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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, 2003
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 Identification No.)
Incorporation or Organization)
1705 Whiskey Road South, Aiken, South Carolina 29803
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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 whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark 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
amendments to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of June 15, 2003, there were issued and outstanding 2,529,824 shares of
the registrant's Common Stock. 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 June 15, 2003, was $38.2
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, 2003. (Parts I and II)
2. Portions of the Registrant's Proxy Statement for the 2003 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 by authorization of the Board of
Directors of Security Federal Bank ("Security Federal" or the "Bank") for the
purpose of becoming a savings and loan holding company that acquired all of the
outstanding stock of Security Federal issued upon the conversion of Security
Federal from the 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 such sales of additional
securities or such activities.
At March 31, 2003, the Company had assets of approximately $444.9 million,
deposits of approximately $358.5 million and shareholders' equity of
approximately $30.0 million.
The executive office of the Company is located at 1705 Whiskey Road South,
Aiken, South Carolina 29803, telephone (803) 641-3000.
Security Federal Bank
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General. Security Federal, a federally chartered stock savings bank, is
headquartered in Aiken, South Carolina. Security Federal, which has 11 branch
offices in Aiken, Bamberg and Lexington Counties, was originally chartered
under the name Aiken Building and Loan Association on March 27, 1922. The
association 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. Security Federal increased its branch
network to nine in October 1993 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, which became the Bank's tenth location. The Bank opened a
branch in West Columbia, Lexington County, South Carolina, in December 2000,
which provides the Bank with the opportunity to expand its market area. The
Bank will be opening a new branch in late July or early August 2003 in
Lexington, South Carolina.
The principal business of Security Federal is the acceptance of savings
deposits from the general public and the origination of mortgage loans to
enable borrowers to purchase or refinance one- to four-family residential real
estate. The Bank also makes loans secured by multi-family residential and
commercial real estate and consumer and commercial loans. In addition, the
Bank originates construction loans on single family residences, multi-family
dwellings and projects, commercial real estate, and loans for the acquisition,
development and construction of residential subdivisions and commercial
projects.
1
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.
Through a real estate partnership and Willow Woods Associates, the Company
was involved in real estate development. The partnership sold its remaining
lots in March 2001, and was completely liquidated by March 31, 2002.
Selected Consolidated Financial Information
- -------------------------------------------
This information is incorporated by reference to page 5 of the 2003 Annual
Report to Stockholders ("Annual Report").
Yields Earned and Rates Paid
- ----------------------------
This information is incorporated by reference to page 13 of the Annual
Report.
Rate/Volume Analysis
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This information is incorporated by reference to page 12 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. The principal lending activity 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 loans secured by 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
projects, commercial real estate, and loans for the acquisition, development
and construction of residential subdivisions and commercial projects.
Adjustable rate mortgage loans ("ARMs") constituted approximately 23.5% of
the Bank's total outstanding loan portfolio at March 31, 2003.
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.
2
Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts in
percentages, by type of loan and by type of security, and presents a
reconciliation of total loans receivable before net items.
At March 31,
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2003 2002 2001 2000 1999
-------------- -------------- -------------- -------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
TYPE OF LOAN:
- -------------
Fixed rate loans
- ----------------
Residential real estate $43,091 16.8% $35,012 14.0% $34,070 13.9% $13,408 6.6% $7,586 4.7%
Commercial business and
commercial real estate 53,509 20.8 55,845 22.4 42,877 17.5 39,756 19.6 27,812 17.3
Consumer 30,165 11.7 33,185 13.3 32,447 13.3 28,984 14.2 28,492 17.7
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total fixed rate loans 126,765 49.3 124,042 49.7 109,394 44.7 82,148 40.4 63,890 39.7
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Adjustable rate loans
- ---------------------
Residential real estate (1) 60,528 23.5 67,220 26.9 89,913 36.7 86,040 42.3 59,507 36.9
Commercial business and
commercial real estate 53,488 20.8 41,551 16.7 31,643 12.9 22,306 11.0 24,514 15.3
Consumer 16,429 6.4 16,667 6.7 13,830 5.7 12,735 6.3 13,140 8.1
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total adjustable rate loans 130,445 50.7 125,438 50.3 135,386 55.3 121,081 59.6 97,161 60.3
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total loans 257,210 100.0% 249,480 100.0% 244,780 100.0% 203,229 100.0% 161,051 100.0%
====== ====== ====== ====== ======
Less
- ----
Loans in process 8,991 11,288 10,739 7,832 7,151
Deferred fees and discounts 152 184 260 275 199
Allowance for loan losses 4,911 3,689 2,784 2,121 1,715
------- ------- ------- ------- -------
Total loans receivable $243,156 $234,319 $230,997 $193,001 $151,986
======= ======= ======= ======= =======
___________
(1) Includes $552,000, $734,000, $1.8 million, $2.2 million and $1.6 million
in multi-family dwellings at March 31, 2003, 2002, 2001, 2000 and 1999,
respectively. Includes residential construction loans.
3
At March 31,
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2003 2002 2001 2000 1999
-------------- -------------- -------------- -------------- --------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
TYPE OF SECURITY:
- -----------------
Real Estate Loans:
Residential real estate (1) $86,707 33.7% $86,486 34.7% $104,819 42.8% $82,754 40.7% $52,860 32.8%
Construction 16,912 6.6 15,746 6.3 19,164 7.8 16,694 8.2 14,233 8.8
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total real estate loans 103,619 40.3 102,232 41.0 123,983 50.6 99,448 48.9 67,093 41.6
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Commercial business and
commercial real estate 106,997 41.6 97,396 39.0 74,520 30.5 62,062 30.6 52,326 32.5
Consumer loans:
Deposit account 1,726 0.7 2,160 0.9 2,516 1.0 1,304 0.6 1,213 0.8
Home equity lines 13,140 5.1 12,352 4.9 10,731 4.4 9,986 4.9 10,296 6.4
Consumer first and second
mortgages 18,551 7.2 20,090 8.1 20,451 8.3 18,593 9.2 20,425 12.7
Other 13,177 5.1 15,250 6.1 12,579 5.2 11,836 5.8 9,698 6.0
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total consumer loans 46,594 18.1 49,852 20.0 46,277 18.9 41,719 20.5 41,632 25.9
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Total loans 257,210 100.0% 249,480 100.0% 244,780 100.0% 203,229 100.0% 161,051 100.0%
====== ====== ====== ====== ======
Less:
Loans in process 8,991 11,288 10,739 7,832 7,151
Deferred fees and discounts 152 184 260 275 199
Allowance for loan losses 4,911 3,689 2,784 2,121 1,715
------- ------- ------- ------- -------
Total loans receivable $243,156 $234,319 $230,997 $193,001 $151,986
======= ======= ======= ======= =======
___________
(1) Includes $552,000, $734,000, $1.8 million, $2.2 million and $1.6 million
in multi-family dwellings at March 31, 2003, 2002, 2001, 2000 and 1999,
respectively.
4
The following schedule illustrates the maturities of Security Federal's
loan portfolio at March 31, 2003. 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, 2003
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Commercial
Business and
Residential Commercial
Real Estate(1) Consumer(2) Real Estate Total
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(In Thousands)
Six months or less (3) . . . . $10,214 $3,756 $24,049 $38,019
Over six months to one year. . 8,512 2,505 8,000 19,017
Over one year to three years . 2,087 7,191 27,278 36,556
Three to five years. . . . . . 1,310 9,147 33,886 44,343
Over five to ten years . . . . 4,698 9,291 6,837 20,826
Over ten years . . . . . . . . 67,807 14,704 6,947 89,458
------- ------- ------- -------
Total (4). . . . . . . . . $94,628 $46,594 $106,997 $248,219
======= ======= ======== ========
___________
(1) Includes multi-family dwellings.
(2) Includes home improvement loans and equity line of credit loans.
(3) Includes demand loans, loans having no stated maturity and overdraft loans.
(4) Loan amounts are net of undisbursed funds for loans in process of $9.0
million.
The total amount of loans due after March 31, 2004, which have
predetermined or fixed interest rates is $82.5 million, while the total amount
of loans due after such date which have floating or adjustable interest rates
is $108.7 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,
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2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(In Thousands)
Originated:
Adjustable rate-residential real
estate $45,260 $41,672 $36,998 $44,382 $36,906
Fixed rate-residential real
estate(1) 92,388 93,602 35,813 22,812 40,018
Consumer 25,439 26,916 20,297 17,080 19,564
Commercial business and commercial
real estate 64,097 50,468 31,623 34,847 25,249
Total consumer/commercial business ------ ------ ------ ------ ------
real estate 89,536 77,384 51,920 51,927 44,813
------ ------ ------ ------ ------
Total loans originated $227,184 $212,658 $124,731 $119,121 $121,737
======= ======= ======= ======= =======
Purchased - - - - -
Less:
Sold:
Fixed rate-residential real
estate $80,345 $84,505 $28,547 $16,927 $33,726
Adjustable rate-residential real
estate - - - - -
Principal repayments 140,613 123,523 53,683 60,324 69,224
(Increase) decrease in loans held
for sale (1,505) (80) 950 (308) 372
Increase (decrease) in other
items, net (1,106) 1,378 3,555 1,163 4,153
Net increase (decrease) $ 8,837 $ 3,332 $37,996 $41,015 $14,262
(Footnote appears on following page.)
5
___________
(1) Includes newly originated fixed rate loans held for sale, construction/
permanent loans converted to fixed rate loans and sold, and residential
lot loans.
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
creation of the loan.
The Bank's loan origination fees generally range from 1% to 2% on
conventional residential mortgages, 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, 2003 was $968,000.
Loan origination and commitment fees are volatile sources of income. Such
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 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,
----------------------------------
2003 2002 2001
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(Dollars in Thousands)
Net deferred loan origination fees earned
during the period(1) . . . . . . . . . . . $209 $224 $149
Mortgage loan origination fees earned as a
percentage of total loans originated
during the period . . . . . . . . . . . . . 0.1% 0.2% 0.2%
Net deferred loan origination fees in loan
portfolio at end of period. . . . . . . . . $152 $184 $260
___________
(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 its interest-
earning assets and interest-bearing liabilities. Currently, most fixed-rate,
long-term mortgage loans are being originated based on Fannie Mae ("FNMA") and
Freddie Mac ("FHLMC") underwriting standards.
Secondary market sales have been made primarily to FHLMC, or other banks or
investors. FHLMC is a quasi-governmental agency that purchases residential
mortgage loans from federally insured financial institutions and certain other
lenders. All loans sold to FHLMC are without recourse to Security Federal and
essentially 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. Previous to that, some loans sold to FHLMC, FNMA and one other
investor had been sold service retained, whereby Security Federal would collect
a .25% to .375% servicing fee on the principal balance of the loan serviced.
However, the pricing on loans sold service released is more favorable to the
borrower. Due to that factor, along with prepayments and refinancings,
Security Federal's loan serviced for others portfolio was decreasing in size.
Due to the fixed costs of servicing that portfolio, Security Federal sold its
loan serviced for others portfolio for a before tax, net gain of approximately
$400,000 in the last quarter of fiscal 2001. At March 31, 2001, Security
Federal was sub-servicing this portfolio of approximately $47.0 million for the
buyer, while the actual transfer took place in April 2001.
6
In fiscal 2003, Security Federal sold $80.3 million in fixed rate residential
loans on a service released basis on the secondary market. Loans closed but
not yet settled with FHLMC or other investors, are carried in the Bank's "loans
held for sale" portfolio. At March 31, 2003, the Bank held $3.7 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, mainly Freddie Mac, 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 fixed rate construction loans or fixed
rate lot loans. The construction loans are for one year terms. Lot loans are
financed on a two, three, or five year balloon term. At March 31, 2003, the
Bank held $32.7 million or 12.7% of the total loan portfolio in these fixed
rate loans in its residential portfolio. At March 31, 2003, the Bank also held
approximately $10.4 million in longer term fixed rate residential mortgage
loans. These loans, which were 4.0% of the entire loan portfolio at March 31,
2003, had converted from ARM loans to fixed rate loans during the previous
twelve months. These fixed rate loans had remaining maturities of 12 to 29
years. At March 31, 2003, the Bank had approximately $31.7 million of
residential ARM loans that could convert to fixed rate loans over the next 48
months. The Bank no longer originates ARM loans 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, and the more significant items on these
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 FHLMC and FNMA 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
FHLMC and FNMA underwriting requirements, not to exceed $322,700 per loan, and
the government loan direct endorser approves Federal Housing Administration
("FHA") loans not to exceed $154,800 and Veterans' Administration ("VA") loans
not to exceed $203,000. The Chairman, Chief Executive Officer, President of
the Bank or Senior Consumer/Commercial Loan Officer approve loans of $250,000
or less, except as set forth above. Loans in excess of $250,000 require
approval of any two of the above and any loan in an amount in excess of
$350,000 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.
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. The total outstanding amount
of residential mortgage loan commitments for portfolio loans issued by Security
Federal as of March 31, 2003, was approximately $200,000 (excluding undisbursed
portions of construction loans in process). Security Federal also had
outstanding commitments available on retail lines of credit (including home
equity and other consumer loans) totaling $32.8 million as of March 31, 2003.
See Note 13 of the Notes to Consolidated Financial Statements contained in the
Annual Report.
Permanent Residential Mortgage Lending. Residential real estate mortgage
loans constituted approximately 33.7% of the Bank's total outstanding loan
portfolio at March 31, 2003.
7
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. Such loans are generally
made consistent with FHLMC and FNMA guidelines. At March 31, 2003, residential
ARMs totaled $60.5 million, or 23.5% of the Bank's loan portfolio. For the
year ended March 31, 2003, the Bank originated $137.6 million in residential
real estate loans, 32.9% 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, such 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 a portion of the loan. 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
both to owner-occupants and to builders for resale. Construction loans are
generally made for periods of six months to one year. Typically, interest
rates on interim construction loans are made on a fixed-rate basis. At March
31, 2003, residential construction loans on one-to four-family dwellings
totaled $16.9 million, or 6.6% of the Bank's loan portfolio. In addition to
the factors mentioned above concerning the creditworthiness of the borrower, on
loans of this type the Bank seeks to evaluate the financial condition and prior
performance of the builder. On construction loans offered to individuals
(non-builders), the Bank offers a construction/permanent loan. The construction
portion of the loan is a fixed rate (typically prime plus .50%) during the
construction period. After construction, the loan then automatically converts
to an adjustable rate mortgage loan. The borrower also has the option, after
the construction period only, to convert it 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, 2003, the Bank had approximately $107.0 million or
41.6% of the Bank's total loan portfolio, in commercial business and commercial
real estate loans. Approximately $66.4 million or 62.0% of commercial business
and commercial real estate loans were secured primarily by real estate at March
31, 2003. 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 as quoted in the Wall Street Journal and adjust
monthly or annually.
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 such 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 and for condominiums and apartments and to adverse
conditions in the local economy. Although commercial loans generally involve
more risk than residential loans, they also typically earn more yield and are
more sensitive to changes in interest rates.
8
The underwriting standards employed by the Bank 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. Normally, the Bank requires the principal or owners
of a business to guarantee all loans made to their business by the Bank.
Although the 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 80%.
At March 31, 2003, the Bank did not have any commercial business or
commercial real estate loans to one borrower in excess of $4.1 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 $4.8 million as calculated at March 31, 2003.
Consumer Loans. The Bank originates consumer loans for any personal,
family or household purpose, including but not limited to the financing of home
improvements, 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, 2003, the Bank had $13.1 million of home equity lines
of credit outstanding and $14.2 million of additional commitments of such 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 carry higher yields and
have shorter terms to maturity than one- to four-family residential mortgage
loans. The Bank has increased its origination of consumer loans during the
past several years and at March 31, 2003, the Bank had total consumer loans of
$46.6 million, or 18.1% of the Bank's loan portfolio.
The underwriting standards employed by the Bank 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 additionally
from any verifiable secondary income. Although credit-worthiness 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, 2003, 1,268 Visa
credit cards had been issued by the Bank with total approved credit lines of
$3.5 million, of which $1.1 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, 2003, the Bank had property
acquired as the result of foreclosures and other property repossessed
classified as repossessed assets valued at $151,000.
9
Delinquent Loans. The following table sets forth information concerning
delinquent mortgage and other loans at March 31, 2003. The amounts presented
represent the total remaining principal balances of the related 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)
Loans delinquent for:
30 - 59 days . . . . . . 7 $ 600 5 $ 251 89 $2,806 12 $ 271
60 - 89 days . . . . . . 1 45 1 10 26 435 5 301
90 days and over . . . . 9 585 2 226 14 229 - -
-- ---- -- ---- - ----- - ----
Total delinquent loans . 17 $1,230 8 $487 129 $3,470 17 $572
=== ===== === ==== === ===== === ====
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 regulation
requires 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. 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, 2003, approximately $6.1 million of the Bank's loans were
classified "substandard" and $861,000 were classified as "special mention."
The Bank had no loans classified as "doubtful" or "loss" at March 31, 2003. As
of March 31, 2003, there were loans totaling $674,000 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. The Bank has had no troubled debt restructurings which involve forgiving a
portion of interest or principal on any loans or making loans at a rate
materially less than that of market rates. 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.
10
The following table sets forth the amounts and categories of risk elements
in the Bank's loan portfolio.
March 31,
--------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Dollars In Thousands)
Loans Delinquent 60 to 89 Days:
Residential. . . . . . . . . . . . . $ 45 $ - $ - $ 163 $ 226
Consumer . . . . . . . . . . . . . . 435 370 320 95 64
Commercial business and real estate. 311 144 274 43 18
------ ------ ------ ------ ------
Total . . . . . . . . . . . . . . . $ 791 $ 514 $ 594 $ 301 $ 308
====== ====== ====== ====== ======
Total as a percentage of total assets 0.18% 0.14% 0.18% 0.10% 0.12%
Non-Accruing Loans Delinquent 90 Days or More:
Residential. . . . . . . . . . . . . $ 585 $ 761 $ - $ 335 $ 362
Consumer . . . . . . . . . . . . . . 229 350 172 386 307
Commercial business and real estate. 226 279 11 169 513
------ ------ ------ ------ ------
Total . . . . . . . . . . . . . . . $1,040 $1,390 $ 183 $ 890 $1,182
====== ====== ====== ====== ======
Total as a percentage of total assets 0.23% 0.37% 0.06% 0.29% 0.46%
Troubled debt restructurings . . . . . $ 674(2) 622 $ 587 $ 784 $706(1)
Repossessed assets . . . . . . . . . . $ 151 $ 98 $ 130 $ 332 $ 154
Allowance for loan losses. . . . . . . $4,911 $3,689 $2,784 $2,121 $1,715
___________
(1) $155,000 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, 2003, 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 $44,000, compared to $58,000 for the year ended March
31, 2002.
At March 31, 2003, non-accrual loans totaled $1.0 million, compared to $1.4
million and $183,000 at March 31, 2002 and 2001, respectively. Included in
non-accruing loans at March 31, 2003 were nine residential real estate loans
totaling $585,000 and two commercial loans totaling $216,000 and 14 consumer
loans totaling $229,000. Of the 14 consumer loans on non-accrual status at
fiscal year end, no loan exceeded $75,000. Of the two commercial loans on non-
accrual status at fiscal year end, no loan exceeded $210,000.
The Bank had seven loans totaling $674,000 at fiscal year end which were
troubled debt restructurings compared to four loans of $622,000 at March 31,
2002. The seven troubled debt restructurings were three consumer loans of
$363,000 secured by residential dwellings, a $15,000 commercial loan secured by
a second mortgage on a residence, a $61,000 commercial loan secured by two
rental properties and a $210,000 commercial loan secured by commercial real
estate. The $15,000 commercial loan was 30 days delinquent and the $210,000
loan was more than 90 days delinquent at March 31, 2003.
At March 31, 2003, repossessed assets had an outstanding carrying value of
$151,000 and consisted of vehicles and land.
Provision for Losses on Loans and Repossessed Assets. Security Federal
recognizes that credit losses will be experienced 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.
11
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 normally can be
classified as higher risk. Specific and general reserves are based on, among
other criteria (1) the risk characteristics on 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, a reserve is maintained for
uncollected interest on loans 90 days or more past due.
At March 31, 2003, total reserves relating to loans were $4.9 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 $153.6 million, or 59.7% of the Bank's total loan portfolio at March 31,
2003, and it is anticipated there will be a continued emphasis on this type of
credit. Although commercial business 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 0.41%. 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 are subject to adjustments 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, 2003, 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,
--------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Dollars In Thousands)
Balance at beginning of year . . . . . $3,689 $2,784 $2,121 $1,715 $1,512
Provision charged to operations. . . . 1,800 1,525 925 750 600
Charge-offs:
Residential real estate. . . . . . . 17 5 4 - 2
Commercial business and commercial
real estate . . . . . . . . . . . . 299 229 86 114 193
Consumer . . . . . . . . . . . . . . 594 584 240 269 235
------ ------ ------ ------ ------
Total charge-offs. . . . . . . . . 910 818 330 383 430
------ ------ ------ ------ ------
Recoveries:
Residential real estate. . . . . . . - 6 17 - -
Commercial business. . . . . . . . . 40 41 4 1 2
Consumer . . . . . . . . . . . . . . 292 151 47 38 31
------ ------ ------ ------ ------
Total recoveries . . . . . . . . . 332 198 68 39 33
------ ------ ------ ------ ------
Balance at end of year . . . . . . . . $4,911 $3,689 $2,784 $2,121 $1,715
====== ====== ====== ====== ======
Ratio of net charge-offs during the
year to average loans outstanding
during the year . . . . . . . . . . . 0.24% 0.26% 0.12% 0.20% 0.28%
====== ====== ====== ====== ======
12
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,
-------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------- ------------- ------------- ------------- -------------
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Residential. . . . . . . . . . . $ 473 40.3% $ 435 41.0% $ 374 50.6% $ 258 48.9% $ 198 41.6%
Consumer . . . . . . . . . . . . 2,219 41.6 1,405 20.0 1,205 18.9 870 20.5 647 25.9
Commercial business and
commercial real estate. . . . . 2,219 18.1 1,849 39.0 1,205 30.5 993 30.6 870 32.5
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total. . . . . . . . . . . . . $4,911 100.0% $3,689 100.0% $2,784 100.0% $2,121 100.0% $1,715 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
13
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, 2003, Security Federal's net investment in its service corporations
(including loans to service corporations) totaled $622,000. 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 ("SFINS"), Security Federal Investments
("SFINV") and Security Federal Trust ("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 business, health, home and life insurance. 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.
Real Estate Partnership. The Company has developed real estate through two
real estate partnerships which it purchased from SFSC at market value in
December 1995. Each project was designed primarily to develop and sell
residential lots in and around the Bank's primary lending area. One project
was completed during fiscal 1998 and the other project was completed during
fiscal 2001. The Company had no investment in the remaining project at March
31, 2003. The Company has no current plans for additional real estate ventures.
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.
Moreover, 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
Associations-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.
Historically, the Bank has maintained its liquid assets above the minimum
requirements imposed by the OTS regulations and at a level believed adequate to
meet requirements of normal daily activities, repayment of maturing debt and
potential deposit outflows. Cash flow projections are regularly reviewed and
updated to assure that adequate liquidity is provided. As of March 31, 2003,
the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings and current borrowings) was approximately 35%.
14
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,
--------------------------
2003 2002 2001
------ ------ ------
(In Thousands)
Interest bearing deposit at FHLB $ 339 $5,205 $5,586
------ ------ ------
Total. . . . . . . . . . . . . . . . . . . . $ 339 $5,205 $5,586
====== ====== ======
Investment Securities:
Available for sale:
GNMA bond . . . . . . . . . . . . . . . . . $ - $ - $1,975
FHLB securities . . . . . . . . . . . . . . 47,794 50,829 26,253
Federal Farm Credit Bank securities . . . . 5,129 8,526 5,022
FHLMC bonds . . . . . . . . . . . . . . . . 816 2,002 2,039
------ ------ ------
Total securities available for sale. . . 53,739 61,357 35,289
------ ------ ------
Held to Maturity:
FHLB securities . . . . . . . . . . . . . . 18,990 - -
FNMA securities . . . . . . . . . . . . . . 30 163 266
Federal Farm Credit securities. . . . . . . 2,006 - -
------ ------ ------
Total securities held to maturity. . . . 21,026 163 266
------ ------ ------
Total securities (1) . . . . . . . . . . . . . . 74,765 61,520 35,555
FHLB stock . . . . . . . . . . . . . . . . . . . 2,859 2,669 3,431
------ ------ ------
Total securities and FHLB stock (1). . . . . . . $77,624 $64,189 $38,986
====== ====== ======
___________
(1) Does not include mortgage-backed securities.
At March 31, 2003, 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.
The following table sets forth the maturities or repricing of investment
securities and FHLB stock at March 31, 2003, 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.
Maturing or Repricing
---------------------------------------------------
After One But After Five But
Within One Within Five Within Ten After Ten
Year Years Years Years
------------ ------------ ------------ ------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
U.S. Government and other
agency obligations $51,004 3.63%$22,951 3.92% $ - -% $ - -%
FHLB stock (1) - - 2,859 4.50 - - - -
------ ----- ------ ----- ------ ----- ------ -----
Total $51,004 3.63%$25,810 3.98% $ - -% $ - -%
====== ===== ====== ===== ====== ===== ====== =====
___________
(1) FHLB stock has no stated maturity date.
15
For information regarding the market value of the Bank's securities
portfolios, see Notes 2 and 3 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. Such 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 ("GNMA") securities) in contrast to the 50% risk weight carried by
residential loans. See "Regulation."
The Bank had $16.8 million, $14.5 million and $10.2 million of
mortgage-backed securities issued by FHLMC at March 31, 2003, 2002 and 2001,
respectively. The Bank had $57.8 million in mortgage-backed securities issued
by FNMA and $32.8 million issued by GNMA at March 31, 2003, compared to $28.2
million in mortgage-backed securities issued by FNMA and $14.7 million issued
by GNMA at March 31, 2002, and $12.0 million in mortgage-backed securities
issued by FNMA and $16.6 million issued by GNMA at March 31, 2001.
At March 31,
--------------------------
2003 2002 2001
------ ------ ------
(In Thousands)
Available for Sale:
FHLMC. . . . . . . . . . . . . . . . . . . . . . $15,810 $13,099 $ 8,195
FNMA . . . . . . . . . . . . . . . . . . . . . . 57,794 28,239 12,031
GNMA . . . . . . . . . . . . . . . . . . . . . . 32,808 14,667 16,596
------- ------ ------
Total. . . . . . . . . . . . . . . . . . . . . $106,412 $56,005 $36,822
======= ====== ======
The following table sets forth the composition of the mortgage-backed
securities held to maturity portfolio at
the dates indicated.
At March 31,
--------------------------------
2003 2002 2001
---------- ---------- ----------
Book Value Book Value Book Value
(In Thousands)
Held to Maturity
FHLMC $941 $1,373 $2,028
========== ========== ==========
At March 31, 2003, 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.
For information regarding the market values of Security Federal's
mortgage-backed securities portfolio, see Notes 2 and 3 of the Notes to
Consolidated Financial Statements contained in the Annual Report.
16
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, 2003. 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, 2003
------------------------------------------------ --------------
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)
FNMA . . . . . $6,709 4.17%$20,189 4.13%$17,545 4.89%$12,583 5.09%$57,026 4.58%
FHLMC. . . . . - - 5,938 4.47 4,571 4.89 5,869 5.56 16,378 4.98
GNMA . . . . . 29,393 3.84 - - 221 6.63 2,815 6.18 32,429 4.06
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total. . . . .$36,102 3.90% 26,127 4.21% 22,337 4.91% 21,267 5.36%105,833 4.48%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
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, 2003, 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,
-------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Interest Rate Range for 2003:
- -----------------------------
Savings accounts 0%-2.50% $16,455 4.6% $15,107 4.9% $12,911 5.0%
NOW and other transaction
accounts 0%-1.98% 82,522 23.0 71,907 23.2 61,453 23.9
Money market funds 1.09%-
2.32% 102,397 28.6 74,075 24.0 49,856 19.4
------- -------- ------- -------- ------- --------
Total non-certificates $201,374 56.2% $161,089 52.1% $124,220 48.3%
======= ======= ======= ====== ======= ======
Certificates:
- -------------
0.00-4.99% $144,635 40.3% $127,068 41.1% $10,021 3.9%
5.00-6.99% 12,437 3.5 19,982 6.5 112,040 43.5
7.00-8.99% 28 - 899 0.3 11,129 4.3
------- -------- ------- -------- ------- --------
Total certificates 157,100 43.8 147,949 47.9 133,190 51.7
------- -------- ------- -------- ------- --------
Total deposits $358,474 100.0% $309,038 100.0% $257,410 100.0%
======= ======= ======= ====== ======= ======
The Bank relies to a limited extent upon locally obtained Jumbo CDs to
maintain its deposit levels. At March 31, 2003, Jumbo CDs constituted 12.4% 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,
--------------------------------
2003 2002 2001
---------- ---------- ----------
(Dollars in Thousands)
Opening balance. . . . . . . . . . . . . $309,038 $257,410 $228,823
Net deposits . . . . . . . . . . . . . . 41,747 41,645 18,642
Interest credited. . . . . . . . . . . . 7,689 9,983 9,945
------- ------- -------
Ending balance . . . . . . . . . . . . . 358,474 309,038 257,410
------- ------- -------
Net increase (decrease). . . . . . . . . 49,436 $51,628 $28,587
======= ======= =======
Percent increase (decrease). . . . . . . 16.0% 20.1% 12.5%
======= ======= =======
18
The following table shows rate and maturity information for the Bank's
certificates of deposit as of March 31, 2003.
Less than 2.00- 3.00- 4.00- 5.00- 6.00- 7.00-
2.00% 2.99% 3.99% 4.99% 5.99% 6.99% 7.99% Total
------ ------ ------ ------ ------ ------ ------ -------
(In Thousands)
Certificate accounts
maturing in quarter
ending:
June 30, 2003. . . . . . . . . . . $12,409 $27,475 $ 8,911 $ 281 $ 265 $ 841 $ 28 $50,210
September 30, 2003 . . . . . . . . 9,641 22,138 4,649 1,426 93 175 - 38,122
December 31, 2003. . . . . . . . . 4,888 12,938 1,268 112 68 18 - 19,292
March 31, 2004 . . . . . . . . . . 3,593 6,187 807 202 20 277 - 11,086
June 30, 2004. . . . . . . . . . . 119 4,565 488 105 93 - - 5,370
September 30, 2004 . . . . . . . . 504 3,827 1,039 674 79 - - 6,123
December 31, 2004. . . . . . . . . - 505 863 13 36 - - 1,417
March 31, 2005 . . . . . . . . . . - 553 487 306 30 90 - 1,466
June 30, 2005. . . . . . . . . . . - 2 34 536 9 3 - 584
September 30, 2005 . . . . . . . . - 178 425 214 18 - - 835
December 31, 2005. . . . . . . . . - - 343 62 8 - - 413
Thereafter . . . . . . . . . . . . - 93 3,536 8,239 10,314 - - 22,182
------ ------ ------ ------ ------ ------ ------ -------
Total. . . . . . . . . . . . . . $31,154 $78,461 $22,850 $12,170 $11,033 $1,404 $28 $157,100
====== ====== ====== ====== ====== ====== ====== =======
The following table indicates the amount of the Bank's deposits of
$100,000 or more by time remaining until maturity at March 31, 2003.
Savings, NOW and
Certificates of Deposit Money Market Accounts
----------------------- ---------------------
(In Thousands)
Maturity Period
Three months or less $ 8,204 $83,755
Over three through six months 11,401 -
Over six through twelve month 16,143 -
Over twelve months 8,685 -
-------- --------
Total $44,433 $83,755
======== ========
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
9 of the Notes to Consolidated Financial Statements contained in the Annual
Report for disclosure 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
Associations-Federal Home Loan Bank System."
At March 31, 2003, the Bank had $4.2 million in retail repurchase
agreements with an average rate of 1.17%. These repurchase agreements are
included in "Other Borrowings" in the consolidated financial statements and
the following table.
19
The following table sets forth the maximum month-end balance and average
balance of FHLB advances and other borrowings at the dates indicated.
Years Ended March 31,
--------------------------
2003 2002 2001
------ ------ ------
(In Thousands)
Maximum Balance:
FHLB advances. . . . . . . . . . . . . . . . . $57,472 $43,058 $68,620
Other borrowings . . . . . . . . . . . . . . . 6,735 6,169 3,578
Average Balance:
FHLB advances. . . . . . . . . . . . . . . . . $42,123 $35,351 $58,555
Other borrowings . . . . . . . . . . . . . . . 5,663 4,187 2,924
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,
--------------------------
2003 2002 2001
------ ------ ------
(Dollars In Thousands)
Balance:
FHLB advances. . . . . . . . . . . . . . . . . $49,772 $33,108 $42,704
Other borrowings . . . . . . . . . . . . . . . 4,193 6,169 3,409
Weighted Average Interest Rate:
At Fiscal Year End:
FHLB advances. . . . . . . . . . . . . . . . . 4.50% 6.09% 5.99%
Other borrowings . . . . . . . . . . . . . . . 1.17 1.73 4.88
During Fiscal Year:
FHLB advances. . . . . . . . . . . . . . . . . 5.31% 5.98% 6.42%
Other borrowings . . . . . . . . . . . . . . . 1.57 2.75 5.71
Competition
- -----------
The Bank serves the counties of Aiken, Bamberg, and Lexington, South
Carolina through its eleven branch offices located in Aiken, Denmark, North
Augusta, Graniteville, Langley, Clearwater, Wagener, and West Columbia,
South Carolina. On October 21, 1993 the Bank expanded its market area through
the acquisition of four branch offices of NationsBank of South Carolina, N.A.
The branches are located in Langley, Graniteville, Clearwater and Wagener,
Aiken County, South Carolina. In December 2000, the Bank opened its West
Columbia office. The Bank is currently constructing a branch in Lexington,
South Carolina, which will open during fiscal 2004.
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 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
20
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.
REGULATION
General
- -------
The Bank is subject to extensive regulation, examination and supervision by
the OTS as its chartering agency, and the FDIC, as the insurer of its deposits.
The activities of federal savings institutions are governed by the Home Owners'
Loan Act ("HOLA") and, in certain respects, the Federal Deposit Insurance Act
("FDIA"), and the regulations issued by the OTS and the FDIC to implement these
statutes. These laws and regulations delineate the nature and extent of the
activities in which federal savings associations may engage. Lending activities
and other investments must comply with various statutory and regulatory capital
requirements. In addition, the Bank's relationship with its depositors and
borrowers is also regulated to a great extent, especially in such matters as
the ownership of deposit accounts and the form and content of the Bank's
mortgage documents. 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 to review the Bank's compliance with various
regulatory requirements. 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, the Bank and their operations.
Federal Regulation of Savings Associations
- ------------------------------------------
Office of Thrift Supervision. The OTS is an office in the Department of the
Treasury subject to the general oversight of the Secretary of the Treasury. The
OTS has extensive authority over the operations of savings associations. Among
other functions, the OTS issues and enforces regulations affecting federally
insured savings associations and regularly examines these institutions.
All savings associations 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 association's total assets, including
consolidated subsidiaries. The Bank's OTS assessment for the fiscal year ended
March 31, 2003 was $87,000.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs, is
under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner.
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 the
greater of (i)1.0% of the aggregate outstanding principal amount of residential
mortgage loans, home purchase contracts and similar obligations at the
beginning of each year, or (ii) 1/20 of its advances (i.e., borrowings) from
the FHLB of Atlanta. The Bank is in compliance with this requirement with an
investment in FHLB of Atlanta stock of $2.9 million at March 31, 2003.
Among other benefits, the FHLB provides a central credit facility primarily
for member institutions. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB System. It makes
21
advances to members in accordance with policies and procedures established by
the FHFB and the Board of Directors of the FHLB of Atlanta.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These contributions
have adversely affected the level of FHLB dividends paid in the past and could
do so in the future. These contributions also could have an adverse effect on
the value of FHLB stock in the future.
Federal Deposit Insurance Corporation. The FDIC is an independent federal
agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. The FDIC maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the Savings Association Insurance
Fund ("SAIF"). The Bank's deposit accounts are insured by the FDIC under the
SAIF to the maximum extent permitted by law. As insurer of the Bank's
deposits, the FDIC has examination, supervisory and enforcement authority over
all savings associations.
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 SAIF or the BIF. 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's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier
1, or core capital, to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or
a risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all
insured institutions is made by the FDIC for each semi-annual assessment
period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than
the designated reserve ratio of 1.25% of SAIF insured deposits. In setting
these increased assessments, the FDIC must seek to restore the reserve ratio to
that designated reserve level, or such higher reserve ratio as established by
the FDIC. The FDIC may also impose special assessments on SAIF members to
repay amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
The premium schedule for BIF and SAIF insured institutions ranged from 0 to
27 basis points. However, SAIF insured institutions and BIF insured
institutions are required to pay a Financing Corporation assessment in order to
fund the interest on bonds issued to resolve thrift failures in the 1980s.
This amount is currently equal to about 1.88 points for each $100 in domestic
deposits for SAIF and BIF insured institutions. These assessments, which may
be revised based upon the level of BIF and SAIF deposits, will continue until
the bonds mature in 2017 through 2019.
Under the FDIA, 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 does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Liquidity Requirements. Federal regulations require the Bank to maintain
sufficient liquidity to ensure its safe and sound operation. Liquid assets
include cash, cash equivalents consisting of short-term interest-earning
deposits, certain other time deposits, and other obligations generally having
remaining maturities of less than five years. Liquidity management is both a
daily and long-term responsibility of management. We adjust liquid assets
based upon
22
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-bearing deposits, and (iv) the
objectives of its asset/liability management program. The Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.
Prompt Corrective Action. The OTS is required to take certain supervisory
actions against undercapitalized savings associations, 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 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."
At March 31, 2003, the Bank was categorized as "well capitalized" under the
prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory agencies
have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). 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 the
Bank fails to meet any standard prescribed by the Guidelines, the OTS may
require the Bank to submit to the OTS an acceptable plan to achieve compliance
with the standard. Management is aware of no conditions relating to these
safety and soundness standards which would require submission of a plan of
compliance.
Qualified Thrift Lender Test. All savings associations, 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
association to have at least 65% of its portfolio 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
association may maintain 60% of its assets in those assets specified in Section
7701(a)(19) of the Internal Revenue Code ("Code"). Under either test, such
assets primarily consist of residential housing related loans and investments.
At March 31, 2003, the Bank met the test and its QTL percentage was 79.8%.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition,
the association is immediately ineligible to receive any new FHLB borrowings
and is subject to national bank limits for payment of dividends. If such
association has not requalified or converted to a national bank within three
years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must
repay promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies. See " Savings and Loan Holding Company
Regulation."
Capital Requirements. Federally insured savings associations, such as the
Bank, are required to maintain a minimum level of regulatory capital. The OTS
has established capital standards, including a tangible capital requirement,
a leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations.
23
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). At March 31, 2003, the Bank
had tangible capital of $28.9 million, or 6.5% of adjusted total assets, which
is approximately $22.2 million above the minimum requirement of 1.5% of
adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 4% of
adjusted total assets, depending on an institution's supervisory rating. Core
capital generally consists of tangible capital. At March 31, 2003, the Bank
had core capital equal to $28.9 million, or 6.5% of adjusted total assets,
which is $11.1 million above the minimum leverage ratio requirement of 4% as in
effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8% of risk-weighted assets. Total capital consists of core
capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be
used to satisfy the risk-based requirement only to the extent of core capital.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, are multiplied by a risk weight, ranging from
0% to 100%, based on the risk inherent in the type of asset. For example, the
OTS has assigned a risk weight of 50% for prudently underwritten permanent one-
to- four family first lien mortgage loans not more than 90 days delinquent and
having a loan-to-value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by FNMA or FHLMC.
On March 31, 2003, the Bank had total risk-based capital of approximately
$31.8 million, including $28.9 million in core capital and $3.0 million in
qualifying supplementary capital, and risk-weighted assets of $245.2 million,
or total capital of 13.0% of risk-weighted assets. This amount was $12.2
million above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to
meet their capital requirements. The OTS is generally required to take action
to restrict the activities of an "undercapitalized association" (generally
defined to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized
associations.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Company or the Bank may have a substantial adverse effect on their operations
and profitability.
Limitations on Capital Distributions. The OTS imposes various restrictions
on savings associations 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 remain well-capitalized, may make capital
distributions during any calendar year equal to the greater of 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 in accordance with this general authority.
Savings institutions proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings institutions that do not, or would not meet their current minimum
capital
24
requirements following a proposed capital distribution, however, 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."
Loans to One Borrower. Federal law provides that savings institutions
are generally subject to the national bank limit on loans to one borrower. A
savings institution may not make a loan or extend credit to a single or related
group of borrowers in excess of 15% of its unimpaired capital and surplus. An
additional amount may be lent, equal to 10% of unimpaired capital and surplus,
if secured by specified readily-marketable collateral. At March 31, 2003, the
Bank's limit on loans to one borrower was $4.8 million. At March 31, 2003, the
Bank's largest single loan to one borrower was $4.0 million, which was
performing according to its original terms.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings associations also
must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association
of its ownership control of, or its relationship to, the subsidiary constitutes
a serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association 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 SAIF. If so, it may require that no SAIF member engage
in that activity directly.
Transactions with Affiliates. Generally, transactions between a
savings association or its subsidiaries and its affiliates are required to be
on terms as favorable to the association as transactions with non-affiliates.
In addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the
Bank include the Company and any company which is under common control with the
Bank. In addition, a savings association may not lend to any affiliate engaged
in activities not permissible for a bank holding company or acquire the
securities of most affiliates. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS.
These conflict of interest regulations and other statutes also impose
restrictions on loans to such persons and their related interests. Among other
things, such loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
Community Reinvestment Act. Under the federal Community Reinvestment
Act ("CRA"), all federally-insured financial institutions have a continuing and
affirmative obligation consistent with safe and sound operations to help meet
all the credit needs of their delineated communities. The CRA does not
establish specific lending requirements or programs nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to meet all the credit needs of its delineated
community. The CRA requires the federal banking agencies, in connection with
regulatory examinations, to assess an institution's record of meeting the
credit needs of its delineated community and to take such record into account
in evaluating regulatory applications to establish a new branch office that
will accept deposits, relocate an existing office, or merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally regulated
financial institution, among others. The CRA requires public disclosure of an
institution's CRA rating. The Bank received an "outstanding" rating as a
result of its latest evaluation.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, 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
25
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. Under the FDIA, the FDIC has the authority to
recommend to the Director of the OTS that enforcement action be taken with
respect to a 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.
Savings and Loan Holding Company Regulation
- -------------------------------------------
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 association subsidiaries which also permits the
OTS to restrict or prohibit activities that are determined to present a serious
risk to the subsidiary savings association.
New Legislation
- ---------------
Gramm-Leach-Bliley Financial Services Modernization Act. On November
12, 1999, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999
was signed into law. The purpose of this legislation was to modernize the
financial services industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms and
other financial service providers. Generally, the Act:
- repealed the historical restrictions and eliminated many federal and state
law barriers to affiliations among banks, securities firms, insurance
companies and other financial service providers;
- provided a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;
- broadened the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies and their financial subsidiaries;
- provided an enhanced framework for protecting the privacy of consumer
information;
- adopted a number of provisions related to the capitalization, membership,
corporate governance and other measures designed to modernize the FHLB
system;
- modified the laws governing the implementation of the CRA; and
- addressed a variety of other legal and regulatory issues affecting day-to-
day operations and long-term activities of financial institutions.
The USA Patriot Act. In response to the events of September 11th,
President George W. Bush signed into law the Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001, or the USA PATRIOT Act, on October 26, 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. By way
of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes
measures intended to encourage information sharing among bank regulatory
agencies and law enforcement bodies. Further, certain provisions of Title III
impose affirmative obligations on a broad range of financial institutions,
including banks, thrifts, brokers, dealers, credit unions, money transfer
agents and parties registered under the Commodity Exchange Act.
26
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
-Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i) internal
policies, procedures, and controls, (ii) specific designation of an anti-
money laundering compliance officer, (iii) ongoing employee training
programs, and (iv) an independent audit function to test the anti-money
laundering program.
-Section 326 of the Act authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue regulations
by October 26, 2002 that provide for minimum standards with respect to
customer identification at the time new accounts are opened.
-Section 312 of the Act requires financial institutions that establish,
maintain, administer, or manage private banking accounts or correspondent
accounts in the United States for non-United States persons or their
representatives (including foreign individuals visiting the United States)
to establish appropriate, specific, and, where necessary, enhanced due
diligence policies, procedures, and controls designed to detect and report
money laundering.
-Effective December 25, 2001, financial institutions are prohibited from
establishing, maintaining, administering or managing correspondent accounts
for foreign shell banks (foreign banks that do not have a physical presence
in any country), and will be subject to certain record keeping obligations
with respect to correspondent accounts of foreign banks.
-Bank regulators are directed to consider a holding company's effectiveness
in combating money laundering when ruling on Federal Reserve Act and Bank
Merger Act applications.
During the first quarter of 2002 the Federal Crimes Enforcement Network
(FinCEN), a bureau of the Department of Treasury, issued proposed and interim
regulations to implement the provisions of Sections 312 and 352 of the USA
Patriot Act. To date, it has not been possible to predict the impact the USA
PATRIOT ACT and its implementing regulations may have on the Company and the
Bank.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002("Sarbanes-Oxley
Act") was signed into law by President Bush on July 30, 2002 in response to
public concerns regarding corporate accountability in connection with the
recent accounting scandals at Enron and WorldCom, among others. 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 is the most far-reaching U.S. securities legislation
enacted in some time. 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 ("Exchange Act").
The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules, requires the SEC and
securities exchanges to adopt extensive additional disclosure, corporate
governance and other related rules and mandates further studies of certain
issues by the SEC and the Comptroller General. 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.
The Sarbanes-Oxley Act addresses, among other matters:
- audit committees;
27
- certification of financial statements by the chief executive officer and
the chief financial officer;
- the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and senior
officers in the twelve month period following initial publication of
any financial statements that later require restatement;
- a prohibition on insider trading during pension plan black out periods;
- disclosure of off-balance sheet transactions;
- a prohibition on personal loans to directors and officers;
- expedited filing requirements for Form 4s;
- disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code;
- "real time" filing of periodic reports;
- the formation of a public accounting oversight board;
- auditor independence; and
- various increased criminal penalties for violations of securities laws.
The Sarbanes-Oxley Act contains provisions which became effective upon
enactment on July 30, 2002 and provisions which will become effective from
within 30 days to one year from enactment. The SEC has been delegated
the task of enacting rules to implement various provisions with respect to,
among other matters, disclosure in periodic filings pursuant to the Exchange
Act.
Acquisitions. Federal law and OTS regulations issued thereunder generally
prohibit a savings and loan holding company, without prior OTS approval, from
acquiring more than 5% of the voting stock of any other savings association
or savings and loan holding company or controlling the assets thereof. They
also prohibit, among other things, any director or officer of a savings and
loan holding company, or any individual who owns or controls more than 25% of
the voting shares of such holding company, from acquiring control of any
savings association not a subsidiary of such savings and loan holding company,
unless the acquisition is approved by the OTS.
Activities. As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions. If the Company acquires
control of another savings association as a separate subsidiary other than in a
supervisory acquisition, it would become a multiple savings and loan holding
company and the activities of the Company and any of its subsidiaries (other
than the Bank or any other SAIF insured savings association) would generally
become subject to additional restrictions. There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company. Federal law
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof which is not an insured association shall commence or
continue for more than two years after becoming a multiple savings and loan
association holding company or subsidiary thereof, any business activity other
than: (i) furnishing or performing management services for a subsidiary
insured institution, (ii) conducting an insurance agency or escrow business,
(iii) holding, managing, or liquidating assets owned by or acquired from a
subsidiary insured institution, (iv) holding or managing properties used or
occupied by a subsidiary insured institution, (v) acting as trustee under deeds
of trust, (vi) those activities previously directly authorized by regulation as
of March 5, 1987 to be engaged in by multiple holding companies or (vii) those
activities authorized by the Federal Reserve Board as permissible for bank
holding companies, unless the OTS by regulation, prohibits or limits such
activities for savings and loan holding companies. Those activities described
in (vii) above also must be approved by the OTS prior to being engaged in by a
multiple savings and loan holding company.
28
Qualified Thrift Lender Test. If the Bank fails the QTL test, within one
year the Company must register as, and will become subject to, the significant
activity restrictions applicable to bank holding companies. See "Federal
Regulation of Savings Associations-Qualified Thrift Lender Test" for
information regarding the Bank's QTL test.
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 will be 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
institution 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, such 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 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" 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.
29
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 10
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 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 Corporation'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 10 of the Notes to Consolidated Financial
Statements contained in the Annual Report.
ITEM 2. Properties
----------
At March 31, 2003, Security Federal owned the buildings and land for its
main office, five of its branch offices, including the operations center,
leased the land and owned the improvements thereon for one of its offices, and
leased the remaining five offices. The property related to the offices owned
by Security Federal had a depreciated cost (including land) of approximately
$2.4 million at March 31, 2003. At March 31, 2003, the aggregate net book
value of leasehold improvements (excluding furniture and equipment) associated
with leased premises was $1.3 million. See Note 5 of the Notes to Consolidated
Financial Statements contained in the Annual Report.
30
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, 2003.
Date
Lease Facility Gross
Owned or Expiration Opened/ Square Net Book
Location Leased Date Acquired Footage Value
- ----------------------- ------- ---------- -------- ------- --------
Main Office:
1705 Whiskey Road S.
Aiken, South Carolina Owned N/A 1980 10,000 $363,000
Full Service Branch Offices
149 E. Baruch Street
Denmark, South Carolina Owned N/A 1984 2,258 162,000
100 Laurens Street, N.W.
Aiken, South Carolina Leased 2013 1959 4,500 10,000
313 East Martintowne Road
North Augusta, South
Carolina Owned(1) N/A 1973 4,356 80,000
1665 Richland Avenue, W.
Aiken, South Carolina Owned N/A 1984 1,942 223,000
Montgomery & Canal Streets
Masonic Shopping Center
Graniteville, South
Carolina Leased 2007 1993(2) 3,576 384,000
2812 Augusta Road
Langley, South Carolina Owned N/A 1993(2) 2,509 149,000
Highway 125 and Highways 1
and 78
Midland Valley Shopping
Center
Clearwater, South Carolina Leased 2003 1993(2) 2,287 105,000
118 Main Street North
Wagener, South Carolina Owned N/A 1993(2) 3,600 240,000
Wal-Mart Superstore
2035 Whiskey Road
Aiken, South Carolina Leased 2001 1996 517 115,000
1185 Sunset Boulevard
West Columbia, South
Carolina Leased 2015 2000 10,000 683,000
5446 Sunset Boulevard
Lexington, South
Carolina (3) Owned(4) N/A 2003(5) 9,200(3) 344,000(6)
(Table continued on following page.)
31
Date
Lease Facility Gross
Owned or Expiration Opened/ Square Net Book
Location Leased Date Acquired Footage Value
- ----------------------- ------- ---------- -------- ------- --------
Operations Center:
871 East Pine Log Road
Aiken, South Carolina Owned N/A 1988 10,000 875,000
________________________
(1) Security Federal has a lease on the land for this office which expires in
2003, but has options through 2063.
(2) Represents acquisition date.
(3) Under construction.
(4) Security Federal has a lease on the land for this office which expires in
2018, but has options through 2063.
(5) Anticipated.
(6) Book value of construction in progress at March 31, 2003. The
anticipated total cost is approximately $1.4 million. The Bank plans to
lease out the second floor.
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, 2003.
PART II
ITEM 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
-----------------------------------------------------
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.
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
32
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
-------------------------------------------
Independent Auditors' Report*
Consolidated Balance Sheets, March 31, 2003 and 2002*
Consolidated Statements of Income For the Years Ended March 31, 2003, 2002
and 2001*
Consolidated Statements of Changes in Shareholders' Equity For the Years
Ended March 31, 2003, 2002 and 2001*
Consolidated Statements of Cash Flows For the Years Ended March 31, 2003,
2002 and 2001*
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.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The information contained under the section captioned "Election of
Directors" in the Proxy Statement is incorporated herein by reference. The
information contained under the section captioned "Compliance With Section
16(a) of the Exchange Act" in the Proxy Statement is incorporated herein by
reference.
ITEM 11. Executive Compensation
----------------------
The information contained in the section captioned "Executive Officers" in
the Proxy Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and 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.
33
Equity Compensation Plan Information. The following table summarizes
share and exercise price information about the Corporation's equity
compensation plans as of March 31, 2003.
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
Plan category warrants and rights warrants and rights column (a))
- ---------------------------- ---------------------- ------------------- -----------------------
(a) (b) (c)
Equity compensation plans
approved by security holders 114,366 $15.77 48,000
Equity compensation plans not
approved by security holders N/A N/A N/A
Total 114,366 N/A 48,000
======= ====== =======
ITEM 13. Certain Relationships and Related Transactions
----------------------------------------------
The information contained in the section captioned "Certain Transactions"
in the Proxy Statement is incorporated herein by reference.
ITEM 14. Controls and Procedures
-----------------------
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Corporation's disclosure controls and procedures (as defined in Section
13(a)-14(c) of the Securities Exchange Act of 1934 (the "Act")) was carried out
under the supervision and with the participation of the Corporation's Chief
Executive Officer, Chief Financial Officer and several other members of the
Corporation's senior management as of the end of the period covered by this
report. The Corporation's Chief Executive Officer and Chief Financial Officer
concluded that the Corporation's disclosure controls and procedures as
currently in effect are effective in ensuring that the information required to
be disclosed by the Corporation in the reports it files or submits under the
Act is (i) accumulated and communicated to the Corporation'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, 2003, the
Corporation 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.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
----------------------------------------------------------------
(a) 1. Financial Statements.
---------------------
For a list of the financial statements filed as part of this
report see Part II - Item 8.
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.
34
3. Exhibits:
---------
3.1 Articles of Incorporation, as amended*
3.2 Bylaws**
4 Instruments defining the rights of security holders,
including indentures***
10 Executive Compensation Plans and Arrangements:
Salary Continuation Agreements****
Amendment One to Salary Continuation Agreements*****
1999 Stock Option Plan**
1987 Stock Option Plan****
Incentive Compensation Plan****
13 Annual Report to Stockholders
21 Subsidiaries of Registrant
23 Consent of Elliott Davis, LLC
___________
* Filed on June 26, 1998, as an exhibit to the Company's Proxy Statement
and incorporated herein by reference.
** Filed on March 2, 2000, as an exhibit to the Company's Registration
Statement on Form S-8 and incorporated herein by reference.
*** Filed on August 12, 1987, as an exhibit to the Company's Registration
Statement on Form 8-A and incorporated herein by reference.
**** Filed on June 28, 1993, as an exhibit to the Company's Annual Report
on Form 10-KSB and incorporated herein by reference.
***** 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.
(b) Reports on Form 8-K.
- -------------------------
During the three months ended March 31, 2003, the Company filed no
Current Reports on Form 8-K.
35
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, 2003 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, 2003
----------------------
Timothy W. Simmons
President, Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/ Roy G. Lindburg June 26, 2003
-------------------
Roy G. Lindburg
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ T. Clifton Weeks June 26, 2003
--------------------
T. Clifton Weeks
Chairman of the Board and Director
By: /s/ Gasper L. Toole III June 26, 2003
-----------------------
Gasper L. Toole III
Director
By: June __, 2003
----------------------
Harry O. Weeks Jr.
Director
By: /s/ Robert E. Alexander June 26, 2003
-----------------------
Robert E. Alexander
Director
By: June __, 2003
-------------------
Thomas L. Moore
Director
By: June __, 2003
-------------------
William Clyburn
Director
By: /s/ Thomas C. Clark June 26, 2003
-------------------
Thomas C. Clark
Director
By: June __, 2003
--------------------
J. Chris Verenes
Director
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 26, 2003
/s/ Timothy W. Simmons
-----------------------
Timothy W. Simmons
President and Chief Executive Officer
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 26, 2003
/s/ Roy G. Lindburg
-----------------------
Roy G. Lindburg
Treasurer and Chief Financial Officer
INDEX TO EXHIBITS
Exhibit Number
- --------------
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Elliott Davis, LLC
99 Certification of Chief Executive Officer and Chief
Financial Officer of Security Federal Corporation Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 13
Annual Report to Stockholders
TABLE OF CONTENTS
Letter to Shareholders 1
Financial Highlights 2-4
Selected Consolidated Financial and Other Data 5
Management's Discussion and Analysis
of Financial Condition and Results of Operations 6
Report of Elliott Davis, LLC, Independent Auditors 22
Consolidated Balance Sheets 23
Consolidated Statements of Income 24
Consolidated Statements of Shareholders' Equity
& Comprehensive Income 25
Consolidated Statements of Cash Flows 26-27
Notes to Consolidated Financial Statements 28-47
Shareholders Information 48-49
Security Federal Bank Board of Directors
& Management Team 50-52
PROFILE
GROUNDED IN TRADITION
GROWING THROUGH SERVICE.
Security Federal Corporation is a community-driven banking and financial
services company dedicated to building long-term relationships with people and
businesses throughout the areas it serves. Founded in Aiken, South Carolina in
1922 to meet the demands of a simpler time, today the company's subsidiary,
Security Federal Bank operates 11 branches and ATM locations and offers 24-hour
online banking services including bill paying, check imaging and transaction
capabilities. In addition to the traditional banking services offered through
Security Federal, the bank also offers Investment, Trust and Insurance services
through three separate financial services subsidiaries: Security Federal
Investments, Inc.; Security Federal Trust, Inc.; and Security Federal
Insurance, Inc. Each is committed to helping customers maximize their money's
worth by providing the personalized financial products and expert financial
guidance they need to navigate the many stages and situations of life.
LETTER TO SHAREHOLDERS
Fellow Shareholders:
While many will remember the year 2002 as one beset by economic uncertainty, we
are pleased to report that Security Federal Corporation remained strong,
realizing both solid financial gains and continued customer growth.
Net income for the fiscal year ending March 31, 2003 increased just over 29% to
$3.2 million or $1.29 per share compared to $1.00 per share for the fiscal year
ending March 31, 2002. Total assets rose 18% to an all-time high of over $445
million, primarily as a result of strong deposit, investment and loan growth.
We are extremely pleased with the progress of our three financial service
subsidiaries, which were established last year. Security Federal Trust, Inc,
now has over $18 million in trust and other assets under management. This
company is filling a much needed niche as a full service local trust company
that emphasizes personal service. Security Federal Investments, Inc. has
proven to be a complement to the trust company as well as the bank. Security
Federal Insurance, Inc. is enabling us to offer insurance assistance and advice
which in many cases has lowered our customers' insurance costs while
improving their coverage. These three companies are making good progress
towards becoming profitable additions to our organization, while at the same
time providing significant additional services to those who bank with us.
Finally, in honoring our commitment to the communities we serve, we provide
Looney Tunes in-school banking at 16 schools throughout our service area. We
offer Financial Counseling, a unique program designed to help people overcome
credit challenges. We are currently working with over 550 customers in an
effort to help them establish a workable budget and improve their credit
rating. We continue to contribute both financially and with volunteers to
local, regional and national non-profit organizations including United Way,
American Heart Association, March of Dimes and The Salvation Army.
Grounded in tradition and growing through service, we look forward to another
prosperous year.
Thank you for your continued support.
Sincerely, Sincerely,
/s/T. Clifton Weeks /s/Timothy W. Simmons
T. Clifton Weeks Timothy W. Simmons
Chairman President & Chief Executive Officer
1
FINANCIAL HIGHLIGHTS
Years Ended March 31,
2003 2002
Net Income $3,231,161 $2,509,586
-------------------------------------------------------------------------
Earnings Per Share - Basis 1.29 1.00
-------------------------------------------------------------------------
Book Value Per Share 11.98 10.13
Total Interest Income 23,659,833 24,632,275
-------------------------------------------------------------------------
Total Interest Expense 10,016,264 12,211,657
-------------------------------------------------------------------------
Net Interest Income Before Provision
For Loan Losses 13,643,569 12,420,618
Provision For Loan Losses 1,800,000 1,525,000
-------------------------------------------------------------------------
Net Income After Provision For Loan Losses 11,843,569 10,895,618
-------------------------------------------------------------------------
Net Interest Margin 3.46% 3.73%
Total Loans Originated 208,506,000 179,646,000
-------------------------------------------------------------------------
Adjustable Rate Loans As A Percentage Of
Total Gross Loans 50.7% 50.3%
2
FINANCIAL HIGHLIGHTS
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Net Income (In Thousands) $3,231 $2,510 $2,127 $2,021 $1,806
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Earnings Per Share - Basic $ 1.29 $ 1.00 $ .85 $ .80 $ .72
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Return on Equity 11.37% 9.97% 9.98% 10.41% 9.56%
3
FINANCIAL HIGHLIGHTS
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Total Assets (In Millions) $ 445 $ 376 $ 331 $ 305 $ 255
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Book Value Per Share $11.98 $10.18 $ 9.43 $ 7.89 $ 7.79
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Allowance for Loan Losses(1) 1.98% 1.55% 1.19% 1.09% 1.12%
(1) Allowance for losses as a percentage of total loans.
4
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Selected Consolidated Financial and Other Data
At Or For The Year Ended March 31,
------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Balance Sheet Data (Dollars In Thousands, Except Per Share Data)
- -------------------------------
Total Assets $444,904 376,320 $330,642 $304,802 $254,718
Cash And Cash Equivalents 8,239 11,528 12,616 7,417 6,951
Investment And Mortgage-Backed
Securities 182,117 118,898 74,405 91,531 85,569
Total Loans Receivable, Net(1) 243,156 234,319 230,997 193,001 151,986
Deposits 358,474 309,038 257,410 228,823 216,533
Advances From Federal Home Loan
Bank 49,772 33,108 42,704 50,611 14,600
Total Shareholders' Equity 30,040 25,401 23,500 19,759 19,560
Income Data
- -------------------------------
Total Interest Income 23,660 24,632 24,153 19,805 17,312
Total Interest Expense 10,016 12,211 13,871 10,378 8,638
------ ------ ------ ------ ------
Net Interest Income 13,644 12,421 10,282 9,427 8,674
Provision For Loan Losses 1,800 1,525 925 750 600
Net Interest Income After ------ ------ ------ ------ ------
Provision For Loan Losses 11,844 10,896 9,357 8,677 8,074
Other Income 3,811 3,465 2,739 2,296 2,641
General And Administrative Expense 10,483 10,337 8,851 7,845 7,962
Income Taxes 1,941 1,514 1,118 1,107 947
------ ------ ------ ------ ------
Net Income $3,231 2,510 $2,127 $2,021 $1,806
====== ====== ====== ====== ======
Per Common Share Data
- -------------------------------
Net Income Per Common Share(Basic) $1.29 1.00 $0.85 $0.80 $0.72
====== ====== ====== ====== ======
Cash Dividends Declared $0.0602 0.0536 $0.0536 $0.0536 $0.0469
====== ====== ====== ====== ======
Other Data
- -------------------------------
Interest Rate Spread Information:
Average During Period 3.19% 3.42% 3.00% 3.19% 3.53%
End Of Period 3.00% 3.48% 3.11% 2.90% 3.15%
Net Interest Margin (Net Interest
Income/Average Earning Assets) 3.46% 3.73% 3.38% 3.54% 3.96%
Average Interest-Earning Assets To
Average Interest-Bearing
Liabilities 110.47% 108.80% 108.39% 109.11% 110.85%
Equity To Total Assets 6.75% 6.75% 7.11% 6.48% 7.68%
Non-Performing Assets To Total
Assets (2) .27% .40% .11% .40% .52%
Return On Assets (Ratio Of Net
Income To Average Total Assets) .79% .71% .66% .72% .77%
Return On Equity (Ratio Of Net
Income To Average Equity) 11.37% 9.97% 9.98% 10.41% 9.56%
Equity To Assets Ratio (Ratio Of
Average Equity To Average Total
Assets) 6.90% 7.14% 6.62% 6.93% 8.08%
Dividend Pay-Out Ratio On Common
Shares 4.67% 5.31% 6.31% 6.70% 6.51%
Number Of Full-Service Offices 11 11 11 10 10
(1) INCLUDES LOANS HELD FOR SALE.
(2) NON-PERFORMING ASSETS CONSIST OF NON-ACCRUAL LOANS AND REPOSSESSED ASSETS.
5
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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
three wholly owned subsidiaries, Security Federal Insurance Inc., Security
Federal Investments Inc., and Security Federal Trust Inc. that were formed in
the fiscal year ended March 31, 2002. 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 1 to 4 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 impacted 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 our 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 to the Consolidated
Financial Statements.
Certain accounting policies involve significant judgements and assumptions by
management, which have a material impact on the carrying value of certain
assets and liabilities; management considers such accounting policies to be
critical accounting policies. The judgements 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 judgements and assumptions made by management, actual results could differ
from these judgements and estimates that could have a material impact on the
carrying values of assets and liabilities and the results of operations of the
Company.
6
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
CRITICAL ACCOUNTING POLICIES, CONTINUED
Of these significant accounting policies, the Company considers its policies
regarding the allowance for loan losses (the "Allowance") to be its most
critical accounting policy due to the significant degree of management
judgement involved in determining the amount of Allowance. The company has
developed policies and procedures for assessing the adequacy of the Allowance,
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 Financial Condition and
Provision for Loan Losses section of this document 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 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, 2003, the negative mismatch of interest-earning assets repricing
or maturing within one year with interest-bearing liabilities repricing or
maturing within one year was $52.8 million or 11.9% of total assets compared to
$93.4 million or 24.8% at March 31, 2002. The decrease in the negative gap was
due to an overall 35.3% increase in financial assets repricing within one year
compared to a smaller increase of 9.1% in interest-bearing liabilities
repricing within one year. Management felt, as many economists had predicted,
that interest rates would probably rise during the latter part of fiscal year
2003, so they positioned the balance sheet to minimize loss of net interest
income if that had occurred. In actuality, interest rates stayed low and
decreased during fiscal year 2003 due to the sluggish economy. For more
information on the Bank's repricing position at March 31, 2003, see the tables
on pages 9 and 10.
7
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
ASSET AND LIABILITY MANAGEMENT, CONTINUED
During the past year, the Bank originated, for investment purposes,
approximately $45.3 million in adjustable rate residential real estate loans,
which are held for investment and not sold. The Bank's loan portfolio included
$130.4 million of adjustable rate consumer loans, commercial loans, and
mortgage loans or, approximately 50.7% of total gross loans at March 31, 2003.
The Bank also originated a total of $89.5 million in consumer and commercial
loans, which are usually short term in nature. During fiscal 2003, 92.7% of
total loan originations were comprised of consumer, commercial, and adjustable
rate mortgage loans ("ARMs") compared to 94.9% of total originations in fiscal
2002. The Bank's portfolio of consumer and commercial loans was $153.6 million
at March 31, 2003, $147.2 million at March 31, 2002, and $120.8 million at
March 31, 2001. Consumer and commercial loans combined were 59.7% of total
loans at March 31, 2003, 59.0% at March 31, 2002, and 49.3% at March 31, 2001.
The Bank originated $10.5 million, $9.1 million, and $6.3 million in fixed rate
residential loans, most of which were residential lot loans with terms of two
to five years, in fiscal 2003, 2002, and 2001, respectively. At March 31, 2003,
these fixed rate residential lot loans, including construction loans with terms
of one year or less, amounted to $32.7 million or 12.7% of the total loan
portfolio compared to $35.0 million or 14.0% at the end of the previous fiscal
year. At March 31, 2003, the Bank held approximately $10.4 million in longer
term fixed rate residential mortgage loans. These loans, which amounted to
4.0% of the total loan portfolio, had converted from ARM loans to fixed rate
loans during the previous 12 months. These fixed rate loans have remaining
maturities ranging from 12 to 29 years. The Bank has approximately $31.7
million left in convertible ARM loans that could convert to fixed rate loans
over the next 48 months. On new originations, the Bank sells virtually all
its 15 and 30 year fixed rate mortgage loans at origination. In fiscal 2001,
the Bank decided to no longer service loans for Freddie Mac or other investors,
because of the fixed cost of servicing those loans, while the income stream
generated by that portfolio was shrinking due to prepayments. Thus, during
fiscal 2003, 2002 and 2001, the Bank sold its new fixed rate residential loan
originations exclusively on a service-released basis. The Bank sold $631,000
in fixed rate residential loans to secondary market agencies on a service-
retained basis in fiscal 2000 and $5.6 million in fiscal 1999. Fixed rate
residential loans sold to Freddie Mac and other institutional investors, on a
service-released basis, totaled $80.3 million in fiscal 2003, $84.5 million in
fiscal 2002, and $29.5 million in fiscal 2001.
Certificates of deposit of $100,000 or more "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,
2003, the Bank had $44.4 million outstanding in Jumbo Certificates compared to
$45.5 million at March 31, 2002. The Bank has no brokered deposits.
The following table sets forth the maturity schedule of certificates of deposit
with balances of $100,000 or greater at March 31, 2003.
Within 3 Months $ 8,204,000
After 3, Within 6 Months 11,401,000
After 6, Within 12 Months 16,143,000
After 12 Months 8,685,000
------------
$44,433,000
============
8
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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, not
mature. 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 accounts, money market accounts,
and regular savings accounts are deemed to reprice in the less than three-
months category.
At March 31
-----------------
2003 2002
------ ------
(Dollars in Thousands)
Loans (1) $ 143,398 $ 138,923
Mortgage-Backed Securities:
Held To Maturity 187 328
Available For Sale 56,054 24,937
Investment Securities:
Held To Maturity 16,159 163
Available For Sale 37,116 17,635
Other Interest-Earning Assets 339 5,205
Total Interest Rate Sensitive Assets
Repricing Within 1 Year $ 253,253 $ 187,191
Deposits 295,145 269,438
FHLB Advances And Other Borrowed Money 10,893 11,169
Total Interest Rate Sensitive Liabilities
Repricing Within 1 Year $ 306,038 $ 280,607
Gap $ (52,785) $ (93,416)
Interest Rate Sensitive Assets/Interest Rate
Sensitive Liabilities 82.75% 66.71%
Gap As A Percent Of Total Assets (11.9)% (24.8)%
(1) LOANS ARE NET OF UNDISBURSED FUNDS AND LOANS IN PROCESS.
9
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
ASSET AND LIABILITY MANAGEMENT, CONTINUED
The following table sets forth the interest sensitivity of the Bank's assets
and liabilities at March 31, 2003, on the basis of the factors and assumptions
set forth in the table on the previous page.
Remaining Time Before Asset/Liability Matures Or Can Be Repriced
----------------------------------------------------------------------
20
Months Months Years Years Years Years Years Total
------ ------ ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Interest-Earnings Assets
- ------------------------
Loans (1) $89,235 $54,163 $64,890 $25,255 $8,326 $6,350 $ - $248,219
Mortgage-Backed Securities:
Held To Maturity, At Cost 47 140 413 243 98 - - 941
Available For Sale, At Fair Value 12,380 43,674 32,426 12,412 4,406 1,114 - 106,412
Investment Securities: (2)
Held To Maturity, At Cost 5,162 10,997 4,999 - - - - 21,158
Available For Sale, At Fair Value 17,852 19,264 16,623 - - - - 53,739
FHLB Stock, At Cost - - 2,859 - - - - 2,859
Other Interest-Earning Assets 339 - - - - - - 339
------- ------- ------- ------ ------ ------ ----- -------
Total Financial Assets $125,015 $128,238 $122,210 $37,910 $12,830 $7,464 $ - $433,667
======= ======= ======= ====== ====== ===== ===== =======
Interest-Bearing Liabilities
- ----------------------------
Deposits:
Certificate Accounts $50,210 $68,500 $16,911 $21,479 $ - $ - $ - $157,100
NOW Accounts 57,481 - - - - - - 57,481
Money Market Accounts 102,499 - - - - - - 102,499
Passbook Accounts 16,455 - - - - - - 16,455
Borrowings 5,893 5,000 33,072 10,000 - - - 53,965
------- ------- ------- ------ ------ ------ ----- -------
Total Interest-Bearing Liabilities $232,538 $73,500 $49,983 $31,479 $ - $ - $ - $387,500
======= ======= ======= ====== ====== ===== ===== =======
Current Period Gap $(107,523) $54,738 $72,227 $ 6,431 $12,830 $7,464 $ - $46,167
Cumulative Gap $(107,523) $(52,785) $19,442 $25,873 $38,703 $46,167 $46,167 $46,167
Cumulative Gap As A Percent Of
Total Assets (24.2)% (11.9)% 4.4% 5.8% 8.7% 10.4% 10.4% 10.4%
(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, 2003.
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.
10
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
FINANCIAL CONDITION
Total assets at March 31, 2003 were $444.9 million, an increase of $68.6
million or 18.2% from March 31, 2002. This increase was the result of a modest
increase in net loans receivable and a significant increase in total investment
and mortgage-backed securities.
Total net loans receivable were $243.2 million at March 31, 2003, an increase
of $8.8 million or 3.8% from the prior year. Residential real estate loans
remained relatively stable and decreased only $118,000 to $99.9 million at
March 31, 2003. Typically, long term, newly originated fixed rate mortgage
loans are not retained in the portfolio but are sold immediately. Adjustable
rate mortgages are typically retained in the portfolio. At March 31, 2003, the
Bank held 58.4% of its residential mortgage loans in ARMs, while it had 41.6%
in fixed rate mortgages. Consumer loans decreased $3.3 million while commercial
business and commercial real estate loans increased to $107.0 million at fiscal
year end from $97.4 million at March 31, 2002; an increase of $9.6 million or
9.9%. Loans held for sale at March 31, 2003 increased $1.5 million from the
previous fiscal year end. Total investments and mortgage- backed securities
increased $63.2 million or 53.2% due to the modest growth in net loans
receivable, strong deposit growth, and arbitrage strategies with FHLB advances.
Repossessed assets increased $53,000 to $151,000 at March 31, 2003 from $98,000
at March 31, 2002. Repossessed assets at March 31, 2003 consisted of vehicles
and land.
Non-accrual loans totaled $1.0 million at March 31, 2003 compared to $1.4
million a year earlier. Non-accrual loans averaged $1.1 million during fiscal
2003. The Bank classifies all loans as non-accrual when they become 90 days or
more delinquent. The Bank had seven loans totaling $674,000 at March 31, 2003
that were troubled debt restructurings compared to four loans of $622,000 at
March 31, 2002. One $15,000 commercial loan was thirty days delinquent and a
$210,000 commercial loan was on non-accrual. The seven troubled debt
restructurings consisted of three consumer loans secured by residential
dwellings totaling $363,000, a $15,000 commercial loan secured by a second
mortgage on a residence, a $61,000 commercial loan secured by two rental
properties, a $25,000 unsecured commercial loan and a $210,000 commercial loan
secured by commercial real estate. All troubled debt restructurings are also
considered impaired. At March 31, 2003, the Bank held $1.2 million in impaired
loans compared to $897,000 at March 31, 2002.
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 1.98% at March 31, 2003 compared to 1.55% at March 31, 2002.
Deposits at the Bank increased $49.4 million or 16.0% to $358.5 million at
March 31, 2003 from $309.0 million at March 31, 2002. The Bank had tremendous
success in attracting money market accounts and certificate of deposit accounts
with aggressive pricing and advertising. The Bank's newest branch located in
West Columbia, South Carolina, which opened in December 2000, also continued to
contribute to deposit growth. Advances from the Federal Home Loan Bank ("FHLB")
increased to $49.8 million at March 31, 2003 from $33.1 million a year earlier,
an increase of $16.7 million. The Bank utilized the majority of the increase
in advances to use arbitrage strategies with investments. Other borrowed
money, which consists of retail repurchase agreements, decreased $2.0 million
to $4.2 million at March 31, 2003 compared to $6.2 million at March 31, 2002.
Total shareholders' equity was $30.0 million at March 31, 2003, an increase of
$4.6 million or 18.1% compared to $25.4 million a year earlier. The increase
was primarily attributable to net income of $3.2 million and a net increase in
accumulated other comprehensive income of $1.6 million, offset by $152,000 in
dividends paid.
11
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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. It 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 old volume); (2) changes in
volume (changes in volume multiplied by old 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 due to volume and the change due to rate.
Fiscal Year 2003 Fiscal Year 2002
Compared To 2002 Compared To 2001
---------------------- ----------------------
Volume Rate Net Volume Rate Net
------ ---- ----- ------ ---- -----
(In Thousands)
Interest-Earning Assets:
Loans: (1)
Real Estate Loans $(1,059) (495) (1,554) $114 (155) (41)
Other Loans (2,316) 1,336 (980) 1,819 (835) 984
------ ----- ----- ------ ----- -----
Total Loans (3,375) 841 (2,534) 1,933 (990) 943
Mortgage-Backed Securities (2) 1,312 (612) 700 950 (450) 500
Investments (2) 1,423 (527) 896 (592) (359) (951)
Other Interest-Earning Assets 21 (55) (34) 51 (64) (13)
------ ----- ----- ------ ----- -----
Total Interest-Earning Assets $ (619) (353) (972) $2,342 (1,863) 479
====== ===== ===== ====== ===== =====
Interest-Bearing Liabilities:
Deposits:
Certificate Accounts $ 352 (2,743) (2,391) $1,589 (1,160) 429
NOW Accounts 32 (24) 8 52 (110) (58)
Money Market Accounts 796 (661) 135 427 (733) (306)
Passbook Accounts 46 (92) (46) 20 (48) (28)
------ ----- ----- ------ ----- -----
Total Deposits 1,226 (3,520) (2,294) 2,088 (2,051) 37
Borrowings 420 (322) 98 (1,280) (416) (1,696)
Total Interest-Bearing ------ ----- ----- ------ ----- -----
Liabilities 1,646 (3,842) (2,196) 808 (2,467) (1,659)
------ ----- ----- ------ ----- -----
Effect On Net Income $(2,265) 3,489 1,224 $1,534 604 2,138
====== ===== ===== ====== ===== =====
(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.
12
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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/ 2003 2002 2001
Rate At ------------------------ ------------------------ ------------------------
March 31, Average Yield/ Average Yield/ Average Yield/
2003 Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- ------- -------- ------ ------- -------- ------ ------- -------- ------
(Dollars in Thousands)
Interest-Earning Assets:
Mortgage Loans 6.25% $90,729 6,279 6.92% $105,676 7,833 7.41% $104,171 $7,874 7.56%
Other Loans 6.69% 146,581 10,650 7.27% 130,359 11,630 8.92% 110,477 10,646 9.64%
-------- ------- -------- ------ ------- -------- ------ ------- -------- ------
Total Loans (1) 6.52% 237,310 16,929 7.13% 236,035 19,463 8.25% 214,648 18,520 8.63%
Mortgage-Backed
Securities (2) 4.48% 77,911 3,453 4.43% 50,045 2,753 5.50% 33,707 2,253 6.68%
Investments (2) 3.75% 75,468 3,233 4.28% 43,924 2,337 5.32% 54,487 3,288 6.03%
Other Interest-
Earning Assets 1.27% 3,478 44 1.27% 2,598 79 3.04% 1,427 92 6.45%
Total Interest-Earning -------- ------- -------- ------ ------- -------- ------ ------- -------- ------
Assets 5.52% $394,167 23,659 6.00% $332,602 24,632 7.41% $304,269 $24,153 7.94%
====== ======= ======= ====== ======= ======= ====== ======= ======= ======
Interest-Bearing
Liabilities:
Certificate Accounts 2.92% $154,614 5,002 3.24% $147,263 7,393 5.02% $117,555 $ 6,964 5.92%
NOW Accounts 0.72% 52,455 332 0.63% 47,691 324 0.68% 41,408 382 0.92%
Money Market Accts. 2.21% 86,093 2,118 2.46% 57,804 1,983 3.43% 47,682 2,289 4.80%
Passbook Accounts 1.23% 15,859 237 1.49% 13,418 283 2.11% 12,584 311 2.47%
Total Interest-Bearing ------ ------- -------- ------ ------- -------- ------ ------- -------- ------
Accounts 2.24% 309,021 7,689 2.49% 266,176 9,983 3.75% 219,229 9,946 4.54%
Other Borrowings 1.17% 5,663 89 1.57% 4,187 115 2.75% 2,924 167 5.71%
FHLB Advances 4.50% 42,123 2,238 5.31% 35,351 2,114 5.98% 58,555 3,758 6.42%
Total Interest-Bearing ------ ------- -------- ------ ------- -------- ------ ------- -------- ------
Liabilities 2.52% $356,807 10,016 2.81% $305,714 12,212 3.99% $280,708 $13,871 4.94%
====== ======= ======= ====== ======= ======= ====== ======= ======= ======
Net Interest Income $13,643 $12,420 $10,282
======= ======= =======
Interest Rate Spread 3.00% 3.19% 3.42% 3.00%
====== ====== ====== ======
Net Yield On Earning
Assets 3.46% 3.73% 3.38%
====== ====== ======
(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.
13
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Comparison of the Years Ended March 31, 2003 and 2002
GENERAL
The Company earned record net income of $3.2 million for the year ended March
31, 2003, an increase of $722,000 or 28.8% over net income of $2.5 million for
the year ended March 31, 2002. This marked the sixth consecutive year of
record earnings. The primary reason for the increased earnings was an increase
in net interest income and other income offset in part by increases in the
provision for loan losses.
NET INTEREST INCOME
Net interest income increased $1.2 million to $13.6 million in fiscal 2003
compared to $12.4 million in fiscal 2002. The overall increase was due to a
$61.6 million increase in total average interest-earning assets in 2003
compared with 2002. The Bank's net yield on earning assets decreased 27 basis
points during the year due primarily to the overall decline in market interest
rates in calendar year 2002; however the effect of the decrease on net interest
income was more than offset by the 18.5% increase in total average interest-
bearing assets. Interest income on loans decreased $2.5 million during the
year ended March 31, 2003 compared to fiscal 2002. The decrease was
attributable to the decrease in overall interest rates charged on the Bank's
loans during fiscal 2003 and a decrease in the yields earned on average total
loans of 1.12%. Average total loan balances during fiscal 2003 and 2002 were
relatively stable. Interest income on investment securities, mortgage-backed
securities, and other investments increased $1.6 million due to a $60.3
million, or 62.4% increase in aggregate average balances during fiscal 2003
compared with 2002. Consistent with general market conditions, the yields on
aggregate investments and mortgage-backed securities decreased by 1.06% in
fiscal 2003 compared to 2002.
Interest expense on deposits decreased $2.3 million during the year ended March
31, 2003 compared to the year ended March 31, 2002. Average interest bearing
deposits increased $42.8 million while the average cost of those deposits
decreased 1.26% during the year. Interest expense on FHLB advances and other
borrowings increased $98,000 during fiscal 2003 compared to 2002. The increase
was due to an increase in the average of other borrowings and FHLB advances
outstanding during the year of $8.2 million offset partially by a decrease in
interest rates on FHLB advances of 67 basis points. The total average cost of
borrowings decreased 77 basis points in fiscal 2003 compared to fiscal 2002.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses increased $275,000 to $1.8 million
during the year ended March 31, 2003. 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.
These methods incorporate percentage of classified loans, five-year averages of
historical loan losses in each loan category, and current economic trends, and
assign percentage targets of reserves in each loan category. Management has
used all three methods for the past four fiscal years.
Non-accrual loans, which are loans delinquent 90 days or more, were $1.0
million at March 31, 2003 compared to $1.4 million at March 31, 2002. Net
charge-offs were $578,000 in fiscal 2003 compared to $620,000 in fiscal 2002.
The ratio of the allowance for loan losses to total loans at March 31, 2003 was
1.98% compared to 1.55% at March 31, 2002. Management felt it prudent to
increase the provision due to the predicted general slowing of the national
economy, the cyclical nature of economic business trends, the growing
percentage of commercial loans in the portfolio compared to residential
mortgage loans, and the entrance into a new loan market for the Bank the prior
year. 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 is an estimate, there can be no guarantee that actual loan losses
would not exceed the Allowance or that additional increases in the Allowance
will not be required in the future.
14
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
OTHER INCOME
Other income increased $346,000 or 10.0% from $3.5 million during fiscal 2002
to $3.8 million during fiscal 2003. Gain on sale of loans increased $134,000 to
$1.7 million during fiscal 2003 compared to $1.5 million during fiscal 2002.
Proceeds of loans held for sale decreased $4.0 million in fiscal year 2003
compared to the previous year; however, a concerted effort to better manage the
Bank's secondary market sales resulted in better pricing in fiscal year
2003 compared to 2002. Loan servicing fees increased $11,000. Service fees on
deposit accounts increased $106,000 due to the growth in demand deposit
accounts. Other miscellaneous income including credit life insurance, annuity,
and investment brokerage commissions, and other miscellaneous income increased
$122,000 or 22.3% during fiscal 2003.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $146,000 or 1.4% to $10.5 million
during the year ended March 31, 2003 compared to $10.3 million during the same
period one year earlier. Compensation and employee benefits increased $149,000
or 2.6% due to normal annual salary adjustments. Occupancy expense increased
$6,000 or less than 1.0%. Advertising expense increased $41,000 during fiscal
2003 due to the promotion of the Bank's financial service subsidiaries and the
advertisement of the Bank's deposit rates. Depreciation and maintenance of
equipment expense decreased $45,000 or 4.1%. Other miscellaneous expenses
encompassing repossessed assets expense, legal, professional, and consulting
expenses, stationery and office supplies, and other sundry expenses increased
$271,000 or 14.0% during fiscal 2003 due primarily to slight increases in most
of the above mentioned expenses.
INCOME TAXES
The provision for income taxes increased $427,000 during the year ended March
31, 2003 compared to the year ended March 31, 2002 due to an increase in
taxable income. The effective tax rate was 37.5% for fiscal 2003 and 37.6% for
fiscal 2002.
15
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Comparison of the Years Ended March 31, 2002 and 2001
GENERAL
The Company earned record net income of $2.5 million for the year ended March
31, 2002, an increase of $382,000 or 18.0% over net income of $2.1 million for
the year ended March 31, 2001. This marked the fifth consecutive year of
record earnings. The primary reason for the increased earnings was an increase
in net interest income and other income offset in part by increases in the
provision for loan losses and general and administrative expenses.
NET INTEREST INCOME
Net interest income increased $2.1 million to $12.4 million in fiscal 2002
compared to $10.3 million in fiscal 2001 due to a 35 basis point increase in
the net yield on interest-earning assets. The Bank also increased its interest
earning assets, fueled by its growth in deposit accounts.
Interest income on loans increased $943,000 as the average portfolio balance
increased $21.4 million during the year ending March 31, 2002, despite the
average yield declining 38 basis points. Interest income on investment
securities, mortgage- backed securities, and other investments decreased
$464,000 as the yield on total investments decreased 94 basis points during the
year. The average balance of the investment portfolio increased $6.9 million
during fiscal 2002.
Interest expense on deposits increased $37,000 during the year ended March 31,
2002 compared to the year ended March 31, 2001. Average interest bearing
deposits increased $46.9 million while the average cost of those deposits
decreased 79 basis points during the year. Interest expense on FHLB advances
and other borrowings decreased $1.7 million during fiscal 2002 due to the
average amount of borrowings decreasing $21.9 million. The average cost of
borrowings decreased 74 basis points comparing fiscal 2002 to fiscal 2001.
PROVISION FOR LOAN LOSSES
The Company's provision for loan losses increased $600,000 to $1.5 million
during the year ended March 31, 2002. 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.
These methods incorporate percentage of classified loans, five-year averages of
historical loan losses in each loan category, and current economic trends and
assigns percentage targets of reserves in each loan category. Management has
used all three methods for the past three fiscal years.
Non-accrual loans, which are loans delinquent 90 days or more, were $1.4
million at March 31, 2002 compared to $183,000 at March 31, 2001. Net
charge-offs were $620,000 in fiscal 2002 compared to $262,000 in fiscal 2001.
The ratio of the allowance for loan losses to total loans at March 31, 2001 was
1.55% compared to 1.19% at March 31, 2001. Management felt it prudent to
increase the provision due to the predicted general slowing of the national
economy, the cyclical nature of economic business cycles, the growing
percentage of commercial loans in the
portfolio compared to residential mortgage loans, and the entrance into a new
loan market for the Bank the prior year. 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.
OTHER INCOME
Other income increased $725,000 or 26.5% from $2.7 million during fiscal 2001
to $3.5 million during fiscal 2002. Gain on sale of loans increased $1.0
million to $1.5 million during fiscal 2002 compared to $496,000 during fiscal
2001 due to a $55.0 million increase in originations of loans held for sale and
a concerted effort to better manage the Bank's secondary market sales. The
origination trend changed due to the decrease in mortgage rates during the
year. Loan servicing fees decreased $105,000. The Bank sold its remaining
mortgage loan servicing for others in January 2001 for a profit on sale of
servicing of approximately $400,000. Service fees on deposit accounts
increased $103,000 due to the growth in demand deposit accounts. Income from
real estate operations decreased $47,000 as the Company sold its remaining lots
held for development in March 2001. Other miscellaneous income encompassing
credit life insurance, annuity, and investment brokerage commissions, and other
miscellaneous income increased $117,000 or 27.3% during fiscal 2002.
16
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased $1.5 million or 16.8% to $10.3
million during the year ended March 31, 2002 compared to $8.9 million during
the same period one year earlier. Compensation and employee benefits
increased $1.0 million or 21.0% due to operating the Bank's West Columbia
branch office a full year compared to four months the prior year, the start up
of the three new subsidiaries, and normal annual salary adjustments. Occupancy
expense increased $128,000 or 18.9% also due to the new branch office.
Advertising expense decreased $25,000 during fiscal 2002. Depreciation and
maintenance of equipment expense increased $79,000 or 7.7% as the Bank
added on-line banking and bill payment software and software and hardware
purchased during fiscal 2001, which was depreciated for a full year. Other
miscellaneous expenses encompassing repossessed assets expense, legal,
professional, and consulting expenses, stationery and office supplies, and
other sundry expenses increased $295,000 or 18.0% during fiscal 2002 due
primarily to slight increases in most of the above mentioned expenses and the
opening of the new branch office.
INCOME TAXES
Income taxes increased $397,000 during the year ended March 31, 2002 compared
to the year ended March 31, 2001 due to an increase in taxable income. The
effective tax rate was 37.6% for fiscal 2002 and 34.4% for fiscal 2001.
17
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
REGULATORY CAPITAL
The following table reconciles the Bank's shareholders' equity to its various
regulatory capital positions:
March 31,
2003 2002
------ ------
(In Thousands)
Shareholders' Equity (1) (2) $28,879 $25,646
Reduction For Goodwill And Other Intangibles - 185
------ ------
Tangible Capital 28,879 25,461
------ ------
Qualifying Core Deposit Intangibles - 185
Core Capital 28,879 25,646
------ ------
Supplemental Capital 3,064 2,879
Less Assets Required To Be Deducted 152 237
------ ------
Total Risk-Based Capital $31,791 $28,288
====== ======
(1) FOR 2003 AND 2002, INCLUDES UNREALIZED GAINS OF $1,445,000 AND UNREALIZED
LOSSES OF $183,000, RESPECTIVELY ON AVAILABLE FOR SALE SECURITIES.
(2) FOR 2003 AND 2002, EXCLUDES EQUITY OF SECURITY FEDERAL CORPORATION, THE
PARENT.
The following table compares the Bank's capital levels relative to regulatory
requirements at March 31, 2003:
Amount Percent Actual Actual Excess Excess
Required Required Amount Percent Amount Percent
-------- -------- ------ ------- ------ -------
(Dollars in Thousands)
Tangible Capital $ 8,881 2.0% $28,879 6.5% $19,998 4.5%
Tier 1 Leverage (Core)
Capital 17,762 4.0% 28,879 6.5% 11,117 2.5%
Tier 1 Risk-Based (Core)
Capital 9,806 4.0% 28,879 11.8% 19,073 7.8%
Total Risk-Based Capital 19,612 8.0% 31,791 13.0% 12,179 5.0%
18
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 their
relative costs.
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 were $145.3 million in fiscal 2003 compared to $128.3 million in
fiscal 2002 and $95.2 million in fiscal 2001. Purchases of investments and
mortgage-backed securities were $168.2 million in fiscal 2003 compared to
$104.0 million in fiscal 2002 and $9.5 million in fiscal 2001.
Outstanding loan commitments for the Bank's residential mortgage loan portfolio
amounted to $200,000 at March 31, 2003 compared to $272,000 at March 31, 2002.
Those commitments were for adjustable rate mortgage loans in which the
commitment generally expires in 45 days. In addition, unused lines of credit
on home equity loans, credit cards, and other loans amounted to $33.5 million
at March 31, 2003. 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
$9.0 million at March 31, 2003. The loans-in-process will disburse over an
average of 90 days. These commitments to originate loans and future advances
of lines of credit are expected to be provided from loan amortizations and
prepayments, deposit inflows, maturing investments and short-term borrowing
capacity.
The Bank is required under applicable federal regulations to maintain a
liquidity ratio at specified levels that are subject to change. The Bank must
maintain a specified level in the form of cash or eligible investments. At
March 31, 2003, the Bank's liquidity ratio was approximately 35%. Management
believes that liquidity during fiscal 2004 can be met through the Bank's
deposit base, which increased $49.4 million during fiscal 2003, and from
maturing investments. Also, the Bank has another $61.4 million in unused
borrowing capacity at FHLB.
Historically the Bank's cash flow from operating activities has been relatively
stable. The cash flows from investing activities have had a trend of
increasing outflows due to increases in purchases of mortgage-backed and
investment securities. The cash flows from financing activities have had a
trend of increased inflows due to increases in FHLB advances. See "Consolidated
Statements of Cash Flows" in the Consolidated Financial Statements.
19
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 143 - Accounting for
Asset Retirement Obligations. This statement requires companies to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and/or normal use of assets. A corresponding asset (which is depreciated over
the life of the asset) must be recorded. The provisions of SFAS No. 143 were
adopted by the Company on January 1, 2003 with no impact on financial position
and results of operations.
In August 2001, the FASB issued SFAS No. 144 - Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes prior pronouncements associated
with impairments or disposal of long-lived assets. This statement establishes
methodologies for assessing impairment of long-lived assets, including assets
to be disposed of by sale or by other means. The adoption of this standard had
no impact on the financial position of the Company.
In April 2002, the FASB issued SFAS No. 145 - Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement rescinds SFAS No. 4 - Reporting Gains and Losses from
Extinguishments of Debt and SFAS No. 64 - Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. This statement also rescinds SFAS No. 44
Accounting for Intangible Assets of Motor Carriers and amends SFAS No. 13 -
Accounting for Leases. This new statement requires gains and losses from
extinguishment of debt to be classified as an extraordinary item only if they
meet the criteria of APB Opinion No. 30 - Reporting the Results of Operations-
Reporting the Effects of Disposal of a Segment of Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, which will
distinguish transactions that are part of an entity's recurring operations from
those unusual or infrequent or that meet the criteria for classification as an
extraordinary item. The adoption of the provisions of SFAS No. 145 had no
impact on the Company's financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146 - Accounting for Costs Associated
with Exit or Disposal Activities, which adddresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3 Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This statement applies
to costs associated with specific exit activities and requires a liability for
a cost associated with an exit or disposal activity to be recognized and
measured initially at its fair value in the period in which the liability is
incurred. A liability for a cost associated with an exit or disposal activity
is incurred when the definition of a liability is met. The provisions of this
statement are effective for exit or disposal activities that are initiated
after December 31, 2002. The provisions of this statement were adopted by the
Company on January 1, 2003 with no impact on the Company's financial position
or results of operations.
In October 2002, the FASB Issued SFAS No. 147 - Accounting for Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144 and
FASB Interpretation No. 9, which brings all business combinations involving
financial institutions, except mutual financial institutions, into the scope of
SFAS No. 141 - Business Combinations. This statement requires all acquisitions
of financial institutions that meet the definition of a business, including
acquisitions of part of a financial institution that meet the definition of a
business, to be accounted for in accordance with SFAS No. 141 and the related
intangible accounted for in accordance with SFAS No. 142. SFAS No. 147
removes such acquisitions from the scope of SFAS No. 72 - Accounting for
Certain Acquisitions of Banking or Thrift Institutions. SFAS No. 147 also
amends SFAS No. 144 to include in its scope long-term customer relationship
intangibles of financial institutions. SFAS No. 147 was effective upon
issuance and had no impact on the Company's financial statements.
20
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RECENTLY ISSUED ACCOUNTING STANDARDS, CONTINUED
In December 2002, the FASB issued SFAS No. 148 - Accounting for Stock-Based
Compensation-Transition and Disclosure - an amendment of SFAS Statement No.
123. This statement amends FASB Statement No. 123 - Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
adopted this standard effective December 31, 2002 and has included the required
disclosures in the footnotes to the financials. The Company has not elected
the fair value treatment of stock-based compensation and the adoption of this
standard had no impact on its financial position.
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.
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.
21
Elliott Davis, LLC
Advisors - CPAs - Consultants
200 East Broad Street
P.O. Box 6286
ELLIOTT DAVIS Greenville, SC 29606-6286
- -------------------------------------------------------------------------------
Phone 864.242.3370
Fax 864.232.7161
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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, 2003 and 2002, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the years in the three year period ended March 31, 2003. 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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, 2003 and 2002
and the consolidated results of their operations and their cash flows for each
of the years in the three year period ended March 31, 2003, in conformity with
accounting standards generally accepted in the United States of America.
/s/ Elliott Davis LLC
Elliott Davis, LLC
Greenville, South Carolina
May 2, 2003
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31,
-------------------
2003 2002
------ ------
ASSETS:
Cash And Cash Equivalents $8,238,690 $11,528,411
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized Cost of $157,821,789
and $117,657,245 at March 31, 2003 and 2002,
Respectively) 160,150,262 117,361,736
Held To Maturity: (Fair Value of $22,040,207 and
$1,571,667 at March 31, 2003 and 2002,
Respectively) 21,966,533 1,536,656
----------- -----------
Total Investment And Mortgage-Backed Securities 182,116,795 118,898,392
Loans Receivable, Net: ----------- -----------
Held For Sale 3,670,498 2,165,918
Held For Investment: (Net of Allowance of
$4,911,224 and $3,689,079 at March 31, 2003 and
2002, Respectively) 239,485,158 232,152,950
----------- -----------
Total Loans Receivable, Net 243,155,656 234,318,868
----------- -----------
Accrued Interest Receivable:
Loans 976,134 1,249,273
Mortgage-Backed Securities 441,900 283,775
Investments 667,735 650,034
----------- -----------
Total Accrued Interest Receivable 2,085,769 2,183,082
----------- -----------
Premises And Equipment, Net 5,219,947 4,859,140
Federal Home Loan Bank Stock, At Cost 2,858,600 2,669,300
Repossessed Assets Acquired In Settlement Of Loans 151,450 98,157
Other Assets 1,077,078 1,764,980
----------- -----------
Total Assets $444,903,985 $376,320,330
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposit Accounts $358,473,601 $309,037,602
Advances From Federal Home Loan Bank 49,772,000 33,108,000
Other Borrowings 4,193,480 6,169,411
Advance Payments By Borrowers For Taxes
And Insurance 279,425 247,149
Other Liabilities 2,145,526 2,357,605
----------- -----------
Total Liabilities 414,864,032 350,919,767
----------- -----------
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 2,529,584 And Outstanding Shares,
2,507,717 at March 31, 2003 And 1,684,240 And
1,671,459 at March 31, 2002 25,298 16,842
Additional Paid-In Capital 3,995,230 3,985,312
Indirect Guarantee Of Employee Stock Ownership
Trust Debt (444,685) (358,297)
Accumulated Other Comprehensive Income (Loss) 1,444,585 (183,335)
Retained Earnings, Substantially Restricted 25,019,525 21,940,041
----------- -----------
Total Shareholders' Equity 30,039,953 25,400,563
----------- -----------
Total Liabilities And Shareholders' Equity $444,903,985 $376,320,330
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended March 31,
------------------------------
2003 2002 2001
------ ------ ------
Interest Income:
Loans $16,929,226 $19,462,998 $18,519,958
Mortgage-Backed Securities 3,453,195 2,752,563 2,253,322
Investment Securities 3,233,033 2,337,395 3,287,767
Other 44,379 79,319 91,782
---------- ---------- ----------
Total Interest Income 23,659,833 24,632,275 24,152,829
---------- ---------- ----------
Interest Expense:
NOW And Money Market Accounts 2,450,502 2,307,002 2,671,159
Passbook Accounts 236,657 282,646 310,941
Certificate Accounts 5,002,233 7,392,855 6,964,464
FHLB Advances And Other Borrowed Money 2,326,872 2,229,154 3,924,747
---------- ---------- ----------
Total Interest Expense 10,016,264 12,211,657 13,871,311
---------- ---------- ----------
Net Interest Income 13,643,569 12,420,618 10,281,518
Provision For Loan Losses 1,800,000 1,525,000 925,000
Net Interest Income After Provision For ---------- ---------- ----------
Loan Losses 11,843,569 10,895,618 9,356,518
---------- ---------- ----------
Other Income:
Gain On Sale Of Investment Securities 4,245 29,817 -
Gain On Sale Of Loans 1,656,152 1,522,535 496,132
Gain On Sale Of Loan Servicing - - 400,000
Loan Servicing Fees 208,791 198,124 302,885
Service Fees On Deposit Accounts 1,272,782 1,166,958 1,064,030
Income From Real Estate Operations - - 46,741
Other 669,143 547,305 429,941
---------- ---------- ----------
Total Other Income 3,811,113 3,464,739 2,739,729
---------- ---------- ----------
General And Administrative Expenses:
Compensation And Employee Benefits 5,953,904 5,805,020 4,798,804
Occupancy 813,113 807,430 679,303
Advertising 216,204 175,256 200,668
Depreciation And Maintenance Of Equipment 1,055,181 1,100,237 1,021,274
Amortization Of Intangibles 185,210 465,240 465,240
FDIC Insurance Premiums 52,793 48,442 45,949
Other 2,206,237 1,934,847 1,640,022
---------- ---------- ----------
Total General And Administrative Expenses 10,482,642 10,336,472 8,851,260
---------- ---------- ----------
Income Before Income Taxes 5,172,040 4,023,885 3,244,987
Provision For Income Taxes 1,940,879 1,514,299 1,117,553
---------- ---------- ----------
Net Income $3,231,161 $2,509,586 $2,127,434
========== ========== ==========
Net Income Per Common Share (Basic) $ 1.29 $ 1.00 $ 0.85
========== ========== ==========
Net Income Per Common Share (Diluted) $ 1.26 $ 0.98 $ 0.83
========== ========== ==========
Cash Dividend Per Share On Common Stock $ 0.0602 $ 0.0536 $0.0536
========== ========== ==========
Weighted Average Shares Outstanding(Basic) 2,508,774 2,506,709 2,509,041
========== ========== ==========
Weighted Average Shares Outstanding(Diluted) 2,558,607 2,560,368 2,555,664
========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
For the Years Ended March 31, 2003, 2002 and 2001
Additional Accumulated Other
Common Paid - In Indirect Guarantee Comprehensive Retained
Stock Capital of ESOP Debt Income (Loss) Earnings Total
------ ---------- ------------------ -------------- --------- ----------
Balance At March 31, 2000 $ 8,421 $3,993,733 $ (186,803) $ (1,629,150) $17,572,500 $19,758,701
Net Income - - - - 2,127,434 2,127,434
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Gains On
Securities Available For Sale - - - 1,977,165 - 1,977,165
----------
Comprehensive Income - - - - - 4,104,599
2-For-1 Stock Split 8,421 (8,421) - - - -
Increase in Indirect Guarantee
of ESOP Debt - - (228,197) - - (228,197)
Cash Dividends - - - - (134,739) (134,739)
------ ---------- ---------- --------- ----------- ----------
Balance At March 31, 2001 $16,842 $3,985,312 $ (415,000) $ 348,015 $19,565,195 $23,500,364
====== ========= ========== ========= =========== ==========
Additional Accumulated Other
Common Paid - In Indirect Guarantee Comprehensive Retained
Stock Capital of ESOP Debt Income (Loss) Earnings Total
------ ---------- ------------------ -------------- --------- ----------
Balance At March 31, 2001 $16,842 $3,985,312 $ (415,000) $ 348,015 $19,565,195 $23,500,364
Net Income - - - - 2,509,586 2,509,586
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Losses On
Securities Available For Sale - - - (511,671) - (511,671)
Reclassification Adjustment For
Gains Included In Net Income - - - (19,679) - (19,679)
----------
Comprehensive Income - - - - - 1,978,236
Decrease in Indirect Guarantee
of ESOP Debt - - 56,703 - - 56,703
Cash Dividends - - - - (134,740) (134,740)
------ ---------- ---------- --------- ----------- ----------
Balance At March 31, 2002 $ 16,842 $3,985,312 $ (358,297) $(183,335) $21,940,041 $25,400,563
====== ========= ========== ========= =========== ==========
Additional Accumulated Other
Common Paid - In Indirect Guarantee Comprehensive Retained
Stock Capital of ESOP Debt Income (Loss) Earnings Total
------ ---------- ------------------ -------------- --------- ----------
Balance At March 31, 2002 $16,842 $3,985,312 $ (358,297) $ 183,335 $21,940,041 $25,400,563
Net Income - - - - 3,231,161 3,231,161
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Gains On
Securities Available For Sale - - - 1,630,552 - 1,630,552
Reclassification Adjustment For
Gains Included In Net Income - - - (2,632) - (2,632)
----------
Comprehensive Income - - - - - 4,859,081
Exercise of Stock Options 23 18,473 18,496
3-for-2 Stock Split 8,433 (8,555) (122)
Increase in Indirect Guarantee
of ESOP Debt - - (86,388) - - (86,388)
Cash Dividends - - - - (151,677) (151,677)
------ ---------- ---------- --------- ----------- ----------
Balance At March 31, 2003 $ 25,298 $3,995,230 $ (444,685) $1,444,585 $25,019,525 $30,039,953
====== ========= ========== ========= =========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended March 31,
------------------------------
2003 2002 2001
------ ------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $3,231,161 $2,509,586 $2,127,434
Adjustments To Reconcile Net Income To
Net Cash Provided By Operating Activities:
Depreciation 825,253 959,341 893,682
Amortization Of Intangibles 185,210 465,240 465,240
Discount Accretion And Premium Amortization 327,329 178,126 25,750
Provisions For Losses On Loans And Real
Estate 1,800,000 1,525,000 875,000
Gain On Sales Of Loans (1,656,152) (1,522,535) (496,132)
Gain On Sales Of Investment Securities (4,245) (29,817) -
(Gain) Loss On Sale Of Real Estate (68,419) 13,681 (88,134)
Amortization Of Deferred Fees On Loans (209,430) (223,581) (148,692)
(Gain) Loss On Disposition Of Premises
And Equipment 1,811 (330) 6,008
Proceeds From Sale Of Loans Held For
Sale 82,001,517 86,027,850 29,042,592
Origination Of Loans For Sale (81,849,945)(84,455,282)(29,496,735)
(Increase) Decrease In Accrued Interest
Receivable:
Loans 273,139 98,905 (384,959)
Mortgage-Backed Securities (158,125) (103,798) 24,026
Investments (17,701) (77,960) 189,354
(Decrease) Increase In Advance Payments
By Borrowers 32,276 (135,329) 8,818
Other, Net (749,680) (1,098,713) (206,547)
--------- --------- ---------
Net Cash Provided By Operating Activities 3,963,999 4,130,384 2,836,705
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase Of Mortgage-Backed Securities
Available For Sale (80,157,881)(40,134,586) (7,496,845)
Principal Repayments On Mortgage-Backed
Securities Available For Sale 30,444,934 17,931,424 6,627,764
Principal Repayments On Mortgage-Backed
Securities Held To Maturity 431,751 740,244 416,356
Purchase Of Investment Securities Held
To Maturity (20,995,471) - -
Purchase Of Investment Securities
Available For Sale (67,041,485)(63,835,317) (1,975,000)
Maturities Of Investment Securities
Available For Sale 75,281,684 34,642,931 22,689,718
Maturities Of Investment Securities
Held To Maturity 133,025 102,351 -
Proceeds From Sales Of Investment
Securities Available For Sale 985,938 2,003,738 -
Proceeds From Sale of Mortgage-Backed
Securities Available For Sale - 3,075,600 -
Purchase Of FHLB Stock (1,017,500) - (825,400)
Redemption Of FHLB Stock 828,200 761,700 -
Increase In Loans Receivable (9,796,818) (5,075,962)(38,154,684)
Investment In Real Estate Held For
Development - - (463,361)
Proceeds From Sale Of Real Estate Held For
Development - - 1,095,900
Proceeds From Sale Of Repossessed Assets 847,009 468,475 582,019
Purchase And Improvement Of Premises And
Equipment (1,187,871) (555,194) (1,877,954)
--------- --------- ---------
Net Cash Used By Investing Activities (71,244,485)(49,874,596)(19,381,487)
---------- ---------- ----------
(Continued)
26
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the Years Ended March 31,
------------------------------
2003 2002 2001
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase In Deposit Accounts 49,435,999 51,627,185 28,587,086
Proceeds From FHLB Advances 119,200,000 75,075,000 98,273,305
Repayment Of FHLB Advances (102,536,000)(84,671,000)(106,180,305)
Proceeds (Repayment) Of Other
Borrowings, Net (1,975,931) 2,760,049 1,198,862
Purchase Of Fractional Shares Due
To Stock Split (122) - -
Proceeds From Exercise Of Stock Options 18,496 - -
Dividends To Shareholders (151,677) (134,740) (134,739)
---------- ---------- ----------
Net Cash Provided By Financing Activities 63,990,765 44,656,494 21,744,209
Net Increase (Decrease) In Cash And ---------- ---------- ----------
Cash Equivalents (3,289,721) (1,087,718) 5,199,427
Cash And Cash Equivalents At Beginning
Of Year 11,528,411 12,616,129 7,416,702
---------- ---------- ----------
Cash And Cash Equivalents At End Of Year $8,238,690 $11,528,411 $12,616,129
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash Paid During The Period For:
Interest $10,246,814 $12,780,647 $13,596,058
========== ========== ==========
Income Taxes $ 2,710,335 $ 1,994,513 $ 1,503,183
========== ========== ==========
Supplemental Schedule Of Non Cash
Transactions:
Additions To Repossessed Assets $ 874,040 $ 402,656 $ 332,203
(Increase) Decrease In Unrealized Net ========== ========== ==========
Loss On Securities Available For
Sale, Net Of Taxes $ 1,627,920 $ (531,350) $1,977,165
========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
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 ("SFINS"), Security Federal Investments ("SFINV"),
Security Federal Trust ("SFT"), and Security Financial Services Corporation
("SFSC"). 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
business, health, home and life insurance. SFINV engages primarily in
investment brokerage services. SFT offers trust, financial planning and
financial management services. SFSC is currently inactive. Also included in
the consolidation is a real estate partnership, Willow Woods. Willow Woods
sold its remaining property in fiscal 2001 and the partnership was liquidated.
(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 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.
The Bank maintained liquid assets in excess of the amount required by
regulations. Liquid assets consist primarily of cash, time deposits, and
certain investment securities.
28
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(d) 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 adjustment 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.
(e) Loans 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.
(f) Repossessed Assets Acquired in Settlement of Loans
--------------------------------------------------
Repossessed assets represents real estate and other assets acquired through
foreclosure or repossession and is 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.
(g) 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 7-30
years for buildings and improvements and generally 5-10 years for furniture,
fixtures and equipment.
(h) 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.
Basically, 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.
29
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(i) 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.
(j) Intangible Assets
-----------------
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through projected undiscounted
future results. The amount of goodwill impairment, if any, is measured based
on projected discounted future results using a discount rate reflecting the
Company's average cost of funds.
Deposit based premiums, representing the cost of acquiring deposits from other
financial institutions, are included in the balance sheet as "Other Assets" and
are amortized by charges to operations over the expected periods to be
benefited. The effective amortization period for intangible assets is
approximately 10 years.
The balance of intangible assets was zero and $185,000 at March 31, 2003 and
March 31, 2002, respectively.
(k) 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 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.
(l) 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.
30
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(m) Stock-Based Compensation
------------------------
At March 31, 2003, the Company sponsored stock-based compensation plans, which
are described more fully in Note 12. The Company has elected the disclosure -
only provision of SFAS No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option
plan. Had compensation cost for the Company's stock option plan been determined
based on the fair value at the grant date consistent with the provisions of
SFAS No. 123, the Company's net income and earnings per share amounts as of the
year ended March 31 would have been reduced to the pro forma amounts indicated
below.
2003 2002 2001
------ ------ ------
Net Income, As Reported $3,231,161 2,509,586 $2,127,434
Deduct: Total stock-based employee
compensation expense determined under fair-
value based method for all awards $ (205,804) (111,908) (56,782)
Net Income, Pro Forma $3,025,357 2,397,678 $2,070,652
Net Income Per Common Share (Basic),
As Reported $ 1.29 1.00 $ 0.85
Net Income Per Common Share (Basic),
Pro Forma $ 1.21 0.96 $ 0.83
Net Income Per Common Share (Diluted),
As Reported $ 1.26 0.98 $ 0.83
Net Income Per Common Share (Diluted),
Pro Forma $ 1.18 0.94 $ 0.81
(n) 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. All per share
data has been restated to reflect the 3-for-2 stock split that occurred during
the year ended March 31, 2003.
For the Year Ended
March 31, 2003 March 31, 2002
------------------------- -------------------------
Per share Per share
Income Shares amounts Income Shares amounts
------ ------ ------- ------ ------ -------
Basic EPS $3,231,161 2,508,774 $1.29 $2,509,586 2,506,709 $1.00
Dilutive effect of:
Stock Options - 33,166 (0.02) - 34,068 (0.01)
ESOP - 16,667 (0.01) - 19,591 (0.01)
------ ------ ------- ------ ------ -------
Diluted EPS $3,231,161 2,558,607 $1.26 $2,509,586 2,560,368 $0.98
(o) Use of Estimates
----------------
The preparation of financial statements in conformity with Generally Accepted
Accounting Principles ("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.
31
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(p) Recently Issued Accounting Standards
------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 143 - Accounting for
Asset Retirement Obligations. This statement requires companies to record the
fair value of an asset retirement obligation as a liability in the period in
which it incurs a legal obligation associated with the retirement of tangible
long-lived assets that result from the acquisition, construction, development
and/or normal use of assets. A corresponding asset (which is depreciated over
the life of the asset) must be recorded. The provisions of SFAS No. 143
were adopted by the Company on January 1, 2003 with no impact on financial
position and results of operations.
In August 2001, the FASB issued SFAS No. 144 - Accounting for the Impairment
or Disposal of Long-Lived Assets, which supersedes prior pronouncements
associated with impairments or disposal of long-lived assets. This statement
establishes methodologies for assessing impairment of long-lived assets,
including assets to be disposed of by sale or by other means. The adoption of
this standard had no impact on the financial position of the Company.
In April 2002, the FASB issued SFAS No. 145 - Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement rescinds SFAS No. 4 - Reporting Gains and Losses from
Extinguishments of Debt and SFAS No. 64 - Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements. This statement also rescinds SFAS No. 44
Accounting for Intangible Assets of Motor Carriers and amends SFAS No. 13
Accounting for Leases. This new statement requires gains and losses from
extinguishment of debt to be classified as an extraordinary item only if they
meet the criteria of APB Opinion No. 30 - Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
which will distinguish transactions that are part of an entity's recurring
operations from those unusual or infrequent or that meet the criteria for
classification as an extraordinary item. The adoption of the provisions of
SFAS No. 145 has no impact on the Company's financial position or results of
operations.
In June 2002, the FASB issued SFAS No. 146 Accounting for Costs Associated
with Exit or Disposal Activities, which adddresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3 - Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This statement applies
to costs associated with specific exit activities and requires a liability for
a cost associated with an exit or disposal activity to be recognized and
measured initially at its fair value in the period in which the liability is
incurred. A liability for a cost associated with an exit or disposal activity
is incurred when the definition of a liability is met. The provisions of this
statement are effective for exit or disposal activities that are initiated
after December 31, 2002. The provisions of this statement were adopted by the
Company on January 1, 2003 with no impact on financial position or results of
operations.
In October 2002, the FASB Issued SFAS No. 147-Accounting for Certain Financial
Institutions-an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9, which brings all business combinations involving
financial institutions, except mutual financial institutions, into the scope
of SFAS No. 141-Business Combinations. This statement requires all
acquisitions of financial institutions that meet the definition of a business,
including acquisitions of part of a financial institution that meet the
definition of a business, must be accounted for in accordance with SFAS No. 141
and the related intangible accounted for in accordance with SFAS No. 142. SFAS
No. 147 removes such acquisitions from the scope of SFAS No. 72-Accounting for
Certain Acquisitions of Banking or Thrift Institutions. SFAS No. 147 also
amends SFAS No. 144 to include in its scope long-term customer relationship
intangibles of financial institutions. SFAS No. 147 was effective upon
issuance and had no impact on the Company's financial statements since all of
the Company's intangibles were fully amortized in 2003.
32
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
In December 2002, the FASB issued SFAS No. 148-Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS Statement No. 123.
This statement amends FASB Statement No. 123-Accounting for Stock-Based
Compensation , to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The
Company adopted this standard effective December 31, 2002 and has included the
required disclosures in the footnotes to the financials. The Company has not
elected the fair value treatment of stock-based compensation and the adoption
of this standard had no impact on its financial position.
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.
(q) 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'
judgements based on information available to them at the time of their
examination.
(r) Reclassifications
-----------------
Certain amounts in prior years' consolidated financial statements have been
reclassified to conform to current year classifications.
33
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) 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, 2003
--------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair value
-------------- ---------- ---------- -----------
FHLB Securities $ 47,062,029 $ 744,865 $ 13,094 $47,793,800
Federal Farm Credit Securities 5,062,776 66,304 - 5,129,080
FHLMC Bonds 804,637 11,114 - 815,751
Mortgage-Backed Securities 104,892,347 1,637,286 118,002 106,411,631
----------- --------- -------- -----------
$157,821,789 $2,459,569 $ 131,096 $160,150,262
=========== ========= ======== ===========
March 31, 2002
--------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair value
-------------- ---------- ---------- -----------
FHLB Securities $ 51,434,653 $ 182,122 $ 787,932 $50,828,843
Federal Farm Credit Securities 8,536,297 39,795 50,392 8,525,700
FHLMC Bonds 2,012,874 17,493 28 607 2,001,760
Mortgage-Backed Securities 55,673,421 594,414 262,402 56,005,433
----------- --------- -------- -----------
$117,657,245 $ 833,824 $1,129,333 $117,361,736
=========== ========= ========= ===========
The amortized cost and fair value of investment and mortgage-backed securities
available for sale at March 31, 2003 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 1 Year $ 1,998,091 $ 1,999,680
1 - 5 Years 25,852,853 26,332,341
More Than 5 Years 25,078,498 25,406,610
Mortgage-Backed Securities 104,892,347 106,411,631
------------- -----------
$157,821,789 $160,150,262
============= ===========
At March 31, 2003, investment and mortgage-backed securities available for sale
of $29.0 million were pledged as collateral for certain deposit accounts. In
addition, the Bank had pledged $16.1 million of investment and mortgage-backed
securities as collateral for FHLB advances and other borrowings.
The Bank received approximately $986,000 and $5,079,000 proceeds from sales of
available for sale securities with approximately $4,200 and $29,800 recorded in
gross gains and no gross losses in the years ended March 31, 2003 and 2002,
respectively. The Bank sold no securities in the year ended March 31, 2001.
34
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) 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, 2003
--------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair value
-------------- ---------- ---------- -----------
FHLB Securities $ 18,989,813 $ 15,661 $ 14,071 $18,991,403
Federal Farm Credit Securities 2,005,459 20,481 - 2,025,940
FNMA Securities 30,331 11 - 30,342
Mortgage-Backed Securities 940,930 51,592 - 992,522
----------- --------- -------- -----------
$ 21,966,533 $ 87,745 $ 14,071 $ 22,040,207
=========== ========= ======== ===========
March 31, 2002
--------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair value
-------------- ---------- ---------- -----------
FNMA Securities $ 163,356 $ 2,771 $ - $ 166,127
Mortgage-Backed Securities 1,373,300 32,240 - 1,405,540
----------- --------- -------- -----------
$ 1,536,656 $ 35,011 $ - $ 1,571,667
=========== ========= ========= ===========
The amortized cost and fair value of investment and mortgage-backed securities
held to maturity at March 31, 2003, 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 1 Year $ - $ -
1 - 5 Years 10,029,633 10,044,843
More Than 5 Years 10,995,970 11,002,842
Mortgage-Backed Securities 940,930 992,522
------------- -----------
$ 21,966,533 $ 22,040,207
============= ===========
35
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) Loans Receivable, Net
---------------------
Loans receivable, net, at March 31 consisted of the following:
2003 2002
------ ------
Residential Real Estate Loans $99,948,293 $100,065,942
Consumer Loans 46,594,413 49,851,549
Commercial Business And Real Estate Loans 106,996,940 97,396,184
Loans Held For Sale 3,670,498 2,165,918
----------- -----------
257,210,144 249,479,593
----------- -----------
Less:
Allowance For Loan Losses 4,911,224 3,689,079
Loans In Process 8,990,687 11,287,518
Deferred Loan Fees 152,577 184,128
----------- -----------
14,054,488 15,160,725
----------- -----------
Total Loans Receivable, Net $243,155,656 $234,318,868
=========== ===========
Changes in the allowance for loan losses for the years ended March 31 are
summarized as follows:
2003 2002 2001
------ ------ ------
Balance At Beginning Of Year $3,689,079 $2,784,117 $2,120,767
Provision For Loan Losses 1,800,000 1,525,000 925,000
Charge Offs (909,494) (817,680) (329,825)
Recoveries 331,639 197,642 68,175
--------- --------- ---------
Total Allowance For Loan Losses $4,911,224 $3,689,079 $2,784,117
========= ========= =========
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.
2003 2002
------ ------
Non-Accrual Loans $1,040,000 $1,390,000
========= =========
Interest Income That Would Have Been
Recognized Under Original Terms $ 44,173 $ 58,000
========= =========
Loans serviced for others at March 31, 2003, 2002 and 2001, were approximately
$646,000, $671,000, and $48.3 million, respectively. On January 31, 2001, the
Company sold the mortgage loan servicing for others to another bank. The gain
on sale of servicing was $400,000. The Company sub-serviced the mortgage loans
for the buyer of the servicing, until the transfer date of April 15, 2001.
At March 31, 2003 and 2002, impaired loans amounted to $1.2 million and
$897,000, respectively. Losses on impaired loans are accounted for in the
allowance for loan loss. For the years ended March 31, 2003 and 2002,
the average recorded investment in impaired loans was $1.0 million and
$786,000, respectively.
The Bank blanket pledges its portfolio of single family mortgage loans to
secure FHLB advances.
36
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) Premises and Equipment, Net
---------------------------
Premises and equipment, net, at March 31 are summarized as follows:
2003 2002
------ ------
Land $ 496,163 496,163
Buildings And Improvements 5,420,768 5,180,492
Furniture And Equipment 5,295,138 5,032,015
Construction In Progress 397,080 1,750
---------- ----------
11,609,149 10,710,420
Less Accumulated Depreciation (6,389,202) (5,851,280)
---------- ----------
Total Premises And Equipment, Net $ 5,219,947 4,859,140
========== ==========
The construction in progress at March 31, 2003 was for a new branch facility in
the city of Lexington, South Carolina which should be completed during the
summer of 2003.
Depreciation expense for the years ended March 31, 2003, 2002, and 2001 was
approximately $825,000, $959,000, and $894,000, respectively.
The Bank has entered into non-cancelable operating leases related to buildings
and land. At March 31, 2003, future minimum payments under non-cancelable
operating leases with initial or remaining terms of one year or more are as
follows (by fiscal year):
2004 $ 277,406
2005 277,406
2006 273,180
2007 252,050
2008 251,367
Thereafter 2,006,253
---------
$3,337,662
=========
Total rental expense amounted to $209,000, $190,000, and $150,000 for the years
ended March 31, 2003, 2002 and 2001, respectively. Five lease agreements with
monthly expenses of $7,083, $2,407, $2,113, $743, and $700 have renewal options
of 45, 10, 10, 30, and 20 years, respectively.
(6) 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 the
greater of: (1) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts, and similar obligations at
the beginning of each year; or, (2) 1/20th of its advances (borrowings) from
the FHLB of Atlanta. The Bank is in compliance with this requirement with an
investment in FHLB of Atlanta stock of $2.9 million as of March 31, 2003.
37
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Real Estate Operations
----------------------
The Company participated in a real estate joint venture near Aiken, named
Willow Woods. The Company owned 50% of the Willow Woods partnership as a joint
venture. The joint venture has been consolidated into the Company's financial
statements because the Company had voting control in the partnership. In the
latter part of fiscal 2001, the Company liquidated the remaining assets of the
Willow Woods partnership and therefore, the Company had no investment in real
estate held for development and sale at March 31, 2003 and 2002. Income from
real estate operations at March 31 is as follows:
2003 2002 2001
------ ------ ------
Real Estate Held For Development And Sale:
Sales $ - - $1,095,900
Cost Of Sales - - 1,049,159
------ ------ ---------
Gross Profit - - 46,741
Recovery Of Previously Recognized Loss - - (50,000)
Other Expenses, Net - - 72,099
------ ------ ---------
Net Income $ - - $ 24,642
====== ====== =========
(8) Deposits
--------
Deposits outstanding by type of account are summarized as follows:
At March 31, 2003 At March 31, 2002
------------------------- -------------------------
Interest Interest
Weighted Rate Weighted Rate
Amount Rate Range Amount Rate Range
---------- ----- ---------- ---------- ----- ----------
Checking Accounts $82,521,610 0.50% 0.00-1.98% $71,906,781 0.58% 0.00-2.47%
Money Market Accts. 102,396,950 2.21% 1.09-2.32% 74,074,781 2.73% 1.74-2.96%
Passbook Accounts 16,455,391 1.23% 0.00-2.50% 15,106,897 1.75% 0.00-2.50%
----------- ----- ---------- ----------- ----- ----------
Total 201,373,951 1.43% 0.00-2.50% 161,088,510 1.68% 0.00-2.96%
----------- ----- ---------- ----------- ----- ----------
Certificate Accounts:
0.00-4.99% 144,633,770 127,067,831
5.00-6.99% 12,437,463 19,982,399
7.00-8.99% 28,417 898,862
----------- -----------
Total 157,099,650 2.92% 1.21-7.02% 147,949,092 3.59% 0.00-7.26%
----------- ----- ---------- ----------- ----- ----------
Total Deposits $358,473,601 2.08% 0.00-7.02%$309,037,602 2.60% 0.00-7.26%
=========== ==== ========= =========== ==== =========
The aggregate amount of short-term certificates of deposit with a minimum
denomination of $100,000 was $44.4 million and $45.5 million at March 31, 2003
and 2002, respectively. The amounts and scheduled maturities of all
certificates of deposit at March 31 are as follows:
March 31,
2003 2002
------ ------
Within 1 Year $118,710,363 $125,974,703
After 1 Year, Within 2 13,749,850 15,454,043
After 2 Years, Within 3 3,160,787 2,202,571
After 3 Years, Within 4 5,272,712 817,484
After 4 Years, Within 5 16,205,938 3,500,291
Thereafter - -
----------- -----------
$157,099,650 $147,949,092
=========== ===========
38
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) 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:
2003 2002
------------------------ ------------------------
Year Ending March 31 Amount Weighted Rate Amount Weighted Rate
-------- ------------- -------- -------------
2003 $ - - $5,000,000 6.40%
2004 1,700,000 1.48% - -
2005 10,072,000 6.14% 10,108,000 6.15%
2006 23,000,000 4.93% 18,000,000 5.98%
2007 - - - -
Thereafter 15,000,000 3.09% - -
---------- ------------- ---------- -------------
$49,772,000 4.50% $33,108,000 6.09%
========== ====== ========== ======
These advances are secured by a blanket collateral agreement with the FHLB by
pledging the Bank's portfolio of residential first mortgage loans and
approximately $11.9 million of investment securities. 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, 2003
- -------------------------------------------------------------------
Borrow Date Maturity Date Amount Int. Rate Type Call Dates
- ----------- ------------- ------ --------- ---- ----------
11/10/00 11/10/05 $5,000,000 5.85% Multi-Call 5/10/03 and quarterly
thereafter
09/04/02 09/04/07 5,000,000 2.82% 1 Time Call 09/04/05
11/07/02 11/07/12 5,000,000 3.354% 1 Time Call 11/07/07
03/10/03 03/10/06 5,000,000 1.15% Multi-Call 3/10/04 and quarterly
thereafter
As of March 31, 2002
- -------------------------------------------------------------------
Borrow Date Maturity Date Amount Int. Rate Type Call Dates
- ----------- ------------- ------ --------- ---- ----------
03/17/00 03/17/03 $1,356,695 6.36% Multi-Call 6/17/02 and quarterly
thereafter
10/25/00 10/25/05 8,000,000 6.04% 1 Time Call 10/25/02
11/10/00 11/10/05 5,000,000 5.85% Multi-Call 5/10/02 and quarterly
thereafter
11/17/00 11/17/05 5,000,000 6.00% 1 Time Call 11/17/02
03/19/01 03/17/03 3,643,305 6.41% Multi-Call 6/17/02 and quarterly
thereafter
At March 31, 2003, the Bank had $61.4 million in additional borrowing capacity
at the FHLB.
The Bank had $4.2 million and $6.2 million in other borrowings (non-FHLB
advances) at March 31, 2003 and 2002, 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
the 13 week Treasury bill. At March 31, 2003 and 2002, the interest rate paid
on these borrowings were 1.17% and 1.73%, respectively. The Bank had pledged
$5.1 million in investment securities at March 31, 2003 and $9.0 million at
March 31, 2002, respectively, as collateral for these borrowings.
39
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(10) Income Taxes
------------
Income tax expense is comprised of the following:
For the Years Ended March 31,
------------------------------
2003 2002 2001
------ ------ ------
Current:
Federal $2,380,675 1,799,303 $1,323,058
State 247,582 200,700 46,000
--------- --------- ---------
Total Current Tax Expense 2,628,257 2,000,003 1,369,058
Deferred: --------- --------- ---------
Federal (525,982) (348,904) (251,505)
State (161,396) (136,800) -
--------- --------- ---------
Total Deferred Tax Expense (687,378) (485,704) (251,505)
--------- --------- ---------
Total Income Tax Expense $1,940,879 1,514,299 $1,117,553
========= ========= =========
The Company's income taxes differ from those computed at the statutory federal
income tax rate, as follows:
For the Years Ended March 31,
------------------------------
2003 2002 2001
------ ------ ------
Tax At Statutory Income Tax Rate $1,758,494 $1,368,121 $1,103,296
State Tax And Other 182,385 146,178 14,257
--------- --------- ---------
Total Income Tax Expense $1,940,879 $1,514,299 $1,117,553
========= ========= =========
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,
2003 2002
------ ------
Deferred Tax Assets:
Provision For Loan Losses $1,964,489 $1,475,632
Goodwill Tax Basis Over Financial
Statement Basis 568,208 680,221
Net Fees Deferred For Financial Reporting 185,108 168,042
Unrealized Loss On Securities Available
For Sale - 112,174
Other 86,292 23,254
--------- ---------
Total Gross Deferred Tax Assets 2,804,097 2,459,323
Deferred Tax Liabilities: --------- ---------
Unrealized Gain On Securities Available
For Sale 883,888 -
FHLB Stock Basis Over Tax Basis 133,367 133,367
Depreciation 192,599 91,968
Other 133,367 464,428
--------- ---------
Total Gross Deferred Tax Liability 1,343,221 689,763
--------- ---------
Net Deferred Tax Asset $1,460,876 $1,769,560
========= =========
The balance of the change in the net deferred tax asset results from the
current period deferred tax expense of $687,378. The net deferred tax asset is
included in other assets in the accompanying consolidated balance sheets.
No valuation allowance for deferred tax assets was required at March 31, 2003
and 2002. 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.
40
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) 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
judgements by regulators with regard to components, risk weightings, and other
factors.
As of March 31, 2003 and 2002, 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
For Under Prompt Corrective
Capital Action
Actual Adequacy Provisions
------------- ------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
March 31, 2003
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets) $28,879 11.8% 9,806 4.0% 14,709 6.0%
Total Risk-Based Capital
(To Risk Weighted Assets) $31,791 13.0% 19,612 8.0% 24,515 10.0%
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets) $28,879 6.5% 17,762 4.0% 22,203 5.0%
Tangible Capital
(To Tangible Assets) $28,879 6.5% 8,881 2.0% 22,203 5.0%
March 31, 2002
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets) $25,646 11.1% $9,212 4.0% $13,818 6.0%
Total Risk-Based Capital
(To Risk Weighted Assets) $28,288 12.3% $18,424 8.0% $23,030 10.0%
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets) $25,646 6.8% $15,072 4.0% $18,841 5.0%
Tangible Capital
(To Tangible Assets) $25,461 6.8% $ 7,533 2.0% $18,831 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").
41
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Employee Benefit Plans
----------------------
The Company is participating in a multiple employer defined contribution
employee benefit plan covering substantially all employees with one or more
years 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 $215,000, $207,000, and $143,000 for the
years ended March 31, 2003, 2002, and 2001, respectively.
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, 2003, 2002, and 2001 were $123,000, $109,000, and
$67,000, respectively. The ESOP from time to time borrows funds from financial
institutions to purchase the Company's stock. The balance of the loan was
$445,000 and $358,000 at March 31, 2003 and 2002, respectively. The Company
carries 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.
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, 2003, 2002, and 2001.
2003 2002 2001
------------------ ----------------- ------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Balance, Beginning
of Year 122,334 $ 15.31 123,834 $ 15.24 122,334 $ 15.14
Options granted 6,000 22.39 3,000 20.00 6,000 18.33
Options exercised 3,468 5.33 - - - -
Options forfeited 10,500 17.62 4,500 16.67 4,500 16.67
Balance, March 31 114,366 $ 15.77 122,334 $ 15.31 123,834 $ 15.24
At March 31, 2003, the Company had the following options outstanding:
Outstanding Earliest Date
Grant Date Options Option Price Exercisable Expiration Date
- ---------- ----------- ------------ ----------- ---------------
1/07/97 13,866 $5.33 1/1/03 to 12/31/03 to
1/1/06 12/31/06
10/19/99 85,500 $16.67 10/1/04 to 9/30/05 to
10/01/08 9/30/09
10/19/99 6,000 $18.33 10/01/03 9/30/04
4/17/01 3,000 $20.00 5/1/06 to 4/30/07
5/1/10 4/30/11
1/16/03 6,000 $22.39 1/1/08 to 12/31/08 to
1/1/12 12/31/12
The above options vest over ten years with the first vesting earned after five
years and 20% vesting earned evenly in years six through ten except for the
6,000 shares granted on 10/19/99 which fully vest on 10/1/03. All options
which vest must be exercised within one year of vesting.
42
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Employee Benefit Plans, Continued
---------------------------------
There were 48,000 options available for granting at March 31, 2003.
The incentive stock option plan adopted by the Company includes a provision for
tandem stock appreciation rights ("SARs"). Upon vesting, these stock
appreciation rights are exercisable in lieu of the stock options granted to the
employee. Upon exercise, the employee chooses the option or SAR feature, and
the tandem instrument is cancelled. The Company accounts for incentive stock
options and tandem SARs under Accounting Principles Board ("APB") Option No.
25, "Accounting for Stock Issued to Employees". APB No. 25 states that
compensation cost for a combination plan permitting an employee to elect one
part should be measured according to the terms that an employee is mostly
likely to elect based on the facts available each period. Due to the personal
income tax implications of SARs under the Internal Revenue Code, employees
have historically elected to exercise options rather than the SARs.
Accordingly, the Company has elected to measure compensation cost for stock
options as required by APB No. 25, rather than for the SARs.
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 $.08 per share for options granted
during the years ended 2003 and 2002, $.16 for options granted during the years
ended 2001 and 2000, and $.22 for shares granted during the year ended 1997,
expected volatility of 10.7% for options granted in 2003, 30% for options
granted in 2002, 2001, and 2000, and 20% for options granted in 1997, risk-free
interest rate of 3.35% for options granted in 2003 and 5.9% for options granted
in 2002, 2001, 2000, and 1997, and expected lives of 6-10 years.
(13) Commitments
-----------
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 $30.4
million and $30.9 million, undisbursed loans in process totaled $9.0 million
and $11.3 million, and letters of credit of $728,000 and $318,000 at March 31,
2003 and 2002, respectively. At March 31, 2003 and 2002, 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 $2.4 million and $2.1
million at March 31, 2003 and 2002, respectively. Outstanding commitments on
mortgage loans not yet closed amounted to $200,000 and $272,000 at March 31,
2003 and 2002, respectively. Such 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, 2003 and 2002, the Bank had
outstanding commitments to sell approximately $3.7 and $2.2 million of loans
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.
43
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Related Party Transactions
--------------------------
At March 31, 2003, the total aggregate indebtedness to the Bank by executive
officers and directors of the Bank and Company, whose individual indebtedness
exceeded $60,000, was $546,000. There was $222,000 in additional loans to
executive officers and directors whose individual indebtedness exceeded $60,000
during fiscal 2002. Repayments on these loans totaled approximately $57,000.
Loans to all employees, officers, and directors of the Company, in the
aggregate constituted approximately 9.75% of the total shareholders' equity of
the Company at March 31, 2003. At March 31, 2003, deposits from executive
officers and directors of the Bank and Company and their related interest in
aggregate approximated $2.2 million.
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 Bank
incurred expenses of $29,000, $29,000, and $28,000 for rent for the years ended
March 31, 2003, 2002 and 2001, respectively. 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.
(15) 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,
-------------------
2003 2002
------ ------
Assets:
Cash $ 146,206 $ 285,396
Investment In Security Federal Bank 30,324,346 25,463,436
Income Tax Receivable From Bank 33,194 32,071
---------- ----------
Total Assets $30,503,746 $25,780,903
========== ==========
Liability And Shareholders' Equity:
Accounts Payable $ 19,108 $ 22,043
Indirect Guarantee of ESOP Debt 444,685 358,297
Shareholders' Equity 30,039,953 25,400,563
---------- ----------
Total Liabilities And Shareholders' Equity $30,503,746 $25,780,903
========== ==========
Condensed Statements of Income Data
For the Years Ended March 31,
------------------------------
2003 2002 2001
------ ------ ------
Income:
Equity In Earnings Of Security Federal
Bank $3,232,989 $2,510,729 $2,092,433
Equity In (Loss) Earnings Of Real Estate
Partnership - - (12,678)
Miscellaneous Income - 406 30,382
--------- --------- ---------
3,232,989 2,511,135 2,110,137
Expenses:
Recovery Of Previously Recognized Loss - - (50,000)
Other Expenses 1,828 1,549 32,703
--------- --------- ---------
1,828 1,549 (17,297)
--------- --------- ---------
Net Income $3,231,161 $2,509,586 $2,127,434
========= ========= =========
44
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(15) Security Federal Corporation Condensed Financial Statements (Parent
Company Only), Continued
-------------------------------------------------------------------
Condensed Statements of Cash Flow Data
For the Years Ended March 31,
------------------------------
2003 2002 2001
------ ------ ------
Operating Activities:
Net Income $3,231,161 $2,509,586 $2,127,434
Adjustments To Reconcile Net Income To
Net Cash Provided By (Used In)
Operating Activities:
Equity In Earnings Of Security
Federal Bank (3,232,989) (2,510,729) (2,092,433)
Equity In Earnings (Loss) Of Real
Estate Partnership - - 12,678
Recovery of Previously Recognized Loss - - (50,000)
(Increase) Decrease In Income Taxes
Receivable And Other Assets (1,123) (700) 202,704
Increase (Decrease) In Accounts Payable (2,936) - 8,409
Net Cash Provided By (Used In) Operating --------- --------- ---------
Activities (5,887) (1,843) 208,792
--------- --------- ---------
Investing Activities:
Return Of Capital From Real Estate
Partnerships - - 196,526
--------- --------- ---------
Net Cash Provided By Investing Activities - - 196,526
--------- --------- ---------
Financing Activities:
Exercise of Stock Options 18,496 - -
Purchase of Fractional Shares Due To
Stock Split (122) - -
Dividends Paid (151,677) (134,740) (134,739)
Net Cash Provided By (Used In) Financing --------- --------- ---------
Activities (133,303) (134,740) (134,739)
Net Increase (Decrease) In Cash (139,190) (136,583) 270,579
Cash At Beginning Of Year 285,396 421,979 151,400
--------- --------- ---------
Cash At End Of Year $ 146,206 $ 285,396 $ 421,979
========= ========= =========
(16) Carrying Amounts and Fair Value of Financial Instruments
--------------------------------------------------------
The carrying amounts and fair value of financial instruments are summarized
below:
At March 31,
-----------------------------------------
2003 2002
------------------- -------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In Thousands)
Financial Assets:
Cash And Cash Equivalents $ 8,239 $ 8,239 $ 11,528 $ 11,528
Investment And Mortgage-Back
Securities $179,788 $182,190 $118,898 $118,933
Loans Receivable, Net $243,156 $250,022 $234,319 $236,591
Federal Home Loan Bank Stock $ 2,859 $ 2,859 $ 2,669 $ 2,669
Financial Liabilities:
Deposits:
Checking, Savings, and Money
Market Accounts $201,374 $201,374 $161,089 $161,089
Certificate Accounts $157,100 $160,818 $147,949 $148,637
Advances From Federal Home
Loan Bank $ 49,772 $ 51,792 $ 33,108 $ 34,675
Other Borrowed Money $ 4,193 $ 4,193 $ 6,169 $ 6,169
45
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) Carrying Amounts and Fair Value of Financial Instruments, Continued
-------------------------------------------------------------------
At March 31, 2003, the Bank had $42.5 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 Office of Thrift Supervison's 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.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(17) Quarterly Financial Data (Unaudited)
------------------------------------
Unaudited condensed financial data by quarter for fiscal year 2003 and 2002 is
as follows (amounts, except per share data, in thousands):
Quarter ended
----------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31,
2002-2003 2002 2002 2002 2003
------- ------- ------- -------
Interest Income $ 6,002 $ 6,001 $ 5,972 $ 5,685
Interest Expense 2,512 2,538 2,547 2,419
------- ------- ------- -------
Net Interest Income 3,490 3,463 3,425 3,266
Provision for Loan Losses 450 450 450 450
Net Interest Income after ------- ------- ------- -------
Provision for Loan Losses 3,040 3,013 2,975 2,816
Noninterest Income 799 882 1,108 1,022
Noninterest Expense 2,684 2,579 2,597 2,623
------- ------- ------- -------
Income before Income Tax 1,155 1,316 1,486 1,215
Provision for Income taxes 438 502 559 442
------- ------- ------- -------
Net Income $ 717 $ 814 $ 927 $ 773
======= ======= ======= =======
Basic Net Income per Common Share $ 0.29 $ 0.32 $ 0.37 $ 0.31
======= ======= ======= =======
Diluted Net Income per Common Share $ 0.28 $ 0.32 $ 0.36 $ 0.30
Basic Weighted Average Shares ======= ======= ======= =======
Outstanding 2,507,573 2,509,707 2,509,484 2,508,331
Diluted Weighted Average Shares ========= ========= ========= =========
Outstanding 2,564,795 2,565,969 2,559,299 2,555,176
========= ========= ========= =========
Quarter ended
----------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31,
2001-2002 2001 2001 2001 2002
------- ------- ------- -------
Interest Income $ 6,185 $ 6,339 $ 6,196 $ 5,912
Interest Expense 3,407 3,349 2,923 2,533
------- ------- ------- -------
Net Interest Income 2,778 2,990 3,273 3,379
Provision for Loan Losses 175 250 500 600
Net Interest Income after ------- ------- ------- -------
Provision for Loan Losses 2,603 2,740 2,773 2,779
Noninterest Income 822 718 1,054 871
Noninterest Expense 2,569 2,551 2,709 2,507
------- ------- ------- -------
Income before Income Tax 856 907 1,118 1,143
Provision for Income taxes 319 338 426 431
------- ------- ------- -------
Net Income $ 537 $ 569 $ 692 $ 712
======= ======= ======= =======
Basic Net Income per Common Share $ 0.21 $ 0.34 $ 0.41 $ 0.43
======= ======= ======= =======
Diluted Net Income per $ 0.21 $ 0.33 $ 0.40 $ 0.42
Basic Weighted Average Shares ======= ======= ======= =======
Outstanding 2,505,263 2,507,189 2,507,189 2,507,189
Diluted Weighted Average Shares ========= ========= ========= =========
Outstanding 2,555,513 2,561,520 2,562,219 2,562,219
========= ========= ========= =========
47
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SHAREHOLDERS INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held at 2:00 p.m., Thursday, July
17, 2003 at the Stevenson-McClelland Parish House Facilities at St. Thaddeus
Episcopal Church, 125 Pendleton Street, S.W., Aiken, SC.
STOCK LISTING
The Company's stock is traded over the counter and trades infrequently.
PRICE RANGE OF COMMON STOCK
The table below shows the range of high and low bid prices as reported by the
Salomon Smith Barney, located in Aiken, South Carolina. These prices represent
actual transactions and do not include retail markups, markdowns or
commissions. The Salomon Smith Barney Company creates a market for the stock.
Quarter Ending High Low
-------------- ------ ------
06-30-01 $20.00 $20.00
09-30-01 $22.33 $21.00
12-31-01 $22.00 $21.00
03-31-02 $21.67 $21.67
06-30-02 $24.00 $21.67
09-30-02 $22.99 $22.11
12-31-02 $22.31 $21.33
03-31-03 $21.33 $20.00
The prices in the table above are adjusted for a 3-for-2 stock split which
occurred in the fiscal year ended March 31, 2003.
As of March 31, 2003, the Company had approximately 435 shareholders and
2,529,584 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
declared and paid dividends of $0.0133 per share for each of the four quarters
of the fiscal year ended March 31, 2002. In fiscal year ended March 31, 2003,
the Company paid cash dividends of $0.0133 for the first three quarters of the
fiscal year. After the 3-for-2 stock split which occurred during the quarter
ended March 31, 2003, the Company paid $0.02 per share cash dividend for that
quarter. The cash dividends are stated on a post split basis.
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. The ability
of the Company to pay dividends depends primarily on the ability of the Bank to
pay dividends to the Company.
48
SHAREHOLDER 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, 2003 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 any of the following companies listed
below. Additionally, shareholder and/or general inquiries may be addressed to
Mrs. Ruth L. Vance of Security Federal Corporation.
GENERAL INQUIRIES TRANSFER AGENT SPECIAL COUNSEL
Mrs. Ruth L. Vance Security Federal Breyer & Associates, PC
Security Federal Corporation Suite 785
Corporation 1705 Whiskey Road, S 8180 Greensboro Drive
1705 Whiskey Road, S P.O. Box 810 McLean, VA 22102
P.O. Box 810 Aiken, SC 29802-0810
Aiken, SC 29802-0810
Phone: 803-641-3000
INDEPENDENT AUDITORS
Elliott Davis, LLC
211 York Street, N.W.
P.O. Box 930
Aiken, SC 29802-0930
49
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
BOARD OF DIRECTORS
T. Clifton Weeks Sen. Thomas L. Moore Harry O. Weeks, Jr.
Chairman President Business Dev. Executive
Security Federal Corporation Boiler Efficiency, Inc. Hutson-Etherredge Co.
Aiken, SC Clearwater, SC Aiken, SC
Dr. Robert E. Alexander Timothy W. Simmons Thomas C. Clark
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 J. Chris Verenes
Advisor for Community Dir. of Planning & Admin.
Alliances Attorney-At-Law Washington Group Intl.
WSRC Aiken, SC Aiken, SC
Aiken, SC
Directors Emeriti:
Walter E. Brooker, Sr.
President, Brooker's Inc.
Denmark, SC
Robert E. Johnson
Corporate Secretary
Attorney-At-Law (Retired)
Aiken, SC
SECURITY FEDERAL BANK ADVISORY BOARDS
DENMARK
Walter E. Brooker, Sr. David H. Crum James W. Harrison
President Attorney-At-Law Owner
Brooker's Inc. Crum, Crum and Crum Jim Harrison Art Gallery
Denmark, SC Denmark, SC Denmark, SC
Claude E. McCain Rev. Isaiah Odom
President Pastor
H.C. McCain Insurance Agency Second Baptist Church
Denmark, SC Barnwell, SC
NORTH AUGUSTA
P. Richard Borden Rev. G.L. Brightharp Helen H. Butler
Owner Owner Retired Banker
Borden Pest Control G.L. Brightharp & Sons Mortuary North Augusta, SC
North Augusta, SC North Augusta, SC
Sen. Thomas L. Moore John P. Potter
President Director of Finance
Boiler Efficiency, Inc. City of North Augusta
Clearwater, SC North Augusta, SC
50
WAGENER
M. Judson Busbee Chad G. Ingram Mary T. Lybrand Richard H. Sumpter
Owner Vice President Retired Banker Retired Educator
Busbee Hardware New World Enterprises Wagener, SC Wagener, SC
Wagener, SC Wagener, SC
MIDLAND VALLEY
Charles A. Hilton Rev. Nathaniel Irvin, Sr. Gloria Busch-Johnson
General Manager Pastor Consultant
Breezy Hill Water& Sewer Old Storm Branch Baptist Church Aiken, SC
Graniteville, SC Clearwater, SC
Sen. Thomas L. Moore Glenda K. Napier Carlton B. Shealy
President Co-Owner Owner
Boiler Efficiency, Inc. Napier Funeral Home C. Shealy Realty Builders &
Clearwater, SC Graniteville, SC Developers
North Augusta, SC
WEST COLUMBIA
Eleanor Powell Clark Dr. G. Tripp Jones L. Ed Kirkland, Jr.
Owner/Operator Physician Owner/Agent
B & E Enterprises Inc. SC Oncology Associates L. Ed Kirkland & Co., LLC
dba McDonald's West Columbia, SC Columbia, SC
Columbia, SC
Donald T. Martin L. Todd Sease
Controller, CPA Partner
Nexsen, Pruet, Jacobs Jumper, Carter, Sease Architects, PA
& Pollard, LLP West Columbia, SC
Columbia, SC
Sen. Nikki G. Setzler Jan Hook-Stamps
Sr. Partner Owner
Setzler & Scott, PA Law Firm Southern Anesthesia & Surgical Co.
West Columbia, SC West Columbia, SC
51
MANAGEMENT TEAM
T. Clifton Weeks Chairman of Security Federal Corporation
Timothy W. Simmons Chairman and Chief Executive Officer
G. L. Toole, III Vice President
Robert E. Johnson Corporate Secretary
Thomas C. Clark President
Roy G. Lindburg Treasurer and Chief Financial Officer
Floyd J. Blackmon Senior Vice President and Chief Operations Officer
Francis M. Thomas, Jr. Senior Vice President - Aiken, Bamberg Counties
Sandra M. Bartlett Vice President - Human Resources
Kathryn Y. Carr Vice President - Special Assets
Carol P. McCleskey Vice President and Branch Coordinator
Harley G. Henkes Internal Auditor and Compliance/Security Officer
Gabriele C. Dukes Vice President - Financial Counseling/Community
Development
Rodney K. Ingle Vice President - Business Development/Commercial Loans
Joseph C. Taylor Vice President - Operations Officer
J. Scott Raines Vice President - Trust, Financial Services Manager
Gregory D. Warfield Vice President - Mortgage Loan Originator
Peggy B. Whitaker Vice President - Business Development/Commercial Loans
Lawrence M. Moran Vice President - Business Development/Commercial Loans
Etta A. Petroff Assistant Vice President - Mortgage Loan
Production/Secondary Marketing
Ruth L. Vance Assistant Secretary and Assistant Vice President
Margaret A. Hurt Assistant Treasurer - Accounting
Laura B. Conway Assistant Vice President - Operations
Kathi J. Snipes Assistant Vice President - Financial Counseling
Patricia B. Moseley Assistant Vice President - Loan and Credit Card
Servicing
Ann C. Johnson Assistant Vice President - Purchasing and Equipment
Maintenance
Elsie K. Dicks Assistant Vice President - Call Center Manager
Catherine O. Fields Assistant Vice President - Construction Loan
Administration
S. Kevin Price Assistant Vice President - Community Development
Jason S. Redd Investment Officer
BANK BRANCHES
Whiskey Road Dana S. Hall, Assistant Vice President/Manager
North Augusta S. Elaine Ivey, Assistant Vice President/Manager
Denmark Cynthia M. Towne, Assistant Vice President/Manager
Laurens Street Vicky W. Moseley, Assistant Vice President/Manager
Richland Avenue Nicole W. Simmons, Manager
Wal-Mart Amanda F. Clifford, Manager
Graniteville Kathy S. Williamson, Assistant Vice President/Manager
Langley Pat W. Guglieri, Assistant Vice President/Manager
Clearwater Gail W. Dotson, Assistant Vice President/Manager
Wagener Sharon M. Swift, Assistant Vice President/Manager
West Columbia Mary B. Clark, Assistant Vice President/Manager
Lexington Geena B. Copeland, Assistant Vice President/Manager
52
Exhibit 21
Subsidiaries of the Registrant
State of Percentage
Parent Subsidiary Incorporation of Ownership
- ------ ---------- ------------- ------------
Security Federal Security Federal Bank United States 100%
Corporation
Security Federal Bank Security Federal Insurance South Carolina 100%
Security Federal Investments South Carolina 100%
Security Federal Trust South Carolina 100%
Security Financial Services South Carolina 100%
Corporation
Exhibit 23
Consent of Elliott Davis, LLC
INDEPENDENT AUDITORS' CONSENT
-----------------------------
Board of Directors
Security Federal Corporation:
We consent to incorporation by reference in the Registration Statement No.
33-80008 on Form S-8 of our report dated May 2, 2003, relating to the
consolidated balance sheet of Security Federal Corporation and subsidiaries as
of March 31, 2003 and the related consolidated statements of income,
shareholders' equity and cash flows for the year then ended, which report
appears in the March 31, 2003 annual report on Form 10-K.
/s/Elliott Davis, LLC
- ---------------------
Elliott Davis, LLC
Greenville, South Carolina
June 26, 2003
Exhibit 99
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 26, 2003
A signed original of this written statement required by Section 906, or
other document authenticating, acknowledging, or otherwise adopting the
signature that appears in typed form within the electronic version of this
written statement required by Section 906, has been provided to Security
Federal Corporation and will be retained by Security Federal Corporation and
furnished to the Securities and Exchange Commission or its staff upon request.