ 3,813 $ 3,505 $ 4,263 $ 3,231
======== ======== ======== ======== ========
Per Common Share Data
- -----------------------
Net Income Per Common
Share (Basic) $ 1.59 $ 1.51 $ 1.39 $ 1.70 $ 1.29
======== ======== ======== ======== ========
Cash Dividends Declared $ 0.24 $ 0.16 $ 0.11 $ 0.08 $ 0.0602
======== ======== ======== ======== ========
Other Data
- -----------------------
Interest Rate Spread
Information:
Average During Period 2.47% 2.52% 2.44% 2.66% 3.19%
End Of Period 2.51% 2.59% 2.45% 2.59% 3.00%
Net Interest Margin (Net
Interest Income/Average
Earning Assets) 2.76% 2.79% 2.64% 2.84% 3.46%
Average Interest-Earning
Assets To Average
Interest-Bearing
Liabilities 108.00% 110.25% 109.07% 109.05% 110.47%
Equity To Total Assets 5.78% 5.71% 5.99% 6.34% 6.75%
Non-Performing Assets
To Total Assets (3) 0.15% 0.20% 0.42% 0.40% 0.27%
Return On Assets (Ratio
Of Net Income To
Average Total Assets) 0.59% 0.62% 0.63% 0.87% 0.79%
Return On Equity (Ratio
Of Net Income To
Average Equity) 10.24% 10.27% 10.28% 13.67% 11.37%
Equity To Assets Ratio
(Ratio Of Average
Equity To Average
Total Assets) 5.78% 6.03% 6.09% 6.36% 6.90%
Dividend Pay-Out Ratio
On Common Shares 15.11% 10.67% 7.96% 4.75% 4.69%
Number Of Full-Service
Offices 11 11 11 11 11
(1) INCLUDES LOANS HELD FOR SALE.
(2) FOR 2004, INCLUDES APPROXIMATELY $1.5 MILLION IN GAIN ON SALE OF BRANCH
(3) NON-PERFORMING ASSETS CONSIST OF NON-ACCRUAL LOANS AND REPOSSESSED ASSETS.
7
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
General
The following discussion is presented to provide the reader with an
understanding of the financial condition and results of operations of Security
Federal Corporation and its subsidiaries. The investment and other activities
of the parent company, Security Federal Corporation (the "Company"), have had
no significant impact on the results of operations for the periods presented
in the financial statements. The information presented in the following
discussion of financial results is indicative of the activities of Security
Federal Bank (the "Bank"), a wholly owned subsidiary of the Company. The Bank
is a federally chartered thrift that was founded in 1922. The Bank also has
four wholly owned subsidiaries, Security Federal Insurance Inc. ("SFINS"),
Security Federal Investments Inc. ("SFINV"), Security Federal Trust Inc.
("SFT"), and Security Federal Financial Services Corporation ("SFSC"). SFINS,
SFINV, and SFT were formed in the fiscal year ended March 31, 2002 and began
operating during the December 2001 quarter. SFINS has a wholly owned
subsidiary, Collier Jennings Financial Corporation, which has as subsidiaries
Collier Jennings Inc., The Auto Insurance Store Inc., and Security Federal
Premium Pay Plans Inc. Security Federal Corporation has a wholly owned
subsidiary, Security Federal Statutory Trust (the "Trust"), which issued and
sold fixed and floating rate capital securities of the Trust. However, under
current accounting guidance, the Trust is not consolidated in the financial
statements. SFSC was formed in 1975 and is currently inactive. Unless the
context indicates otherwise, references to the Company shall include the Bank
and its subsidiaries.
The principal business of the Bank is accepting deposits from the general
public and originating consumer and commercial business loans as well as
mortgage loans that enable borrowers to purchase or refinance one to four
family residential real estate. The Bank also originates construction loans
on single-family residences, multi-family dwellings and projects, and
commercial real estate, as well as loans for the acquisition, development and
construction of residential subdivisions and commercial projects.
The Bank's net income is dependent on its interest rate spread which is the
difference between the average yield earned on its loan and investment
portfolios and the average rate paid on its deposits and borrowings. The
Bank's interest spread is influenced by interest rates, deposit flows, and
loan demands. Levels of non-interest income and operating expense are also
significant factors in earnings.
Forward-Looking Statements
This document, including information included or incorporated by reference,
contents, and future filings by the Company on Form 10-K, Form 10-Q, and Form
8-K, and future oral and written statements by the Company and its management
may contain forward-looking statements about the Company and its subsidiaries
which we believe are within the meaning of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements include, without
limitation: statements with respect to anticipated future operating and
financial performance; growth opportunities; interest rates; acquisition and
divestiture opportunities; and synergies, efficiencies, and cost-savings.
Words such as "may," "could," "should," "would," "believe," "anticipate,"
"estimate," "expect," "intend," "plan," and similar expressions are intended
to identify these forward-looking statements. Forward-looking statements by
the Company and its management are based on beliefs, plans, objectives, goals,
expectations, anticipations, estimates, and intentions of management and are
not guarantees of future performance. Factors which could affect results
include interest rate trends, the general economic climate in the Company's
market area and the nation as a whole, the ability of the Company to control
costs and expenses, deposit flows, demand for mortgages and other loans, real
estate values and vacancy rates, competition, pricing, loan delinquency rates
and changes in federal regulation. These factors should be considered in
evaluating "forward-looking statements," and undue reliance should not be
placed on any such statements. The Company disclaims any obligation to update
or revise any forward-looking statements based on the occurrence of future
events, the receipt of new information, or otherwise. The important factors
we discuss below and elsewhere in this document, identified in the Company's
filings with the Securities and Exchange Commission ("SEC"), and presented by
our management from time to time could cause actual results to differ
materially from those indicated by the forward-looking statements made in this
document.
Critical Accounting Policies
The Company has adopted various accounting policies which govern the
application of accounting principles generally accepted in the United States
in the preparation of the Company's financial statements. The significant
accounting policies of the Company are described in Note 1 of the Notes to the
Consolidated Financial Statements.
8
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Critical Accounting Policies, Continued
Certain accounting policies involve significant judgments and assumptions by
management, which have a material impact on the carrying value of certain
assets and liabilities; management considers these accounting policies to be
critical accounting policies. The judgments and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of
the judgments and assumptions made by management, actual results could differ
from these judgments and estimates that could have a material impact on the
carrying values of assets and liabilities and the results of operations of the
Company.
Of these significant accounting policies, the Company considers its policies
regarding the allowance for loan losses to be its most critical accounting
policy because of the significant degree of management judgment involved in
determining the amount of allowance for loan losses. The Company has
developed policies and procedures for assessing the adequacy of the allowance
for loan losses, recognizing that this process requires a number of
assumptions and estimates with respect to its loan portfolio. The Company's
assessments may be impacted in future periods by changes in economic
conditions, the impact of regulatory examinations, and the discovery of
information with respect to borrowers, which is not known to management at the
time of the issuance of the consolidated financial statements. Refer to the
discussion under the section entitled "Financial Condition" and "Provision for
Loan Losses" section in the "Comparison of the Years Ended March 31, 2007 and
2006" and "Comparison of the Years Ended March 31, 2006 and 2005" herein for a
further discussion of the Company's estimation process and methodology related
to the allowance for loan losses.
Asset and Liability Management
The Bank's program of asset and liability management seeks to limit the Bank's
vulnerability to material and prolonged increases or decreases in interest
rates, or "interest rate risk." The principal determinant of the exposure of
the Bank's earnings to interest rate risk is the timing difference ("gap")
between the repricing or maturity of the Bank's interest-earning assets and
the repricing or maturity of its interest-bearing liabilities. If the
maturities of the Bank's assets and liabilities were perfectly matched and the
interest rates borne by its assets and liabilities were equally flexible and
moved concurrently (neither of which is the case), the impact on net interest
income of any material and prolonged changes in interest rates would be
minimal.
A positive gap position generally has an adverse effect on net interest income
during periods of falling interest rates. A positive one-year gap position
occurs when the dollar amount of rate sensitive assets maturing or repricing
within one year exceeds the dollar amount of rate sensitive liabilities
maturing or repricing during that same one-year period. In a period of
falling interest rates, the interest received on interest earning assets will
increase slower than the interest paid on interest-bearing liabilities,
causing a decrease in net interest income. During periods of rising interest
rates, the interest received on interest earning assets will increase faster
than interest paid on interest-bearing liabilities, thus increasing net
interest income.
A negative gap position generally has an adverse effect on net interest income
during periods of rising interest rates. A negative one-year gap position
occurs when the dollar amount of rate sensitive liabilities maturing or
repricing within one year exceeds the dollar amount of rate sensitive assets
maturing or repricing during that same period. As a result, during periods of
rising interest rates, the interest paid on interest-bearing liabilities will
increase faster than interest received from earning assets, thus reducing net
interest income. The reverse is true in periods of declining interest rates
resulting generally in an increase in net interest income.
The Bank's Board of Directors reviews the Interest Rate Exposure Report
generated for the Bank by the Office of Thrift Supervision. This report
measures the interest rate sensitivity of the Bank's net portfolio value
("NPV") on a quarterly basis under different interest rate scenarios. The
Bank's sensitivity measure is well within the Bank's policy on changes in NPV.
The Bank's asset and liability policies are directed toward maximizing
long-term profitability while managing acceptable interest rate risk within
the Bank's policies.
At March 31, 2007, the positive mismatch of interest-earning assets repricing
or maturing within one year with interest-bearing liabilities repricing or
maturing within one year was $1.7 million or 0.2% of total assets compared to
$26.7 million or 4.1% at March 31, 2006. For more information on the Bank's
repricing position at March 31, 2007, see the tables on pages 11 and 12.
9
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Asset and Liability Management, Continued
During the past year, the Bank originated, for investment purposes,
approximately $40.3 million in adjustable rate residential real estate loans
("ARM's"), which are held for investment and not sold. The Bank's loan
portfolio included $274.3 million of adjustable rate consumer loans,
commercial loans, and mortgage loans or, approximately 61.0% of total gross
loans at March 31, 2007. During fiscal 2007, the Bank originated $318.5
million in consumer and commercial loans, which are usually short term in
nature. The Bank's portfolio of consumer and commercial loans was $323.0
million at March 31, 2007, $267.8 million at March 31, 2006, and $213.1
million at March 31, 2005. Consumer and commercial loans combined were 71.8%
of total loans at March 31, 2007, 68.5% of total loans at March 31, 2006, and
63.0% at March 31, 2005.
At March 31, 2007, the Bank held approximately $7.7 million in longer term
fixed rate residential mortgage loans. These loans, which amounted to 1.7% of
the total loan portfolio, had converted from ARM loans to fixed rate loans
during the previous 60 months. These fixed rate loans have remaining
maturities ranging from 10 to 29 years. As of March 31, 2007, the Bank no
longer has any ARM loans that have conversion features to fixed rate loans.
On new originations, the Bank sells virtually all of its 15 and 30 year fixed
rate mortgage loans at origination. Fixed rate residential loans sold to
Freddie Mac and other institutional investors, on a service-released basis,
totaled $30.3 million in fiscal 2007, $29.9 million in fiscal 2006, and $26.0
million in fiscal 2005. The Bank sells all its fixed rate mortgage loans on a
service-release basis.
Certificates of deposit of $100,000 or more, referred to as "Jumbo
Certificates," are normally considered to be interest rate sensitive because
of their relatively short maturities. Many financial institutions have used
Jumbo Certificates to manage interest rate sensitivity and liquidity. The
Bank has not relied on Jumbo Certificates for liquidity or asset liability
management. As of March 31, 2007, the Bank had $110.6 million outstanding in
Jumbo Certificates compared to $61.9 million at March 31, 2006. The Bank has
no brokered deposits. The majority of the Bank's deposits originate from the
Bank's immediate market area.
The following table sets forth the maturity schedule of certificates of
deposit with balances of $100,000 or greater at March 31, 2007.
At March 31, 2007
(In Thousands)
-----------------
Within 3 Months $ 32,587
After 3, Within 6 Months 18,663
After 6, Within 12 Months 52,275
After 12 Months 7,074
--------
$110,599
========
10
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Asset and Liability Management, Continued
The following table sets forth the Bank's interest-bearing liabilities and
interest-earning assets repricing or maturing within one year. The table on
the following page presents the Bank's entire interest-bearing liabilities and
interest-earning assets into repricing or maturity time periods. Both tables
present adjustable rate loans in the periods they are scheduled to reprice and
fixed rate loans are shown in the time frame of corresponding principal
amortization schedules. Adjustable and fixed rate loans are also adjusted for
the Company's estimates of pre-payments. Mortgage-backed securities are shown
at repricing dates, but also include prepayment estimates. Both tables also
assume investments reprice at the earlier of maturity; the likely call date,
if any, based on current interest rates; or the next scheduled interest rate
change, if any. NOW's are assumed to have a decay rate of 20% the first year,
money market accounts to have a decay rate of 65% the first year, and
statement savings accounts to have a decay rate of 20% the first year. The
balance, for all three products, is deemed to reprice in the one to three year
category. Callable fixed rate Federal Home Loan Bank ("FHLB") advances are
included in borrowings, and are deemed to mature at the expected call date or
maturity, based on the stated interest rate of the advance and current market
rates. Junior subordinated debentures are shown at their repricing date or
call date.
At March 31
----------------------
2007 2006
-------- --------
(Dollars In Thousands)
Loans (1) $279,508 $254,588
Mortgage-Backed Securities:
Available For Sale 81,072 78,367
Investment Securities:
Held To Maturity 27,000 10,000
Available For Sale 16,707 3,475
Other Interest-Earning Assets & FHLB Stock 10,004 10,865
-------- --------
Total Interest Rate Sensitive Assets Repricing
Within 1 Year $414,291 $357,295
-------- --------
Deposits 346,914 280,329
FHLB Advances And Other Borrowed Money 65,665 50,290
-------- --------
Total Interest Rate Sensitive Liabilities
Repricing Within 1 Year $412,579 $330,619
-------- --------
Gap $ 1,712 $ 26,676
======== ========
Interest Rate Sensitive Assets/Interest Rate
Sensitive Liabilities 100.04% 108.07%
Gap As A Percent Of Total Assets 0.2% 4.1%
(1) LOANS ARE NET OF UNDISBURSED FUNDS AND LOANS IN PROCESS.
11
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Asset and Liability Management, Continued
The following table sets forth the interest sensitivity of the Bank's assets
and liabilities at March 31, 2007, on the basis of the factors and assumptions
set forth in the table on the previous page.
(Dollars In Thousands)
< Three 3 - 12 1 - 3 3 - 5 5 - 10 >10
Months Months Years Years Years Years Total
-------- -------- -------- -------- -------- ------- --------
Interest-Earnings Assets
- ------------------------------
<s> <c> <c> <c> <c> <c> <c> <c>
Loans (1) $190,642 $ 88,866 $ 84,345 $ 58,657 $ 17,482 $ 3,624 $443,616
Mortgage-Backed Securities:
Available For Sale, At Fair
Value 19,404 61,668 38,431 9,293 4,034 2,251 135,081
Investment Securities: (2)
Held To Maturity, At Cost 11,000 16,000 24,000 9,984 3,000 - 63,984
Available For Sale, At Fair
Value 3,073 13,634 17,917 16,061 - - 50,685
FHLB Stock, At Cost - 8,209 - - - - 8,209
Other Interest-Earning Assets 1,795 - - - - - 1,795
-------- -------- -------- -------- -------- ------- --------
Total Financial Assets $225,914 $188,377 $164,693 $ 93,995 $ 24,516 $ 5,875 $703,370
======== ======== ======== ======== ======== ======= ========
Interest-Bearing Liabilities
- ------------------------------
Deposits:
Certificate Accounts $ 63,616 $172,336 $ 13,390 $ 5,930 $ - $ - $255,272
NOW Accounts 6,450 6,450 51,603 - - - 64,503
Money Market Accounts 47,285 47,285 50,922 - - - 145,492
Statement Savings
Accounts 1,746 1,746 13,967 - - - 17,459
Borrowings 30,665 35,000 48,000 37,278 15,349 - 166,292
-------- -------- -------- -------- -------- ------- --------
Total Interest-Bearing
Liabilities $149,762 $262,817 $177,882 $ 43,208 $ 15,349 $ - $649,018
======== ======== ======== ======== ======== ======= ========
Current Period Gap $ 76,152 $(74,440) $(13,189) $ 50,787 $ 9,167 $ 5,875 $ 54,352
Cumulative Gap $ 76,152 $ 1,712 $(11,477) $ 39,310 $ 48,477 $54,352 $ 54,352
Cumulative Gap As A Percent
Of Total Assets 10.3% 0.2% (1.6)% 5.3% 6.6% 7.4% 7.4%
(1) LOANS ARE NET OF UNDISBURSED FUNDS AND LOANS IN PROCESS.
(2) CALLABLE SECURITIES ARE SHOWN AT THEIR LIKELY CALL DATES BASED ON MANAGEMENT'S ESTIMATES AT MARCH 31,
2007.
In evaluating the Bank's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing tables must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates. Additionally, the interest rates
of certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates. Loan repayment rates and withdrawals of deposits
will likely differ substantially from the assumed rates previously set forth
in the event of significant changes in interest rates due to the option of
borrowers to prepay their loans and the ability of depositors to withdraw
funds prior to maturity. Further, certain assets, such as ARMs, have features
that restrict changes in interest rates on a short-term basis as well as over
the life of the asset.
12
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Financial Condition
Total assets at March 31, 2007 were $738.1 million, an increase of $79.4
million or 12.1% from $658.7 million at March 31, 2006. This increase was
primarily the result of an increase in net loans receivable.
Total net loans receivable were $436.0 million at March 31, 2007, an increase
of $60.9 million or 16.2% from $375.1 million at March 31, 2006. Residential
real estate loans held for investment increased $3.5 million or 2.9% to $125.5
million at March 31, 2007. Typically, long term, newly originated fixed rate
mortgage loans are not retained in the portfolio but are sold immediately.
ARMs are typically retained in the portfolio. At March 31, 2007, the Bank
held 90.9% of its residential mortgage loans in ARMs, while it had 9.1% in
fixed rate mortgages. Consumer loans increased $5.2 million or 8.9% while
commercial business and commercial real estate loans increased $50.0 million
or 23.9% to $259.2 million at fiscal year end March 31, 2007 from $209.2
million at March 31, 2006. A large portion of the increased activity in
commercial lending took place in the Midlands area of South Carolina including
Columbia, Lexington, and West Columbia. A significant portion of these loans
is acquisition and development loans. Loans held for sale, which was $1.5
million at March 31, 2007, increased $209,000 from the previous fiscal year
end. Total investments and mortgage-backed securities increased $11.3 million
or 4.8% to $249.7 million at March 31, 2007. Cash and cash equivalents were
$13.4 million at March 31, 2007 compared to $14.4 million at March 31, 2006.
Property and equipment increased $4.2 million or 36.3% to $15.9 million in
fiscal 2007 as the Bank completed renovations on its downtown Aiken branch
building and headquarters, began renovations of its Whiskey Road Aiken branch
building, invested in two lots in the metro Columbia, South Carolina area for
future branches, and purchased another lot for future relocation of its
Clearwater branch. The cash value of Bank Owned Life Insurance ("BOLI") was
$5.8 million at March 31, 2007 compared to $5.0 million at March 31, 2006.
The increase was due to accumulated BOLI earnings of $243,000 and an
additional BOLI purchase of $541,000 during the fiscal year ended March 31,
2007. BOLI, which earns tax-free yields, is utilized to partially offset the
cost of the Company's employee benefits programs and provide key person
insurance on certain officers of the Company.
Repossessed assets acquired in settlement of loans decreased $66,000 to
$25,000 at March 31, 2007 from $91,000 at March 31, 2006. The sole
repossessed asset at March 31, 2007 was a single-family dwelling.
Non-accrual loans totaled $1.1 million at March 31, 2007 compared to $1.2
million a year earlier. Non-accrual loans averaged $1.3 million in fiscal
2007 compared to $1.6 million during fiscal 2006. The Bank classifies all
loans as non-accrual when they become 90 days or more delinquent. The Bank
had five loans that were troubled debt restructurings totaling $204,000 at
March 31, 2007 compared to six loans totaling $418,000 at March 31, 2006. The
five troubled debt restructurings consisted of two consumer loans secured by
first mortgages on residential dwellings totaling $130,000, a $10,000 consumer
loan secured by a second mortgage on a residential dwelling, a $52,000
commercial loan secured by two rental properties, and a $12,000 unsecured
commercial loan. The $10,000 consumer loan was 30 days delinquent at March
31, 2007 while the other 4 loans were current in payments. All troubled debt
restructurings are also considered impaired. At March 31, 2007, the Bank held
$1.5 million in impaired loans compared to $2.1 million at March 31, 2006.
In July 2006, the Company acquired Collier Jennings Financial, an insurance
agency specializing in consumer automobile insurance and premium financing.
The resulting goodwill and other intangibles were $1.2 million and $533,000 at
March 31, 2007, respectively. Collier Jennings is now a subsidiary of
Security Federal Insurance.
The Bank reviews its loan portfolio and allowance for loan losses on a monthly
basis. Future additions to the Bank's allowance for loan losses are dependent
on, among other things, the performance of the Bank's loan portfolio, the
economy, changes in real estate values, and interest rates. There can be no
assurance that additions to the allowance will not be required in future
periods. Management continually monitors its loan portfolio for the impact of
local economic changes. The ratio of allowance for loan losses to total loans
was 1.65% at March 31, 2007 compared to 1.76% at March 31, 2006.
Deposits at the Bank increased $44.5 million or 9.3% to $523.7 million at
March 31, 2007 from $479.2 million at March 31, 2006. The Bank was very
successful in attracting certificate of deposit accounts with aggressive
pricing and advertising. Advances from the FHLB increased to $153.0 million
at March 31, 2007 from $131.4 million a year earlier, an increase of $21.6
million or 16.5%. Other borrowed money, which consists of retail repurchase
agreements, increased $798,000 or 11.0% to $8.1 million at March 31, 2007 from
$7.3 million at March 31, 2006. The Company issued its first trust preferred
security issuance in September 2006. Gross proceeds of the issuance were $5.2
million and are classified as junior subordinated debentures on the
consolidated balance sheet.
13
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Financial Condition, Continued
Total shareholders' equity was $42.7 million at March 31, 2007, an increase of
$5.1 million or 13.5% from $37.6 million a year earlier. The increase was
attributable to net income of $4.1 million, proceeds from the exercise of
stock options of $438,000, a decrease in the employee stock ownership debt of
$216,000, and a net decrease in accumulated other comprehensive loss of $1.3
million, offset partially by the purchase of $413,000 of treasury stock, and
$623,000 in dividends paid.
Results of Operations
The following table presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table also distinguishes between the
changes related to higher or lower outstanding balances and the changes due to
the volatility of interest rates. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to: (1) changes in rate (changes in rate multiplied by prior year
volume); (2) changes in volume (changes in volume multiplied by prior year
rate); and (3) net change (the sum of the prior columns). For purposes of
this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change attributable to
volume and the change attributable to rate.
Fiscal Year 2007 Fiscal Year 2006
Compared To 2006 Compared To 2005
------------------------ ------------------------
Volume Rate Net Volume Rate Net
------ ------ ------ ------ ------ ------
(In Thousands)
Interest-Earning Assets:
Loans: (1)
Real Estate Loans $ 385 $ 558 $ 943 $ 553 $ 266 $ 819
Other Loans 4,534 2,294 6,828 3,728 2,041 5,769
------ ------ ------ ------ ------ ------
Total Loans 4,919 2,852 7,771 4,281 2,307 6,588
Mortgage-Backed
Securities (2) (629) 948 318 (609) 479 (130)
Investments (2) 635 745 1,380 350 185 535
Other Interest-Earning
Assets (9) 21 12 2 32 34
------ ------ ------ ------ ------ ------
Total Interest-Earning
Assets $4,916 $4,565 $9,481 $4,024 $3,003 $7,027
====== ====== ====== ====== ====== ======
Interest-Bearing
Liabilities:
Deposits:
Certificate Accounts $2,092 $2,499 $4,591 $ 959 $1,349 $2,308
NOW Accounts (5) 119 114 22 330 352
Money Market Accounts (303) 1,437 1,134 (232) 1,295 1,063
Savings Accounts (9) 0 (9) 2 - 2
------ ------ ------ ------ ------ ------
Total Deposits 1,775 4,055 5,830 751 2,974 3,725
Borrowings 1,158 976 2,134 602 117 719
------ ------ ------ ------ ------ ------
Total Interest-Bearing
Liabilities 2,933 5,031 7,964 1,353 3,091 4,444
------ ------ ------ ------ ------ ------
Effect On Net Income $1,983 $ (466) $1,517 $2,671 $ (88) $2,583
====== ====== ====== ====== ====== ======
(1) INTEREST ON NON-ACCRUAL LOANS IS NOT INCLUDED IN INCOME, ALTHOUGH THEIR
LOAN BALANCES ARE INCLUDED IN AVERAGE LOANS OUTSTANDING.
(2) SECURITIES AVAILABLE FOR SALE ARE COMPUTED USING THEIR HISTORICAL COST.
14
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Results of Operations, Continued
The following table presents the total dollar amount of interest income from average interest-earning assets
for the periods indicated and the resultant yields as well as the interest expense on average
interest-bearing liabilities expressed both in dollars and rates. No tax equivalent adjustments were made.
Averages For Fiscal Years Ended March 31,
--------------------------------------------------------------------------------
Yield/ 2007 2006 2005
Rate at ------------------------- ------------------------- -------------------------
March 31, Average Yield/ Average Yield/ Average Yield/
2007 Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- ------- -------- ------ ------- -------- ------ ------- -------- ------
(Dollars In Thousands)
<s> <c> <c> <c> <c> <c> <c> <c> <c> <c> <c>
Interest-Earning
Assets:
Mortgage Loans 6.05% $118,793 $ 7,285 6.13% $112,223 $ 6,342 5.65% $102,365 $ 5,568 5.44%
Other Loans 8.23% 289,925 23,896 8.24% 232,793 17,068 7.33% 179,251 11,433 6.38%
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total Loans (1) 7.67% 408,718 31,181 7.63% 345,016 23,410 6.79% 281,616 17,001 6.04%
Mortgage-Backed
Securities (2) 4.73% 133,923 5,773 4.31% 150,107 5,455 3.63% 167,582 5,585 3.33%
Investments (2) 4.66% 115,253 5,070 4.40% 99,473 3,690 3.71% 89,813 3,155 3.51%
Other Interest-
Earning Assets 5.31% 1,412 74 5.23% 1,775 62 3.49% 1,647 28 1.70%
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total Interest-
Earning Assets 6.56% $659,306 $42,098 6.39% $596,371 $32,617 5.47% $540,658 $25,769 4.77%
==== ======== ======= ==== ======== ======= ==== ======== ======= ====
Interest-Bearing
Liabilities:
Certificate
Accounts 4.99% $229,120 $10,497 4.58% $175,703 $ 5,906 3.36% $142,459 $ 3,598 $2.53%
NOW Accounts 1.03% 62,578 811 1.30% 63,000 697 1.11% 58,092 345 0.59%
Money Market
Accounts 4.14% 146,781 5,798 3.95% 156,508 4,664 2.98% 166,735 3,601 2.16%
Savings Accounts 0.98% 16,895 166 0.98% 17,969 175 0.98 17,657 173 0.98%
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total Interest-
Bearing
Accounts 3.89% 455,374 17,272 3.79% 413,180 11,442 2.77% 384,943 7,717 2.01%
Other
Borrowings 4.41% 7,080 318 4.49% 6,201 210 3.38% 5,488 84 1.53%
Jr. Subordinated
Debt 6.97% 2,721 192 7.05% - - - - - -
FHLB Advances 4.36% 145,299 6,151 4.23% 121,526 4,317 3.55% 105,272 3,724 3.54%
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total Interest-
Bearing
Liabilities 4.05% $610,474 $23,933 3.92% $540,907 $15,969 2.95% $495,703 $11,525 $2.33%
==== ======== ======= ==== ======== ======= ==== ======== ======= ====
Net Interest
Income $18,165 $16,648 $14,244
======= ======= =======
Interest Rate
Spread 2.51% 2.47% 2.52% 2.44%
==== ==== ==== ====
Net Yield On
Earning Assets 2.76% 2.79% 2.64%
==== ==== ====
(1) INTEREST ON NON-ACCRUAL LOANS IS NOT INCLUDED IN INCOME, ALTHOUGH THEIR LOAN BALANCES ARE INCLUDED IN
AVERAGE LOANS OUTSTANDING.
(2) SECURITIES AVAILABLE FOR SALE ARE COMPUTED USING THEIR HISTORICAL COST.
15
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Comparison of the Years Ended March 31, 2007 and 2006
General
The Company's earnings were $4.1 million for the year ended March 31, 2007,
compared to $3.8 million for the year ended March 31, 2006. The $314,000 or
8.2% increase in earnings was attributable primarily to an increase in net
interest income and other income offset partially by an increase in general
and administrative expenses.
Net Interest Income
Net interest income increased $1.5 million or 9.1% to $18.2 million in fiscal
2007 from $16.7 million in fiscal 2006. The increase was attributable to an
increase of $62.9 million to $659.3 million in average interest-earning assets
during fiscal 2007. The Bank's interest rate spread decreased five basis
points to 2.47% during fiscal 2007. The yield of average earning assets
increased 92 basis points to 6.39%, while the cost of average interest bearing
liabilities increased 97 basis points to 3.92%. Interest income on loans
increased $7.8 million to $31.2 million during the year ended March 31, 2007
from $23.4 million during fiscal 2006. The increase was attributable to an
increase in average total loans outstanding of $63.7 million and an 84 basis
point increase in the yield earned on the Bank's loans during fiscal 2007.
Interest income on investment securities, mortgage-backed securities, and
other investments increased $1.7 million as a result of an increase in yield
of 70 basis points in the overall investment portfolio. The aggregate average
balance in the overall investment portfolio, including mortgage-backed
securities, investments, and other interest-earning assets, decreased $767,000
during fiscal 2007 compared to fiscal 2006 to help fund the growth in loans.
Interest expense on deposits increased $5.8 million or 51.0% to $17.3 million
during the year ended March 31, 2007. Average interest bearing deposits
increased $42.2 million while the average cost of those deposits increased 102
basis points during the year. Interest expense on FHLB advances and other
borrowings increased $1.9 million or 42.9% to $6.5 million during fiscal 2007.
The increase was a result of an increase in average FHLB advances and other
borrowings outstanding during the year of $24.6 million while the average
costs of those borrowings increased 71 basis points to 4.25% in fiscal 2007
compared to 3.54% in fiscal 2006. Interest expense on junior subordinated
debentures was $192,000 during fiscal 2007, with a weighted average cost of
7.05%. The Company issued its first junior subordinated debentures in
September 2006. Net proceeds of the issuance were $5.0 million.
Provision for Loan Losses
The Company's provision for loan losses decreased $60,000 to $600,000 during
the year ended March 31, 2007 from $660,000 in fiscal 2006. 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.
Non-accrual loans, which are loans delinquent 90 days or more, were $1.1
million at March 31, 2007 compared to $1.2 million at March 31, 2006. Net
charge-offs were $30,000 in fiscal 2007 compared to $239,000 in fiscal 2006.
The ratio of the allowance for loan losses to total loans at March 31, 2007
was 1.65% compared to 1.76% at March 31, 2006. Management believes the
allowance for loan losses is adequate based on its best estimates of the
losses inherent in the loan portfolio, although there can be no guarantee as
to these estimates. In addition, bank regulatory agencies may require
additions to the allowance for loan losses based on their judgments and
estimates as part of their examination process. Because the allowance for
loan losses is an estimate, there can be no guarantee that actual loan losses
would not exceed the allowance for loan losses or that additional increases in
the allowance for loan losses will not be required in the future.
16
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Other Income
Other income increased $1.2 million from $2.6 million during fiscal 2006 to
$3.9 million during fiscal 2007. Gain on sale of loans was $461,000 in fiscal
2007 compared to $467,000 during fiscal 2006. Service fees on deposit
accounts increased $107,000 or 9.5% to $1.2 million during fiscal 2007 as a
result of an increase in the number of demand accounts. Income from insurance
agency commissions increased $608,000 to $650,000 due to the acquisition of
Collier Jennings Financial ("Collier Jennings") at the beginning of the
September 2006 quarter. Other agency income from Collier Jennings was $68,000
during fiscal 2007. Trust income increased $119,000 or 32.7% to $482,000
during fiscal 2007 due to an increase in trust account balances. Income from
Bank Owned Life Insurance was $243,000 during fiscal year 2007. The Company
did not own any Bank Owned Life Insurance until March 31, 2006. Other
miscellaneous income including annuity and investment brokerage commissions,
Bank credit life insurance on loans, and other miscellaneous income increased
$142,000 or 24.7% to $718,000 during fiscal 2007 due primarily to an increase
in the gain on sale of repossessed assets and increased annuity and investment
brokerage commissions. The Bank's three financial subsidiaries, SFINS, SFINV,
and SFT began operating in the latter part of the fiscal year ended March 31,
2002. SFINS is an insurance agency handling property and casualty insurance
and life and health insurance and became profitable during the fiscal year
ended March 31, 2004. In fiscal 2006, SFINS incurred a slight loss due to an
increase in staff. In fiscal 2007 SFINS incurred an $83,000 loss due to
infrastructure being put in place for the assimilation of Collier Jennings.
SFINV markets mutual funds, discount brokerage, and annuities. SFT is a
full-service trust company. SFINV and SFT had losses of $33,000 and $35,000,
respectively, in fiscal 2007.
General and Administrative Expenses
General and administrative expenses increased $2.1 million or 16.4% to $15.2
million during the year ended March 31, 2007 compared to the same period one
year earlier due primarily to the Collier Jennings insurance agency
acquisition, which added approximately $1.1 million in general and
administrative expenses. Without that acquisition, general and administrative
expenses increased $1.0 million or 7.7%. Compensation and employee benefits
increased $1.8 million or 23.8% to $9.4 million as a result of the Collier
Jennings acquisition, the hiring of additional business development officers
and auditing staff, and normal annual salary adjustments. Excluding the
acquisition, compensation and employee benefits expense increased $1.2 million
or 16.4%. Occupancy expense increased $147,000 or 11.6% to $1.4 million as a
result of the depreciation of branch renovations and the leasing of additional
office space. Marketing expense increased $125,000 or 72.5% from $172,000 to
$297,000 to advertise consumer loans and certificates of deposit during the
year. Depreciation and maintenance of equipment expense increased $216,000 or
19.7% to $1.3 million. FDIC insurance premiums were $58,000 in both fiscal
2007 and 2006. Other miscellaneous expenses, which encompasses repossessed
assets expense, legal, professional, and consulting expenses, stationery and
office supplies, and other expenses decreased $231,000 or 8.1% during fiscal
2007.
Income Taxes
The provision for income taxes increased $364,000 to $2.1 million or 20.5%
during the year ended March 31, 2007 compared to the year ended March 31,
2006, a result of an increase in taxable income. The effective tax rate was
34.2% for fiscal 2007 and 31.8% for fiscal 2006.
17
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Comparison of the Years Ended March 31, 2006 and 2005
General
The Company's earnings were $3.8 million for the year ended March 31, 2006,
compared to $3.5 million for the year ended March 31, 2005. The $307,000 or
8.8% increase in earnings was attributable primarily to an increase in net
interest income offset partially by an increase in general and administrative
expenses.
Net Interest Income
Net interest income increased $2.4 million or 16.9% to $16.6 million in fiscal
2006 from $14.2 million in fiscal 2005. The increase was attributable to an
increase of $55.7 million to $596.4 million in average interest-earning assets
during fiscal 2006. The Bank's interest rate spread increased eight basis
points to 2.52% during fiscal 2006. The yield of average earning assets
increased 70 basis points to 5.47%, while the cost of average interest bearing
liabilities increased 62 basis points to 2.95%. Interest income on loans
increased $6.4 million to $23.4 million during the year ended March 31, 2006
from $17.0 million during fiscal 2005. The increase was attributable to an
increase in average total loans outstanding of $63.4 million and a 75 basis
point increase in the yield earned on the Bank's loans during fiscal 2006.
Interest income on investment securities, mortgage-backed securities, and
other investments increased $439,000 as a result of an increase in yield of 28
basis points in the overall investment portfolio. The aggregate average
balance in the overall investment portfolio, including mortgage-backed
securities, investments, and other interest earning assets, decreased $7.7
million in fiscal 2006 compared to fiscal 2005 to fund loan growth.
Interest expense on deposits increased $3.7 million or 48.3% to $11.4 million
during the year ended March 31, 2006 from $7.7 million during the year ended
March 31, 2005. Average interest bearing deposits increased $28.2 million
while the average cost of those deposits increased 77 basis points during the
year. Interest expense on FHLB advances and other borrowings increased
$719,000 or 18.9% to $4.5 million during fiscal 2006 from $3.8 million during
fiscal 2005. The increase was a result of an increase in average FHLB
advances and other borrowings outstanding during the year of $17.0 million
while the average costs of those borrowings remained relatively stable at
3.54% and 3.44% for fiscal 2006 and 2005, respectively.
Provision for Loan Losses
The Company's provision for loan losses decreased $120,000 to $660,000 during
the year ended March 31, 2006 from $780,000 in fiscal 2005. 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.
Non-accrual loans, which are loans delinquent 90 days or more, were $1.2
million at March 31, 2006 compared to $2.4 million at March 31, 2005. Net
charge-offs were $239,000 in fiscal 2006 compared to $260,000 in fiscal 2005.
The ratio of the allowance for loan losses to total loans at March 31, 2006
was 1.76% compared to 1.94% at March 31, 2005. Management believes the
allowance for loan losses is adequate based on its best estimates of the
losses inherent in the loan portfolio, although there can be no guarantee as
to these estimates. In addition, bank regulatory agencies may require
additions to the allowance for loan losses based on their judgments and
estimates as part of their examination process. Because the allowance for
loan losses is an estimate, there can be no guarantee that actual loan losses
would not exceed the allowance for loan losses or that additional increases in
the allowance for loan losses will not be required in the future.
18
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Other Income
Other income increased $105,000 from $2.5 million during fiscal 2005 to $2.6
million during fiscal 2006. Gain on sale of loans increased $32,000 or 7.3%
to $467,000 during fiscal 2006. Service fees on deposit accounts decreased
$94,000 or 7.7% to $1.1 million during fiscal 2006 as a result of an increase
in the average interest rate used to offset commercial analysis charges on
business demand accounts. Trust fees increased $137,000 or 60.6% to $363,000
during fiscal 2006. Other miscellaneous income including life and casualty
insurance commissions, annuity and investment brokerage commissions, credit
life insurance, gain on sale of repossessed assets, and other miscellaneous
income decreased $19,000 or 3.00% to $618,000 during fiscal 2006 due primarily
to an decrease in the gain on sale of repossessed assets of $50,000. The
Bank's three financial subsidiaries, SFINS, SFINV, and SFT began operating in
the latter part of the fiscal year ended March 31, 2002. SFINS is an
insurance agency handling property and casualty insurance and life and health
insurance and became profitable during the fiscal year ended March 31, 2004.
During fiscal 2006, SFINS incurred a slight loss due to an increase in staff.
SFINV markets mutual funds, discount brokerage, and annuities. SFT is a
full-service trust company. SFINV and SFT have not yet attained
profitability.
General and Administrative Expenses
General and administrative expenses increased $2.2 million or 20.9% to $13.0
million during the year ended March 31, 2006 from $10.8 million for the same
period one year earlier. Compensation and employee benefits increased $1.3
million or 21.2% to $7.6 million as a result of the hiring of additional
business development officers, accounting and auditing staff, normal annual
salary adjustments, and an increase in the discretionary contribution to the
Employee Stock Ownership Plan as a result of meeting profitability targets.
Occupancy expense increased $178,000 or 16.4% to $1.3 million as a result of
the depreciation of branch renovations and the leasing of additional office
space. Advertising expense decreased $10,000 or 5.6% to $172,000 while
depreciation and maintenance of equipment expense increased $46,000 or 4.4% to
$1.1 million. FDIC insurance premiums were $58,000 in both fiscal 2006 and
2005. Other miscellaneous expenses, which encompasses repossessed assets
expense, legal, professional, and consulting expenses, stationery and office
supplies, and other sundry expenses increased $717,000 or 33.5% during fiscal
2006 due primarily to increases in audit, legal, and consulting fees to comply
with the ever increasing regulatory burden and an increase in investment
management fees in Security Federal Trust.
Income Taxes
The provision for income taxes increased $67,000 to $1.8 million or 3.9%
during the year ended March 31, 2006 compared to $1.7 million for the year
ended March 31, 2005, a result of an increase in taxable income. The
effective tax rate was 31.8% for fiscal 2006 and 32.8% for fiscal 2005.
19
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Regulatory Capital
The following table reconciles the Bank's shareholders' equity to its various
regulatory capital positions:
March 31,
--------------------
2007 2006
------- -------
(In Thousands)
Bank's Shareholders' Equity (1) $47,318 $39,473
Reduction For Goodwill And Other Intangibles 1,730 -
------- -------
Tangible Capital 45,588 39,473
------- -------
Core Capital 45,588 39,473
------- -------
Supplemental Capital 6,016 5,104
Less Assets Required To Be Deducted 22 9
------- -------
Total Risk-Based Capital $51,582 $44,568
======= =======
(1) FOR FISCAL 2007 AND 2006, EXCLUDES UNREALIZED LOSS OF $748 THOUSAND AND
$2.1 MILLION, RESPECTIVELY ON AVAILABLE FOR SALE SECURITIES.
The following table compares the Bank's capital levels relative to regulatory
requirements at March 31, 2007:
Amount Percent Actual Actual Excess Excess
Required Required Amount Percent Amount Percent
-------- -------- ------ ------- ------ -------
(Dollars In Thousands)
Tangible Capital $14,737 2.0% $45,588 6.2% $30,851 4.2%
Tier 1 Leverage (Core)
Capital 29,474 4.0% 45,588 6.2% 16,114 2.2%
Tier 1 Risk-Based (Core)
Capital 19,251 4.0% 45,588 9.5% 26,337 5.5%
Total Risk-Based Capital 38,503 8.0% 51,582 10.7% 13,079 2.7%
20
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Liquidity and Capital Resources
Liquidity refers to the ability of the Bank to generate sufficient cash flows
to fund current loan demand, repay maturing borrowings, fund maturing deposit
withdrawals, and meet operating expenses. The Bank's primary sources of funds
include loan repayments, loan sales, increased deposits, advances from the
FHLB, and cash flow generated from operations. The need for funds varies
among periods depending on funding needs as well as the rate of amortization
and prepayment on loans. The use of FHLB advances varies depending on loan
demand, deposit inflows, and the use of investment leverage strategies to
increase net interest income.
The principal use of the Bank's funds is the origination of mortgages and
other loans and the purchase of investments and mortgage-backed securities.
Loan originations on loans held for investment were $358.9 million in fiscal
2007 compared to $277.2 million in fiscal 2006 and $222.5 million in fiscal
2005. The bulk of the increase in originations in fiscal 2007, 2006, and 2005
was due primarily to an increase in commercial loan originations, which
increased $85.4 million, $63.9 million, and $45.9 million, respectively.
Purchases of investments and mortgage-backed securities were $63.4 million in
fiscal 2007 compared to $59.4 million in fiscal 2006 and $81.3 million in
fiscal 2005. Another use of the Bank's funds is the building and renovation
of branch offices. The Bank plans to consider expanding its branch network in
Aiken and Lexington Counties and surrounding areas during the next few years.
Unused lines of credit on home equity loans, credit cards, and commercial
loans amounted to $90.7 million at March 31, 2007. Home equity loans are made
on a floating rate basis with final maturities of 10 to 15 years. Credit
cards are generally made on a floating rate basis, and are renewed annually or
every other year. Management does not anticipate that the percentage of funds
drawn on unused lines of credit will increase substantially over amounts
currently utilized. In addition to the above commitments, the Bank has
undisbursed loans-in-process of $6.4 million at March 31, 2007, which will
disburse over an average of 90 days. These commitments to originate loans and
future advances of lines of credit are expected to be funded from loan
amortizations and prepayments, deposit inflows, maturing investments, and
short-term borrowing capacity.
The following table sets forth the length of time until maturity for unused
commitments to extend credit and standby letters of credit at March 31, 2007.
After
After One Three Greater
Within Through Through Than
One Three Twelve Within One
(In Thousands) Month Months Months One Year Year Total
------- -------- ------- -------- ------- -------
Unused lines of credit $4,652 $2,523 $39,070 $46,245 $44,438 $90,683
Standby letters of
credit 90 243 635 968 - 968
------ ------ ------- ------- ------- -------
Total $4,742 $2,766 $39,705 $47,213 $44,438 $91,651
====== ====== ======= ======= ======= =======
Management believes that future liquidity can be met through the Bank's
deposit base, which increased $44.5 million during fiscal 2007, and from
maturing investments. Also, the Bank has another $68.2 million in unused
borrowing capacity at FHLB at March 31, 2007.
Historically the Bank's cash flow from operating activities has been
relatively stable. The cash flows from investing activities varies with the
need to invest excess funds or utilize leverage strategies with the purchase
of mortgage-backed and investment securities. The cash flows from financing
activities vary with the need for FHLB advances. See "Consolidated Statements
of Cash Flows" in the Consolidated Financial Statements contained herein.
21
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Contractual Obligations
In the normal course of business, the Company enters into contractual
obligations that meet various business needs. These contractual obligations
include time deposits to customers, borrowings from the FHLB of Atlanta, other
borrowings, junior subordinated debentures, and lease obligations for
facilities. See Notes 6, 9, 10, and 11 of the Notes to the Consolidated
Financial Statements included herein for additional information. The
following table summarizes the Company's long-term contractual obligations at
March 31, 2007:
One to Three
Less than Three to Five
One Year Years Years Thereafter Total
--------- ------- ------- ---------- -------
(In Thousands)
Time deposits $235,952 $13,390 $ 5,930 $ - $255,272
FHLB Advances 55,000 48,000 34,700 15,349 153,049
Other Borrowings 8,088 - - - 8,088
Jr. Sub. Debentures - - 5,155 - 5,155
Operating Lease
Obligations 443 876 845 3,180 5,344
Purchase Obligation -
Building Contract 2,583 - - - 2,583
-------- ------- ------- ------- --------
Total $302,066 $62,266 $46,630 $18,529 $429,491
======== ======= ======= ======= ========
Off-Balance Sheet Arrangements
In the normal course of business, the Company makes off-balance sheet
arrangements, including credit commitments to its customers to meet their
financial needs. These arrangements involve, to varying degrees, elements of
credit and interest rate risk not recognized in the consolidated statement of
financial condition. The Bank makes personal, commercial, and real estate
lines of credit available to customers and does issue standby letters of
credit.
Commitments to extend credit to customers are subject to the Bank's normal
credit policies and are essentially the same as those involved in extending
loans to customers. See Note 14 of the Notes to the Consolidated Financial
Statements included herein for additional information.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements, related notes, and other financial
information presented herein have been prepared in accordance with Generally
Accepted Accounting Principles ("GAAP") that require the measurement of
financial position and operating results in terms of historical dollars
without considering changes in relative purchasing power over time due to
inflation. Unlike most industrial companies, substantially all of the assets
and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Security Federal Corporation and Subsidiaries
Aiken, South Carolina
We have audited the accompanying consolidated balance sheets of Security
Federal Corporation and Subsidiaries as of March 31, 2007 and 2006, and the
related consolidated statements of income, shareholders' equity and
comprehensive income and cash flows for each of the years in the three year
period ended March 31, 2007. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Security Federal Corporation and Subsidiaries as of March 31, 2007 and
2006, and the consolidated results of their operations and their cash flows
for each of the years in the three year period ended March 31, 2007, in
conformity with accounting principles generally accepted in the United States
of America.
/s/Elliott Davis, LLC
Columbia, South Carolina
June 19, 2007
23
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31,
----------------------------
2007 2006
------------ ------------
ASSETS:
Cash And Cash Equivalents $13,438,129 $14,351,208
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized Cost of
$186,970,867 and $166,808,236 at March
31, 2007 and 2006, Respectively) 185,766,296 163,445,066
Held To Maturity: (Fair Value of
$63,286,641 and $73,084,450 at March 31,
2007 and 2006, Respectively) 63,983,589 74,987,805
------------ ------------
Total Investment And Mortgage-Backed Securities 249,749,885 238,432,871
------------ ------------
Loans Receivable, Net:
Held For Sale 1,529,748 1,320,644
Held For Investment: (Net of Allowance of
$7,296,791 and $6,704,734 at March 31, 2007
and 2006, Respectively) 434,508,612 373,788,432
------------ ------------
Total Loans Receivable, Net 436,038,360 375,109,076
------------ ------------
Accrued Interest Receivable:
Loans 1,459,193 1,096,014
Mortgage-Backed Securities 550,682 508,432
Investments 1,181,639 945,620
------------ ------------
Total Accrued Interest Receivable 3,191,514 2,550,066
------------ ------------
Premises And Equipment, Net 15,895,192 11,662,976
Federal Home Loan Bank Stock, At Cost 8,209,200 7,149,800
Repossessed Assets Acquired In Settlement Of
Loans 24,909 91,022
Bank Owned Life Insurance 5,783,620 5,000,001
Intangible Assets, Net 532,500 -
Goodwill 1,197,954 -
Other Assets 4,048,928 4,330,795
------------ ------------
Total Assets $738,110,191 $658,677,815
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposit Accounts $523,737,592 $479,229,339
Advances From Federal Home Loan Bank 153,049,272 131,363,000
Other Borrowings 8,088,194 7,289,773
Junior Subordinated Debentures 5,155,000 -
Advance Payments By Borrowers For Taxes
And Insurance 486,101 501,998
Mandatorily Redeemable Financial Instruments 1,417,312 -
Other Liabilities 3,483,512 2,691,946
------------ ------------
Total Liabilities 695,416,983 621,076,056
------------ ------------
Commitments (Notes 6 and 16)
Shareholders' Equity:
Serial Preferred Stock, $.01 Par Value;
Authorized 200,000 Shares; Issued And
Outstanding, None - -
Common Stock, $.01 Par Value; Authorized
5,000,000 Shares, Issued And Outstanding
Shares, 2,637,942 And 2,609,116,
Respectively, at March 31, 2007 And
2,558,234 And 2,537,378, Respectively,
at March 31, 2006 25,814 25,582
Additional Paid-In Capital 4,850,029 4,404,110
Treasury Stock, (At Cost 28,826 and 11,312
shares at March 31, 2007 and 2006,
respectively) (651,220) (238,656)
Indirect Guarantee Of Employee Stock
Ownership Trust Debt - (215,503)
Accumulated Other Comprehensive Loss (747,316) (2,086,509)
Retained Earnings, Substantially Restricted 39,215,901 35,712,735
------------ ------------
Total Shareholders' Equity 42,693,208 37,601,759
------------ ------------
Total Liabilities And Shareholders' Equity $738,110,191 $658,677,815
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended March 31,
---------------------------------------
2007 2006 2005
----------- ----------- -----------
Interest Income:
Loans $31,180,719 $23,410,189 $17,001,126
Mortgage-Backed Securities 5,772,667 5,455,369 5,584,979
Investment Securities 5,070,355 3,689,641 3,155,436
Other 73,873 62,008 27,764
----------- ----------- -----------
Total Interest Income 42,097,614 32,617,207 25,769,305
----------- ----------- -----------
Interest Expense:
NOW And Money Market Accounts 6,609,207 5,360,351 3,945,513
Passbook Accounts 165,664 175,237 173,250
Certificate Accounts 10,497,490 5,906,157 3,597,761
FHLB Advances And Other Borrowed
Money 6,468,828 4,527,182 3,808,221
Junior Subordinated Debentures 191,811 - -
----------- ----------- -----------
Total Interest Expense 23,933,000 15,968,927 11,524,745
----------- ----------- -----------
Net Interest Income 18,164,614 16,648,280 14,244,560
Provision For Loan Losses 600,000 660,000 780,000
----------- ----------- -----------
Net Interest Income After Provision
For Loan Losses 17,564,614 15,988,280 13,464,560
----------- ----------- -----------
Other Income:
Gain On Sale Of Investment
Securities - 48,962 -
Gain On Sale Of Loans 460,750 467,481 435,635
Service Fees On Deposit Accounts 1,239,579 1,132,194 1,226,118
Commissions From Insurance Agency 649,548 41,803 26,567
Other Agency Income 67,613 - -
Trust Income 482,376 363,413 226,266
Bank Owned Life Insurance Income 242,619 - -
Other 718,046 575,715 609,732
----------- ----------- -----------
Total Other Income 3,860,531 2,629,568 2,524,318
----------- ----------- -----------
General And Administrative Expenses:
Compensation And Employee Benefits 9,384,640 7,579,695 6,255,794
Occupancy 1,411,006 1,263,839 1,086,017
Advertising 297,330 172,409 182,699
Depreciation And Maintenance Of
Equipment 1,309,696 1,094,149 1,047,815
FDIC Insurance Premiums 58,325 57,702 57,830
Amortization Of Intangibles 67,500 - -
Other 2,628,612 2,859,587 2,142,636
----------- ----------- -----------
Total General And Administrative
Expenses 15,157,109 13,027,381 10,772,791
----------- ----------- -----------
Income Before Income Taxes 6,268,036 5,590,467 5,216,087
Provision For Income Taxes 2,141,483 1,777,616 1,710,592
----------- ----------- -----------
Net Income $ 4,126,553 $ 3,812,851 $ 3,505,495
=========== =========== ===========
Net Income Per Common Share (Basic) $ 1.59 $ 1.51 $ 1.39
=========== =========== ===========
Net Income Per Common Share
(Diluted) $ 1.58 $ 1.48 $ 1.37
=========== =========== ===========
Cash Dividend Per Share On Common
Stock $ .24 $ 0.16 $ 0.11
=========== =========== ===========
Weighted Average Shares Outstanding
(Basic) 2,594,525 2,532,999 2,524,123
=========== =========== ===========
Weighted Average Shares Outstanding
(Diluted) 2,608,552 2,575,061 2,561,437
=========== =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
For the Years Ended March 31, 2007, 2006 and 2005
Accumulated
Additional Indirect Other
Common Paid - In Treasury Guarantee Comprehensive Retained
Stock Capital Stock Of ESOP Debt Income (Loss) Earnings Total
------ ---------- ---------- ------------ ------------- ---------- -------
<s> <c> <c> <c> <c> <c> <c> <c>
Balance At March 31,
2004 $25,333 $4,013,674 $ - $(336,972) $ 689,755 $29,080,125 $33,471,915
Net Income - - - - 3,505,495 3,505,495
Other Comprehensive
Income, Net Of
Tax:
Unrealized Holding
Losses On
Securities
Available For
Sale, Net Of
Taxes - - - - (1,651,259) - (1,651,259)
-----------
Comprehensive Income - - - - - - 1,854,236
Purchase Of Treasury
Stock At Cost,
8,077 Shares (165,089) (165,089)
Exercise Of Stock
Options 105 168,130 - - - - 168,235
Decrease in
Indirect Guarantee
Of ESOP Debt - - - 60,755 - - 60,755
Cash Dividends - - - - - (278,987) (278,987)
------- ---------- --------- --------- ----------- ----------- -----------
Balance At March
31, 2005 $25,438 $4,181,804 $(165,089) $(276,217) $ (961,504) $32,306,633 $35,111,065
======= ========== ========= ========= =========== =========== ===========
- ------------------------------------------------------------------------------------------------------------
Accumulated
Additional Indirect Other
Common Paid - In Treasury Guarantee Comprehensive Retained
Stock Capital Stock Of ESOP Debt Income (Loss) Earnings Total
------ ---------- ---------- ------------ ------------- ---------- -------
<s> <c> <c> <c> <c> <c> <c> <c>
Balance At March
31, 2005 $25,438 $4,181,804 $(165,089) $(276,217) $ (961,504) $32,306,633 $35,111,065
Net Income - - - - - 3,812,851 3,812,851
Other Comprehensive
Income, Net Of
Tax:
Unrealized Holding
Losses On
Securities
Available For
Sale, Net of
Taxes - - - - (1,094,649) - (1,094,649)
Reclassification
Adjustment For
Gains Included
In Net Income,
Net of Taxes (30,356) (30,356)
-----------
Comprehensive
Income - - - - - - 2,687,846
Purchase of
Treasury Stock
At Cost, 3,235
Shares - - (73,567) - - - (73,567)
Exercise Of Stock
Options 144 222,306 - - - - 222,450
Decrease in
Indirect
Guarantee Of
ESOP Debt - - - 60,714 - - 60,714
Cash Dividends - - - - - (406,749) (406,749)
------- ---------- --------- --------- ----------- ----------- -----------
Balance At March
31, 2006 $25,582 $4,404,110 $(238,656) $(215,503) $(2,086,509) $35,712,735 $37,601,759
======= ========== ========= ========= =========== =========== ===========
- ------------------------------------------------------------------------------------------------------------
Accumulated
Additional Indirect Other
Common Paid - In Treasury Guarantee Comprehensive Retained
Stock Capital Stock Of ESOP Debt Income (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 - - - - - 4,126,553 4,126,553
Other Comprehensive
Income, Net Of
Tax:
Unrealized Holding
Gains On
Securities
Available For
Sale, Net Of
Taxes - - - - 1,339,193 - 1,339,193
-----------
Comprehensive
Income - - - - - - 5,465,746
Purchase of
Treasury Stock
At Cost, 17,514
Shares (412,564) - - - (412,564)
Exercise Of Stock
Options 232 438,233 - - - - 438,465
Decrease in
Indirect
Guarantee Of
ESOP Debt - - - 215,503 - - 215,503
Stock Compensation
Expense 7,686 7,686
Cash Dividends - - - - - (623,387) (623,387)
------- ---------- --------- --------- ----------- ----------- -----------
Balance At March
31, 2007 $25,814 $4,850,029 $(651,220) $ - $ (747,316) $39,215,901 $42,693,208
======= ========== ========= ========= =========== =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended March 31,
------------------------------------------
2007 2006 2005
------------ ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income $ 4,126,553 $ 3,812,851 $ 3,505,495
Adjustments To Reconcile Net
Income To Net Cash Provided By
Operating Activities:
Depreciation Expense 1,011,963 965,226 859,809
Amortization of Intangible Assets 67,500 - -
Stock Option Compensation Expense 7,686 - -
Discount Accretion And Premium
Amortization 405,777 927,981 1,193,221
Provisions For Losses On Loans
And Real Estate 600,000 660,000 780,000
Gain On Sales Of Loans (460,750) (467,481) (435,635)
Gain On Sales Of Investment
Securities - (48,962) -
(Gain) Loss On Sale Of Real
Estate (48,678) 21,416 (50,329)
Amortization Of Deferred Fees
On Loans (283,252) (170,009) (184,642)
Loss (Gain) On Disposition Of
Premises And Equipment 165 32,344 (3,525)
Proceeds From Sale Of Loans
Held For Sale 30,793,793 30,370,085 26,392,654
Origination Of Loans Held
For Sale (30,542,147) (28,945,486) (26,530,912)
(Increase) Decrease In
Accrued Interest Receivable:
Loans (363,179) (194,142) 717
Mortgage-Backed Securities (42,250) 47,501 (6,392)
Investments (236,019) (223,876) 56,981
(Decrease) Increase In
Advance Payments By Borrowers (15,897) 84,588 99,989
Other, Net 88,888 295,799 (1,708,142)
------------ ------------ ------------
Net Cash Provided By Operating
Activities 5,110,153 7,167,835 3,969,289
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase Of Mortgage-Backed
Securities Available For
Sale (30,261,270) (31,386,556) (53,211,974)
Principal Repayments On
Mortgage-Backed Securities
Available For Sale 34,829,410 49,386,450 47,852,116
Principal Repayments On
Mortgage-Backed Securities
Held To Maturity - 10,407 89,769
Purchase Of Investment
Securities Held To Maturity - - (26,041,400)
Purchase Of Investment
Securities Available For Sale (33,152,147) (28,031,364) (2,015,626)
Maturities Of Investment
Securities Available For Sale 8,019,815 4,924,531 13,111,305
Maturities Of Investment
Securities Held To Maturity 11,000,000 1,000,000 21,000,000
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 (7,232,000) (6,897,300) (4,967,800)
Redemption Of FHLB Stock 6,172,600 5,982,000 3,550,100
Increase In Loans Receivable (61,061,837) (59,900,035) (56,631,543)
Proceeds From Sale Of
Repossessed Assets 139,700 173,547 432,595
Purchase And Improvement Of
Premises And Equipment (5,244,344) (4,746,502) (2,211,117)
Proceeds From Sale of
Premises and Equipment - - 3,525
Increase In Bank Owned
Life Insurance (783,619) (5,000,001) -
------------ ------------ ------------
Net Cash Used By Investing
Activities (77,573,692) (70,437,813) (59,040,050)
------------ ------------ ------------
(Continued)
27
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the Years Ended March 31,
------------------------------------------
2007 2006 2005
------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Increase In Deposit Accounts 44,508,253 48,941,948 40,694,746
Proceeds From FHLB Advances 279,973,450 262,655,000 148,738,000
Repayment Of FHLB Advances (258,287,178) (243,330,000) (133,036,000)
Proceeds Of Other Borrowings, Net 798,421 1,695,616 117,134
Proceeds From Junior Subordinated
Debentures 5,155,000 - -
Proceeds From Exercise Of Stock
Options 438,465 222,450 168,235
Purchase of Treasury Stock (412,564) (73,567) (165,089)
Dividends To Shareholders (623,387) (406,749) (278,988)
------------- ------------- ------------
Net Cash Provided By Financing
Activities 71,550,460 69,704,698 56,238,038
------------- ------------- ------------
Net Increase (Decrease) In Cash
And Cash Equivalents (913,079) 6,434,720 1,167,277
Cash And Cash Equivalents At
Beginning Of Year 14,351,208 7,916,488 6,749,211
------------- ------------- ------------
Cash And Cash Equivalents At End
Of Year $ 13,438,129 $ 14,351,208 $ 7,916,488
============= ============= ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash Paid During The Period For:
Interest $ 23,339,597 $ 15,679,123 $ 11,413,369
============= ============= ============
Income Taxes $ 1,869,292 $ 2,276,825 $ 2,221,012
============= ============= ============
Supplemental Schedule Of Non
Cash Transactions:
Additions To Repossessed Assets $ 24,909 $ 232,985 $ 384,397
============= ============= ============
Decrease (Increase) In
Unrealized Net Loss On
Securities Available For Sale,
Net Of Taxes $ 1,339,193 $ (1,125,005) $ (1,651,259)
============= ============= ============
Issuance Of A Mandatorily
Redeemable Financial
Instrument Through The
Issuance Of Common Stock $ 1,417,312 $ - $ -
============= ============= ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies
-------------------------------
The following is a description of the more significant accounting and
reporting policies used in the preparation and presentation of the
accompanying consolidated financial statements. All significant intercompany
transactions have been eliminated in consolidation.
(a) Basis of Consolidation and Nature of Operations
-----------------------------------------------
The accompanying consolidated financial statements include the
accounts of Security Federal Corporation (the "Company") and its
wholly owned subsidiary, Security Federal Bank (the "Bank") and the
Bank's wholly owned subsidiaries, Security Federal Insurance, Inc.
("SFINS"), Security Federal Investments, Inc. ("SFINV"), Security
Federal Trust Inc. ("SFT"), and Security Financial Services
Corporation ("SFSC"). Security Federal Corporation has a wholly
owned subsidiary, Security Federal Statutory Trust (the "Trust"),
which issued and sold fixed and floating rate capital securities of
the Trust. However, under current accounting guidance, the Trust
is not consolidated in the financial statements. The Bank is
primarily engaged in the business of accepting savings and
demand deposits and originating mortgage loans and other loans to
individuals and small businesses for various personal and
commercial purposes. SFINS, SFINV, and SFT were formed during
fiscal 2002 and began operating during the December 2001 quarter.
SFINS is an insurance agency offering auto, business, health, home
and life insurance. SFINS has a wholly owned subsidiary, Collier
Jennings Financial Corporation which has as subsidiaries Collier
Jennings Inc., The Auto Insurance Store Inc., and Security Federal
Premium Plan Plans Inc. SFINV engages primarily in investment
brokerage services. SFT offers trust, financial planning and
financial management services.
(b) Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks, interest-bearing balances in other
banks, and federal funds sold. Cash equivalents have original
maturities of three months or less.
(c) Investment and Mortgage-Backed Securities
-----------------------------------------
Investment securities, including mortgage-backed securities, are
classified in one of three categories: held to maturity, available
for sale, or trading. Management determines the appropriate
classification of debt securities at the time of purchase.
Investment securities are classified as held to maturity when the
Company has the positive intent and ability to hold the securities
to maturity. These securities are recorded at cost and adjusted
for amortization of premiums and accretion of discounts over the
estimated life of the security using a method that approximates a
level yield. Prepayment assumptions on mortgage-backed securities
are anticipated.
Management classifies investment securities that are not considered
to be held to maturity as available for sale. These type of
investments are stated at fair value with unrealized gains and
losses, net of tax, reported in a separate component of
shareholders' equity ("accumulated other comprehensive income
(loss)"). Gains and losses from sales of investment and
mortgage-backed securities available for sale are determined using
the specific identification method. The Company has no trading
securities.
(d) Loans Receivable Held for Investment
------------------------------------
Loans are stated at their unpaid principal balance. Interest
income is computed using the simple interest method and is recorded
in the period earned.
29
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
(e) Allowance for Loan Losses
-------------------------
The Company provides for loan losses using the allowance method.
Accordingly, all loan losses are charged to the related allowance
and all recoveries are credited to the allowance for loan losses.
Additions to the allowance for loan losses are provided by charges
to operations based on various factors which, in Management's
judgment, deserve current recognition in estimating possible
losses. Such factors considered by Management include the fair
value of the underlying collateral, stated guarantees by the
borrower, if applicable, the borrower's ability to repay from other
economic resources, growth and composition of the loan portfolios,
the relationship of the allowance for loan losses to 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 to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making
these evaluations. Allowances for loan losses are subject to
periodic evaluations by various regulatory authorities and may be
subject to adjustments based upon the information that is available
at the time of their examinations.
The Company values impaired loans at the loan's fair value if it is
probable that the Company will be unable to collect all amounts due
according to the terms of the loan agreement at the present value
of expected cash flows, the market price of the loan, if available,
or the value of the underlying collateral. Expected cash flows are
required to be discounted at the loan's effective interest rate.
When the ultimate collectibility of an impaired loan's principal is
in doubt, wholly or partially, all cash receipts are applied to
principal. When this doubt does not exist, cash receipts are
applied under the contractual terms of the loan agreement first to
interest then to principal. Once the recorded principal balance
has been reduced to zero, future cash receipts are applied to
interest income to the extent that any interest has been foregone.
Further cash receipts are recorded as recoveries of any amounts
previously charged off.
(f) Loans Receivable Held for Sale
------------------------------
Loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses are provided for in a valuation
allowance by charges to operations.
(g) Repossessed Assets Acquired in Settlement of Loans
--------------------------------------------------
Repossessed assets represent real estate and other assets acquired
through foreclosure or repossession and are initially recorded at
the lower of cost (principal balance of the former mortgage loan
less any specific valuation allowances) or estimated fair value
less costs to sell. Subsequent improvements are capitalized.
Costs of holding real estate, such as property taxes, insurance,
general maintenance and interest expense, are expensed as a period
cost. Fair values are reviewed regularly and allowances for
possible losses are established when the carrying value of the
asset owned exceeds the fair value less estimated costs to sell.
Fair values are generally determined by reference to an outside
appraisal.
(h) Premises and Equipment
----------------------
Premises and equipment are carried at cost, net of accumulated
depreciation. Depreciation of premises and equipment is amortized
on a straight-line method over the estimated useful life of the
related asset. Estimated lives are seven to 30 years for buildings
and improvements and generally three to 10 years for furniture,
fixtures and equipment. Maintenance and repairs are charged to
current expense. The cost of major renewals and improvements
are capitalized.
(i) Intangible Assets and Goodwill
------------------------------
Intangible Assets consist of the customer list and employment
contracts resulting from the Company's acquisition of Collier
Jennings Financial Corporation in July 2006. The goodwill also is
a result of the excess of the cost over the fair value of net
assets resulting from the Collier Jennings acquisition.
Intangible assets are amortized over their estimated economic lives
using methods that reflect the pattern in which the economic
benefits are utilized. Goodwill is reviewed for impairment
annually or whenever events or changes in circumstances indicate
the carrying amount of an asset may not be recoverable.
30
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(j) Income Taxes
------------
Deferred tax expense or benefit is recognized for the net change
during the year in the deferred tax liability or asset. That
amount together with income taxes currently payable is the total
amount of income tax expense or benefit for the year. Deferred
taxes are provided for in differences in financial reporting bases
for assets and liabilities compared with their tax bases.
Generally, a current tax liability or asset is established for
taxes presently payable or refundable and a deferred tax liability
or asset is established for future tax items. A valuation
allowance, if applicable, is established for deferred tax assets
that may not be realized. Tax bad debt reserves in excess of the
base year amount (established as taxable years ending March 31,
1988 or later) would create a deferred tax liability. Deferred
income taxes are provided for in differences between the provision
for loan losses for financial statement purposes and those allowed
for income tax purposes.
(k) Loan Fees and Costs Associated with Originating Loans
-----------------------------------------------------
Loan fees received, net of direct incremental costs of originating
loans, are deferred and amortized over the contractual life of the
related loan. The net fees are recognized as yield adjustments by
applying the interest method. Prepayments are not anticipated.
(l) Interest Income
---------------
Interest on loans is accrued and credited to income monthly based
on the principal balance outstanding and the contractual rate on
the loan. The Company places loans on non-accrual status when they
become greater than 90 days delinquent or when, in the opinion of
management, full collection of principal or interest is unlikely.
The Company provides an allowance for uncollectible accrued
interest on loans that are contractually 90 days delinquent for all
interest accrued prior to the loan being placed on non-accrual
status. The loans are returned to an accrual status when full
collection of principal and interest appears likely.
(m) Advertising Expense
-------------------
Advertising and public relations costs are generally expensed as
incurred. External costs relating to direct mailing costs are
expensed in the period in which the direct mailings are sent.
Advertising and public relations costs of $297,330, $172,409, and
$182,699 were included in the Company's results of operations for
2007, 2006, and 2005, respectively.
31
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(n) Fair Value of Financial Instruments
-----------------------------------
The Company discloses the fair value of on- and off-balance sheet
financial instruments when it is practicable to do so. Fair values
are based on quoted market prices, where available, on estimates of
present value, or on other valuation techniques. These estimates
are made at a specific point in time, are subjective in nature, and
involve uncertainties and significant judgment. In addition, the
Company does not disclose the fair value of non-financial
instruments. Accordingly, the aggregate fair values presented do
not represent the underlying fair value of the Company.
Fair value approximates carrying value for the following financial
instruments due to the short-term nature of the instrument: cash
and cash equivalents.
Securities are valued using quoted fair market prices.
Fair value for the Company's off-balance sheet financial
instruments is based on the discounted present value of the
estimated future cash flows.
Fair value for variable rate loans that reprice frequently, loans
held for sale, and loans that mature in less than three months is
based on the carrying value. Fair value for fixed rate mortgage
loans, personal loans, and other loans (primarily commercial)
maturing after three months is based on the discounted present
value of the estimated future cash flows. Discount rates used in
these computations approximate the rates currently offered for
similar loans of comparable terms and credit quality.
Fair value for demand deposit accounts and interest-bearing
accounts with no fixed maturity date is equal to the carrying
value. Certificates of deposit accounts and securities sold under
repurchase agreements maturing within one year are valued at their
carrying value. The fair value of certificates of deposit accounts
and securities sold under repurchase agreements after one year are
estimated by discounting cash flows from expected maturities using
current interest rates on similar instruments. Fair value for
long-term FHLB advances is based on discounted cash flows using the
Company's current incremental borrowing rate. Discount rates used
in these computations approximate rates currently offered for
similar borrowings of comparable terms and credit quality. Junior
subordinated debentures are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements.
32
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(o) Stock-Based Compensation
------------------------
On April 1, 2006, the Company adopted the fair value recognition
provisions of Financial Accounting Standards Board ("FASB") SFAS
123 (R), Shared-Based Payment, 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 April 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 123 (R)
have been utilized.
In adopting SFAS 123 (R), 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 net
income per common share as if the Company had applied fair value
recognition provisions to stock-based employee compensation for the
years ended March 31, 2007, 2006, and 2005.
2007 2006 2005
---------- ---------- ----------
Net Income, As Reported $4,126,553 $3,812,851 $3,505,495
Deduct: Total stock-based
employee compensation
expense determined under
fair-value based method for
all awards, net of tax $ - $ (365,483) $ (150,807)
---------- ---------- ----------
Net Income, Pro Forma $4,126,553 $3,447,368 $3,354,688
========== ========== ==========
Net Income Per Common Share
(Basic), As Reported $ 1.59 $ 1.51 $ 1.39
========== ========== ==========
Net Income Per Common Share
(Basic), Pro Forma $ 1.59 $ 1.36 $ 1.33
========== ========== ==========
Net Income Per Common Share
(Diluted), As Reported $ 1.58 $ 1.48 $ 1.37
========== ========== ==========
Net Income Per Common Share
(Diluted), Pro Forma $ 1.58 $ 1.34 $ 1.31
========== ========== ==========
On March 30, 2006, the Board of Directors approved accelerating the
vesting of 98,800 unvested stock options. The accelerated vesting
was effective as of March 30, 2006. All of the other terms and
conditions applicable to the outstanding stock options remained
unchanged.
The decision to accelerate vesting of these options will avoid
recognition of pre-tax compensation expense by the Company upon the
adoption of SFAS 123(R). In the Company's view, the future
compensation expense could outweigh the incentive and retention
value associated with the stock options. The future compensation
expense, net of income taxes, that was avoided, based upon the
effective date of April 1, 2006, was approximately $275,000. The
Company believes that the acceleration of vesting stock options
meets the criteria for variable accounting under FIN No. 44. Based
upon past experience, the Company believes the grantees of these
stock options will remain as a director or employee of the Company.
33
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(p) Earnings Per Share
------------------
Net income per share is computed by dividing consolidated net
income by the weighted average number of common shares outstanding
during the period. The treasury stock method is used to compute
the dilutive effect of stock options in the diluted weighted
average number of common shares.
For the Year Ended
----------------------------------------------------------
March 31, 2007 March 31, 2006
----------------------------- ---------------------------
Per Share Per Share
Income Shares Amounts Income Shares Amounts
------ ------ --------- ------ ------ ---------
Basic EPS $4,126,553 2,594,525 $ 1.59 $3,812,851 2,532,999 $ 1.51
Dilutive effect
of:
Stock Options - 14,027 (0.01) - 32,666 (0.02)
ESOP - - - - 10,396 (0.01)
---------- --------- ------ ---------- --------- ------
Diluted EPS $4,126,553 2,608,552 $ 1.58 $3,812,851 2,576,061 $ 1.48
========== ========= ====== ========== ========= ======
For the Year Ended
March 31, 2005
--------------------------------
Per share
Income Shares amounts
------ ------ ---------
Basic EPS $3,505,495 2,524,123 $ 1.39
Dilutive effect of:
Stock Options - 22,726 (0.012)
ESOP - 14,588 (0.008)
---------- --------- -------
Diluted EPS $3,505,495 2,561,437 $ 1.37
========== ========= =======
(q) Use of Estimates
----------------
The preparation of financial statements in conformity with GAAP
requires Management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of income and expenses during
the reporting periods. Actual results could differ from those
estimates.
34
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(r) Recently Issued Accounting Standards
------------------------------------
The following is a summary of recent authoritative pronouncements
that could affect accounting, reporting, and disclosure of
financial information by the Company:
In February 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting ("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." FAS 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 al 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 derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transitions. FIN 48
is effective for fiscal years beginning afterbeginning after
December 15, 2006. The Company is currently analyzing the effects
of FIN 48 Company the its financial position, results of
operations or cash flows.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.
35
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(r) Recently Issued Accounting Standards
------------------------------------
In September 2006, the FASB issued SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement
Plans" ("SFAS 158"), which amends SFAS 87 and SFAS 106 to require
recognition of the overfunded or underfunded status of pension and
other postretirement benefit plans on the balance sheet. Under
SFAS 158, gains and losses, prior service costs and credits, and
any remaining transition amounts under SFAS 87 and SFAS 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 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, that would be required to
be accounted for under SFAS 158 and the is currently analyzing the
effects of SFAS 158 but does not expect its implementation of SFAS
158 didwill not have any impact will have a significant impact on
the Company's financial conditions or results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities - Including
an amendment of FASB Statement No. 115." This statement permits,
but does not require, entities to measure many financial
instruments at fair value. The objective is to provide entities
with an opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions.
Entities electing this option will apply it when the entity first
recognizes an eligible instrument and will report unrealized gains
and losses on such instruments in current earnings. This
statement 1) applies to all entities, 2) specifies certain election
dates, 3) can be applied on an instrument-by-instrument basis with
some exceptions, 4) is irrevocable and 5) applies only to entire
instruments. One exception is demand deposit liabilities, which are
explicitly excluded as qualifying for fair value. With respect to
SFAS 115, available-for-sale and held-to-maturity securities at the
effective date are eligible for the fair value option at that date.
If the fair value option is elected for those securities at the
effective date, cumulative unrealized gains and losses at that date
shall be included in the cumulative-effect adjustment and
thereafter, such securities will be accounted for as trading
securities. SFAS 159 is effective for the Company on January 1,
2008. Earlier adoption is permitted in 2007 if the Company also
elects to apply the provisions of SFAS 157, "Fair Value
Measurement." The Company is currently analyzing the fair value
option provided under SFAS 159.
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, 2007. Entities should
recognize the effects of applying this Issue 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.
36
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(r) Recently Issued Accounting Standards
------------------------------------
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.
In December 2006, the FASB issued a Staff Position ("FSP") on EITF
00-19-2, "Accounting for Registration Payment Arrangements ("FSP
EITF 00-19-2"). This FSP specifies that the contingent obligation
to make future payments or otherwise transfer consideration under a
registration payment arrangement, whether issued as a separate
agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in
accordance with SFAS No. 5, "Accounting for Contingencies." If the
transfer of consideration under a registration payment arrangement
is probable and can be reasonably estimated at inception, the
contingent liability under the registration payment arrangement is
included in the allocation of proceeds from the related financing
transaction (or recorded subsequent to the inception of a prior
financing transaction) using the measurement guidance in SFAS No.
5. This FSP is effective immediately for registration payment
arrangements and the financial instruments subject to those
arrangements that are entered into or modified subsequent to the
issuance of the FSP. For prior arrangements, the FSP is effective
for financial statements issued for fiscal years beginning after
December 15, 2006 and interim periods within those years. The
Company does not believe the adoption of this FSP will have a
material impact on its financial position, results of operations
and cash flows.
Other accounting standards that have been issued or proposed by the
FASB or other standards-setting bodies that do not require adoption
until a future date are not expected to have a material impact on
the consolidated financial statements upon adoption.
(s) Risks and Uncertainties
-----------------------
In the normal course of its business, the Company encounters two
significant types of risk: economic and regulatory. There are
three main components of economic risk: interest rate risk, credit
risk, and market risk. The Company is subject to interest rate
risk to the degree that its interest-bearing liabilities mature or
reprice at different speeds, or on different bases, than its
interest-earning assets. Credit risk is the risk of default on the
Company's loan portfolio that results from borrowers' inability or
unwillingness to make contractually required payments. Market risk
reflects changes in the value of collateral underlying loans
receivable, the valuation of real estate held by the Company, and
the valuation of loans held for sale and mortgage-backed securities
available for sale. The Company is subject to the regulations of
various government agencies. These regulations can and do change
significantly from period to period. The Company also undergoes
periodic examinations by the regulatory agencies, which may subject
it to further changes with respect to asset valuations, amounts of
required loss allowances, and operating restrictions, resulting
form the regulators' judgments based on information available to
them at the time of their examination.
(t) Reclassifications
-----------------
Certain amounts in prior years' consolidated financial statements
have been reclassified to conform to current year classifications.
37
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(2) 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
former 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
==========
(3) 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:
March 31, 2007
-----------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair value
-------------- ---------- ---------- ------------
FHLB Securities $ 38,487,381 $ 17,627 $ 131,886 $ 38,373,122
Federal Farm Credit
Securities 9,217,205 8,580 11,504 9,214,281
FNMA Bonds 2,942,530 - 12,141 2,930,389
FHLMC Bonds 64,071 - 94 63,977
Mortgage-Backed
Securities 136,156,742 276,292 1,352,007 135,081,027
Equity Securities 102,938 562 - 103,500
------------ -------- ---------- ------------
$186,970,867 $303,061 $1,507,632 $185,766,296
============ ======== ========== ============
38
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) Investment and Mortgage-Backed Securities, Available for Sale, Continued
------------------------------------------------------------------------
March 31, 2006
-----------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair value
-------------- ---------- ---------- ------------
FHLB Securities $ 24,269,864 $ - $ 265,031 $ 24,004,833
Federal Farm Credit
Securities 2,965,989 - 25,049 2,940,940
FNMA Bonds 1,000,000 - 20,620 979,380
FHLMC Bonds 230,693 - 534 230,159
Mortgage-Backed
Securities 138,238,752 126,648 3,178,584 135,186,816
Equity Securities 102,938 - - 102,938
------------ -------- ---------- ------------
$166,808,236 $126,648 $3,489,818 $163,445,066
============ ======== ========== ============
FHLB securities, Federal Farm Credit securities, FNMA bonds, FHLMC bonds,
and FNMA and FHLMC mortgage-backed securities are issued by
government-sponsored enterprises ("GSE's"). GSE's are not backed by the
full faith and credit of the United States government. Included in the
tables above and below in mortgage-backed securities are GNMA mortgage-
backed securities, which are backed by the full faith and credit of the
United States government. At March 31, 2007, the Bank held an amortized
cost and fair value of $48.8 million in GNMA mortgage-backed securities
included in mortgage-backed securities listed above.
The amortized cost and fair value of investment and mortgage-backed
securities available for sale at March 31, 2007 are shown below by
contractual maturity. Expected maturities will differ from contractual
maturities because borrowers have the right to prepay obligations with or
without call or prepayment penalties.
Amortized Cost Fair Value
-------------- ----------
Less Than One Year $ 5,544,938 $ 5,528,733
One - Five Years 22,933,608 22,875,414
More Than Five Years 22,335,579 22,281,122
Mortgage-Backed Securities 136,156,742 135,081,027
------------ ------------
$186,970,867 $185,766,296
============ ============
At March 31, 2007 and 2006, the amortized cost and fair value of
investment and mortgage-backed securities available for sale pledged as
collateral for certain deposit accounts, FHLB advances and other
borrowings were $80.5 million and $79.5 million and $56.8 million and
$56.0 million, respectively.
The Bank received approximately $3.8 million in proceeds from sales of
available for sale securities with approximately $42,000 recorded in
gross gains and $3,500 in gross losses during the year ended March 31,
2006. There were no sales of available for sale securities in the years
ended March 31, 2007 and 2005.
The following table shows gross unrealized losses and fair value,
aggregated by investment category, and length of time that individual
available for sale securities have been in a continuous unrealized loss
position, at March 31, 2007.
Less than 12 Months 12 Months or More Total
-------------------- ---------------------- ----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------- ---------- ------- ---------- ------- -----------
<s> <c> <c> <c> <c> <c> <c>
Agency securities $15,156,780 $33,884 $17,461,591 $ 121,741 $32,618,371 $ 155,625
Mortgage-backed
securities $10,054,833 $52,982 $75,881,409 $1,299,025 $85,936,241 $1,352,007
39
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) Investment and Mortgage-Backed Securities, Available for Sale, Continued
------------------------------------------------------------------------
Securities classified as available-for-sale are recorded at fair market
value. Approximately 94.2% of the unrealized losses, or 121 individual
securities, consisted of securities in a continuous loss position for 12
months or more. The Company has the ability and intent to hold these
securities until such time as the value recovers or the securities
mature. The Company believes, based on industry analyst reports and
credit ratings, that the deterioration in value is attributable to
changes in market interest rates and is not in the credit quality of the
issuer and therefore, these losses are not considered other-than-
temporary.
(4) 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:
March 31, 2007
---------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
-------------- ---------- ---------- -----------
FHLB Securities $55,994,852 $21,560 $573,841 $55,442,571
Federal Farm Credit
Securities 7,988,737 - 144,667 7,844,070
----------- ------- -------- -----------
$63,983,589 $21,560 $718,508 $63,286,641
=========== ======= ======== ===========
March 31, 2006
---------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
-------------- ---------- ---------- -----------
FHLB Securities $66,002,180 $ - $1,618,360 $64,383,820
Federal Farm Credit
Securities 8,985,625 - 284,995 8,700,630
----------- ------- ---------- -----------
$74,987,805 $ - $1,903,355 $73,084,450
=========== ======= ========== ===========
FHLB securities and Federal Farm Credit securities are issued by
government-sponsored enterprises ("GSE's"). GSE's are not backed by the
full faith and credit of the United States government.
The amortized cost and fair value of investment and mortgage-backed
securities held to maturity at March 31, 2007, by contractual maturity,
are shown below. Expected maturities will differ from contractual
maturities due to call features on certain investments.
Amortized Cost Fair Value
-------------- ----------
Less Than One Year $ 9,000,000 $ 8,960,320
One - Five Years 25,988,130 25,755,350
More Than Five Years 28,995,459 28,570,971
----------- -----------
$63,983,589 $63,286,641
=========== ===========
At March 31, 2007 and 2006, the amortized cost and fair value of
investment and mortgage-backed securities held to maturity pledged as
collateral for certain deposit accounts, FHLB advances and other
borrowings were $51.0 million and $50.4 million and $49.0 million and
$47.6 million, respectively.
The Bank received approximately $250,000 in proceeds from the sale of
three held to maturity securities with approximately $10,324 recorded in
gross gains and no gross losses during the year ended March 31, 2006.
All three securities had paid down at least ninety percent therefore
meeting the intent of SFAS 115, "Accounting for Certain Investment in
Debt and Equity Securities". There were no sales of held to maturity
securities during the years ended March 31, 2007 and 2005.
40
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(4) Investment and Mortgage-Backed Securities, Held to Maturity, Continued
----------------------------------------------------------------------
The following table shows gross unrealized losses and fair value,
aggregated by investment category, and length of time that individual
held to maturity securities have been in a continuous unrealized loss
position, at March 31, 2007.
Less than 12 Months 12 Months or More Total
-------------------- -------------------- -------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------- ---------- ------- ---------- ------- ----------
Agency
securities $1,978,750 $12,740 $59,265,081 $705,768 $61,243,831 $718,508
Approximately 98.2% of the unrealized losses, or 60 individual
securities, consisted of securities in a continuous loss position for 12
months or more. The Company's held-to-maturity portfolio is recorded at
amortized cost. The Company has the ability and intends to hold these
securities to maturity. The Company believes, based on industry analysis
reports and credit ratings, that the deterioration in value is
attributable to changes in market interest rates and not in credit
quality of the issuer and therefore, these losses are not considered
other-than-temporary.
41
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(5) Loans Receivable, Net
---------------------
Loans receivable, net, at March 31 consisted of the following:
2007 2006
------------ ------------
Residential Real Estate Loans $125,512,411 $122,026,698
Consumer Loans 63,809,478 58,612,669
Commercial Business And Real Estate Loans 259,207,877 209,214,332
Loans Held For Sale 1,529,748 1,320,644
------------ ------------
450,059,514 391,173,943
------------ ------------
Less:
Allowance For Loan Losses 7,296,791 6,704,734
Loans In Process 6,443,372 9,185,133
Deferred Loan Fees 280,991 175,000
------------ ------------
14,021,154 16,064,867
------------ ------------
Total Loans Receivable, Net $436,038,360 $375,109,076
============ ============
Changes in the allowance for loan losses for the years ended March 31 are
summarized as follows:
2007 2006 2005
---------- ---------- ----------
Balance At Beginning Of Year $6,704,734 $6,284,055 $5,763,935
Allowance Acquired in Acquisition 21,697 - -
Provision For Loan Losses 600,000 660,000 780,000
Charge Offs (132,712) (301,650) (443,132)
Recoveries 103,072 62,329 183,252
---------- ---------- ----------
Total Allowance For Loan Losses $7,296,791 $6,704,734 $6,284,055
========== ========== ==========
The following table sets forth the amount of the Company's non-accrual
loans and the status of the related interest income at March 31.
2007 2006
---------- ----------
Non-Accrual Loans $1,055,000 $1,191,000
========== ==========
Interest Income That Would Have Been
Recognized Under Original Terms $ 107,000 $ 111,000
========== ==========
At March 31, 2007 and 2006, impaired loans amounted to $1.5 million and
$2.1 million, respectively. Losses on impaired loans are accounted for
in the allowance for loan loss. For the years ended March 31, 2007 and
2006, the average recorded investment in impaired loans was $1.6 million
and $1.4 million, respectively.
The Bank blanket pledges its portfolio of single-family mortgage loans to
secure FHLB advances.
42
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(6) Premises and Equipment, Net
---------------------------
Premises and equipment, net, at March 31 are summarized as follows:
2007 2006
----------- -----------
Land $ 5,141,399 $ 2,810,406
Buildings And Improvements 10,790,875 8,693,773
Furniture And Equipment 7,337,134 6,270,596
Construction In Progress 1,816,230 1,902,474
----------- -----------
25,085,638 19,677,249
Less Accumulated Depreciation (9,190,446) (8,014,273)
----------- -----------
Total Premises And Equipment, Net $15,895,192 $11,662,976
=========== ===========
Depreciation expense for the years ended March 31, 2007, 2006, and 2005
was approximately $1,012,000, $965,000, and $860,000, respectively.
The Bank has entered into non-cancelable operating leases related to
buildings and land. At March 31, 2007, future minimum payments under
non-cancelable operating leases with initial or remaining terms of one
year or more are as follows (by fiscal year):
2008 $ 442,602
2009 438,656
2010 437,192
2011 437,192
2012 407,792
Thereafter 3,179,976
----------
$5,343,410
==========
Total rental expense amounted to $343,000, $295,000, and $289,000 for the
years ended March 31, 2007, 2006 and 2005, respectively. Five lease
agreements with monthly expenses of $8,250, $7,083, $5,734 $743, and $700
have multiple renewal options totaling 20, 45, 30, 40, and 10 years,
respectively.
(7) Intangible Assets and Goodwill
------------------------------
Intangible assets and goodwill are the result of the Collier Jennings
acquisition in July 2006. Intangible assets and goodwill consisted of
the following:
Year Ended
March 31, 2007
--------------
Customer List
Balance at beginning of year $ -
Acquired 375,000
Amortization (33,750)
----------
Balance at end of year 341,250
----------
Employment Contracts
Balance at beginning of year -
Acquired 225,000
Amortization 33,750
----------
Balance at end of year 191,250
----------
Total Intangibles 532,500
Goodwill 1,197,954
----------
Total $1,730,454
==========
43
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(8) FHLB Stock
----------
Every federally insured savings institution is required to invest in FHLB
stock. No ready market exists for this stock and it has no quoted fair
value. However, because redemption of this stock has historically been
at par, it is carried at cost.
The Bank, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount equal to
a membership component, which is 0.20% of total assets at December 31,
2006 and 2005 plus a transaction component which equals 4.5% of
outstanding advances (borrowings) from the FHLB of Atlanta. The Bank is
in compliance with this requirement with an investment in FHLB of Atlanta
stock of $8.2 million and $7.1 million as of March 31, 2007 and 2006,
respectively.
(9) Deposits
--------
Deposits outstanding by type of account are summarized as follows:
At March 31, 2007 At March 31, 2006
----------------------------- -----------------------------
Interest Interest
Weighted Rate Weighted Rate
Rate Range Amount Rate Range
--------- -------- -------- -------- ------- --------
Checking
Accounts $105,515,095 0.63% 0.00-2.96% $105,347,713 0.97% 0.00-2.96%
Money Market
Accts. 145,491,774 4.14% 1.09-4.41% 151,494,548 3.50% 1.09-3.93%
Passbook
Accounts 17,458,680 0.98% 0.00-1.51% 17,795,109 0.98% 0.00-1.51%
------------ ---- --------- ------------ ---- ---------
Total 268,465,549 2.55% 0.00-4.41% 274,637,370 2.36% 0.00-3.93%
------------ ---- --------- ------------ ---- ---------
Certificate
Accounts:
0.00 - 1.99% - 59,797
2.00 - 2.99% 2,971,616 26,836,415
3.00 - 3.99% 36,044,826 72,831,817
4.00 - 4.99% 35,617,605 94,240,989
5.00 - 5.99% 180,637,996 10,622,951
------------ ------------
Total 255,272,043 4.99% 2.83-5.85% 204,591,969 3.98% 1.74-5.30%
------------ ---- --------- ------------ ---- ---------
Total
Deposits $523,737,592 3.74% 2.83-5.85% $479,229,339 3.05% 0.00-5.30%
============ ==== ========= ============ ==== =========
The aggregate amount of short-term certificates of deposit with a minimum
denomination of $100,000 was $110.6 million and $61.9 million at March
31, 2007 and 2006, respectively. The amounts and scheduled maturities of
all certificates of deposit at March 31 are as follows:
March 31,
---------------------------
2007 2006
------------ ------------
Within 1 Year $235,951,662 $164,023,363
After 1 Year, Within 2 10,891,655 31,427,049
After 2 Years, Within 3 2,498,279 3,423,264
After 3 Years, Within 4 2,781,426 2,104,277
After 4 Years, Within 5 3,149,021 3,614,016
Thereafter - -
------------ ------------
$255,272,043 $204,591,969
============ ============
44
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(10) Advances From Federal Home Loan Bank (FHLB) And Other Borrowings
----------------------------------------------------------------
Advances from the FHLB at March 31 are summarized by year of maturity and
weighted average interest rate below:
2007 2006
-------------------------- ---------------------------
Year Ending March 31 Amount Weighted Rate Amount Weighted Rate
------------ ------------- ------------ -------------
2007 - - 18,000,000 2.83%
2008 10,000,000 4.25% 5,000,000 3.09%
2009 25,000,000 4.75% 20,000,000 3.28%
2010 5,000,000 3.09% 5,000,000 3.09%
2011 10,000,000 4.76% 20,000,000 4.37%
2012 19,700,000 4.77% 5,000,000 4.64%
Thereafter 83,349,272 4.20% 58,363,000 3.99%
------------ ---- ------------ ----
$153,049,272 4.36% $131,363,000 3.74%
============ ==== ============ ====
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 amortized cost and fair value of $85.3
million and $84.8 million at March 31, 2007 and $64.5 million and $63.0
million at March 31, 2006, respectively. Advances are subject to
prepayment penalties.
The following tables show 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 March 31, 2007
- ------------------------------------------------------------------------------
Borrow Date Maturity Date Amount Int. Rate Type Call Dates
- ----------- ------------- -------- --------- -------- ---------------
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 06/26/07 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 4.53% Multi-Call 06/26/07 and
quarterly
thereafter
06/02/06 06/02/16 5,000,000 5.16% 1 Time Call 06/02/11
07/11/06 07/11/16 5,000,000 4.80% Multi-Call 07/11/08 and
quarterly
thereafter
10/25/06 10/25/11 5,000,000 4.83% 1 Time Call 10/27/08
11/29/06 11/29/16 5,000,000 4.025% Multi-Call 11/29/07 and
quarterly
thereafter
01/19/07 07/21/14 5,000,000 4.885% 1 Time Call 07/21/11
03/09/07 03/09/12 4,700,000 4.286% Multi-Call 06/11/07 and
quarterly
thereafter
45
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(10) Advances From Federal Home Loan Bank (FHLB) And Other Borrowings,
-----------------------------------------------------------------
Continued
---------
As of March 31, 2006
- ------------------------------------------------------------------------------
Borrow Date Maturity Date Amount Int. Rate Type Call Dates
- ----------- ------------- -------- --------- -------- ---------------
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
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
At March 31, 2007 and 2006, the Bank had $68.2 million and $66.2 million
in additional borrowing capacity, respectively at the FHLB.
The Bank had $8.1 million and $7.3 million in other borrowings (non-FHLB
advances) at March 31, 2007 and 2006, respectively. These borrowings
consisted of repurchase agreements with certain commercial demand deposit
customers for sweep accounts. The interest rate paid on these borrowings
floats monthly with money market type rates. At March 31, 2007 and
2006, the interest rate paid on these borrowings was 4.41% and 4.43%,
respectively. The Bank had pledged as collateral for these borrowings
investment securities with amortized costs and fair values of $23.4
million and $23.4 million at March 31, 2007 and $25.5 million and $24.9
million at March 31, 2006, respectively, as collateral for these
borrowings.
(11) 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 Capital Securities accrue and pay distributions annually at a rate
per annum equal to a blended rate of 6.97% at March 31, 2007. 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 March 31, 2007. 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.
46
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(12) Income Taxes
------------
Income tax expense is comprised of the following:
For the Years Ended March 31,
----------------------------------
2007 2006 2005
---------- --------- ---------
Current:
Federal $1,995,334 1,534,117 1,610,169
State 136,437 155,772 163,495
---------- --------- ---------
Total Current Tax Expense 2,131,771 1,689,889 1,773,664
---------- --------- ---------
Deferred:
Federal 7,241 77,600 (55,791)
State 2,471 10,127 (7,281)
---------- --------- ---------
Total Deferred Tax Expense 9,712 87,727 (63,072)
---------- --------- ---------
Total Income Tax Expense $2,141,483 1,777,616 1,710,592
========== ========= =========
The Company's income taxes differ from those computed at the statutory
federal income tax rate, as follows:
For the Years Ended March 31,
----------------------------------
2007 2006 2005
---------- --------- ---------
Tax At Statutory Income Tax Rate $2,131,132 1,900,759 1,773,470
State Tax And Other 10,351 (123,143) (62,878)
---------- --------- ---------
Total Income Tax Expense $2,141,483 1,777,616 1,710,592
========== ========= =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below.
At March 31,
-----------------------
2007 2006
---------- ----------
Deferred Tax Assets:
Provision For Loan Losses $2,769,862 $2,545,116
Goodwill Tax Basis Over Financial Statement Basis 152,917 249,495
Net Fees Deferred For Financial Reporting 164,914 187,191
Unrealized Loss on Securities Available for Sale 457,470 1,276,659
Other 177,591 163,664
---------- ----------
Total Gross Deferred Tax Assets 3,722,754 4,422,125
---------- ----------
Deferred Tax Liabilities:
FHLB Stock Basis Over Tax Basis 126,565 126,565
Depreciation 182,310 218,318
Other 55,400 88,484
Intangibles 198,622 -
---------- ----------
Total Gross Deferred Tax Liability 562,897 433,367
---------- ----------
Net Deferred Tax Asset $3,159,857 $3,988,758
========== ==========
No valuation allowance for deferred tax assets was required at March 31,
2007 and 2006. The realization of net deferred tax assets may be based
on utilization of carrybacks to prior taxable periods, anticipation of
future taxable income in certain periods, and the utilization of tax
planning strategies. Management has determined that the net deferred tax
asset can be supported based upon these criteria.
47
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(13) Regulatory Matters
------------------
The Bank is subject to various regulatory capital requirements that are
administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and discretionary
actions by regulators that could have a material adverse effect on the
Company. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgments by regulators
with regard to components, risk weightings, and other factors.
As of March 31, 2007 and 2006, the Bank was categorized as "well
capitalized" under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Bank had to maintain total
risk-based capital, Tier 1 risk-based capital, and Tier 1 leverage ratios
at 10%, 6%, and 5%, respectively. There are no conditions or events that
management believes have changed the Bank's classification.
The Bank's regulatory capital amounts and ratios are as follows as of the
dates indicated:
To Be Well
Capitalized
Under Prompt
Corrective
Actual For Capital Adequacy Action Provisions
--------------- -------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------- ------- ------ -----
(Dollars in Thousands)
March 31, 2007
Tier 1 Risk-Based
Core Capital (To
Risk Weighted
Assets) $45,588 9.5% 19,251 4.0% 28,877 6.0%
Total Risk-Based
Capital (To Risk
Weighted Assets) 51,582 10.7% 38,503 8.0% 48,128 10.0%
Tier 1 Leverage
(Core) Capital
(To Adjusted
Tangible Assets) 45,588 6.2% 29,474 4.0% 36,843 5.0%
Tangible Capital
(To Tangible
Assets) 45,588 6.2% 14,737 2.0% 36,843 5.0%
March 31, 2006
Tier 1 Risk-Based
Core Capital (To
Risk Weighted
Assets) $39,473 9.7% $16,328 4.0% $24,492 6.0%
Total Risk-Based
Capital (To Risk
Weighted Assets) 44,568 10.9% 32,669 8.0% 40,836 10.0%
Tier 1 Leverage
(Core) Capital
(To Adjusted
Tangible Assets) 39,473 6.0% 26,431 4.0% 33,039 5.0%
Tangible Capital
(To Tangible
Assets) 39,473 6.0% 13,224 2.0% 33,039 5.0%
The payment of dividends by the Company depends primarily on the ability
of the Bank to pay dividends to the Company. The payment of dividends by
the Bank to the Company is subject to substantial restrictions and would
require prior notice to the Office of Thrift Supervision ("OTS").
(14) Employee Benefit Plans
----------------------
The Company is participating in a multiple employer defined contribution
employee benefit plan covering substantially all employees with six
months or more of service. The Company matches a portion of the
employees' contributions and the plan has a discretionary profit sharing
provision. The total employer contributions were $349,000, $113,000, and
$36,000 for the years ended March 31, 2007, 2006, and 2005, respectively.
48
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(14) Employee Benefit Plans, Continued
---------------------------------
The Company has an Employee Stock Ownership Plan ("ESOP") for the
exclusive benefit of employee participants. The discretionary
contributions for the years ended March 31, 2007, 2006, and 2005 were
zero, $231,000 and $75,000, respectively. The ESOP from time to time
borrows funds from financial institutions to purchase the Company's
stock. The balance of the loan was zero and $216,000 at March 31, 2007
and 2006, respectively. The entire balance of the loan was paid off in
June 2006. The Company carried the debt as a liability and a reduction
in equity, although the Company neither endorses nor guarantees the loan.
The loan is repaid by Company contributions to the trustee, who in turn
makes the loan payment to the financial institution. Because of the high
cost of maintaining the ESOP, including legal, accounting, and audit
fees, and the fact the ESOP has no more stock to allocate, the Company
is in the process of terminating the plan.
The Company has an Employee Stock Purchase Plan ("ESPP"). The ESPP
allows employees of the Company to purchase stock quarterly at a 15%
discount through payroll deduction. The ESPP, which was approved by
stockholders in July 2005, began operating in January 2007.
Participation is voluntary. Employees are limited to investing $25,000
or 5% of their annual salary, whichever is lower, during the year. At
March 31, 2007, there were 28 employees participating.
Certain officers of the Company participate in a supplemental retirement
plan. These benefits are not qualified under the Internal Revenue Code
and they are not funded. During the year ended March 31, 2007, the
Company incurred an expense of $167,000 for this plan.
Certain officers of the Company participate in an incentive stock option
plan. Options are granted at exercise prices not less than the fair
value of the Company's common stock on the date of the grant. The
following is a summary of the activity under the Company's incentive
stock option plan for the years ended March 31, 2007, 2006, and 2005.
2007 2006 2005
---------------- ----------------- -----------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Balance, Beginning
of Year 118,046 $19.50 135,292 $19.09 131,639 $18.23
Options granted 14,000 23.03 6,500 23.91 32,000 20.89
Options exercised 25,196 17.40 14,396 15.45 10,547 15.95
Options forfeited 7,250 19.27 9,350 19.52 17,800 19.58
------- ------- -------
Balance, March 31 99,600 $20.55 118,046 $19.50 135,292 $19.09
======= ======= =======
Options Exercisable 85,600 $20.14 118,046 $19.50 20,672 $15.82
======= ======= =======
Options Available
For Grant 59,000 13,750 10,000
======= ======= =======
Stock options outstanding as of March 31, 2007 are as follows:
Weighted Average
Number of Remaining
Range of Exercise Prices Option Shares Contractual Weighted Average
Low/High Outstanding Life (Years) Exercise Price
------------- ------------ ----------------
$ 15.00 / $20.00 30,600 2.56 16.67
$ 20.01 / $24.22 69,000 7.81 22.07
------ ---- ------
99,600 6.19 $20.14
====== ==== ======
The aggregate intrinsic value of the stock options outstanding and
exercisable at March 31, 2007 amounted to $485,455. Total compensation
expense related to stock options was $7,700 for the period ended March
31, 2007. As of March 31, 2007, there was $124,000 of total unrecognized
compensation cost related to non-vested stock options. The cost is
expected to be recognized over a weighted average period of 9 years.
49
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(14) Employee Benefit Plans, Continued
---------------------------------
At March 31, 2007, the Company had the following options outstanding:
Outstanding
Grant Date Options Option Price Expiration Date
---------- ----------- ------------ ---------------
10/19/99 51,000 $16.67 9/30/05 to 9/30/09
1/16/03 1,500 $22.39 12/31/12
9/1/03 3,000 $24.00 8/31/13
12/1/03 3,000 $23.65 11/30/13
1/01/04 8,500 $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 26,000 $20.55 12/31/14
1/1/05 2,000 $22.61 12/31/15
1/1/06 6,500 $22.91 12/31/16
8/24/06 14,000 $23.03 08/24/16
50
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(14) Employee Benefit Plans, Continued
---------------------------------
The options listed on the previous page vested immediately on March 30,
2006 as a result of an action taken by the Board of Directors except for
the 14,000 options granted during the year ended March 31, 2007. All
options, issued prior to January 16, 2003, must be exercised between now
and within one year of the original vesting schedule, except those
granted during the year ended March 31, 2004 until March 31, 2006, may be
exercised anytime between now and the end of the tenth year after the
grant date. Options granted after March 31, 2006 vest 20% per year
every year after the end of five years after the date of the grant.
Those options granted after March 31, 2006 may be exercised as they vest
in years six through ten, or until the end of year ten after the grant
date.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions for grants: Dividend yield of $0.24, $0.16, and $0.08
per share for options granted during the years ended March 31, 2007,
2006, and 2005, respectively, expected volatility of 30.2% for options
granted in 2007, 39.8% for options granted in 2006, and 21.2% for options
granted in 2005, risk-free interest rate of 4.36% for options granted in
2007, 4.42% for options granted in 2006, and 4.82% for options granted in
2005, and expected lives of six to ten years.
(15) Bank Owned Life Insurance
-------------------------
On March 31, 2006 and July 1, 2006, the Company purchased bank owned life
insurance. The cash value of the life insurance policies are recorded as
a separate line item in the accompanying balance sheets at $5.8 million
and $5.0 million at March 31, 2007 and 2006, respectively. The insurance
provides key person life insurance on certain officers of the company.
The earnings-portion of the insurance policies grows tax deferred and
helps offset the cost of the Company's benefits program. The Company
recorded earnings of $243,000 for the growth in the cash value of life
insurance during the year ended March 31, 2007.
51
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(16) Commitments and Contingencies
-----------------------------
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company
is a defendant in certain claims and legal actions arising in the
ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these
matters is not expected to have a material adverse effect on the
consolidated financial condition of the Company.
In conjunction with its lending activities, the Bank enters into various
commitments to extend credit and issue letters of credit. Loan
commitments (unfunded loans and unused lines of credit) and letters of
credit are issued to accommodate the financing needs of the Bank's
customers. Loan commitments are agreements by the Bank to lend at a
future date, so long as there are no violations of any conditions
established in the agreement. Letters of credit commit the Bank to make
payments on behalf of customers when certain specified events occur.
Financial instruments where the contract amount represents the Bank's
credit risk include commitments under pre-approved but unused lines of
credit of $87.1 million and $68.0 million, undisbursed loans in process
totaled $6.4 million and $9.2 million, and letters of credit of $1.0
million and $1.4 million at March 31, 2007 and 2006, respectively. At
March 31, 2007 and 2006, the fair value of standby letters of credit was
immaterial.
These loan and letter of credit commitments are subject to the same
credit policies and reviews as loans on the balance sheet. Collateral,
both the amount and nature, is obtained based upon management's
assessment of the credit risk. Since many of the extensions of credit
are expected to expire without being drawn, the total commitment amounts
do not necessarily represent future cash requirements. In addition to
these loan commitments noted above, the Bank had unused credit card loan
commitments of $3.6 million and $2.9 million at March 31, 2007 and 2006,
respectively. Outstanding commitments on mortgage loans not yet closed
amounted to $0 and $351,000 at March 31, 2007 and 2006, respectively.
These commitments, which are funded subject to certain limitations,
extend over varying periods of time with the majority being funded within
45 days. At March 31, 2007 and 2006, the Bank had outstanding
commitments to sell approximately $1.5 and $1.3 million of loans,
respectively, which encompassed the Bank's held for sale loans. The Bank
also has commitments to sell mortgage loans not yet closed, on a best
efforts basis. Best efforts means the Bank suffers no penalty if they
are unable to deliver the loans to the potential buyers. The fair value
of the Bank's commitment to originate mortgage loans at committed
interest rates and to sell such loans to permanent investors is
insignificant.
52
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(17) Related Party Transactions
--------------------------
Certain directors, executive officers and companies with which they are
affiliated, are customers of and have banking transactions with the Bank
in the ordinary course of business. These loans were made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable arms-length transactions.
A summary of loan transactions with directors, including their
affiliates, and executive officers follows:
For the years ended March 31,
------------------------------
2007 2006 2005
-------- -------- --------
Balance, beginning of year $420,239 $550,010 $528,974
New loans 274,797 255,278 115,827
Less loan payments 42,935 385,049 94,791
-------- -------- --------
Balance, end of year $652,101 $420,239 $550,010
======== ======== ========
Loans to all employees, officers, and directors of the Company, in the
aggregate constituted approximately 8.52% and 5.54% of the total
shareholders' equity of the Company at March 31, 2007 and 2006,
respectively. At March 31, 2007 and 2006, deposits from executive
officers and directors of the Bank and Company and their related
interests in aggregate approximated $4.7 million and $2.8 million,
respectively.
The Company rents office space from a company in which a director and an
officer of the Company and the Bank have an ownership interest. The
Company incurred expenses of $65,000, $51,000, and $41,000 for rent for
the years ended March 31, 2007, 2006, and 2005, respectively. The
Company increased the amount of office space covered by that lease during
fiscal 2007. On July 1, 2006, the Company began renting office space
from another executive officer. On that lease, the Company incurred rent
expense of $31,000 during the year ended March 31, 2007. Management is
of the opinion that the transactions with respect to office rent are made
on terms that are comparable to those which would be made with
unaffiliated persons.
53
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(18) Security Federal Corporation Condensed Financial Statements (Parent
-------------------------------------------------------------------
Company Only)
-------------
The following is condensed financial information of Security Federal
Corporation (Parent Company only). The primary asset is its investment
in the Bank subsidiary and the principal source of income for the Company
is equity in undistributed earnings from the Bank.
Condensed Balance Sheet Data
At March 31,
-------------------------
2007 2006
----------- -----------
Assets:
Cash $ 2,377,723 $ 294,984
Investment Securities, Available For Sale 103,286 102,938
Investment in Security Federal Statutory Trust 155,000 -
Investment In Security Federal Bank 46,569,777 37,387,118
Accounts Receivable And Other Assets 81,695 41,330
----------- -----------
Total Assets $49,287,481 $37,826,370
=========== ===========
Liability And Shareholders' Equity:
Accounts Payable And Other Liabilities $ 21,961 $ 9,108
Junior Subordinated Debentures 5,155,000 -
Mandatorily Redeemable Financial Instrument 1,417,312 -
Indirect Guarantee Of ESOP Debt - 215,503
Shareholders' Equity 42,693,208 37,601,759
----------- -----------
Total Liabilities And Shareholders' Equity $49,287,481 $37,826,370
=========== ===========
Condensed Statements of Income Data
For the Years Ended March 31,
------------------------------------
2007 2006 2005
---------- ---------- ----------
Income:
Equity In Earnings Of Security
Federal Bank $4,246,503 $3,821,229 $3,512,277
Interest Income 5,767 - -
Miscellaneous Income 7,887 - -
---------- ---------- ----------
Total Income 4,260,157 3,821,229 3,512,277
---------- ---------- ----------
Expenses:
Interest Expense 191,811 - -
Other Expenses 15,310 13,762 11,190
---------- ---------- ----------
Total Expenses 207,121 13,762 11,190
---------- ---------- ----------
Income Before Income Taxes 4,053,036 3,807,467 3,501,087
Income Tax Benefit (73,517) (5,384) (4,408)
========== ========== ==========
Net Income $4,126,553 $3,812,851 $3,505,495
========== ========== ==========
54
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(18) Security Federal Corporation Condensed Financial Statements (Parent
-------------------------------------------------------------------
Company Only), Continued
------------------------
Condensed Statements of Cash Flow Data
For the Years Ended March 31,
--------------------------------------
2007 2006 2005
---------- ----------- -----------
Operating Activities:
Net Income $ 4,126,553 $ 3,812,851 $ 3,505,495
Adjustments To Reconcile Net Income
To Net Cash Used In Operating
Activities:
Equity In Earnings Of Security
Federal Bank (4,246,503) (3,821,229) (3,512,277)
Stock Compensation Expense 7,686 - -
Increase In Accounts Receivable
And Other Assets (40,363) (5,384) (4,409)
Increase In Accounts Payable 12,859 - -
---------- ----------- -----------
Net Cash Used In Operating
Activities (139,768) (13,762) (11,191)
---------- ----------- -----------
Investing Activities:
Purchase Of Investment Securities - (102,938) -
Investment in Security Federal
Statutory Trust (155,000) - -
Additional Investment in
Security Federal Bank (4,597,319) - -
Dividend Received From Security
Federal Bank 1,000,000 - -
---------- ----------- -----------
Net Cash (Used In) Provided By
Investing Activities (3,752,319) (102,938) -
---------- ----------- -----------
Financing Activities:
Exercise Of Stock Options 438,465 222,450 168,235
Purchase Of Treasury Stock,
At Cost (412,564) (73,567) (165,089)
Proceeds From Junior
Subordinated Debenture 5,155,000 - -
Proceeds From Mandatorily
Redeemable Financial Instrument 1,417,312 - -
Dividends Paid (623,387) (406,749) (278,987)
---------- ----------- -----------
Net Cash Provided (Used) In
Financing Activities 5,974,826 (257,866) (275,841)
---------- ----------- -----------
Net Increase (Decrease) In Cash 2,082,739 (374,566) (287,032)
Cash At Beginning Of Year 294,984 669,550 956,582
---------- ----------- -----------
Cash At End Of Year $2,377,723 $ 294,984 $ 669,550
========== =========== ===========
(19) Carrying Amounts and Fair Value of Financial Instruments
--------------------------------------------------------
The carrying amounts and fair value of financial instruments are
summarized below:
At March 31,
-------------------------------------------
2007 2006
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In Thousands)
Financial Assets:
Cash And Cash Equivalents $ 13,438 13,438 $ 14,351 14,351
Investment And Mortgage-Back
Securities $249,750 249,053 $238,433 236,530
Loans Receivable, Net $436,038 439,785 $375,109 376,221
FHLB Stock $ 8,209 8,209 $ 7,150 7,150
Financial Liabilities:
Deposits:
Checking, Savings, And
Money Market Accounts $268,466 268,466 $274,637 274,637
Certificate Accounts $255,272 255,068 $204,592 203,871
Advances From FHLB $153,049 152,595 $131,363 129,117
Other Borrowed Money $ 8,088 8,088 $ 7,290 7,290
Junior Subordinated Debentures $ 5,155 5,155 $ - -
Mandatorily Redeemable
Financial Instrument $ 1,417 1,403 $ - -
55
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(19) Carrying Amounts and Fair Value of Financial Instruments, Continued
-------------------------------------------------------------------
At March 31, 2007, the Bank had $98.1 million of off-balance sheet
financial commitments. These commitments are to originate loans and
unused consumer lines of credit and credit card lines. Because these
obligations are based on current market rates, if funded, the original
principal is considered to be a reasonable estimate of fair value.
Fair value estimates are made at a specific point in time, based on
relevant market data and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale the Bank's entire holdings of a particular
financial instrument. Because no active market exists for a significant
portion of the Bank's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current
economic conditions, current interest rates and prepayment trends, risk
characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in any of these assumptions used in calculating fair
value would also significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Bank has
significant assets and liabilities that are not considered financial
assets or liabilities including deposit franchise values, loan servicing
portfolios, deferred tax liabilities, and premises and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of these estimates. The
values used are provided from the OTS interest rate risk model.
The Company has used management's best estimate of fair value on the
above assumptions. Thus, the fair values presented may not be the
amounts, which could be realized, in an immediate sale or settlement of
the instrument. In addition, any income taxes or other expenses that
would be incurred in an actual sale or settlement are not taken into
consideration in the fair value presented.
56
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(20) Quarterly Financial Data (Unaudited)
------------------------------------
Unaudited condensed financial data by quarter for fiscal year 2007 and
2006 is as follows (amounts, except per share data, in thousands):
Quarter ended
-------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31,
2006-2007 2006 2006 2006 2007
---------- ---------- ---------- ----------
Interest Income $ 9,625 $ 10,283 $ 10,814 $ 11,376
Interest Expense 5,214 5,744 6,380 6,595
---------- ---------- ---------- ----------
Net Interest Income 4,411 4,539 4,434 4,781
Provision For Loan Losses 150 150 150 150
---------- ---------- ---------- ----------
Net Interest Income After
Provision For Loan
Losses 4,261 4,389 4,284 4,631
Non-interest Income 752 913 988 1,208
Non-interest Expense 3,443 3,729 3,817 4,168
---------- ---------- ---------- ----------
Income Before Income
Tax 1,569 1,573 1,455 1,671
Provision For Income taxes 547 546 478 571
---------- ---------- ---------- ----------
Net Income $ 1,023 $ 1,027 $ 977 $ 1,100
========== ========== ========== ==========
Basic Net Income Per
Common Share $ 0.40 $ 0.39 $ 0.37 $ 0.42
========== ========== ========== ==========
Diluted Net Income Per
Common Share $ 0.40 $ 0.39 $ 0.37 $ 0.42
========== ========== ========== ==========
Basic Weighted Average
Shares Outstanding 2,538,951 2,610,605 2,617,037 2,611,507
========== ========== ========== ==========
Diluted Weighted Average
Shares Outstanding 2,564,893 2,622,996 2,625,945 2,620,375
========== ========== ========== ==========
Quarter ended
-------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31,
2005-2006 2005 2005 2005 2006
---------- ---------- ---------- ----------
Interest Income $ 7,461 $ 7,887 8,322 8,946
Interest Expense 3,489 3,784 4,112 4,584
---------- ---------- ---------- ----------
Net Interest Income 3,972 4,103 4,210 4,362
Provision For Loan Losses 165 165 165 165
---------- ---------- ---------- ----------
Net Interest Income
After Provision For
Loan Losses 3,807 3,938 4,045 4,197
Non-interest Income 641 697 662 630
Non-interest Expense 2,996 3,172 3,204 3,655
---------- ---------- ---------- ----------
Income Before Income
Tax 1,452 1,463 1,503 1,172
Provision For Income taxes 523 514 545 196
---------- ---------- ---------- ----------
Net Income $ 929 $ 949 $ 958 $ 976
========== ========== ========== ==========
Basic Net Income Per
Common Share $ 0.37 $ 0.38 $ 0.38 $ 0.38
========== ========== ========== ==========
Diluted Net Income Per
Common Share $ 0.36 $ 0.37 $ 0.37 $ 0.38
========== ========== ========== ==========
Basic Weighted Average
Shares Outstanding 2,530,389 2,527,533 2,536,304 2,537,771
========== ========== ========== ==========
Diluted Weighted Average
Shares Outstanding 2,556,205 2,585,543 2,570,767 2,591,728
========== ========== ========== ==========
57
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
SHAREHOLDERS INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held at 2:00 p.m., Thursday, July
19, 2007 at the City of Aiken Municipal Conference Center, 215 The Alley,
Aiken, South Carolina.
STOCK LISTING
The Company's stock is traded on the Over-The-Counter-Bulletin Board under the
symbol "SFDL.OB." The stock began trading on the Bulletin Board in October
2003.
PRICE RANGE OF COMMON STOCK
The table below shows the range of high and low bid prices. These prices
represent actual transactions and do not include retail markups, markdowns or
commissions. Market makers include Sterne, Agee, and Leach, Inc., Morgan
Keegan and Company, Inc., A.G. Edwards and Sons, Inc., Hill, Thompson, and
Magid, and Monroe Securities, Inc.
Quarter Ending High Low
-------------- ------ ------
06-30-05 $21.75 $21.75
09-30-05 $29.00 $29.00
12-31-05 $23.50 $23.50
03-31-06 $24.25 $24.25
06-30-06 $25.50 $22.70
09-30-06 $23.50 $22.10
12-31-06 $24.00 $23.00
03-31-07 $25.00 $23.30
As of March 31, 2007, the Company had approximately 550 shareholders and
2,609,116 outstanding shares of common stock.
DIVIDENDS
The first quarterly dividend on the stock was paid to shareholders on March
15, 1991. Dividends will be paid upon the determination of the Board of
Directors that such payment is consistent with the long-term interest of the
Company. The factors affecting this determination include the Company's
current and projected earnings, operating results, financial condition,
regulatory restrictions, future growth plans, and other relevant factors. The
Company paid $0.02 per share cash dividends for each of the quarters during
fiscal 2003-2004 and the first quarter of fiscal 2004-2005. The Company paid
$0.03 per share cash dividend in each of the last three quarters of 2004-2005.
The Company paid $0.04 per share cash dividends for each of the quarters
during fiscal 2005-2006 and $0.06 per share cash dividends for each of the
quarters during fiscal 2006-2007.
The ability of the Company to pay dividends depends primarily on the ability
of the Bank to pay dividends to the Company. The Bank may not declare or pay
a cash dividend on its stock or repurchase shares of its stock if the offset
thereof would be to cause its regulatory capital to be reduced below the
amount required for the liquidation account or to meet applicable regulatory
capital requirements. Pursuant to the OTS regulations, Tier 1 associations
(associations that before and after the proposed distribution meet or exceed
their fully phased-in capital requirements) may make capital distributions
during any calendar year equal to 100% of net income for the year-to-date plus
50% of the amount by which the association's total capital exceeds its fully
phased-in capital requirement as measured at the beginning of the capital
year. However, a Tier 1 association deemed to be in need of more than normal
supervision by the OTS may be downgraded to a Tier 2 or Tier 3 association as
a result of such a determination. The Bank is also required to give the OTS
30 days notice prior to the declaration of a dividend. Unlike the Bank, there
is no regulatory restriction on the payment of dividends by the Company;
however, it is subject to the requirements of South Carolina. South Carolina
generally prohibits the Company from paying dividends if, after giving effect
to a proposed dividend: (1) the Company would be unable to pay its debts as
they become due in the normal course of business, or (2) the Company's total
assets would be less than its total liabilities plus the sum that would be
needed to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those receiving the dividend.
58
[Picture Appears Here]
Carol McCleskey
Senior Vice President,
Branch Administrator and A Familiar Face
Security Officer
Carol McCleskey is Senior Vice President, Branch Administrator and Security
Officer for Security Federal. In her role as Branch Administrator, Carol has
management responsibility for 11 branches located in Aiken and Lexington
counties in addition to the Evans, Georgia and Columbia, South Carolina
branches to open later this fall. Carol has over 40 years of banking
experience and is a resident of Aiken. She is a graduate of Leadership Aiken
County and is very active within the Aiken community. We are fortunate to have
such an experienced and dedicated member on the Security Federal Bank team.
Shareholders Information
Annual and Other Reports
The Company is required to file an annual report on Form 10-K for its fiscal
year ended March 31, 2006 with the Securities and Exchange Commission. Copies
of Form 10-K, Security Federal Corporation's annual report, and the Company's
quarterly reports may be obtained from and inquiries may be addressed to Ms.
Beverly Bradham of Security Federal Corporation.
GENERAL TRANSFER SPECIAL
INQUIRIES AGENT COUNSEL
Ms. Beverly Bradham Security Federal Breyer & Associates, PC
Security Federal Corp. Corporation Suite 785
238 Richland Ave., NW 238 Richland Ave., NW 8180 Greensboro Drive
P.O. Box 810 P.O. Box 810 McLean, VA 22102
Aiken, SC 29802-0810 Aiken, SC 29802-0810
Phone: 803-641-3000
Toll free: 866-851-3000
INDEPENDENT
AUDITORS
Elliott Davis, LLC
1901 Main Street
Suite 1650
P.O. Box 2227
Columbia, SC 29202-2227
59
BOARD OF DIRECTORS
T. Clifton Weeks Sen. Thomas L. Moore Harry O. Weeks, Jr.
Chairman President Business Dev. Executive
Security Federal Corp. Boiler Efficiency, Inc. Hutson-Etherredge Co.
Aiken, SC Clearwater, SC Aiken, SC
Dr. Robert E. Alexander Timothy W. Simmons J. Chris Verenes
Chancellor Emeritus President/CEO President
Univ. of SC at Aiken Security Federal Corp. Security Federal Bank
Aiken, SC Aiken, SC Aiken, SC
Hon. William Clyburn G. L. Toole, III Roy G. Lindburg
Member of the South Attorney-At-Law Executive Vice President
Carolina Aiken, SC Treasurer/CFO
House of Representatives Security Federal Corp.
Aiken, SC Aiken, SC
- ------------------------------------------------------------------------------
Directors Emeritus: Walter E. Brooker, Sr.
President, Brooker's Inc.
Denmark, SC
60
BANK ADVISORY BOARDS
NORTH AUGUSTA-----------------------------------------------------------------
P. Richard Borden Rev. G.L. Helen H. Butler
Owner Brightharp Retired Banker
Borden Pest Control Owner North Augusta, SC
North Augusta, SC G.L. Brightharp &
Sons Mortuary
North Augusta, SC
William M. Hixon Sen. Thomas L. John P. Potter
Owner Moore Director of Finance
Hixon Realty President City of North
North Augusta, SC Boiler Efficiency, Inc. Augusta
Clearwater, SC North Augusta, SC
WAGENER-----------------------------------------------------------------------
M. Judson Busbee Chad G. Ingram Mary T. Lybrand
Owner President Retired Banker
Busbee Hardware Garvin Oil Company Wagener, SC
Wagener, SC Wagener, SC
Dr. Michael L. Miller Richard H. Sumpter
Anesthesiologist Retired Educator
Palmetto Health Wagener, SC
Richland Memorial Hosp.
Columbia, SC
MIDLAND VALLEY----------------------------------------------------------------
Charles A. Hilton Rev. Nathaniel Irvin, Sr. Rev. Stephen Phillips
General Manager Pastor Pastor
Breezy Hill Old Storm Branch Christian Heritage
Water & Sewer Baptist Church Church
Graniteville, SC Clearwater, SC Graniteville, SC
Sen. Thomas L. Glenda K. Napier Carlton B. Shealy
Moore Co-Owner Owner
President Napier Funeral Home C. Shealy Realty
Boiler Efficiency, Inc. Graniteville, SC Builders &
Clearwater, SC Developers
North Augusta, SC
In Memory
Gloria Busch Johnson [Picture Appears Here]
1942 - 2006
We were saddened to lose a member of the Security Federal family this year.
Gloria Busch Johnson joined the Midland Valley Advisory Board in 1994. Gloria
was an active board member and took great pride in her association with
Security Federal. She was the Executive Director of the Midland Valley Chamber
of Commerce and was named the 2006 Citizen of the Year by the Chamber of
Commerce. Gloria was respected by all and will be missed.
WESTCOLUMBIA - LEXINGTON------------------------------------------------------
Eleanor Powell Clark Sandra Dooley Parker L. Todd Sease
Owner/Operator Attorney Partner
B & E Enterprises Inc. Dooley, Dooley, Spence, Jumper, Carter, Sease
dba McDonald's Parker & Hipp, PA Architects, PA
Columbia, SC Lexington, SC West Columbia, SC
G. Scott Middleton Sen. Nikki G. Setzler Dianne Light
Owner Sr. Partner Owner
Agape Assisted Living/ Setzler & Scott, PA Dianne's on Devine
Nursing & Related Com. Law Firm & DiPrato's Deli
West Columbia, SC West Columbia, SC Columbia, SC
Jan Hook-Stamps Donald T. Martin
Owner Controller, CPA
Elante Day Spa Nexsen, Pruet, LLC
West Columbia, SC Columbia, SC
61
MANAGEMENT TEAM & BRANCH LOCATIONS
Management Team---------------------------------------------------------------
T. Clifton Weeks Chairman of Security Federal Corporation
Timothy W. Simmons Chairman and Chief Executive Officer, Security Federal
Bank
G.L. Toole, III Vice President
Robert E. Alexander Corporate Secretary
J. Chris Verenes President, Security Federal Bank
Roy G. Lindburg Executive Vice President, Treasurer and Chief Financial
Officer
Frank Thomas Executive Vice President - Aiken Area Executive
Marian Shapiro Executive Vice President - Midlands Area Executive
Lynn B. Shepard Senior Vice President - Senior Operations Officer
Sandra M. Bartlett Senior Vice President - Human Resources
Carol P. McCleskey Senior Vice President - Branch Administration
H. Stanley Price Senior Vice President - Augusta Area Executive
William O. Boyte, III Senior Vice President - Construction Lending -
Midlands Area
Audrey Varn President - Security Federal Trust and Investments
Gerald Jennings President - Security Federal Insurance
Margaret Hurt Controller
Gabriele C. Dukes Vice President - Financial Counseling
Janice S. Hauerwas Vice President - Mortgage Loan Originator
Gregory D. Warfield Vice President - Mortgage Loan Originator
Stan Carter Vice President - Mortgage Loan Originator
Josie Quiller Vice President - Mortgage Lending
James E. Bristow Vice President - Business Development/Commercial Loans
Paul T. Rideout Vice President - Business Development/Commercial Loans
Michael Strange Vice President - Business Development/Commercial Loans
Elsie K. Dicks Vice President - Credit Administration
Patricia B. Moseley Vice President - Loan Servicing
Ronald R. Davis Vice President - Senior Auditor
Laura B. Conway Vice President - Operations Auditor
Rochelle D. Wright Vice President - Information Technology
Branch Locations--------------------------------------------------------------
Whiskey Road, Aiken, SC
Dana S. Hall, Assistant Vice President/Manager
North Augusta, SC
Kathy S. Williamson, Assistant Vice President/Manager
Laurens Street, Aiken, SC
Vicky W. Moseley, Assistant Vice President/Manager
Richland Avenue, Aiken, SC
Melanie Mackay, Assistant Vice President/Manager
South Side, Aiken, SC
Shane M. Bagby, Assistant Vice President/Manager
Graniteville, SC
Tonya Key, Assistant Vice President/Manager
Langley, SC
Pat W. Guglieri, Assistant Vice President/Manager
Clearwater, SC
Gail W. Dotson, Assistant Vice President/Manager
Wagener, SC
Scott Tindal, Assistant Vice President/Manager
West Columbia, SC
Mary B. Clark, Assistant Vice President/Manager
Lexington, SC
Sherrie Tanner, Assistant Vice President/Manager
Opening Fall 2007
Assembly Street, Columbia, SC
Marianne Poppacoda, Assistant Vice President/Manager
Evans, GA
Josh Booth, Assistant Vice President/Manager
62
OUR LOCATIONS
[Map appears here]
Exhibit 21
Subsidiaries of the Registrant
State of Percentage
Parent Subsidiary Incorporation of Ownership
- ------ ---------- ------------- ------------
Security Federal Security Federal United States 100%
Corporation Bank
Security Federal Trust South Carolina 100%
Security Federal Security Federal South Carolina 100%
Bank Insurance, Inc.
Security Federal South Carolina 100%
Investments, Inc.
Security Federal Trust, South Carolina 100%
Inc.
Security Financial South Carolina 100%
Services Corporation
Exhibit 23
Consent of Elliott Davis, LLC
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------
The Board of Directors
Security Federal Corporation
We consent to incorporation by reference in the Registration Statement No.
333-31500, 333-102337 and 333-136813 on Form S-8 of our report dated June 19,
2007, relating to the consolidated balance sheet of Security Federal
Corporation and subsidiaries as of March 31, 2007 and the related consolidated
statements of income, shareholders' equity and cash flows for the year then
ended, which report appears in the March 31, 2007 Annual Report on Form 10-K.
/s/ Elliott Davis, LLC
Columbia South Carolina
June 27, 2007
Exhibit 31.1
Certification Required
by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934
I, Timothy W. Simmons, certify that:
1. I have reviewed this annual report on Form 10-K 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 periods 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
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: June 27, 2007
/s/Timothy W. Simmons
-------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
Exhibit 31.2
Certification Required
by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934
I, Roy G. Lindburg, certify that:
1. I have reviewed this annual report on Form 10-K 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 periods 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
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: June 27, 2007
/s/Roy G. Lindburg
-------------------------------------
Roy G. Lindburg
Treasurer and Chief Financial Officer
Exhibit 32
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 Annual Report on Form
10-K, that:
1. the report fully complies with the requirements of Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all
material respects, the company's financial condition and results of
operations.
/s/Timothy W. Simmons /s/Roy G. Lindburg
- ------------------------------------- -------------------------------------
Timothy W. Simmons Roy G. Lindburg
President and Chief Executive Officer Treasurer and Chief Financial Officer
Dated: June 27, 2007