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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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: SHARES:
-------------------- ---------------------- ---------
Common Stock, par
value $0.01 per share January 31, 2004 2,533,291
INDEX
- ------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at December 31, 2003 and
March 31, 2003 1
Consolidated Statements of Income for the Three and
Nine Months Ended December 31, 2003 and 2002 2
Consolidated Statements of Shareholders' Equity at
December 31, 2002 and 2003 4
Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis - of Results of
Operations and Financial Condition 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk 20
Item 4. Controls and Procedures 20
- ------------------------------------------------------------------------------
PART II. OTHER INFORMATION
Other Information 21
Signatures 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
December 31, 2003 March 31, 2003
----------------- --------------
Assets: (Unaudited) (Audited)
Cash And Cash Equivalents $ 7,884,118 $ 8,238,690
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized cost of
$178,086,288 at December 31, 2003 and
$157,821,789 at Mar ch 31, 2003) 178,536,334 160,150,262
Held To Maturity: (Fair value of
$70,930,419 at December 31, 2003 and
$22,040,207 at March 31, 2003) 71,340,435 21,966,533
------------ ------------
Total Investment And Mortgage-Backed
Securities 249,876,769 182,116,795
------------ ------------
Loans Receivable, Net:
Held For Sale 687,532 3,670,498
Held For Investment: (Net of allowance
of $5,573,416 at December 31, 2003 and
$4,911,224 at March 31, 2003) 253,047,220 239,485,158
------------ ------------
Total Loans Receivable, Net 253,734,752 243,155,656
------------ ------------
Accrued Interest Receivable:
Loans 924,454 976,134
Mortgage-Backed Securities 557,854 441,900
Investments 851,771 667,735
Premises And Equipment, Net 6,636,487 5,219,947
Federal Home Loan Bank Stock, At Cost 4,925,600 2,858,600
Repossessed Assets Acquired In Settlement
Of Loans 177,249 151,450
Other Assets 2,265,520 1,077,078
------------ ------------
Total Assets $527,834,574 $444,903,985
============ ============
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $389,042,360 $358,473,601
Advances From Federal Home Loan Bank 98,911,000 49,772,000
Other Borrowed Money 5,972,359 4,193,480
Advance Payments By Borrowers For Taxes
And Insurance 169,716 279,425
Other Liabilities 2,174,665 2,145,526
------------ ------------
Total Liabilities $496,270,100 $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 - 2,533,291
And Outstanding Shares - 2,516,035 At
December 31, 2003 And 2,529,824 And
2,507,717 At March 31, 2003 25,333 25,298
Additional Paid-In Capital 4,013,674 3,995,230
Indirect Guarantee Of Employee Stock
Ownership Trust Debt (336,972) (444,685)
Accumulated Other Comprehensive Gain 279,209 1,444,585
Retained Earnings, Substantially Restricted 27,583,230 25,019,525
------------ ------------
Total Shareholders' Equity $ 31,564,474 $ 30,039,953
------------ ------------
Total Liabilities And Shareholders' Equity $527,834,574 $444,903,985
============ ============
See accompanying notes to consolidated financial statements.
1
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended December 31,
-------------------------------
2003 2002
------------- -------------
Interest Income:
Loans $ 3,794,651 $ 4,276,984
Mortgage-Backed Securities 1,274,626 871,076
Investment Securities 812,525 805,799
Other 1,703 17,749
----------- -----------
Total Interest Income 5,883,505 5,971,608
----------- -----------
Interest Expense:
NOW And Money Market Accounts 827,316 588,866
Passbook Accounts 44,357 54,520
Certificate Accounts 787,075 1,295,183
Advances And Other Borrowed Money 754,555 608,019
----------- -----------
Total Interest Expense 2,413,303 2,546,588
----------- -----------
Net Interest Income 3,470,202 3,425,020
Provision For Loan Losses 300,000 450,000
----------- -----------
Net Interest Income After Provision For
Loan Losses 3,170,202 2,975,020
----------- -----------
Other Income:
Gain On Sale Of Loans 199,880 550,879
Loan Servicing Fees 58,556 47,958
Service Fees On Deposit Accounts 338,147 346,400
Other 199,266 162,513
----------- -----------
Total Other Income 795,849 1,107,750
----------- -----------
General And Administrative Expenses:
Salaries And Employee Benefits 1,443,495 1,488,493
Occupancy 239,619 194,220
Advertising 73,418 65,680
Depreciation And Maintenance Of Equipment 270,464 265,082
FDIC Insurance Premiums 13,507 13,210
Other 519,497 570,254
----------- -----------
Total General And Administrative Expenses 2,560,000 2,596,939
----------- -----------
Income Before Income Taxes 1,406,051 1,485,831
Provision For Income Taxes 502,979 558,936
----------- -----------
Net Income $ 903,072 $ 926,895
=========== ===========
Basic Net Income Per Common Share $ 0.36 $ 0.37
=========== ===========
Diluted Net Income Per Common Share $ 0.35 $ 0.36
=========== ===========
Cash Dividend Per Share On Common Stock $ 0.02 $ 0.0133
=========== ===========
Basic Weighted Average Shares Outstanding 2,513,958 2,509,484
=========== ===========
Diluted Weighted Average Shares Outstanding 2,561,891 2,559,299
=========== ===========
See accompanying notes to consolidated financial statements.
2
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Nine Months Ended December 31,
-----------------------------
2003 2002
------------- -------------
Interest Income:
Loans $ 11,610,325 $ 12,962,885
Mortgage-Backed Securities 3,157,744 2,518,112
Investment Securities 2,221,690 2,454,840
Other 11,284 38,709
------------ ------------
Total Interest Income 17,001,043 17,974,546
------------ ------------
Interest Expense:
NOW And Money Market Accounts 2,201,576 1,847,175
Passbook Accounts 133,335 188,136
Certificate Accounts 2,760,290 3,838,951
Advances And Other Borrowed Money 2,003,626 1,722,605
------------ ------------
Total Interest Expense 7,098,827 7,596,867
------------ ------------
Net Interest Income 9,902,216 10,377,679
Provision For Loan Losses 900,000 1,350,000
------------ ------------
Net Interest Income After Provision For
Loan Losses 9,002,216 9,027,679
------------ ------------
Other Income:
Net Gain On Sale Of Investments - 4,245
Gain On Sale Of Loans 1,256,116 1,176,879
Loan Servicing Fees 160,167 149,010
Service Fees On Deposit Accounts 1,029,443 947,962
Other 609,491 511,211
------------ ------------
Total Other Income 3,055,217 2,789,307
------------ ------------
General And Administrative Expenses:
Salaries And Employee Benefits 4,484,527 4,436,241
Occupancy 696,538 594,443
Advertising 177,598 183,747
Depreciation And Maintenance Of Equipment 808,180 783,671
FDIC Insurance Premiums 41,174 39,060
Amortization Of Intangibles - 185,210
Other 1,578,812 1,637,661
------------ ------------
Total General And Administrative Expenses 7,786,829 7,860,033
------------ ------------
Income Before Income Taxes 4,270,604 3,956,953
Provision For Income Taxes 1,555,012 1,499,117
------------ ------------
Net Income $ 2,715,592 $ 2,457,836
============ ============
Basic Net Income Per Common Share $ 1.08 $ 0.98
============ ============
Diluted Net Income Per Common Share $ 1.06 $ 0.96
============ ============
Cash Dividend Per Share On Common Stock $ 0.06 $ 0.04
============ ============
Basic Weighted Average Shares Outstanding 2,512,361 2,508,921
============ ============
Diluted Weighted Average Shares Outstanding 2,562,930 2,563,355
============ ============
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 $25,400,563
Net Income - - - - 2,457,836 2,457,836
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Gains On Securities
Available For Sale - - - 2,067,873 - 2,067,873
-----------
Comprehensive Income 4,525,709
Decrease In Indirect
Guarantee of ESOP
Debt (4,957) - - (4,957)
Exercise of Stock
Options 23 18,473 18,496
Cash Dividends ($.04 per
share) - - - - (101,079) (101,079)
-------- ---------- --------- ----------- ----------- -----------
Balance at
December 31, 2002 $ 16,865 $4,003,785 $(363,254) $ 1,884,538 $24,296,798 $29,838,732
======== ========== ========= =========== =========== ===========
Beginning Balance At
March 31, 2003 $ 25,298 $3,995,230 $(444,685) $ 1,444,585 $25,019,525 $30,039,953
Net Income - - - - 2,715,592 2,715,592
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Losses On Securities
Available For Sale - - - (1,165,376) - (1,165,376)
-----------
Comprehensive Income 1,550,216
Decrease In Indirect
Guarantee of ESOP
Debt - - 107,713 - - 107,713
Exercise Of Stock
Options 35 18,444 - - - 18,479
Cash Dividends ($.06 per
share) - - - - (151,887) (151,887)
-------- ---------- --------- ----------- ----------- -----------
Balance at
December 31, 2003 $ 25,333 $4,013,674 $(336,972) $ 279,209 $27,583,230 $31,564,474
======== ========== ========= =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended December 31,
-------------------------------
2003 2002
------------- ------------
Cash Flows From Operating Activities:
Net Income $ 2,715,592 $ 2,457,836
Adjustments To Reconcile Net Income To Net
Cash Provided By Operating Activities:
Depreciation Expense 625,502 666,358
Amortization Of Intangibles - 185,210
Discount Accretion And Premium Amortization 709,295 140,907
Provisions For Losses On Loans And Real
Estate 900,000 1,350,000
Gain On Sale Of Investment Securities
Available For Sale - (4,425)
Gain On Sale Of Loans (1,256,116) (1,176,879)
Gain On Sale Of Real Estate (58,201) (52,467)
Amortization Of Deferred Fees On Loans (149,489) (153,665)
Proceeds From Sale Of Loans Held For Sale 59,591,842 58,799,638
Origination Of Loans For Sale (55,352,760) (57,415,125)
(Increase) Decrease In Accrued Interest
Receivable:
Loans 51,680 129,284
Mortgage-Backed Securities (115,954) (142,768)
Investments (184,036) (108,896)
Increase In Advance Payments By Borrowers (109,709) (99,905)
(Gain) Loss on Disposition of Premises and
Equipment (1,170) 681
Other, Net (338,539) (668,571)
------------- ------------
Net Cash Provided By Operating Activities 7,027,937 3,907,213
------------- ------------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Available For Sale 45,511,172 20,026,904
Principal Repayments On Mortgage-Backed
Securities Held To Maturity 529,398 419,609
Purchase Of Investment Securities Available
For Sale - (67,041,485)
Purchase Of Investment Securities Held To
Maturity (79,886,945) -
Purchase Of Mortgage-Backed Securities
Available For Sale (97,688,197) (61,090,188)
Maturities Of Investment Securities
Available For Sale 31,156,545 52,666,270
Maturities of Investment Securities Held
To Maturity 30,030,331 85,835
Proceeds From Sale of Securities Available
For Sale - 985,938
Purchase Of FHLB Stock (4,104,300) (276,200)
Redemption Of FHLB Stock 2,037,300 291,900
Increase In Loans To Customers (14,840,622) (5,398,479)
Proceeds From Sale Of Repossessed Assets 560,451 630,117
Purchase And Improvement Of Premises And
Equipment (2,042,042) (878,673)
Proceeds from Sale of Premises And Equipment 1,170 -
------------- ------------
Net Cash Used By Investing Activities (88,735,739) (59,578,452)
------------- ------------
Cash Flows From Financing Activities:
Increase In Deposit Accounts 30,568,759 32,585,439
Proceeds From FHLB Advances 168,550,000 77,525,000
Repayment Of FHLB Advances (119,411,000) (57,561,000)
Net Proceeds (Repayment) Of Other
Borrowings 1,778,879 (1,205,157)
Dividends To Shareholders (151,887) (101,079)
Proceeds From Exercise of Stock Options 18,479 18,496
------------- ------------
Net Cash Provided By Financing Activities 81,353,230 51,261,699
------------- ------------
(Continued)
5
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended December 31,
-------------------------------
2003 2002
------------- ------------
Net Increase (Decrease) In Cash And Cash
Equivalents (354,572) (4,409,540)
Cash And Cash Equivalents At Beginning Of
Period 8,238,690 11,528,411
------------- ------------
Cash And Cash Equivalents At End Of Period $ 7,884,118 $ 7,118,871
============= ============
Supplemental Disclosure Of Cash Flows
Information:
Cash Paid During The Period For Interest $ 7,206,265 $ 7,733,268
Cash Paid During The Period For Income Taxes $ 1,514,888 $ 2,086,455
Additions To Repossessed Acquired Through
Foreclosure $ 528,049 $ 593,900
Increase (Decrease) In Unrealized Net Gain
On Securities Available For Sale, Net Of
Taxes $ (1,165,376) $ 2,067,873
See accompanying notes to consolidated financial statements.
6
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and accounting principles generally
accepted in the United States of America; therefore, they do not include all
disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows. Such statements are unaudited but, in
the opinion of management, reflect all adjustments, which are of a normal
recurring nature and necessary for a fair presentation of results for the
selected interim periods. Users of financial information produced for interim
periods are encouraged to refer to the footnotes contained in the audited
financial statements appearing in our 2003 Annual Report to Shareholders when
reviewing interim financial statements. The results of operations for the
nine-month period ended December 31, 2003 are not necessarily indicative of
the results that 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 December 31, 2003 and March 31, 2003 consisted of
the following:
Loans held for sale were $687,532 and $3,670,498 at December 31, 2003 and
March 31, 2003, respectively.
Loans Held For Investment: December 31, 2003 March 31, 2003
----------------- --------------
Residential Real Estate $105,663,564 $ 99,948,293
Consumer 46,094,900 46,594,413
Commercial Business & Real Estate 120,283,097 106,996,940
------------ ------------
272,041,561 253,539,646
------------ ------------
Less:
Allowance For Possible Loan Loss 5,573,416 4,911,224
Loans In Process 13,255,925 8,990,687
Deferred Loan Fees 165,000 152,577
------------ ------------
18,994,341 14,054,488
------------ ------------
$253,047,220 $239,485,158
============ ============
The following is a reconciliation of the allowance for loan losses for the
nine months ending:
December 31, 2003 December 31, 2002
----------------- -----------------
Beginning Balance $ 4,911,224 $ 3,689,079
Provision 900,000 1,350,000
Charge-offs (374,341) (593,505)
Recoveries 136,533 250,487
------------ ------------
Ending Balance $ 5,573,416 $ 4,696,061
============ ============
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
December 31, 2003 Cost Gains Losses Fair Value
- ----------------- ----------- ---------- ----------- ----------
US Government and Agency
Obligations $70,928,547 $ 244,872 $ 681,751 $70,491,668
Mortgage-Backed Securities 411,888 26,863 - 438,751
----------- ---------- ---------- -----------
Total $71,340,435 $ 271,735 $ 681,751 $70,930,419
=========== ========== ========== ===========
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
December 31, 2003 Cost Gains Losses Fair Value
- ----------------- ----------- ---------- ----------- ----------
US Government and Agency
Obligations $ 21,707,228 $ 391,371 $ 7,630 $ 22,090,969
Mortgage-Backed
Securities 156,379,060 1,121,078 1,054,773 156,445,365
------------ ---------- ---------- ------------
Total $178,086,288 $1,512,449 $1,062,403 $178,536,334
============ ========== ========== ============
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:
December 31, 2003 March 31, 2003
--------------------- ----------------------
Demand Accounts: Balance Rate Balance Rate
Checking $ 79,971,510 0.48% $ 82,521,610 0.50%
Money Market 155,809,789 1.97% 102,396,950 2.21%
Regular Savings 17,129,711 0.98% 16,455,391 1.23%
------------ ------------
Total Demand Accounts 252,911,010 1.43% 201,373,951 1.43%
------------ ------------
Certificate Accounts:
0 - 4.99% 124,996,454 144,633,770
5.00 - 6.99% 11,134,896 12,437,463
7.00 - 8.99% - 28,417
------------ ------------
Total Certificate Accounts 136,131,350 2.20% 157,099,650 2.92%
------------ ------------
Total Deposit Accounts $389,042,360 1.70% $358,473,601 2.08%
============ ============
6. Advances From Federal Home Loan Bank "FHLB"
Federal Home Loan Bank Advances are summarized by year of maturity and
weighted average interest rate in the table below:
December 31, 2003 March 31, 2003
--------------------- ----------------------
Fiscal Year Due: Balance Rate Balance Rate
2004 $ 25,875,000 1.18% $ 1,700,000 1.48%
2005 10,036,000 6.14% 10,072,000 6.14%
2006 23,000,000 4.93% 23,000,000 4.93%
2007 5,000,000 2.64% - -
2008 10,000,000 2.96% 10,000,000 2.96%
Thereafter 25,000,000 2.91% 5,000,000 3.35%
------------ ------------
Total Advances $ 98,911,000 3.25% $ 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 $43.6 million in investment securities at December 31, 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 December 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 2/10/01 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 03/10/04 and
quarterly
thereafter
10/24/03 10/24/08 10,000,000 2.705% Multi-call 10/24/06 and
quarterly
thereafter
12/10/03 12/12/05 5,000,000 2.16% Multi-call 12/12/05 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 02/10/01 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:
December 31, 2003 March 31, 2003
(Dollars in Thousands)
----------------------------------
Bank's Shareholders' Equity $ 31,871 $ 30,324
Unrealized Gain On Available For Sale Of
Securities, Net Of Tax (279) (1,445)
Reduction For Goodwill And Other Intangibles - -
--------- ---------
Tangible Capital 31,592 28,879
Qualifying Core Deposits And Intangible
Assets - -
--------- ---------
Core Capital 31,592 28,879
Supplemental Capital 3,404 3,064
Assets Required To Be Deducted (89) (152)
========= =========
Risk-Based Capital $ 34,907 $ 31,791
========= =========
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at December 31, 2003:
(Dollars in Thousands)
-----------------------------------------------------------------------
Amt. Required % Required Actual Amt. Actual % Excess Amt. Excess %
-----------------------------------------------------------------------
Tangible
Capital $10,556 2.0% $31,592 5.99% $21,036 3.99%
Tier 1
Leverage
(Core)
Capital 21,112 4.0% 31,592 5.99% 10,480 1.99%
Total
Risk-Based
Capital 21,740 8.0% 34,907 12.85% 13,167 4.85%
Tier 1
Risk-Based
(Core)
Capital 10,870 4.0% 31,592 11.63% 20,722 7.63%
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
No. 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
-----------------------------------------------------------
December 31, 2003
-----------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- ------------------- ---------
Basic EPS $ 903,072 2,513,958 $ 0.36
Effect of Diluted
Securities:
Stock Options - 29,542 (0.006)
ESOP - 18,391 (0.004)
---------- --------- -------
Diluted EPS $ 903,072 2,561,891 $ 0.35
10
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
For the Quarter Ended
-----------------------------------------------------------
December 31, 2002
-----------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- ------------------- ---------
Basic EPS $ 926,895 2,509,484 $ 0.37
Effect of Diluted
Securities:
Stock Options - 31,946 (0.006)
ESOP - 17,869 (0.004)
---------- --------- -------
Diluted EPS $ 926,895 2,559,299 $ 0.36
For the Nine Months Ended
-----------------------------------------------------------
December 31, 2003
-----------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- ------------------- ---------
Basic EPS $ 2,715,592 2,512,361 $ 1.08
Effect of Diluted
Securities:
Stock Options - 32,006 (0.013)
ESOP - 18,563 (0.007)
----------- --------- -------
Diluted EPS $ 2,715,592 2,562,930 $ 1.06
For the Nine Months Ended
-----------------------------------------------------------
December 31, 2002
-----------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- ------------------- ---------
Basic EPS $ 2,457,836 2,508,921 $ 0.98
Effect of Diluted
Securities:
Stock Options - 36,141 (0.013)
ESOP - 18,293 (0.007)
----------- --------- -------
Diluted EPS $ 2,457,836 2,563,355 $ 0.96
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 SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation for the three months and the nine months ended December
31, 2003 and 2002.
11
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
Three Months Ended Nine Months Ended
December 31, December 31,
2003 2002 2003 2002
-------- -------- --------- ---------
Net income, as reported $903,072 $926,895 $2,715,592 $2,457,836
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effect $(65,114) $(27,977) $ (195,342) $ (83,931)
Net Income, Pro Forma $837,958 $898,918 $2,520,250 $2,373,905
Basic earnings share:
As Reported $ 0.36 $ 0.37 $ 1.08 $ 0.98
Pro Forma $ 0.33 $ 0.36 $ 1.00 $ 0.95
Diluted earnings share:
As reported $ 0.35 $ 0.36 $ 1.06 $ 0.96
Pro forma $ 0.33 $ 0.35 $ 0.98 $ 0.93
10. Branch Sale
On October 24, 2003, the Company announced it had reached a verbal agreement
to sell its Denmark, South Carolina branch office to South Carolina Bank and
Trust of Orangeburg, South Carolina. The branch has deposits of approximately
$15 million and loans of approximately $7 million. The written agreement was
signed in November 2003 and the transaction is expected to be 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 $82.9 million or 18.6% during the nine
months ended December 31, 2003 primarily as a result of an increase of $67.8
million or 37.2% in total investment securities and a $10.6 million or 4.4%
increase in net loans receivable.
Residential real estate loans, net of loans in process, increased $1.5 million
or 1.6% during the nine months ended December 31, 2003, commercial loans
increased $13.3 million or 12.4%, while consumer loans decreased $500,000 or
1.1%. Loans held for sale decreased $3.0 million to $688,000 during the same
period.
Repossessed assets increased $26,000 to $177,000 during the nine months ended
December 31, 2003.
Non-accrual loans totaled $2.4 million at December 31, 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 December 31, 2003, the Bank held
$1.6 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 December 31, 2003, the Bank had seven loans
totaling $658,000 in TDR's compared to seven loans totaling $665,000 at March
31, 2003. At December 31, 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. A commercial loan TDR of $217,000, secured by
equipment, and a $15,000 consumer loan TDR secured by a second mortgage on a
residential dwelling, were more than 60 days delinquent. The other four TDR's,
two consumer loans totaling $143,000 secured by residential dwellings, a
$24,000 unsecured commercial loan, and a $58,000 commercial loan secured by
two rental properties were current as of December 31, 2003.
Deposits increased $30.6 million or 8.5% during the nine months ended December
31, 2003 as a result of competitive rates offered by the Bank. FHLB advances
increased $49.1 million or 98.7% to $98.9 million during the same period due
to investment leverage strategies employed to increase net interest income.
Other borrowings, consisting of commercial repurchase sweep accounts,
increased $1.8 million or 42.4% to $6.0 million during the nine-month period.
The Board of Directors of the Company declared the 50th, 51st, and 52nd
consecutive quarterly dividends of $.02 per share per quarter, in April, July,
and October 2003, which totaled $152,000. The employee stock ownership trust
of the Company paid $108,000 of principal on the employee stock ownership plan
loan during the nine-month period. Unrealized net gains on securities
available for sale, net of tax, decreased $1.2 million during the nine months
ended December 31, 2003. The Company's net income for the nine-month period
was $2.7 million. These items combined to increase shareholders' equity by
$1.5 million or 5.1% during the nine months ended December 31, 2003. Book
value per share was $12.55 at December 31, 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 nine months ended December 31,
2003, loan disbursements exceeded loan repayments resulting in a $10.6
million or 4.4% increase in total net loans receivable.
Deposits and other borrowings are also an important source of funds for the
Company. During the nine months ended December 31, 2003, deposits increased
$30.6 million while FHLB advances increased $49.1 million. The Bank had $33.0
million in additional borrowing capacity at the FHLB at the end of the period.
At December 31, 2003, the Bank had $98.5 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 December 31, 2003, the Bank
had $26.2 million in unused consumer lines of credit, including home equity
lines and unsecured lines. The Bank also had $14.7 million in unused
commercial lines of credit committed to customers. The majority of the $40.9
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 although to date, no leases have been signed. The
Company has announced plans to open a full service branch office in Irmo,
South Carolina during calendar year 2004. Along with the West Columbia and
Lexington branches, this would be the Company's third branch location in
Lexington County.
Historically, the Company's cash flows from operating activities have 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 audited 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 judgments and assumptions we use are based on historical
experience and other factors, which we believe to be reasonable under the
circumstances. Because of the nature of the judgments and assumptions we
make, actual results could differ from these judgments and estimates which
could have a material impact on our carrying values of assets and liabilities
and our results of operations.
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.
14
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Accounting and Reporting Changes
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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.
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 othercontracts 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 did 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 November 2002, the FASB issued Interpretation ("Fin") No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 requires a company, at the
time it issues a guarantee, to recognize an initial liability for the fair
value of obligations assumed under the guarantee, to recognize an initial
liability for the fair value of obligations assumed under the guarantee and
elaborates on existing disclosure requirements related to guarantees and
warranties. The initial recognition requirements of Fin No. 45 are effective
for guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of periods ending after
December 15, 2002. The adoption of FIN No. 45 did not have a material impact
on the financial condition or operating results of the Company.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities." FIN No. 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive
a majority of the entity's residual returns, or both. FIN No. 46 also
requires disclosures about variable interest entities that a company is not
required to consolidate, but in which it has a significant variable interest.
FIN No. 46 provides guidance for determining whether an entity qualifies as a
variable interest entity by considering, among other considerations, whether
the entity lacks sufficient equity or its equity holders lack adequate
decision-making ability. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to existing entities in the first fiscal year
or interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003.
regardless of when the variable interest entity was established. The adoption
of FIN No. 46 did not have a material effect on the Company's financial
position or results of operations.
15
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
Accounting and Reporting Changes, Continued
In June 2003, the American Institute of Certified Public Accountants ("AICPA")
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. In
January 2004, the AICPA decided to no longer pursue this Statement of
Position.
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.
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 DECEMBER 31, 2003
- ------------------------------------------------------------------
Net Income
Net income was $903,000 for the three months ended December 31, 2003,
representing a decrease in earnings of $24,000 or 2.6% from $927,000 for the
same period in 2002.
Net Interest Income
Net interest income increased $45,000 or 1.3% to $3.5 million during the three
months ended December 31, 2003 as a result of a decrease in interest expense
offset in part by a decrease in interest income. Interest earning assets
increased an average of $86.7 million while average interest-bearing
liabilities increased $84.1 million. The interest rate spread decreased 49
basis points to 2.64% during the three months ended December 31, 2003 compared
to the same period in 2002.
Interest income on loans decreased $482,000 or 11.3% to $3.8 million during
the three months ended December 31, 2003 as a result of the yield in the loan
portfolio decreasing 107 basis points despite the average loan portfolio
balance increasing by $10.0 million. Interest income from investment,
mortgage-backed, and other securities increased $394,000 or 23.3% due to an
increase in the average balance of the portfolio of $76.7 million despite a
decrease in the yield in the portfolio of 62 basis points. Total interest
income decreased $88,000 or 1.5% to $5.9 million for the three months ended
December 31, 2003 from $6.0 million for the same period in 2002.
Total interest expense decreased $133,000 or 5.2% to $2.4 million during the
three months ended December 31, 2003 compared to $2.5 million for the same
period one-year earlier. Interest expense on deposits decreased $280,000 or
14.4% during the period as average interest bearing deposits grew $45.3
million compared to the average balance in 2002 while the cost of deposits
decreased 61 basis points. Interest expense on advances and other borrowings
increased $147,000 or 24.1% as the cost of debt outstanding decreased 155
basis points during the 2003 period compared to 2002 while average total
borrowings outstanding increased approximately $38.8 million.
Provision for Loan Losses
The Bank's provision for loan losses was $300,000 during the three months
ended December 31, 2003 compared to $450,000 for the quarter ended December
31, 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 $2.4 million at December 31, 2003 compared to
$1.0 million at March 31, 2003. The ratio of allowance for loan losses to the
Company's total loans was 2.15% at December 31, 2003 compared to 1.98% at
March 31, 2003. Net charge-offs were $104,000 during the three months ended
December 31, 2003 compared to $177,000 during the same period in 2002.
Other Income
Total other income decreased $312,000 or 28.2% to $796,000 during the three
months ended December 31, 2003 compared to the same period a year ago. Gain
on sale of loans decreased $351,000 or 63.7% to $200,000 during the period as
the origination and sale of fixed rate mortgages decreased due to a slowing of
re-financings. Loan servicing fees increased $11,000 to $59,000 while service
fees on deposit accounts decreased $8,000 or 2.4% to $338,000. 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
$37,000 or 22.6% to $199,000 during the three months ended December 31, 2003.
17
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 DECEMBER 31, 2003, CONTINUED
- -----------------------------------------------------------------------------
General and Administrative Expenses
General and administrative expenses decreased $37,000 or 1.4% to $2.6 million
during the three months ended December 31, 2003 compared to the same period in
2002. Salaries and employee benefits expense decreased $45,000 or 3.0%.
Occupancy expense increased $45,000 due primarily to the land lease for the
Lexington branch, which opened in August 2003. Advertising expense increased
$8,000 to $73,000 primarily to promote the new branch office. Depreciation and
maintenance of equipment expense increased $5,000 or 2.0% during the quarterly
period. FDIC insurance premiums remained virtually the same at $14,000.
Other miscellaneous expense, consisting of legal, professional, and consulting
expenses, stationery and office supplies, and other sundry expenses, decreased
$51,000 or 8.9% for the three months ended December 31, 2003 compared to the
three months ended December 31, 2002.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2003
- -----------------------------------------------------------------
Net Income
Net income was $2.7 million for the nine months ended December 31, 2003,
representing an increase in earnings of $258,000 or 10.5% from the same period
in 2002.
Net Interest Income
Net interest income decreased $475,000 or 4.6% to $9.9 million during the nine
months ended December 31, 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 $74.2 million while average interest-bearing
liabilities increased $69.1 million. The interest rate spread decreased 65
basis points to 2.67% during the nine months ending December 31, 2003 compared
to the same period in 2002.
Interest income on loans decreased $1.4 million or 10.4% to $11.6 million
during the nine months ended December 31, 2003 as a result of the yield in the
loan portfolio decreasing 97 basis points despite the average loan portfolio
balance increasing $7.6 million. Interest income from investment,
mortgage-backed, and other securities increased $379,000 or 7.6% due to the
average balance of the portfolio increasing $66.6 million despite the yield in
the portfolio decreasing 113 basis points. Total interest income decreased
$974,000 or 5.4% to $17.0 million for the nine months ended December 31, 2003
from $18.0 million for the same period in 2002.
Total interest expense decreased $498,000 or 6.6% to $7.1 million during the
nine months ended December 31, 2003 compared to $7.6 million for the same
period one-year earlier. Interest expense on deposits decreased $779,000 or
13.3% during the period as average interest bearing deposits grew $44.2
million compared to the average balance in 2002 while the cost of deposits
decreased 62 basis points. Interest expense on advances and other borrowings
increased $281,000 or 16.3% as the cost of debt outstanding decreased 129
basis points during the 2003 period compared to 2002 while average total
borrowings outstanding increased approximately $24.9 million.
Provision for Loan Losses
The Bank's provision for loan losses was $900,000 during the nine months ended
December 31, 2003 compared to $1.4 million for the same period ending December
31, 2002. Net charge-offs were $238,000 during the nine months ended December
31, 2003 compared to $343,000 for the nine months ended December 31, 2002.
18
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Results of Operations
and Financial Condition
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2003, CONTINUED
- ----------------------------------------------------------------------------
Other Income
Total other income increased $266,000 or 9.5% to $3.1 million during the nine
months ended December 31, 2003 compared to the same period a year ago. Gain
on sale of loans increased $79,000 or 6.7% to $1.3 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 $11,000 to $160,000 while service fees on deposit accounts increased
$81,000 or 8.6% 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 $98,000 or 19.2% during the nine months ended December 31, 2003.
General and Administrative Expenses
General and administrative expenses decreased $73,000 or 0.9% to $7.8 million
during the nine months ended December 31, 2003 compared to the same period in
2002. Salaries and employee benefits expense increased $48,000 or 1.1% due to
an increase in full time equivalents for the new Lexington branch office and
as a result of normal annual salary increases. Occupancy expense increased
$102,000 due primarily to the land lease for the Lexington branch office,
which opened in August 2003. Advertising expense decreased $6,000 or 3.4%
while the depreciation and maintenance of equipment expense increased $25,000
or 3.1% during the nine-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 December 31, 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
$59,000 or 3.6% for the nine months ended December 31, 2003 compared to the
nine months ended December 31, 2002.
19
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 rate risk
sensitivity has increased slightly over the past year. The Bank has rated
favorably compared to thrift peers concerning interest rate sensitivity.
For the three and nine month periods ended December 31, 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 2.64% and
2.67%, 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) 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 Securities and Exchange Commission's rules and forms.
(b) Changes in Internal Controls: In the quarter and nine-months ended
December 31, 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.
20
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
---------------------------------------------------
None
Item 5 Other Information
-----------------
None
Item 6 Exhibits And Reports On Form 8-K
--------------------------------
(a) 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.
31.2 Certification of the Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act.
32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley
Act.
(1) Filed 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.
21
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.
(b) Reports on Form 8-K.
Current Report on Form 8-K dated October 28, 2003 regarding the
Company's earnings release for the quarter ended September 30,
2003.
Current Report on Form 8-K dated December 8, 2003 regarding the
resignation of Thomas C. Clark
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: February 11, 2004 By:/s/ Timothy W. Simmons
------------------------ --------------------------------
Timothy W. Simmons
President
Duly Authorized Representative
Date: February 11, 2004 By:/s/ Roy G. Lindburg
------------------------ --------------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
22
EXHIBIT 31.1
Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
23
Certification
I, Timothy W. Simmons, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: February 11, 2004
/s/ Timothy W. Simmons
-------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
24
EXHIBIT 31.2
Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
25
Certification
I, Roy G. Lindburg, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: February 11, 2004
/s/ Roy G. Lingburg
-------------------------------------
Roy G. Lindburg
Chief Financial Officer
26
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. Lingburg
- ------------------------------ ---------------------------------
Timothy W. Simmons Roy G. Lindburg
Chief Executive Officer Chief Financial Officer
Dated: February 11, 2004