SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD: FROM: TO: -------------------- ------------------ COMMISSION FILE NUMBER: 0-16120 SECURITY FEDERAL CORPORATION South Carolina 57-0858504 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification) 1705 WHISKEY ROAD, AIKEN, SOUTH CAROLINA 29801 (Address of Principal Executive Office) (Zip code) (803) 641-3000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES NO ------- ------- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. CLASS: OUTSTANDING SHARES AT: $0.01 PAR VALUE: - ----------------- ---------------------- ---------------- Common Stock June 30, 1999 $842,120 INDEX Security Federal Corporation and Subsidiaries ============================================================================== PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO. Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets 1 Consolidated Statements of Income 2 Consolidated Statement of Shareholders' Equity 3 Consolidated Statements of Cash Flows 4 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis Results of Operations and Financial Condition 10 ============================================================================== PART II. OTHER INFORMATION Other Information 14 Signatures 16 ============================================================================== SCHEDULES OMITTED All schedules other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information is included in the consolidated financial statements and related notes. Security Federal Corporation and Subsidiaries Consolidated Balance Sheets (Unaudited) June 30, 1999 March 31, 1999 ----------------- ------------------ Assets: Cash and Cash Equivalents $ 6,232,870 $ 6,951,347 Investment And Mortgage-Backed Securities: Available For Sale: (Amortized cost of $91,584,256 at June 30, 1999 and $82,240,153 at March 31, 1999) 90,051,287 82,035,772 Held To Maturity: (Fair value of $3,125,640 at June 30, 1999 and $3,579,500 at March 31, 1999) 3,138,182 3,532,863 Loans Receivable Net: Held For Sale 1,521,810 1,604,300 Held For Investment: (Net of allowance of $1,809,435 at June 30, 1999 and $1,715,068 at March 31, 1999) 155,833,552 150,381,301 ----------------- ------------------ $ 157,355,362 $ 151,985,601 ----------------- ------------------ Accrued Interest Receivable: Loans 719,984 657,153 Mortgage-Backed Securities 185,864 146,739 Investments 700,326 803,696 Premises And Equipment, Net 4,102,741 4,198,774 Federal Home Loan Bank Stock, At Cost 1,121,600 1,245,000 Real Estate Acquired In Settlement Of Loans 175,143 154,143 Real Estate Held For Development And Sale 546,791 552,111 Other Assets 2,821,577 2,454,724 ----------------- ------------------ Total Assets $ 267,151,727 $ 254,717,923 ================= ================== Liabilities And Shareholders' Equity Liabilities: Deposit Accounts $ 221,099,798 $ 216,532,683 Advances From Federal Home Loan Bank 21,782,000 14,600,000 Other Borrowed Money 1,328,995 869,270 Advance Payments By Borrowers For Taxes and Insurance 373,421 274,067 Other Liabilities 3,388,731 2,881,461 ----------------- ------------------ Total Liabilities $ 247,972,945 $ 235,157,481 ----------------- ------------------ Shareholders' Equity: Serial Preferred Stock, $.01 Par Value; Authorized Shares - 200,000 Issued; Outstanding Shares - None Common Stock, $.01 Par Value; Authorized Shares - 5,000,000 Issued; Outstanding Shares - 842,120 At June 30, 1999 And March 31, 1999 $ 8,421 $ 4,211 Additional Paid-In Capital 3,993,733 3,997,943 Accumulated Other Comprehensive Loss (951,054) (127,738) Retained Earnings, Substantially Restricted 16,127,682 15,686,026 ----------------- ------------------ Total Shareholders' Equity $ 19,178,782 $ 19,560,442 ----------------- ------------------ Total Liabilities And Shareholders' Equity $ 267,151,727 $ 254,717,923 ================= ================== See accompanying notes to consolidated financial statements. 1 Security Federal Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) Three Months Ended June 30, --------------------------------- 1999 1998 --------------- ---------------- Interest Income: Loans $ 3,219,375 $ 3,031,855 Mortgage-Backed Securities 482,799 102,843 Investment Securities 837,659 1,081,186 Other 25,566 27,852 --------------- ---------------- Total Interest Income $ 4,565,399 $ 4,243,736 --------------- ---------------- Interest Expense: NOW And Money Market Accounts 695,721 442,565 Passbook Accounts 77,575 74,616 Certificate Accounts 1,302,007 1,279,967 Advances And Other Borrowed Money 258,860 278,856 --------------- ---------------- Total Interest Expense $ 2,334,163 $ 2,076,004 --------------- ---------------- Net Interest Income 2,231,236 2,167,732 Provision For Loan Losses 150,000 150,000 Net Interest Income After Provision --------------- ---------------- For Loan Losses $ 2,081,236 $ 2,017,732 --------------- ---------------- Other Income: Net Gain On Sale Of Investments 0 0 Gain On Sale Of Loans 113,504 98,463 Loan Servicing Fees 73,016 82,442 Service Fees On Deposit Accounts 238,446 202,475 Income From Real Estate Operations 34,843 67,078 Other 108,248 144,278 --------------- ---------------- Total Other Income $ 568,057 $ 594,736 --------------- ---------------- General And Administrative Expenses: Salaries And Employee Benefits 1,027,302 975,136 Occupancy 125,340 117,361 Advertising 32,460 100,494 Depreciation And Maintenance Of Equipment 209,750 193,510 FDIC Insurance Premiums 21,171 19,662 Amortization Of Intangibles 116,310 116,310 Other 395,990 393,711 --------------- ---------------- Total General And Administrative Expenses $ 1,928,323 $ 1,916,184 --------------- ---------------- Income Before Income Taxes 720,970 696,284 Provision For Income Taxes 245,629 240,886 --------------- ---------------- Net Income $ 475,341 $ 455,398 =============== ================ Basic Net Income Per Common Share $ 0.56 $ 0.54 =============== ================ Diluted Net Income Per Common Share $ 0.56 $ 0.54 =============== ================ Cash Dividend Per Share On Common Stock $ 0.04 $ 0.03 =============== ================ Basic Weighted Average Shares Outstanding 842,120 842,120 =============== ================ Diluted Weighted Average Shares Outstanding 846,052 844,986 =============== ================ See accompanying notes to consolidated financial statements. 2 Security Federal Corporation and Subsidiaries Consolidated Statement of Shareholders' Equity (Unaudited) Accumulated Other Additional Comprehensive Common Paid-In Income Retained Stock Capital (Loss) Earnings Total Beginning Balance At March 31, 1998 $4,211 $3,997,943 $ 75,713 $ 13,998,174 $18,076,041 Net Income ----- ----- ----- 1,805,749 1,805,749 Other Comprehen- sive Income, Net Of Tax: Unrealized Holding Losses On Securities Available For Sale ----- ----- (203,451) ----- (203,451) Reclassification Adjustment For Gains Included In Net Income ----- ----- ----- ----- ----- Comprehensive Income 1,602,298 2 For 1 Stock Split 4,210 (4,210) ----- ----- ----- Cash Dividends ----- ----- ----- (117,897) (117,897) Balance At March 31, 1999 $8,421 $3,993,733 $(127,738) $15,686,026 $19,560,442 ====== ========== ========= =========== =========== Beginning Balance At March 31, 1999 $8,421 $3,993,733 $(127,738) $15,686,026 $19,560,442 Net Income ----- ----- ----- 475,341 475,341 Other Comprehen- sive Income, Net Of Tax: Unrealized Holding Losses On Securities Available For Sale ----- ----- (823,316) ----- (823,316) Reclassification Adjustment For Gains Included In Net Income ----- ----- ----- ----- ----- Comprehensive Income (347,975) Cash Dividends ----- ----- ----- (33,685) (33,685) Balance at June 30, 1999 $8,421 $3,993,733 $(951,054) $16,127,682 $19,178,782 ====== ========== ========= =========== =========== - ------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements. 3 Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Three Months Ended June 30, --------------------------------- 1999 1998 --------------- ---------------- Cash Flows From Operating Activities: Net Income $ 475,341 $ 455,398 Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation Expense $ 186,582 $ 153,131 Amortization Of Intangibles 116,310 116,310 Discount Accretion And Premium Amortization 28,329 (12,531) Provisions For Losses On Loans And Real Estate 150,000 150,000 Gain On Sale Of Investments 0 0 Gain On Sale Of Loans (113,504) (98,463) Gain On Sale Of Real Estate (34,843) (83,991) Amortization Of Deferred Fees On Loans (38,159) (65,374) Proceeds From Sale Of Loans Held For Sale 6,688,586 5,346,772 Origination Of Loans For Sale (6,492,592) (5,095,395) (Increase) Decrease In Accrued Interest Receivable: Loans (62,831) 56,841 Mortgage-Backed Securities (39,125) (18,608) Investments 103,370 (13,128) Increase (Decrease) In Advance Payments By Borrowers 99,354 5,797 Loss On Disposition Of Premises And Equipment 7,131 0 Other, Net 529,379 (225,773) --------------- ---------------- Net Cash Provided By Operating Activities $ 1,603,328 $ 670,986 --------------- ---------------- Cash Flows From Investing Activities: Principal Repayments On Mortgage-Backed Securities Held To Maturity $ 334,749 $ 169,711 Principal Repayments On Mortgage-Backed Securities Available For Sale 2,069,903 67,105 Purchase Of Investment Securities Available For Sale (7,998,438) (7,999,375) Purchase Of Mortgage-Backed Securities Available For Sale (8,650,117) (4,201,289) Maturities Of Investment Securities Available For Sale 5,210,003 5,635,270 Maturities Of Investment Securities Held To Maturity 56,149 0 Purchase Of FHLB Stock (475,900) 0 Redemption Of FHLB Stock 599,300 0 (Increase) Decrease In Loans To Customers (5,585,092) 40,572 Investment In Real Estate Held For Development (129,637) (168,647) Proceeds From Sale Of Real Estate Held For Development 169,800 356,310 Proceeds From Sale Of Real Estate Acquired Through Foreclosure 0 182,083 Purchase Of Premises And Equipment (107,655) (128,195) Proceeds From Sale Of Premises And Equipment 9,975 0 --------------- ---------------- Net Cash Used By Investing Activities $ (14,496,960) $ (6,046,455) --------------- ---------------- Cash Flows From Financing Activities: Increase In Deposit Accounts $ 4,567,115 $ 1,404,820 Proceeds From FHLB Advances 27,675,000 25,650,000 Repayment Of FHLB Advances (20,493,000) (20,233,000) Proceeds Of Other Borrowings 473,529 0 Repayment Of Other Borrowings (13,804) (13,014) Exercise Of Stock Options 0 0 Dividends To Shareholders (33,685) (25,264) --------------- ---------------- Net Cash Provided By Financing Activities $ 12,175,155 $ 6,783,542 --------------- ---------------- (Continued) 4 Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Three Months Ended June 30, --------------------------------- 1999 1998 --------------- ---------------- Net Increase (Decrease) In Cash And Cash Equivalents $ (718,477) $ 1,408,073 Cash And Cash Equivalents At Beginning Of Period 6,951,347 4,658,681 --------------- ---------------- Cash And Cash Equivalents At End Of Period $ 6,232,870 $ 6,066,754 =============== ================ Supplemental Disclosure Of Cash Flows Information: Cash Paid During The Period For Interest $ 2,253,561 $ 1,882,941 Cash Paid During The Period For Income Taxes $ 350 $ 16,936 Additions To Real Estate Acquired Through Foreclosure $ 21,000 $ 179,901 Increase In Unrealized Net Loss On Securities Available For Sale, Net Of Taxes $ 823,316 $ 25,264 See accompanying notes to consolidated financial statements. 5 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements were prepared in accordance with instructions from Form 10-QSB and generally accepted accounting principles; therefore, they do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows. Such statements are unaudited but, in the opinion of management, reflect all adjustments, all of which are of a normal recurring nature and necessary for a fair presentation of results for the selected interim periods. Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the Annual Report to Shareholders when reviewing interim financial statements. The results of operations for the three-month period ended June 30, 1999 are not necessarily indicative of the results that may be expected for the entire fiscal year. This Form 10-QSB contains certain forward-looking statements with respect to the financial condition, results of operations, and business. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those anticipated by such forward-looking statements include, but are not limited to, changes in interest rates, changes in the regulatory environment, changes in general economic conditions and inflation, changes in the securities market, and Year 2000 if not effectively corrected. Management cautions readers of Form 10-QSB not to place undue reliance on forward-looking statements contained herein. 2. Principles of Consolidation The accompanying unaudited consolidated financial statements include the accounts of Security Federal Corporation (the "Company") and its wholly owned subsidiary, Security Federal Bank (the "Bank"), and the Bank's wholly owned subsidiary Security Financial Services Corporation ("SFSC"). SFSC engages primarily in investment brokerage services. Also included in consolidation is a real estate partnership. 3. Loans Receivable, Net Loans Receivable, Net, at June 30, 1999 and March 31, 1999 consisted of the following: Loans held for sale were $1,521,810 and $1,604,300 at June 30, 1999 and March 31, 1999 respectively. Loans Held For Investment: June 30, 1999 March 31, 1999 ---------------- ---------------- Residential Real Estate $ 74,161,794 $ 65,489,233 Consumer 41,473,061 41,631,602 Commercial Business & Real Estate 52,824,139 52,325,690 ---------------- ---------------- $ 168,458,994 $ 159,446,525 ---------------- ---------------- Less: Allowance For Possible Loan Loss 1,809,435 1,715,068 Loans In Process 10,622,958 7,150,607 Deferred Loan Fees 193,049 199,549 ---------------- ---------------- $ 12,625,442 $ 9,065,224 ---------------- ---------------- $ 155,833,552 $ 150,381,301 ================ ================ The following is a reconciliation of the allowance for loan losses for the three months ending: June 30, 1999 June 30, 1998 ---------------- ---------------- Beginning Balance $ 1,715,068 $ 1,512,038 Provision 150,000 150,000 Charge-offs (64,261) (115,271) Recoveries 8,628 8,831 ---------------- ---------------- Ending Balance $ 1,809,435 $ 1,555,598 ================ ================ 6 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 4. Securities Investment and Mortgage-Backed Securities, Held to Maturity - ----------------------------------------------------------- The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment and mortgage-backed securities held to maturity are as follows: Gross Gross June 30, 1999 Amortized Unrealized Unrealized - ------------- Cost Gains Losses Fair Value ----------- -------- -------- ----------- US Government and Agency Obligations $ 280,673 $ 3,952 $ 0 $ 284,625 Mortgage-Backed Securities 2,857,509 14,402 30,896 2,841,015 ----------- -------- -------- ----------- Total $ 3,138,182 $ 18,354 $ 30,896 $ 3,125,640 =========== ======== ======== =========== March 31, 1999 - -------------- US Government and Agency Obligations $ 336,822 $ 542 $ 0 $ 337,364 Mortgage-Backed Securities 3,196,041 46,652 557 3,242,136 ----------- -------- -------- ----------- Total $ 3,532,863 $ 47,194 $ 557 $ 3,579,500 =========== ======== ======== =========== Investment And Mortgage-Backed Securities, Available For Sale - ------------------------------------------------------------- The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment and mortgage-backed securities available for sale are as follows: Gross Gross June 30, 1999 Amortized Unrealized Unrealized - ------------- Cost Gains Losses Fair Value ----------- -------- ---------- ----------- US Government and Agency Obligations $60,245,625 $ 56,145 $1,038,854 $59,262,916 Mortgage-Backed Securities 31,338,631 14,690 564,950 30,788,371 ----------- -------- ---------- ----------- Total $91,584,256 $ 70,835 $1,603,804 $90,051,287 =========== ======== ========== =========== March 31, 1999 - -------------- US Government and Agency Obligations $57,459,009 $165,373 $ 264,488 $57,359,894 Mortgage-Backed Securities 24,781,144 23,850 129,116 24,675,878 ----------- -------- ---------- ----------- Total $82,240,153 $189,223 $ 393,604 $82,035,772 =========== ======== ========== =========== 7 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 5. Deposits A summary of deposit accounts by type with weighted average rates is as follows: June 30, 1999 March 31, 1999 -------------------- --------------------- Demand Accounts: Balance Rate Balance Rate -------------------- --------------------- Checking $ 53,038,168 0.79% $ 53,435,702 0.84% Money Market 51,279,801 4.59% 49,369,915 4.70% Regular Savings 13,238,080 2.49% 11,847,962 2.47% ------------ ------------ Total Demand Accounts $117,556,049 2.64% $114,653,579 2.67% ============ ============ Certificate Accounts: 0 - 4.99% $ 39,464,444 $ 31,100,943 5.00 - 6.99% 63,941,493 70,640,349 7.00 8.99% 137,812 137,812 ------------ ------------ Total Certificate Accounts $103,543,749 5.08% $101,879,104 5.18% ============ ============ Total Deposit Accounts $221,099,798 3.78% $216,532,683 3.85% ============ ============ 6. Federal Home Loan Bank Advances Federal Home Loan Bank Advances are summarized by year of maturity and weighted average interest rate in the table below: June 30, 1999 March 31, 1999 -------------------- --------------------- Fiscal Year Due: Balance Rate Balance Rate -------------------- --------------------- 2000 $ 7,728,000 5.25% $ 528,000 8.70% 2001 3,856,000 5.88% 856,000 8.75% 2002 0 0% 0 0% 2003 5,000,000 5.69% 5,000,000 5.69% Thereafter 5,198,000 5.61% 8,216,000 5.42% ------------ ------------ Total Advances $ 21,782,000 5.55% $ 14,600,000 5.82% ============ ============ 7. Regulatory Matters The following table reconciles the Company's Shareholders' equity to its various regulatory capital positions: June 30, 1999 March 31, 1999 (Dollars in Thousands) --------------------------------------- Bank's Shareholders' Equity $ 18,526 $ 18,879 Unrealized Loss On Available For Sale Of Securities, Net Of Tax 951 128 Reduction For Goodwill And Other Intangibles (1,465) (1,581) ------------ ----------- Tangible Capital 18,012 17,426 Qualifying Core Deposits And Intangible Assets 638 664 ------------ ----------- Core Capital 18,650 18,090 Supplemental Capital 1,809 1,715 ------------ ----------- Risk-Based Capital $ 20,459 $ 19,805 ============ =========== The following table compares the Company's capital levels relative to the applicable regulatory requirements at June 30, 1999. (Dollars in Thousands) ------------------------------------------------------------- Amt. % Actual Actual Excess Excess Required Required Amt. % Amt. % ------------------------------------------------------------- Tangible Capital $ 5,322 2.0% $ 18,012 6.77% $ 12,690 4.77% Tier 1 Leverage (Core) Capital 10,670 4.0% 18,650 6.99% 7,980 2.99% Total Risk-Based Capital 12,548 8.0% 20,459 13.04% 7,911 5.04% Tier 1 Risk-Based (Core) Capital 6,274 4.0% 18,650 11.89% 12,376 7.89% 8 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 7. Regulatory Matters, Continued The Company's regulatory capital amounts and ratios at June 30, 1999 are as follows: (Dollars in Thousands) To Be Well Capitalized For Capital Under Prompt Adequacy Corrective Action Actual Purposes Provisions -------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio -------------------------------------------------------- Tier I Risk-Based Core Capital $ 18,650 11.9% $ 6,274 4.0% $ 9,411 6.0% Risk-Based Capital (To Risk Weighted Assets) 20,459 13.0% 12,548 8.0% 15,684 10.0% Core Capital (To Adjusted Tangible Assets) 18,650 7.0% 10,670 4.0% 13,338 5.0% Tangible Capital (To Tangible Assets) 18,012 6.8% 5,322 2.0% 13,306 5.0% 9 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition Changes in Financial Condition Total assets of the Company increased $12.4 million during the three months ended June 30, 1999, due primarily to increases of $5.4 million or 3.5% in total net loans receivable and $7.6 million or 8.9% in investment securities. Funded residential real estate loans increased $5.2 million or 8.9% during the period while other loans increased only $340,000. Combined with higher coupon loans prepaying, this led to a decrease in the overall yield of the loan portfolio. Real estate acquired in settlement of loans (REO) increased $39,000 while real estate acquired for development decreased $5,000 during the three-month period. Deposits increased $4.6 million or 2.1% during the three months ended June 30, 1999 and Federal Home Loan Bank (FHLB) advances grew $7.2 million to fund the Company's 4.9% growth in assets. The Board of Directors declared the 34th consecutive quarterly dividend of $.04 per share in May 1999, which totaled $34,000. Unrealized losses on securities available for sale increased $823,000 during the three months ended June 30, 1999 due to the recent rise in U.S. Treasury and agency yields. Net income for the three months was $475,000 for the Company. These items combined to decrease shareholders' equity by $382,000 or 2.0% during the three months ended June 30, 1999. Book value per share was $22.77 at June 30, 1999 compared to $23.23 at March 31, 1999. At its October 1998 Board of Directors meeting, the Board declared a 2-for-1 stock split of the Company's common stock. The stock split was accomplished through a 100% stock dividend that was issued on or about December 15, 1998 to shareholders of record as of November 30, 1998. Liquidity and Capital Resources In accordance with Office of Thrift Supervision (OTS) regulations, the Company is required to maintain a liquidity ratio at specified levels that are subject to change. Currently, a minimum of 4.0% of the combined total of deposits and certain borrowings must be maintained in the form of cash or eligible investments. The Company's average liquidity during the three months ended June 30, 1999 was approximately 38%. The Company's current liquidity level is deemed adequate to meet the requirements of normal operations, potential deposit outflows, and loan demand while still allowing for optimal investment of funds and return on assets. Loan repayments and maturities of investments are a significant source of funds, whereas loan disbursements are a primary use of the Company's funds. During the three months ended June 30, 1999, loan disbursements exceeded loan repayments resulting in a $5.4 million or 3.5% increase in total net loans receivable. Deposits and other borrowings are also an important source of funds for the Company. During the three months ended June 30, 1999, deposits increased $4.6 million while FHLB advances increased $7.2 million. At June 30, 1999, the Bank had $86.6 million of certificates of deposit maturing within one year. Based on previous experience, the Bank anticipates a major portion of these certificates will be renewed. Liquidity resources at June 30, 1999 are sufficient to meet outstanding mortgage loan commitments of $1.1 million and unused lines of credit of $22.9 million. Management believes that the Company's liquidity needs will continue to be supported by the Company's deposit base and borrowing capacity. 10 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition Accounting and Reporting Changes. In June 1997, the FASB issued SFAS 131, Disclosures about Segments of an Enterprise and Related Information. This statement establishes standards for the way public business companies are to report information about operating segments in annual financial statements and requires those companies to report selected information about operating segments in interim financial reports issued to shareholders. SFAS 131 is effective for financial statements for periods beginning after December 15, 1997. Earlier application is encouraged. In the initial year of application, comparative information for earlier years is to be restated, unless it is impractical to do so. SFAS 131 need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application shall be reported in financial statements for interim periods in the second year of application. This standard does not materially effect the Company's current method of financial reporting. In April 1998, the FASB issued SFAS 132, Employers' Disclosures about Pensions and Other Post-retirement Benefits. The new statement revises the required disclosures for employee benefit plans, but it does not change the measurement or recognition of such plans. While the new standard requires some additional information about benefit plans, it helps preparers of financial statements by eliminating certain disclosures and by standardizing the disclosures for pensions and other post-retirement benefits to the extent practicable. SFAS 132 supercedes the disclosure requirements in SFAS 87, Employers' Accounting for Pensions, SFAS 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and SFAS 106, Employers' Accounting for Post-Retirement Benefits Other than Pensions. The new disclosures are effective for fiscal years beginning after December 15, 1997. The adoption of SFAS 132 did not have an impact on the financial statements of the Company due to the disclosure only requirements. In June 1998, the FASB issued SFAS 133, Accounting for Derivative Instrument and Hedging Activities. All derivatives are to be measured at fair value and recognized in the balance sheet as assets or liabilities. The statement is effective for fiscal years and quarters beginning after June 15, 1999. The Company has limited use of derivative transactions at this time; therefore, this does not have a significant effect on the Company. In October 1998, the FASB issued SFAS 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. The new statement establishes accounting and reporting standards for certain activities of mortgage banking enterprises. The statement is effective for the first quarter beginning after December 15, 1998. The statement will have no effect on the financial statements of the Company. Impact of Inflation and Changing Prices The consolidated financial statements, related notes, and other financial information presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in relative purchasing power over time due to inflation. Unlike industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than does inflation. 11 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition Year 2000 Considerations The Company recognizes that there is a business risk in computerized systems as the calendar rolls over into the next century. If the computer systems misinterpret the date, items such as interest calculations on loans and deposits will be incorrect. This problem is commonly called the "Year 2000 Problem." A number of computer systems used by the Company in its day-to-day operations will be affected by this problem. Management has established a committee (the "Y2K Project Team") which has identified all affected systems and is currently working to ensure that this event will not disrupt operations. The Y2K Project Team reports regularly to the Company's Board of Directors. The Company is also working closely with outside computer vendors to ensure that all software corrections and warranty commitments are obtained and to arrange mock conversion testing. Testing of the Company's core processing systems occurred in December 1998. The test was evaluated and appears to have been successful. The Company's contingency plan has been completed and tested and will be re-tested. The Company's Year 2000 project costs are not expected to have a material impact on its results of operations, liquidity or capital resources. The Company has funded approximately $350,000 in preparing for Y2K. Future expenditures for Y2K compliance are not known at this time. The impact of Year 2000 noncompliance by all outside parties with whom the Company may transact business cannot be fully gauged at this time. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 - -------------------------------------------------------------- Net Income Net income was $475,000 for the three months ended June 30, 1999, representing an increase in earnings of $20,000 or 4.4% compared to the same period in 1998. Net Interest Income Net interest income increased $64,000 or 2.9% during the three months ended June 30, 1999 due to an increase in total interest income offset in part by an increase in interest expense. Interest income on loans increased $188,000 or 6.2% during the quarter as a result of total net loans increasing as the average yield in the loan portfolio decreased. Investment, mortgage-backed, and other securities interest income increased $134,000 or 11.1% during the three months ended June 30, 1999 due to an increase in the average balance in the investment portfolio despite a 22 basis points decline in the average yield in the portfolio. Total interest income rose $322,000 or 7.6% during the three months ended June 30, 1999 compared to the same period in 1998. Total interest expense increased $258,000 or 12.4% during the three months ended June 30, 1999 compared to the same period one-year earlier. Interest expense on deposits increased $278,000 or 15.5% during the period as deposits grew significantly compared to the average balance in 1998 despite a decline in the cost of deposits during the 1999 quarter. Interest expense on advances and other borrowings decreased $20,000 during the three-months ended June 30, 1999 even though the average amount of debt outstanding increased slightly in the 1999 period compared to 1998. Provision for Loan Losses The Bank's provision for loan losses was $150,000 during both the three months ended June 30, 1999 and 1998. The amount of the provision is determined by Management's on-going monthly analysis of the loan portfolio. Non-accrual loans, which are loans delinquent 90 days or more, were $1.7 million at June 30, 1999 compared to $1.2 million at March 31, 1999. The ratio of allowance for loan losses to the Company's total loans was 1.14% at June 30, 1999 compared to 1.12% at March 31, 1999. Net charge-offs were $56,000 during the three months ended June 30, 1999 compared to $106,000 during the three-month period in 1998. 12 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Results of Operations and Financial Condition RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999, Continued - ------------------------------------------------------------------------- Other Income Total other income decreased $27,000 or 4.5% during the three months ended June 30, 1999 compared to the same period one-year earlier. Gain on sale of loans increased $15,000 during the period while loan servicing fees decreased $9,000 as the portfolio of loans serviced for others decreased. Service fees on deposit accounts grew $36,000 as the number of commercial and personal demand deposit accounts increased. Income from real estate operations stemming from the Willow Woods partnership decreased $32,000 during the period. Other miscellaneous income including credit life insurance commissions, net gain on sale of repossessed assets, safe deposit rental income, annuity and stock brokerage commissions through SFSC, and other miscellaneous fees decreased $36,000 during the three months ended June 30, 1999. General and Administrative Expenses General and administrative expenses increased $12,000 or 0.6% during the three months ended June 30, 1999 compared to the same period in 1998. Salaries and employee benefits expense grew $52,000 or 5.4% due to an increase in staff in customer service positions to handle increased business and due to normal annual salary increases. Occupancy expense increased $8,000 or 6.8% during the period. Advertising expense decreased $68,000 while the depreciation and maintenance of equipment expense increased $16,000 during the quarterly period. FDIC insurance premiums rose $2,000 as deposit account balances increased. Amortization of intangible expense was $116,000 during the three months ended June 30 in fiscal 1999 and 1998. Other miscellaneous expense, consisting of legal, professional, and consulting expenses, stationery and office supplies, and other sundry expenses, increased $2,000 or 0.6% for the three months ended June 30, 1999 compared to the three months ended June 30, 1998. 13 Security Federal Corporation and Subsidiaries Other Information Item 1 Legal Proceedings ----------------- The Company is not engaged in any legal proceedings of a material nature at the present time. From time to time, the Company is a party to legal proceedings in the ordinary course of business wherein it enforces its security interest in mortgage loans it has made. Item 2 Changes In Securities And Use Of Proceeds ----------------------------------------- Not applicable. Item 3 Defaults Upon Senior Securities ------------------------------- None Item 4 Submission Of Matters To A Vote Of Security Holders --------------------------------------------------- None Item 5 Other Information ----------------- None Item 6 Exhibits And Reports On Form 8-K -------------------------------- Exhibits: 3.1 Articles Of Incorporation* 3.2 Articles Of Amendment, Dated August 28, 1998, To Articles Of Incorporation 3.3 Bylaws** 10 Executive Compensation Plans And Arrangements: Salary Continuation Agreements*** Amendment One To Salary Continuation Agreements**** Stock Option Plan*** Incentive Compensation Plan*** 27 Financial Data Schedule * Filed as an exhibit to the Company's June 23, 1998 proxy statement and incorporated herein by reference. ** Filed as an exhibit to the Company's Form 8-K dated August 31, 1998 and incorporated herein by reference. *** Filed on June 28, 1993, as an exhibit to the Company's Annual Report on Form 10-KSB pursuant to Section 12(g) of the Securities Exchange Act of 1934. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. **** Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1993 pursuant to Section 12(g) of the Securities Exchange Act of 1934. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. 14 Security Federal Corporation and Subsidiaries Signatures Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to the signed on its behalf by the undersigned thereunto duly authorized. Security Federal Corporation Date: August 9, 1999 By: /s/ Roy G. Lindburg ------------------------------------- Roy G. Lindburg Treasurer/CFO Duly Authorized Representative 16