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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD:
FROM: TO:
-------------- --------------
COMMISSION FILE NUMBER: 0-16120
SECURITY FEDERAL CORPORATION
South Carolina 57-0858504
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1705 WHISKEY ROAD, AIKEN, SOUTH CAROLINA 29801
(Address of Principal Executive Office)(Zip code)
(803) 641-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
------ ------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practical date.
CLASS: OUTSTANDING SHARES AT: $0.01 PAR VALUE:
------------ ---------------------- ----------------
Common Stock October 31, 2003 2,531,744
INDEX
- ------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at September 30, 2003 and
March 31, 2003 1
Consolidated Statements of Income for the Three and Six
Months Ended September 30, 2003 and 2002 2
Consolidated Statements of Shareholders' Equity at
September 30, 2002 and 2003 4
Consolidated Statements of Cash Flows for the Six Months
Ended September 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis - of Results of
Operations and Financial Condition 11
Item 3. Quantitative and Qualitative Disclosure about Market Risk 19
Item 4. Controls and Procedures 19
- ------------------------------------------------------------------------------
PART II. OTHER INFORMATION
Other Information 20
Signatures 21
Certifications 22
- ------------------------------------------------------------------------------
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information is included in the consolidated financial statements and related
notes.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets
September 30, 2003 March 31, 2003
------------------ --------------
Assets: (Unaudited) (Audited)
Cash And Cash Equivalents $ 7,876,785 $ 8,238,690
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized cost of
$168,233,219 at September 30, 2003 and
$157,821,789 at Mar ch 31, 2003) 168,497,564 160,150,262
Held To Maturity: (Fair value of
$61,912,230 at September 30, 2003 and
$22,040,207 at March 31, 2003) 62,446,673 21,966,533
------------ ------------
Total Investment And Mortgage-Backed
Securities 230,944,237 182,116,795
------------ ------------
Loans Receivable, Net:
Held For Sale 1,149,366 3,670,498
Held For Investment: (Net of allowance of
$5,376,962 at September 30, 2003 and
$4,911,224 at March 31, 2003) 236,632,395 239,485,158
------------ ------------
Total Loans Receivable, Net 237,781,761 243,155,656
------------ ------------
Accrued Interest Receivable:
Loans 906,851 976,134
Mortgage-Backed Securities 520,366 441,900
Investments 694,286 667,735
Premises And Equipment, Net 6,478,000 5,219,947
Federal Home Loan Bank Stock, At Cost 3,789,000 2,858,600
Repossessed Assets Acquired In Settlement
Of Loans 73,000 151,450
Other Assets 3,580,797 1,077,078
------------ ------------
Total Assets $492,645,083 $444,903,985
============ ============
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $383,925,430 $358,473,601
Advances From Federal Home Loan Bank 69,329,000 49,772,000
Other Borrowed Money 5,937,600 4,193,480
Advance Payments By Borrowers For Taxes
And Insurance 565,515 279,425
Other Liabilities 2,298,934 2,145,526
------------ ------------
Total Liabilities $462,056,479 $414,864,032
------------ ------------
Shareholders' Equity:
Serial Preferred Stock, $.01 Par Value;
Authorized Shares - 200,000; Issued
And Outstanding Shares - None $ - $ -
Common Stock, $.01 Par Value; Authorized
Shares - 5,000,000; Issued - 2,531,744
And Outstanding Shares - 2,514,488 At
September 30, 2003 And 2,529,824 And
2,507,717 At March 31, 2003 25,317 25,298
Additional Paid-In Capital 4,005,444 3,995,230
Indirect Guarantee Of Employee Stock
Ownership Trust Debt (336,972) (444,685)
Accumulated Other Comprehensive Gain 164,001 1,444,585
Retained Earnings, Substantially Restricted 26,730,814 25,019,525
------------ ------------
Total Shareholders' Equity $ 30,588,604 $ 30,039,953
------------ ------------
Total Liabilities And Shareholders' Equity $492,645,083 $444,903,985
============ ============
See accompanying notes to consolidated financial statements.
1
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended September 30,
--------------------------------
2003 2002
-------------- -------------
Interest Income:
Loans $3,860,169 $4,325,173
Mortgage-Backed Securities 961,039 848,410
Investment Securities 677,782 813,864
Other 4,813 13,810
---------- ----------
Total Interest Income 5,503,803 6,001,257
---------- ----------
Interest Expense:
NOW And Money Market Accounts 709,868 635,061
Passbook Accounts 43,322 64,332
Certificate Accounts 916,115 1,281,974
Advances And Other Borrowed Money 628,088 557,218
---------- ----------
Total Interest Expense 2,297,393 2,538,585
---------- ----------
Net Interest Income 3,206,410 3,462,672
Provision For Loan Losses 300,000 450,000
---------- ----------
Net Interest Income After Provision For
Loan Losses 2,906,410 3,012,672
---------- ----------
Other Income:
Net Gain On Sale Of Investments - 4,245
Gain On Sale Of Loans 413,685 336,149
Loan Servicing Fees 52,424 50,260
Service Fees On Deposit Accounts 339,684 319,960
Other 253,011 171,812
---------- ----------
Total Other Income 1,058,804 882,426
---------- ----------
General And Administrative Expenses:
Salaries And Employee Benefits 1,428,376 1,457,204
Occupancy 237,859 204,909
Advertising 77,648 41,677
Depreciation And Maintenance Of Equipment 273,885 249,584
FDIC Insurance Premiums 14,072 13,084
Amortization Of Intangibles - 68,900
Other 545,601 543,768
---------- ----------
Total General And Administrative Expenses 2,577,441 2,579,126
---------- ----------
Income Before Income Taxes 1,387,773 1,315,972
Provision For Income Taxes 497,912 502,181
---------- ----------
Net Income $ 889,861 $ 813,791
========== ==========
Basic Net Income Per Common Share $ 0.35 $ 0.32
========== ==========
Diluted Net Income Per Common Share $ 0.35 $ 0.32
========== ==========
Cash Dividend Per Share On Common Stock $ 0.02 $ 0.0133
========== ==========
Basic Weighted Average Shares Outstanding 2,512,600 2,509,707
========== ==========
Diluted Weighted Average Shares Outstanding 2,568,601 2,565,969
========== ==========
See accompanying notes to consolidated financial statements.
2
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Six Months Ended September 30,
-----------------------------
2003 2002
------------ ------------
Interest Income:
Loans $ 7,815,674 $ 8,685,901
Mortgage-Backed Securities 1,883,118 1,647,036
Investment Securities 1,409,165 1,649,041
Other 9,581 20,960
---------- ----------
Total Interest Income 11,117,538 12,002,938
---------- ----------
Interest Expense:
NOW And Money Market Accounts 1,374,260 1,258,309
Passbook Accounts 88,978 133,616
Certificate Accounts 1,973,215 2,543,768
Advances And Other Borrowed Money 1,249,071 1,114,586
---------- ----------
Total Interest Expense 4,685,524 5,050,279
---------- ----------
Net Interest Income 6,432,014 6,952,659
Provision For Loan Losses 600,000 900,000
---------- ----------
Net Interest Income After Provision For
Loan Losses 5,832,014 6,052,659
---------- ----------
Other Income:
Net Gain On Sale Of Investments - 4,245
Gain On Sale Of Loans 1,056,236 626,000
Loan Servicing Fees 101,611 101,052
Service Fees On Deposit Accounts 691,296 601,562
Other 410,225 348,698
---------- ----------
Total Other Income 2,259,368 1,681,557
---------- ----------
General And Administrative Expenses:
Salaries And Employee Benefits 3,041,032 2,947,748
Occupancy 456,919 400,223
Advertising 104,180 118,067
Depreciation And Maintenance Of Equipment 537,716 518,589
FDIC Insurance Premiums 27,667 25,850
Amortization Of Intangibles - 185,210
Other 1,059,315 1,067,407
---------- ----------
Total General And Administrative Expenses 5,226,829 5,263,094
---------- ----------
Income Before Income Taxes 2,864,553 2,471,122
Provision For Income Taxes 1,052,033 940,181
---------- ----------
Net Income $1,812,520 $1,530,941
========== ==========
Basic Net Income Per Common Share $ 0.72 $ 0.61
========== ==========
Diluted Net Income Per Common Share $ 0.71 $ 0.60
========== ==========
Cash Dividend Per Share On Common Stock $ 0.04 $ 0.0266
========== ==========
Basic Weighted Average Shares Outstanding 2,511,563 2,508,647
========== ==========
Diluted Weighted Average Shares Outstanding 2,563,450 2,565,383
========== ==========
See accompanying notes to consolidated financial statements.
3
Security Federal Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity (Unaudited)
Accumulated
Additional Indirect Other
Common Paid-In Guarantee of Comprehensive Retained
Stock Capital ESOP Debt Income (Loss) Earnings Total
-------- ---------- ---------- ---------- ------------ ------------
Beginning Balance At
March 31, 2002 $ 16,842 $3,985,312 $(358,297) $(183,335) $21,940,041 $25,400,563
Net Income - - - - 1,530,941 1,530,941
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Gains On Securities
Available For Sale - - - 1,819,475 - 1,819,475
-----------
Comprehensive Income 3,350,416
Decrease In Indirect
Guarantee of ESOP Debt - - 33,714 - - 33,714
Cash Dividends ($.0133
per share) - - - - (67,369) (67,369)
-------- ---------- --------- ---------- ----------- -----------
Balance at
September 30, 2002 $ 16,842 $3,985,312 $(324,583) $1,636,140 $23,403,613 $28,717,324
======== ========== ========= ========== =========== ===========
Beginning Balance At
March 31, 2003 $ 25,298 $3,995,230 $(444,685) $1,444,585 $25,019,525 $30,039,953
Net Income - - - - 1,812,520 1,812,520
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Losses On Securities
Available For Sale - - - (1,280,584) - (1,280,584)
-----------
Comprehensive Income 531,936
Decrease In Indirect
Guarantee of ESOP Debt - - 107,713 - - 107,713
Exercise Of Stock Options 19 10,214 - - - 10,233
Cash Dividends ($.02 per
share) - - - - (101,231) (101,231)
-------- ---------- --------- ---------- ----------- -----------
Balance at
September 30, 2003 $ 25,317 $4,005,444 $(336,972) $ 164,001 $26,730,814 $30,588,604
======== ========== ========= ========== =========== ===========
See accompanying notes to consolidated financial statements.
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended September 30,
-----------------------------
2003 2002
----------- ------------
Cash Flows From Operating Activities:
Net Income $1,812,520 $1,530,941
Adjustments To Reconcile Net Income To Net
Cash Provided By Operating Activities:
Depreciation Expense 404,527 401,276
Amortization Of Intangibles - 185,210
Discount Accretion And Premium Amortization 371,748 (72,787)
Provisions For Losses On Loans And Real
Estate 600,000 900,000
Gain On Sale Of Investment Securities
Available For Sale - (4,425)
Gain On Sale Of Loans (1,056,236) (626,000)
Gain On Sale Of Real Estate (41,496) (44,467)
Amortization Of Deferred Fees On Loans (105,060) (100,052)
Proceeds From Sale Of Loans Held For Sale 49,676,277 34,438,586
Origination Of Loans For Sale (46,098,909) (36,182,793)
(Increase) Decrease In Accrued Interest
Receivable:
Loans 69,283 118,735
Mortgage-Backed Securities (78,466) (83,174)
Investments (26,551) (102,085)
Increase In Advance Payments By Borrowers 286,090 222,434
(Gain) Loss on Disposition of Premises
and Equipment (150) -
Other, Net (1,459,054) (638,624)
----------- -----------
Net Cash Provided (Used) By Operating
Activities 4,354,523 (57,225)
----------- -----------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Available For Sale 34,006,208 10,199,004
Principal Repayments On Mortgage-Backed
Securities Held To Maturity 491,582 37,644
Purchase Of Investment Securities Available
For Sale - (35,020,625)
Purchase Of Investment Securities Held To
Maturity (62,945,138) -
Purchase Of Mortgage-Backed Securities
Available For Sale (71,060,405) (33,542,209)
Maturities Of Investment Securities
Available For Sale 26,214,104 22,503,614
Maturities of Investment Securities Held
To Maturity 22,030,331 52,437
Proceeds From Sale of Securities Available
For Sale - 985,938
Purchase Of FHLB Stock (2,281,700) -
Redemption Of FHLB Stock 1,351,300 291,900
(Increase) Decrease In Loans To Customers 2,014,023 (2,600,823)
Proceeds From Sale Of Repossessed Assets 463,746 541,867
Purchase And Improvement Of Premises And
Equipment (1,662,580) (518,183)
Proceeds from Sale of Premises And
Equipment 150 -
----------- -----------
Net Cash Used By Investing Activities (51,378,379) (37,069,436)
----------- -----------
Cash Flows From Financing Activities:
Increase In Deposit Accounts 25,451,829 23,562,788
Proceeds From FHLB Advances 89,875,000 46,125,000
Repayment Of FHLB Advances (70,318,000) (34,168,000)
Net Proceeds (Repayment) Of Other
Borrowings 1,744,120 (419,928)
Dividends To Shareholders (101,231) (67,370)
Proceeds From Exercise of Stock Options 10,233 -
----------- -----------
Net Cash Provided By Financing Activities 46,661,951 35,032,490
----------- -----------
(Continued)
5
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended September 30,
-----------------------------
2003 2002
----------- ------------
Net Increase (Decrease) In Cash And Cash
Equivalents (361,905) (2,094,171)
Cash And Cash Equivalents At Beginning Of
Period 8,238,690 11,528,411
----------- -----------
Cash And Cash Equivalents At End Of Period $ 7,876,785 $ 9,434,240
=========== ===========
Supplemental Disclosure Of Cash Flows
Information:
Cash Paid During The Period For Interest $ 4,824,535 $ 5,181,206
Cash Paid During The Period For Income
Taxes $ 935,888 $ 1,362,575
Additions To Repossessed Acquired Through
Foreclosure $ 343,800 $ 484,400
Increase (Decrease) In Unrealized Net Gain
On Securities Available For Sale, Net Of
Taxes $(1,280,584) $ 1,819,475
See accompanying notes to consolidated financial statements.
6
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and accounting principles generally
accepted in the United States of America; therefore, they do not include all
disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows. Such statements are unaudited but, in
the opinion of management, reflect all adjustments, which are of a normal
recurring nature and necessary for a fair presentation of results for the
selected interim periods. Users of financial information produced for interim
periods are encouraged to refer to the footnotes contained in our 2003 Annual
Report to Shareholders when reviewing interim financial statements. The
results of operations for the six month period ended September 30, 2003 are
not necessarily indicative of the results may be expected for the entire
fiscal year. This Form 10-Q contains certain forward-looking statements with
respect to the financial condition, results of operations, and business of
Security Federal Corporation. These forward-looking statements involve
certain risks and uncertainties. Factors that may cause actual results to
differ materially from those anticipated by such forward-looking statements
include, but are not limited to, changes in interest rates, changes in the
regulatory environment, changes in general economic conditions and inflation,
and changes in the securities market. Management cautions readers of this
Form 10-Q not to place undue reliance on the forward-looking statements
contained herein.
2. Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Security Federal Corporation (the "Company") and its wholly owned
subsidiary, Security Federal Bank (the "Bank"), and the Bank's wholly owned
subsidiaries, Security Federal Insurance, Inc. ("SFINS"), Security Federal
Investments, Inc. ("SFINV"), Security Federal Trust, Inc. ("SFT"), and
Security Financial Services Corporation ("SFSC"). The Bank is primarily
engaged in the business of accepting savings and demand deposits and
originating mortgage and other loans to individuals and small businesses for
various personal and commercial purposes. SFINS, SFINV, and SFT were formed
during fiscal 2002 and began operation during the December 2001 quarter.
SFINS is an insurance agency offering business, health, home and life
insurance. SFINV engages primarily in investment brokerage services. SFT
offers trust, financial planning and financial management services. SFSC is
currently inactive.
3. Loans Receivable, Net
Loans receivable, net, at September 30, 2003 and March 31, 2003 consisted of
the following:
Loans held for sale were $1,149,366 and $3,670,498 at September 30, 2003 and
March 31, 2003, respectively.
Loans Held For Investment: September 30, 2003 March 31, 2003
------------------ --------------
Residential Real Estate $100,539,858 $ 99,948,293
Consumer 46,162,390 46,594,413
Commercial Business & Real Estate 106,887,418 106,996,940
------------ ------------
253,589,666 253,539,646
------------ ------------
Less:
Allowance For Possible Loan Loss 5,376,962 4,911,224
Loans In Process 11,423,076 8,990,687
Deferred Loan Fees 157,233 152,577
------------ ------------
16,957,271 14,054,488
------------ ------------
$236,632,395 $239,485,158
============ ============
The following is a reconciliation of the allowance for loan losses for the six
months ending:
September 30, 2003 September 30, 2002
------------------ ------------------
Beginning Balance $ 4,911,224 $ 3,689,079
Provision 600,000 900,000
Charge-offs (238,893) (314,383)
Recoveries 104,631 148,205
------------ ------------
Ending Balance $ 5,376,962 $ 4,422,901
============ ============
7
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
4. Securities
Investment and Mortgage-Backed Securities, Held to Maturity
- -----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities held to maturity are as
follows:
Gross Gross
Amortized Unrealized Unrealized
September 30, 2003 Cost Gains Losses Fair Value
- ------------------ ----------- ---------- ----------- ----------
US Government and Agency
Obligations $61,996,971 $172,507 $736,264 $61,433,214
Mortgage-Backed Securities 449,702 29,314 - 479,016
----------- -------- -------- -----------
Total $62,446,673 $201,821 $736,264 $61,912,230
=========== ======== ======== ===========
March 31, 2003
- --------------
US Government and Agency
Obligations $21,025,603 $ 36,153 $ 14,071 $21,047,685
Mortgage-Backed Securities 940,930 51,592 - 992,522
----------- -------- -------- -----------
Total $21,966,533 $ 87,745 $ 14,071 $22,040,207
=========== ======== ======== ===========
Investment And Mortgage-Backed Securities, Available For Sale
- -------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities
available for sale are as follows:
Gross Gross
Amortized Unrealized Unrealized
September 30, 2003 Cost Gains Losses Fair Value
- ------------------ ----------- ---------- ----------- ----------
US Government and Agency
Obligations $ 26,670,638 $ 537,806 $ - $ 27,208,444
Mortgage-Backed Securities 141,562,581 994,987 1,268,448 141,289,120
------------ ---------- ---------- ------------
Total $168,233,219 $1,532,793 $1,268,448 $168,497,564
============ ========== ========== ============
March 31, 2003
- --------------
US Government and Agency
Obligations $ 52,929,442 $ 822,283 $ 13,094 $ 53,738,631
Mortgage-Backed Securities 104,892,347 1,637,286 118,002 106,411,631
------------ ---------- ---------- ------------
Total $157,821,789 $2,459,569 $ 131,096 $160,150,262
============ ========== ========== ============
8
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
5. Deposit Accounts
A summary of deposit accounts by type with weighted average rates is as
follows:
September 30, 2003 March 31, 2003
-------------------- -------------------
Demand Accounts: Balance Rate Balance Rate
------------------- -------------------
Checking $ 80,897,746 0.41% $ 82,521,610 0.50%
Money Market 140,105,831 1.96% 102,396,950 2.21%
Regular Savings 18,054,791 0.99% 16,455,391 1.23%
------------ ------------
Total Demand Accounts 239,058,368 1.36% 201,373,951 1.43%
------------ ------------
Certificate Accounts:
0 - 4.99% 133,663,605 144,633,770
5.00 - 6.99% 11,203,457 12,437,463
7.00 - 8.99% - 28,417
------------ ------------
Total Certificate Accounts 144,867,062 2.34% 157,099,650 2.92%
------------ ------------
Total Deposit Accounts $383,925,430 1.73% $358,473,601 2.08%
============ ============
6. Advances From Federal Home Loan Bank
Federal Home Loan Bank Advances are summarized by year of maturity and
weighted average interest rate in the table below:
September 30, 2003 March 31, 2003
------------------- ------------------
Fiscal Year Due: Balance Rate Balance Rate
------------------ ------------------
2004 $11,275,000 1.21% $ 1,700,000 1.48%
2005 10,054,000 6.14% 10,072,000 6.14%
2006 23,000,000 4.93% 23,000,000 4.93%
2007 5,000,000 2.64% - -
Thereafter 20,000,000 3.23% 15,000,000 3.09%
----------- -----------
Total Advances $69,329,000 3.85% $49,772,000 4.50%
=========== ===========
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 $39.2 million in investment securities at September 30, 2003.
Advances are subject to prepayment penalties.
The following table shows callable FHLB advances as of the dates indicated.
These advances are also included in the above table. All callable advances
are callable at the option of the FHLB. If an advance is called, the Bank has
the option to payoff the advance without penalty, re-borrow funds on different
terms, or convert the advance to a three-month floating rate advance tied to
LIBOR.
As of September 30, 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 3.35% 1 Time Call 11/07/07
03/10/03 03/10/06 5,000,000 1.15% Multi-Call 03/10/04 and
quarterly
thereafter
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 08/10/02 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 3.35% 1 Time Call 11/07/07
03/10/03 03/10/06 5,000,000 1.15% Multi-Call 03/10/04 and
quarterly
thereafter
9
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
7. Regulatory Matters
The following table reconciles the Bank's shareholders' equity to its various
regulatory capital positions:
September 30, 2003 March 31, 2003
(Dollars in Thousands)
-----------------------------------
Bank's Shareholders' Equity $30,851 $30,324
Unrealized Gain On Available For Sale Of
Securities, Net Of Tax (164) (1,445)
Reduction For Goodwill And Other Intangibles - -
------- -------
Tangible Capital 30,687 28,879
Qualifying Core Deposits And Intangible Assets - -
------- -------
Core Capital 30,687 28,879
Supplemental Capital 3,162 3,064
Assets Required To Be Deducted (102) (152)
======= =======
Risk-Based Capital $33,747 $31,791
======= =======
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at September 30, 2003:
(Dollars in Thousands)
----------------------------------------------------------------------
Amt. Required % Required Actual Amt. Actual % Excess Amt. Excess %
----------------------------------------------------------------------
Tangible
Capital $ 9,856 2.0% $30,687 6.23% $20,831 4.23%
Tier 1
Leverage
(Core)
Capital 19,706 4.0% 30,687 6.23% 10,981 2.23%
Total Risk-
Based
Capital 20,234 8.0% 33,747 13.34% 13,513 5.34%
Tier 1 Risk-
Based
(Core)
Capital 10,117 4.0% 30,687 12.13% 20,570 8.13%
8. Earnings Per Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS
128 specifies the computation, presentation and disclosure requirements for
earnings per share ("EPS") for entities with publicly held common stock or
potential common stock such as options, warrants, convertible securities or
contingent stock agreements if those securities trade in a public market.
This standard specifies computation and presentation requirements for both
basic EPS and, for entities with complex capital structures, diluted EPS.
Basic EPS is computed by dividing net income by the weighted average number of
common shares outstanding. Diluted EPS is similar to the computation of basic
EPS except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. The dilutive effect of options
outstanding under the Company's stock option plan is reflected in diluted
earnings per share by application of the treasury stock method.
The following table provides a reconciliation of the numerators and
denominators of the Basic and Diluted EPS computations:
For the Quarter Ended
------------------------------------------------------------
September 30, 2003
------------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ---------
Basic EPS $889,861 2,512,600 $ 0.35
Effect of Diluted
Securities:
Stock Options - 38,090 -
ESOP - 17,911 -
Diluted EPS $889,861 2,568,601 $ 0.35
10
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
For the Quarter Ended
------------------------------------------------------------
September 30, 2002
------------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ---------
Basic EPS $813,791 2,509,707 $ 0.32
Effect of Diluted
Securities:
Stock Options - 35,458 -
ESOP - 20,804 -
-------- --------- ------
Diluted EPS 813,791 2,565,969 $ 0.32
For the Six Months Ended
------------------------------------------------------------
September 30, 2003
------------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ---------
Basic EPS $1,812,520 2,511,563 $ 0.72
Effect of Diluted
Securities:
Stock Options - 33,238 (0.01)
ESOP - 18,649 -
---------- --------- ------
Diluted EPS 1,812,520 2,563,450 $ 0.71
For the Six Months Ended
------------------------------------------------------------
September 30, 2002
------------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ---------
Basic EPS $1,530,941 2,508,647 $ 0.61
Effect of Diluted
Securities:
Stock Options - 37,554 (0.01)
ESOP - 19,182 -
---------- --------- ------
Diluted EPS $1,530,941 2,565,383 $ 0.60
9. Stock-Based Compensation
The Company has a stock-based employee compensation plan which is accounted
for under the recognition and measurement principles of Accounting Principles
Board ("APB" Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations). No stock-based employee compensation cost is
reflected in net income, as all stock options granted under these plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share as if we had applied the fair value recognition provisions
of Financial Accounting Standards Board ("FASB") SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation for the six
months and the three months ended September 30, 2003 and 2002.
11
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
Three Months Ended Six Months Ended
September 30, September 30,
2003 2002 2003 2002
--------- -------- ---------- ----------
Net income, as reported $889,861 $813,791 $1,812,520 $1,530,941
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effect $(65,114) $(51,451) $ (130,228) $ (102,902)
Net Income, Pro Forma $824,747 $762,340 $1,682,292 $1,428,039
Basic earnings share:
As Reported $ .36 $ .33 $ .73 $ .61
Pro Forma $ .33 $ .31 $ .67 $ .57
Diluted earnings share:
As reported $ .35 $ .32 $ .71 $ .60
Pro forma $ .33 $ .30 $ .66 $ .56
10. Subsequent Events
On October 24, 2003, the Company announced it had reached a verbal agreement
to sell its Denmark, SC branch office to South Carolina Bank and Trust of
Columbia, SC. The branch has deposits of approximately $15 million and loans
of approximately $7 million. The written agreement is expected to be signed
in November 2003 and the transaction completed during the March 2004 quarter.
12
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Changes in Financial Condition
Total assets of the Company increased $47.7 million or 10.7% during the six
months ended September 30, 2003 primarily as a result of an increase of $48.8
million or 26.8% in total investment securities offset partially by a $5.4
million or 2.2% decrease in net loans receivable.
Residential real estate loans, net of loans in process, decreased $1.8 million
or 2.0% during the six months ended September 30, 2003, while consumer loans
decreased $432,000 or 0.9% and commercial loans decreased $110,000 or 0.1%.
Loans held for sale decreased $2.5 million to $1.1 million during the same
period.
Repossessed assets decreased $79,000 to $73,000 during the six months ended
September 30, 2003.
Non-accrual loans totaled $1.9 million at September 30, 2003 compared to $1.0
million at March 31, 2003. The Bank classifies all loans as non-accrual when
they become 90 days or more delinquent. At September 30, 2003, the Bank held
$1.3 million in impaired loans compared to $1.2 million at March 31, 2003.
The Bank includes troubled debt restructuring ("TDR") within the meaning of
SFAS No. 114 in impaired loans. At September 30, 2003, the Bank had seven
loans totaling $660,000 in TDR's compared to seven loans totaling $665,000 at
March 31, 2003. At September 30, 2003 one commercial loan TDR of $201,000 was
more than 90 days delinquent and on non-accrual status. That loan is secured
by commercial real estate. An unsecured commercial loan TDR of $25,000
secured by a residential dwelling was more than 60 days delinquent. Two
consumer loans secured by residential mortgages totaling $75,000 were more
than 30 days delinquent. The other three TDR's, a $215,000 commercial loan
secured by equipment, an $85,000 consumer loan secured by a residential
dwelling and a $59,000 commercial loan secured by two rental properties were
current as of September 30, 2003.
Deposits increased $25.5 million or 7.1% during the six months ended September
30, 2003 as a result of competitive rates offered by the Bank. Federal Home
Loan Bank ("FHLB") advances increased $19.6 million or 39.3% during the same
period due to investment leverage strategies employed to increase net interest
income. Other borrowings, consisting of commercial repurchase sweep accounts,
increased $1.7 million or 41.6% to $5.9 million during the six-month period.
The Board of Directors of the Company declared the 50th and 51st consecutive
quarterly dividends of $.02 per share per quarter, in April and July 2003,
which totaled $102,000. The employee stock ownership trust of the Company
paid $108,000 of principal on the employee stock ownership plan loan during
the six-month period. Unrealized net gains on securities available for sale,
net of tax, decreased $1.3 million during the six months ended September 30,
2003. The Company's net income for the six month period was $1.8 million.
These items combined to increase shareholders' equity by $549,000 or 1.8%
during the six months ended September 30, 2003. Book value per share was
$12.17 at September 30, 2003 compared to $11.98 at March 31, 2003.
Liquidity and Capital Resources
In accordance with Office of Thrift Supervision ("OTS") regulations, the
Company is required to maintain sufficient liquidity to operate in a safe and
sound manner. The Company's current liquidity level is deemed adequate to
meet the requirements of normal operations, potential deposit outflows, and
loan demand while still allowing for optimal investment of funds and return on
assets. Loan repayments and maturities of investments are a significant source
of funds, whereas loan disbursements and the purchase of investments are a
primary use of the Company's funds. During the six months ended September 30,
2003, loan repayments exceeded loan disbursements resulting in a $5.4 million
or 2.2% decrease in total net loans receivable.
Deposits and other borrowings are also an important source of funds for the
Company. During the six months ended September 30, 2003, deposits increased
$25.5 million while FHLB advances increased $19.6 million. The Bank had $59.0
million in additional borrowing capacity at the FHLB at the end of the period.
At September 30, 2003, the Bank had $104.3 million of certificates of deposit
maturing within one year. Based on previous experience, the Bank anticipates
a major portion of these certificates will be renewed.
13
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Liquidity and Capital Resources, Continued
Through its operations the Bank, has made contractual commitments to extend
credit in the ordinary course of its business activities. These commitments
are legally binding agreements to lend money to our customers at predetermined
interest rates for a specified period of time. At September 30, 2003, the
Bank had $25.8 million in unused consumer lines of credit, including home
equity lines and unsecured lines. The Bank also had $9.0 million in unused
commercial lines of credit committed to customers. The majority of the $34.8
million will not be drawn at the same time. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary, by the Bank upon extension of
credit, is based on our credit evaluation of the borrower. Collateral varies
but may include accounts receivable, inventory, property, plant and equipment,
commercial and residential real estate. The Bank manages the credit risk on
these commitments by subjecting them to normal underwriting and risk
management processes.
The Company completed construction of a full service branch office in
Lexington, South Carolina, which opened in August 2003. The total cost of the
two-story building, which was built on land on which the Company has a
long-term lease, was $1.4 million. The Company plans to lease the second
floor for rental income.
Historically, the Company's cash flow from operating activities has been
relatively stable. The cash flow 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 as a result of increases in FHLB advances.
Management believes that the Company's liquidity will continue to be supported
by the Company's deposit base and borrowing capacity during the next year.
Critical Accounting Policies
We have adopted various accounting policies which govern the application of
accounting principles generally accepted in the United States in the
preparation of our financial statements. Our significant accounting policies
are described in the footnotes to the consolidated financial statements at
March 31, 2003 as filed on our annual report on Form 10-K. Certain accounting
policies involve significant judgements and assumptions by us which have a
material impact on the carrying value of certain assets and liabilities. We
consider these accounting policies to be critical accounting policies. The
judgements and assumptions we use are based on historical experience and other
factors, which we believe to be reasonable under the circumstances. Because
of the nature of the judgements and assumptions we make, actual results could
differ from these judgements and estimates which could have a material impact
on our carrying values of assets and liabilities and our results of
operations.
We believe the allowance for loan losses is a critical accounting policy that
requires the most significant judgements and estimates used in preparation of
our consolidated financial statements. Refer to the portion of this
discussion that addresses our allowance for the loan losses for a description
of our processes and methodology for determining our allowance for loan
losses.
Accounting and Reporting Changes
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-based Compensation Transition and
Disclosure", an amendment of FASB Statement No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and Accounting Pronouncement Board ("APB") Opinion No. 28,
"Interim Financial Reporting", to require disclosure in the summary of
significant accounting policies of the effects of an entity's accounting
policy with respect to stock-based employee compensation on reported net
income and earnings per share in annual and interim financial statements.
While SFAS No. 148 does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of SFAS No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic
value method of APB Opinion No. 25. The provisions of SFAS No. 148 are
effective for annual financial statements for fiscal years ending after
December 15, 2002, and for financial reports containing condensed financial
statements for interim period beginning after December 15, 2002. The Company
has adopted the disclosure provisions of SFAS No. 148 which had no impact on
the financial condition or operating results of the Company.
14
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Accounting and Reporting Changes, Continued
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts and loan commitments that relate to
the origination of mortgage loans held for sale, and for hedging activities
under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered
into or modified after June 30, 2003. The adoption of SFAS No. 149 will not
have a material impact on the financial condition or operating results of the
Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances.) Many of those
instruments were previously classified as equity. SFAS No. 150 is generally
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a
material impact on the financial condition or operating results of the
Company.
In June 2003, the American Institute of Certified Public Accountants issued an
exposure draft of a proposed Statement of Position ("SOP"), "Allowance for
Credit Losses". The proposed SOP addresses the recognition and measurement by
creditors of the allowance for credit losses related to all loans, as that
term is defined in SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan." The proposed SOP provides that the allowance for credit losses
reported on a creditor's balance sheet should consist only of (1) a component
for individual loan impairment recognized and measured pursuant to FASB
Statement No. 114 and (2) one or more components of collective loan impairment
recognized pursuant to FASB Statement No. 5, "Accounting for Contingencies",
and measured in accordance with the guidance in the proposed SOP. The
provisions of the proposed SOP would be effective for financial statements for
fiscal years beginning after December 15, 2003, with earlier application
permitted. The effect of initially applying the provisions of the proposed SOP
would be reported as a change in accounting estimate. Comments on the
exposure draft were by September 19, 2003. The effect on the financial
condition or operating results of the Company related to the adoption of this
proposed SOP has not been determined, but would most likely be material.
Impact of Inflation and Changing Prices
The consolidated financial statements, related notes, and other financial
information presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in relative purchasing power over time due to inflation.
Unlike industrial companies, substantially all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest
rates generally have a more significant impact on a financial institution's
performance than does inflation. See "Item 3. Quantitative and Qualitative
Disclosures about Market Risk" for additional discussions of changes in
interest rates.
15
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
- -------------------------------------------------------------------
Net Income
Net income was $890,000 for the three months ended September 30, 2003,
representing an increase in earnings of $76,000 or 9.4% from $814,000 for the
same period in 2002.
Net Interest Income
Net interest income decreased $256,000 or 7.4% to $3.2 million during the
three months ended September 30, 2003 as a result of a decrease in total
interest income offset in part by a decrease in interest expense. Interest
earning assets increased an average of $70.5 million while average
interest-bearing liabilities increased $58.5 million. The interest rate
spread decreased 72 basis points to 2.63% during the three months ended
September 30, 2003 compared to the same period in 2002.
Interest income on loans decreased $465,000 or 10.8% to $3.9 million during
the three months ended September 30, 2003 as a result of the yield in the loan
portfolio decreasing 92 basis points despite the average loan portfolio
balance increasing by $4.5 million. Interest income from investment,
mortgage-backed, and other securities decreased $33,000 or 1.9% due to a
decrease of 141 basis points in the average yield in the portfolio although
the average balance of the portfolio increased $65.9 million. Total interest
income decreased $498,000 or 8.3% to $5.5 million for the three months ended
September 30, 2003 from $6.0 million for the same period in 2002.
Total interest expense decreased $241,000 or 9.5% to $2.3 million during the
three months ended September 30, 2003 compared to $2.5 million for the same
period one-year earlier. Interest expense on deposits decreased $312,000 or
15.8% during the period as average interest bearing deposits grew $43.6
million compared to the average balance in 2002 while the cost of deposits
decreased 68 basis points. Interest expense on advances and other borrowings
increased $71,000 or 12.7% as the cost of debt outstanding decreased 131 basis
points during the 2003 period compared to 2002 while average total borrowings
outstanding increased approximately $20.9 million.
Provision for Loan Losses
The Bank's provision for loan losses was $300,000 during the three months
ended September 30, 2003 compared to $450,000 for the quarter ended September
30, 2002. The amount of the provision is determined by management's on-going
monthly analysis of the loan portfolio. Non-accrual loans, which are loans
delinquent 90 days or more, were $1.9 million at September 30, 2003 compared
to $1.0 million at March 31, 2003. The ratio of allowance for loan losses to
the Company's total loans was 2.21% at September 30, 2003 compared to 1.98% at
March 31, 2003. Net charge-offs were $46,000 during the three months ended
September 30, 2003 compared to $68,000 during the same period in 2002.
Other Income
Total other income increased $176,000 or 20.0% to $1.1 million during the
three months ended September 30, 2003 compared to the same period a year ago.
Gain on sale of loans increased $78,000 or 23.1% to $414,000 during the period
as the origination and sale of fixed rate mortgages increased due to the low
rates offered on fixed rate loans industry wide. Loan servicing fees
increased $2,000 to $52,000 while service fees on deposit accounts increased
$20,000 or 6.2% due to a concerted effort to reduce waived service charges.
Other miscellaneous income including credit life insurance commissions, net
gain on sale of repossessed assets, safe deposit rental income, annuity and
stock brokerage commissions, trust fees, and other miscellaneous fees
increased $81,000 or 47.3% during the three months ended September 30, 2003.
16
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003, CONTINUED
- ------------------------------------------------------------------------------
General and Administrative Expenses
General and administrative expenses decreased $2,000 or 0.1% to $2.6 million
during the three months ended September 30, 2003 compared to the same period
in 2002. Salaries and employee benefits expense decreased $29,000 or 2.0%.
Occupancy expense increased $33,000 due primarily to the land lease for the
Lexington branch, which opened in August 2003. Advertising expense increased
$36,000 to $78,000 primarily to promote the new branch office. Depreciation
and maintenance of equipment expense increased $24,000 or 9.7% during the
quarterly period. FDIC insurance premiums increased slightly by $1,000 during
the quarter ended September 30, 2003. The amortization of intangibles expense
decreased $69,000 to zero during the quarter. At September 30, 2003, the
Company had no further intangibles on the balance sheet. Other miscellaneous
expense, consisting of legal, professional, and consulting expenses,
stationery and office supplies, and other sundry expenses, increased $2,000 or
0.3% for the three months ended September 30, 2003 compared to the three
months ended September 30, 2002.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2003
- -----------------------------------------------------------------
Net Income
Net income was $1.8 million for the six months ended September 30, 2003,
representing an increase in earnings of $282,000 or 18.4% from $1.5 million
for the same period in 2002.
Net Interest Income
Net interest income decreased $521,000 or 7.5% to $6.4 million during the six
months ended September 30, 2003 as a result of a decrease in total interest
income offset in part by a decrease in interest expense. Average interest
earning assets increased $67.8 million while average interest-bearing
liabilities increased $61.5 million. The interest rate spread decreased 74
basis points to 2.69% during the six months ending September 30, 2003 compared
to the same period in 2002.
Interest income on loans decreased $870,000 or 10.0% to $7.8 million during
the six months ended September 30, 2003 as a result of the yield in the loan
portfolio decreasing 92 basis points despite the average loan portfolio
balance increasing $6.3 million. Interest income from investment,
mortgage-backed, and other securities decreased $15,000 or 0.5% due to a 144
basis points decrease in the average yield in the portfolio although the
average balance of the portfolio increased $61.5 million. Total interest
income decreased $885,000 or 7.4% to $11.1 million for the six months ended
September 30, 2003 from $12.0 million for the same period in 2002.
Total interest expense decreased $365,000 or 7.2% to $4.7 million during the
six months ended September 30, 2003 compared to $5.1 million for the same
period one-year earlier. Interest expense on deposits decreased $499,000 or
12.7% during the period as average interest bearing deposits grew $43.6
million compared to the average balance in 2002 while the cost of deposits
decreased 63 basis points. Interest expense on advances and other borrowings
increased $135,000 or 12.1% as the cost of debt outstanding decreased 109
basis points during the 2003 period compared to 2002 while average total
borrowings outstanding increased approximately $17.9 million.
Provision for Loan Losses
The Bank's provision for loan losses was $600,000 during the six months ended
September 30, 2003 compared to $900,000 for the same period ending September
30, 2002. Net charge-offs were $134,000 during the six months ended September
30, 2003 compared to $166,000 for the six months ended September 30, 2002.
17
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2003, CONTINUED
- ----------------------------------------------------------------------------
Other Income
Total other income increased $578,000 or 34.4% to $2.3 million during the six
months ended September 30, 2003 compared to the same period a year ago. Gain
on sale of loans increased $430,000 or 68.7% to $1.1 million during the period
as the origination and sale of fixed rate mortgages increased due to the low
rates offered on fixed rate loans industry wide. Loan servicing fees
increased $1,000 to $102,000 while service fees on deposit accounts increased
$90,000 or 14.9% due to a concerted effort to reduce waived service charges.
Other miscellaneous income including credit life insurance commissions, net
gain on sale of repossessed assets, safe deposit rental income, annuity and
stock brokerage commissions, and trust fees, and other miscellaneous fees
increased $62,000 or 17.6% during the six months ended September 30, 2003.
General and Administrative Expenses
General and administrative expenses decreased $36,000 or 0.7% to $5.2 million
during the six months ended September 30, 2003 compared to the same period in
2002. Salaries and employee benefits expense increased $93,000 due to an
increase in full time equivalents in order to prepare for the opening of the
Lexington branch during quarter ended September 30, 2003 and as a result of
normal annual salary increases. Occupancy expense increased $57,000 due
primarily to the land lease for the Lexington branch office, which opened in
August 2003. Advertising expense decreased $14,000 or 11.8% while the
depreciation and maintenance of equipment expense increased $19,000 or 3.7%
during the six-month period. FDIC insurance premiums increased minimally by
$2,000 during the 2003 period. The amortization of intangibles expense
decreased $185,000 to zero during the period. At September 30, 2003, the
Company had no further intangibles on the balance sheet. Other miscellaneous
expense, consisting of legal, professional, and consulting expenses,
stationery and office supplies, and other sundry expenses, decreased $8,000 or
0.8% for the six months ended September 30, 2003 compared to the six months
ended September 30, 2002.
18
Security Federal Corporation and Subsidiaries
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, investment, deposit and borrowing activities.
Management actively monitors and manages its interest rate risk exposure.
Although the Company manages other risks such as credit quality and liquidity
risk in the normal course of business, management considers interest rate risk
to be its most significant market risk that could potentially have the largest
material effect on the Company's financial condition and results of
operations. Other types of market risks such as foreign currency exchange
rate risk and commodity price do not arise in the normal course of the
Company's business activities.
The Company's profitability is affected by fluctuations in the market interest
rate. Management's goal is to maintain a reasonable balance between exposure
to interest rate fluctuations and earnings. A sudden and substantial increase
or decrease in interest rates may adversely impact the Company's earnings to
the extent that the interest rates on interest-earning assets and
interest-bearing liabilities do not change at the same rate, to the same
extent or on the same basis. The Company monitors the impact of changes in
interest rates on its net interest income using a test that measures the
impact on net interest income and net portfolio value of an immediate change
in interest rates in 100 basis point increments and by measuring the Bank's
interest sensitivity gap ("Gap"). Net portfolio value is defined as the net
present value of assets, liabilities, and off-balance sheet contracts. Gap is
the amount of interest sensitive assets repricing or maturing over the next
twelve months compared to the amount of interest sensitive liabilities
maturing or repricing in the same time period. Recent net portfolio value
reports furnished by the OTS indicate that the Bank's interest sensitivity has
improved in recent quarters over the past year. The Bank has rated favorably
compared to thrift peers concerning interest rate sensitivity.
For the three and six month periods ended September 30, 2003, the Bank's
interest rate spread, defined as the average yield on interest bearing assets
less the average rate paid on interest bearing liabilities was 2.63% and
2.69%, respectively. As of the year ended March 31, 2003, the interest rate
spread was 3.00%. The interest rate spread has decreased due to investment
securities growing faster than loan receivables. Loan receivables earn a
higher yield than investment securities. Also, loan yields are falling due to
refinancing of residential and commercial loans. If interest rates were to
increase suddenly and significantly, the Bank's net interest income and net
interest spread would be compressed.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Sections 13a -
15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Act")) was
carried out under the supervision and with the participation of the Company's
Chief Executive Officer, Chief Financial Officer and several other members of
the Company's senior management as of the end of the period covered by this
quarterly report. The Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures as
currently in effect are effective in ensuring that the information required to
be disclosed by the Company in the reports it files or submits under the Act
is (i) accumulated and communicated to the Company's management (including the
Chief Executive Officer and Chief Financial Officer) in a timely manner, and
(ii) recorded, processed, summarized and reported within the time period
specified in the SEC's rules and forms.
(b) Changes in Internal Controls: In the quarter and six-months ended
September 30, 2003, the Company did not make any significant changes in, nor
take any corrective actions regarding, its internal controls or other factors
that could significantly affect these controls.
19
Security Federal Corporation and Subsidiaries
Part II: Other Information
Item 1 Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Company is a
party to legal proceedings in the ordinary course of business wherein
it enforces its security interest in mortgage loans it has made.
Item 2 Changes In Securities And Use Of Proceeds
-----------------------------------------
Not applicable.
Item 3 Defaults Upon Senior Securities
-------------------------------
None
Item 4 Submission Of Matters To A Vote Of Security Holders
---------------------------------------------------
The election of directors was presented for vote to the shareholders
at the Annual Meeting held on July 17, 2003. Votes for T. Clifton
Weeks were as follows: 2,036,100 votes for, 3,538 votes withheld.
Votes for Timothy W. Simmons were as follows: 2,036,100 votes for,
3,538 votes withheld. Votes for Thomas C. Clark were as follows:
2,036,100 votes for, 3,538 votes withheld. Directors continuing in
office are Gasper L. Toole, III, Thomas L. Moore, J. Chris Verenes,
Harry O. Weeks, Jr., Robert E. Alexander and William Clyburn.
Item 5 Other Information
-----------------
None
Item 6 Exhibits And Reports On Form 8-K
--------------------------------
Exhibits:
3.1 Articles Of Incorporation (1)
3.2 Articles Of Amendment, Dated August 28, 1998, To Articles Of
Incorporation
3.3 Bylaws (2)
10 Executive Compensation Plans And Arrangements:
Salary Continuation Agreements (3)
Amendment One To Salary Continuation Agreements (4)
Stock Option Plan (3)
1999 Stock Option Plan (5)
2002 Stock Option Plan (6)
Incentive Compensation Plan (3)
31.1 Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act.
31.1 Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act.
32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley
Act.
(1) Filed as an exhibit to the Company's June 23, 1998 proxy statement and
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Form 8-K filed September 1, 1998 and
incorporated herein by reference.
(3) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended March 31, 1993 and incorporated herein by reference.
20
Security Federal Corporation and Subsidiaries
Exhibits And Reports on Form 8-K, Continued
(4) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended December 30, 1993 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Registration Statement on Form S-8
filed March 2, 2002 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's June 19, 2002 proxy statement and
incorporated herein by reference.
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: November 7, 2003 By:/s/Timothy W. Simmons
----------------------------
Timothy W. Simmons
President
Duly Authorized Representative
Date: November 7, 2003 By:/s/Roy G. Lindburg
----------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
21
EXHIBIT 31.1
Certification of the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
Certification
I, Timothy W. Simmons, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 7, 2003
/s/Timothy W. Simmons
----------------------------
Timothy W. Simmons
President and Chief Executive Officer
23
EXHIBIT 31.1
Certification of the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
Certification
I, Roy G. Lindburg, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 7, 2003
/s/Roy G. Lindburg
----------------------------
Roy G. Lindburg
Chief Financial Officer
24
EXHIBIT 32
Certification Pursuant to Section 906 of the Sarbanes Oxley Act
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF SECURITY FEDERAL CORPORATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and in connection with this Quarterly Report on Form 10-Q that:
1. the report fully complies with the requirements of Section 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all
material respects, the company's financial condition and results of
operations.
/s/Timothy W. Simmons /s/Roy G. Lindburg
- ------------------------------- ---------------------------------
Timothy W. Simmons Roy G. Lindburg
Chief Executive Officer Chief Financial Officer
Dated: November 7, 2003