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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-16120
SECURITY FEDERAL CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
South Carolina 57-08580504
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1705 Whiskey Road South, Aiken, South Carolina 29803
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (803) 641-3000
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Securities registered pursuant to Section 12(b)
of the Act: None
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Securities registered pursuant to Section 12(g)
of the Act: Common Stock, par value
$0.01 per share
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
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As of June 15, 2005, there were issued and outstanding 2,535,026 shares
of the registrant's Common Stock. The aggregate market value of the voting
stock held by non-affiliates of the registrant, computed by reference to the
average of the bid and asked price of such stock as of September 30, 2004, was
$29.9 million. (The exclusion from such amount of the market value of the
shares owned by any person shall not be deemed an admission by the registrant
that such person is an affiliate of the registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the Fiscal
Year Ended March 31, 2005. (Parts I and II)
2. Portions of the Registrant's Proxy Statement for the 2005 Annual Meeting
of Stockholders. (Part III)
PART I
Item 1. Business
Security Federal Corporation
- ----------------------------
Security Federal Corporation (the "Company") was incorporated under the
laws of the State of Delaware in July 1987 for the purpose of becoming the
savings and loan holding company for Security Federal Bank ("Security
Federal" or the "Bank") upon the Bank's conversion from mutual to the stock
form (the "Conversion"). Effective August 17, 1998, the Company changed its
state of incorporation from Delaware to South Carolina.
As a South Carolina corporation, the Company is authorized to engage in
any activity permitted by South Carolina General Corporation Law. The Company
is a unitary savings and loan holding company. Through the unitary holding
company structure, it is possible to expand the size and scope of the
financial services offered beyond those currently offered by the Bank. The
holding company structure also provides the Company with greater flexibility
than the Bank would have to diversify its business activities, through
existing or newly formed subsidiaries, or through acquisitions or mergers of
stock thrift institutions as well as other companies. There are no current
arrangements, understandings or agreements regarding any such acquisition.
Future activities of the Company, other than the continuing operations of
Security Federal, will be funded through dividends from Security Federal and
through borrowings from third parties. See "Regulation - Savings and Loan
Holding Company Regulation" and "Taxation." Activities of the Company may also
be funded through sales of additional securities or income generated by other
activities of the Company. At this time, there are no plans regarding such
sales of additional securities or such activities.
At March 31, 2005, the Company had assets of approximately $586.0
million, deposits of approximately $430.3 million and shareholders' equity of
approximately $35.1 million.
The executive office of the Company is located at 1705 Whiskey Road
South, Aiken, South Carolina 29803, and its telephone number is (803)
641-3000.
Security Federal Bank
- ---------------------
General. Security Federal is a federally chartered stock savings bank
headquartered in Aiken, South Carolina. Security Federal with 11 branch
offices in Aiken and Lexington Counties, was originally chartered under the
name Aiken Building and Loan Association on March 27, 1922. It received its
federal charter and changed its name to Security Federal Savings and Loan
Association of Aiken on March 7, 1962, and later changed its name to Security
Federal Savings Bank of South Carolina, on November 11, 1986. Effective April
8, 1996, the Bank changed its name to Security Federal Bank. The Bank
converted from the mutual to the stock form of organization on October 30,
1987.
In October 1993, Security Federal increased its branch network to nine
offices with the completion of its acquisition of four former NationsBank of
South Carolina, N.A. branches located in Aiken County. In February 1996,
Security Federal opened a new branch office in the Aiken Wal-Mart Superstore.
The Bank opened a branch in West Columbia, Lexington County, South Carolina,
in December 2000, which provided the Bank with the opportunity to expand its
market area. In August 2003, the Bank opened a new branch in Lexington, South
Carolina. During February 2004, the Bank completed the sale of its Denmark,
South Carolina branch office to South Carolina Bank and Trust, N.A. of
Orangeburg, South Carolina. In 2004, the Bank opened a full service branch in
Irmo, South Carolina.
The principal business of Security Federal is accepting deposits from the
general public and originating mortgage loans to enable borrowers to purchase
or refinance one- to four-family residential real estate. The Bank also makes
multi-family residential and commercial real estate loans, consumer loans and
commercial loans as well as construction loans on single family residences,
multi-family dwellings and projects, commercial real-estate, and loans for the
acquisition, development and construction of residential subdivisions and
commercial projects. Additional financial services are provided by three of
the Bank's wholly owned subsidiaries, Security Federal Insurance, Inc.,
Security Federal Investments, Inc. and Security Federal Trust, Inc.
1
Security Federal's income is derived primarily from interest and fees
earned in connection with its lending activities, and its principal expenses
are interest paid on savings deposits and borrowings and operating expenses.
Selected Consolidated Financial Information
- -------------------------------------------
This information is incorporated by reference to page 7 of the 2005
Annual Report to Stockholders ("Annual Report").
Yields Earned and Rates Paid
- ----------------------------
This information is incorporated by reference to page 15 of the Annual
Report.
Rate/Volume Analysis
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This information is incorporated by reference to page 14 of the Annual
Report.
Lending Activities
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General. The primary source of revenue for the Bank is interest and fee
income from lending activities. The principal lending activity of the Bank is
making conventional first mortgage real estate loans to enable borrowers to
purchase or refinance one- to four-family residential real property. The Bank
also makes multi-family residential and commercial real estate and consumer
and commercial loans. The Bank continues to emphasize the origination of
adjustable rate residential mortgage loans, subject to market conditions, for
retention in its portfolio. In addition, the Bank originates construction
loans on single family residences, multi-family dwellings and projects, and
loans for the acquisition, development and construction of residential
subdivisions and commercial projects.
Adjustable rate mortgage loans ("ARMs") constituted approximately 27.7%
of the Bank's total outstanding loan portfolio at March 31, 2005.
The loan-to-value ratio, maturity and other provisions of loans made by
the Bank reflect its policy of making the maximum loan permissible consistent
with applicable regulations, established lending policies and market
conditions. The Bank requires title insurance (or acceptable legal opinions
on smaller loans secured by real estate) and fire insurance, and flood
insurance where applicable, on loans secured by improved real estate.
2
Loan Portfolio Composition. The following table sets forth information concerning the composition of
the Bank's loan portfolio in dollar amounts and in percentages by type of loan, and presents a
reconciliation of total loans receivable before net items.
At March 31,
---------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
TYPE OF LOAN:
- -------------
Fixed Rate Loans
- ----------------
Residential real
estate........... $ 31,336 9.3% $43,911 15.8% $ 43,091 16.8% $ 35,012 14.0% $ 34,070 13.9%
Commercial busi-
ness and commer-
cial real estate. 77,202 22.8 62,799 22.6 53,509 20.8 55,845 22.4 42,877 17.5
Consumer.......... 27,047 8.0 26,508 9.5 30,165 11.7 33,185 13.3 32,447 13.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total fixed
rate loans..... 135,585 40.1 133,218 47.9 126,765 49.3 124,042 49.7 109,394 44.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Adjustable rate loans
- ---------------------
Residential real
estate........... 93,564 27.7 67,516 24.3 60,528 23.5 67,220 26.9 89,913 36.7
Commercial busi-
ness and commer-
cial real estate. 85,015 25.2 58,313 20.9 53,488 20.8 41,551 16.7 31,643 12.9
Consumer.......... 23,797 7.0 19,133 6.9 16,429 6.4 16,667 6.7 13,830 5.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total adjustable
rate loans..... 202,376 59.9 144,962 52.1 130,445 50.7 125,438 50.3 135,386 55.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans..... 337,961 100.0% 278,180 100.0% 257,210 100.0% 249,480 100.0% 244,780 100.0%
===== ===== ===== ===== =====
Less
- ----
Loans in process.. 14,627 12,356 8,991 11,288 10,739
Deferred fees and
discounts........ 161 165 152 184 260
Allowance for loan
losses........... 6,284 5,764 4,911 3,689 2,784
Total loans -------- -------- -------- -------- --------
receivable..... $316,889 $259,895 $243,156 $234,319 $230,997
======== ======== ======== ======== ========
3
The following table sets forth information concerning the composition of the Bank's loan portfolio in
dollar amounts and in percentages by type of security, and presents a reconciliation of total loans
receivable before net items.
At March 31,
---------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
TYPE OF SECURITY:
- ----------------
Real Estate Loans:
Residential real
estate.......... $105,516 31.2% $ 95,863 34.5% $ 86,707 33.7% $ 86,486 34.7% $104,819 42.8%
Residential
construction.... 19,384 5.8 15,564 5.6 16,912 6.6 15,746 6.3 19,164 7.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real
estate loans.. 124,900 37.0 111,427 40.1 103,619 40.3 102,232 41.0 123,983 50.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Commercial business
and commercial
real estate...... 162,217 48.0 121,112 43.5 106,997 41.6 97,396 39.0 74,520 30.5
Consumer loans:
Deposit account.. 1,145 0.3 1,383 0.5 1,726 0.7 2,160 0.9 2,516 1.0
Home equity
lines........... 16,918 5.0 13,694 4.9 13,140 5.1 12,352 4.9 10,731 4.4
Consumer first
and second
mortgages....... 22,327 6.6 15,080 5.4 18,551 7.2 20,090 8.1 20,451 8.3
Other............ 10,454 3.1 15,484 5.6 13,177 5.1 15,250 6.1 12,579 5.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer
loans......... 50,844 15.0 45,641 16.4 46,594 18.1 49,852 20.0 46,277 18.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans.. 337,961 100.0% 278,180 100.0% 257,210 100.0% 249,480 100.0% 244,780 100.0%
===== ===== ===== ===== =====
Less:
Loans in process.. 14,627 12,356 8,991 11,288 10,739
Deferred fees and
discounts........ 161 165 152 184 260
Allowance for loan
losses........... 6,284 5,764 4,911 3,689 2,784
Total loans -------- -------- -------- -------- --------
receivable.... $316,889 $259,895 $243,156 $234,319 $230,997
======== ======== ======== ======== ========
4
The following schedule illustrates the maturities of Security Federal's
loan portfolio at March 31, 2005. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period when the
contract is due. This schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
At March 31, 2005
----------------------------------------------------
Commercial
Business and
Residential Commercial
Real Estate (1) Consumer (2) Real Estate Total
--------------- ------------ ----------- ---------
(In Thousands)
Six months or less (3)... $ 12,484 $ 4,803 $ 22,838 $ 40,125
Over six months to
one year................ 10,087 1,256 37,857 49,200
Over one year to three
years................... 3,281 5,720 33,310 42,311
Three to five years...... 1,738 7,163 51,052 59,953
Over five to ten years... 3,450 15,345 8,263 27,058
Over ten years........... 79,233 16,557 8,897 104,687
-------- -------- -------- --------
Total (4).............. $110,273 $ 50,844 $162,217 $323,334
======== ======== ======== ========
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(1) Includes multi-family dwellings.
(2) Includes home improvement loans and equity line of credit loans.
(3) Includes demand loans, loans having no stated maturity and overdraft
loans.
(4) Loan amounts are net of undisbursed funds for loans in process of $14.6
million.
The total amount of loans due after March 31, 2006, which have
predetermined or fixed interest rates is $110.1 million, while the total
amount of loans due after that date which have floating or adjustable interest
rates is $123.9 million.
Loan Originations, Purchases and Sales. The following table shows the
loan origination, purchase, sale and repayment activities of the Bank for the
periods indicated.
Year Ended March 31,
------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(In Thousands)
Originated:
Adjustable rate -
residential real estate.... $ 43,578 $ 47,263 $ 45,260 $ 41,672 $ 36,998
Fixed rate - residential
real estate (1)............ 41,746 73,291 92,388 93,602 35,813
Consumer.................... 29,290 26,829 25,439 26,916 20,297
Commercial business and
commercial real estate..... 134,439 91,562 64,097 50,468 31,623
-------- -------- -------- -------- --------
Total consumer/commercial
business real estate..... 163,729 118,391 89,536 77,384 51,920
-------- -------- -------- -------- --------
Total loans originated.. $249,053 $238,945 $227,184 $212,658 $124,731
======== ======== ======== ======== ========
Purchased................... $ 6,536 $ 3,500 $ -- $ -- $ --
Less:
Sold:
Fixed rate - residential
real estate................ $ 25,957 $ 63,497 $ 80,345 $ 84,505 $ 28,547
Adjustable rate -
residential real estate.... -- -- -- -- --
Principal repayments........ 169,277 156,012 140,613 123,523 53,683
(Increase) decrease in
loans held for sale........ 574 1,967 (1,505) (80) 950
Increase (decrease) in
other items, net........... 2,787 4,230 (1,106) 1,378 3,555
Net increase (decrease)..... $ 56,994 $ 16,739 $ 8,837 $ 3,332 $ 37,996
- -----------
(1) Includes newly originated fixed rate loans held for sale, construction/
permanent loans converted to fixed rate loans and sold, and residential
lot loans.
5
In addition to interest earned on loans, the Bank receives loan
origination fees or "points" for originating loans. Loan points are a
percentage of the principal amount of the mortgage loan which are charged to
the borrower for the creation of the loan.
The Bank's loan origination fees generally range from 1% to 2% on
conventional residential mortgages, commercial real estate loans and
commercial business loans. The total fee income (including amounts amortized
to income as yield adjustments) for the fiscal year ended March 31, 2005 was
$725,000.
Loan origination and commitment fees are volatile sources of income.
These fees vary with the volume and type of loans and commitments made and
purchased and with competitive conditions in mortgage markets, which in turn
are governed by the demand for and availability of money.
The following table shows deferred loan origination fees recognized as
income by the Bank expressed as a percentage of the dollar amount of total
mortgage loans originated (and retained in the Bank's portfolio) and purchased
during the periods indicated and the dollar amount of deferred loan
origination fees at the end of each respective period.
At or for the Year Ended March 31,
----------------------------------
2005 2004 2003
---- ---- ----
(Dollars in Thousands)
Net deferred loan origination fees
earned during the period (1)............. $185 $188 $209
Mortgage loan origination fees earned
as a percentage of total loans
originated during the period............. 0.4% 0.3% 0.4%
Net deferred loan origination fees in
loan portfolio at end of period.......... $161 $165 $152
- -----------
(1) Includes amounts amortized to interest income as yield adjustments. Does
not include fees earned on loans sold.
The Bank also receives other fees and charges related to existing loans,
conversion fees, assumption fees, late charges, and other fees collected in
connection with a change in borrower or other loan modifications.
Security Federal currently sells substantially all conforming fixed-rate
loans with terms of 15 years or greater in the secondary mortgage market.
These loans are sold in order to provide a source of funds and as one of the
strategies available to close the gap between the maturities of the Bank's
interest-earning assets and interest-bearing liabilities. Currently, most
fixed-rate, long-term mortgage loans are being originated based on Federal
National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage
Corporation ("Freddie Mac") underwriting standards.
Secondary market sales have been made primarily to Freddie Mac, or other
banks or investors. Freddie Mac is a quasi-governmental agency that purchases
residential mortgage loans from federally insured financial institutions and
certain other lenders. All loans sold to Freddie Mac are without recourse to
Security Federal and generally all other loans sold to other investors are
without recourse. For the past few years, substantially all loans have been
sold on a service released basis. Previous to that, some loans sold to
Freddie Mac, Fannie Mae and one other investor had been sold service retained,
whereby Security Federal would collect a .25% to .375% servicing fee on the
principal balance of the loan serviced. However, the pricing on loans sold
service released is more favorable to the borrower. As a result of that
factor, along with prepayments and refinancings, Security Federal's loan
serviced for others portfolio was decreasing in size. Accordingly, because of
the fixed costs of servicing that portfolio, Security Federal sold its loan
serviced for others portfolio for a before tax, net gain of approximately
$400,000 in the last quarter of fiscal 2001.
In fiscal 2005, Security Federal sold $26.0 million in fixed rate
residential loans on a service released basis on the secondary market. Loans
closed but not yet settled with Freddie Mac or other investors, are carried in
the Bank's "loans held for sale" portfolio. At March 31, 2005, the Bank had
$2.3 million of loans held for sale. These loans are fixed rate residential
loans that have been originated in the Bank's name and have closed. Virtually
all of these loans have commitments to be purchased by investors, mainly
Freddie Mac, and the majority of these loans were locked in by
6
price with the investors on the same day or shortly thereafter that the loan
was locked in with the Bank's customers. Therefore, these loans present very
little market risk for the Bank. The Bank usually delivers to and receives
funding from the investor within 30 days. Security Federal originates all of
its loans held for sale on a "best efforts" basis. Best efforts means that
the Bank suffers no penalty if it is unable to deliver a loan to a potential
investor.
The Bank also originates and holds adjustable and fixed rate construction
loans and fixed rate lot loans. The construction loans are for one year
terms. Lot loans are financed on a two or three year term, or a five year
balloon term. At March 31, 2005, the Bank held $19.4 million, or 5.8% of the
total loan portfolio in construction loans and $12.2 million, or 3.6% of the
total loan portfolio in lot loans, in its residential portfolio. At March 31,
2005, the Bank also held approximately $9.5 million in longer term fixed rate
residential mortgage loans. These loans, which were 2.8% of the entire loan
portfolio at March 31, 2005, had converted from adjustable rate mortgage
("ARM") loans to fixed rate loans during the previous 36 months. These fixed
rate loans had remaining maturities of 10 to 27 years. At March 31, 2005, the
Bank had approximately $16.0 million of residential ARM loans that could
convert to fixed rate loans over the next 24 months. The Bank no longer
originates ARM loans with conversion features.
Loan Solicitation and Processing. The Bank actively solicits mortgage
loan applications from existing customers, real estate agents, builders, real
estate developers and others. The Bank also receives mortgage loan
applications as a result of customer referrals and from walk-in customers.
Detailed loan applications are obtained to determine the borrower's
creditworthiness and ability to repay. The more significant items on loan
applications are verified through the use of credit reports, financial
statements and confirmations. After analysis of the loan application and
property or collateral involved, including an appraisal of the property
(residential appraisals are obtained through independent fee appraisers), the
lending decision is made in accordance with the underwriting guidelines of the
Bank. These guidelines are generally consistent with Freddie Mac and Fannie
Mae guidelines for residential real estate loans. With respect to commercial
real estate loans, the Bank also reviews the capital adequacy of the business,
the income potential of the property, the ability of the borrower to repay the
loan and honor its other obligations, and general economic and industry
conditions.
Upon receipt of a loan application and all required related information
from a prospective borrower, the loan application is submitted for approval or
rejection. The residential mortgage loan underwriters approve loans which
meet Freddie Mac and Fannie Mae underwriting requirements, not to exceed
$359.650 per loan, Federal Housing Administration ("FHA") loans not to exceed
$172,632, and Veterans' Administration ("VA") loans not to exceed $359,650.
The Chairman, Chief Executive Officer, or President of the Bank approve loans
of $300,000 or less, except as set forth above for conforming conventionally
underwritten, single family mortgage loans, which are approved by the
underwriters. The Senior Business Development officers approve loans up to
$250,000. Commercial, consumer, and all non-conforming real estate loans in
excess of $350,000 require approval of any two of the above and any loan in an
amount in excess of $500,000 must be approved by the Bank's Executive
Committee, which operates as the Bank's Loan Committee. The loan approval
limits shown are the aggregate of all loans to any one borrower or entity, not
including loans that are the borrower's primary residence, and are
conventionally underwritten.
The general policy of Security Federal is to issue loan commitments to
qualified borrowers for a specified time period. These commitments are
generally for a period of 45 days or less. With management approval,
commitments may be extended for a longer period. The total outstanding amount
of residential mortgage loan commitments for portfolio loans issued by
Security Federal as of March 31, 2005, was approximately $180,000 (excluding
undisbursed portions of construction loans in process). Security Federal also
had outstanding commitments available on retail lines of credit (including
home equity and other consumer loans) totaling $28.3 million as of March 31,
2005. See Note 13 of the Notes to Consolidated Financial Statements contained
in the Annual Report.
Permanent Residential Mortgage Lending. Residential real estate mortgage
loans constituted approximately 31.2% of the Bank's total outstanding loan
portfolio at March 31, 2005.
Security Federal offers a variety of ARMs which offer adjustable rates of
interest, payments, loan balances or terms to maturity which vary according to
specified indices. The Bank's ARMs generally have a loan term of 15 to 30
years with initial rate adjustments every one, three, five or seven years
during the term of the loan. After the initial rate
7
adjustment, the loan rate then adjusts annually. Most of the Bank's ARMs
contain a 200 basis point limit as to the maximum amount of change in the
interest rate at any adjustment period and a 500 or 600 basis point limit over
the life of the loan. The Bank generally originates ARMs to hold in its
portfolio. Such loans are generally made consistent with Freddie Mac and
Fannie Mae guidelines. At March 31, 2005, residential ARMs totaled $93.6
million, or 27.7% of the Bank's loan portfolio. For the year ended March 31,
2005, the Bank originated $85.3 million in residential real estate loans,
51.1% of which had adjustable rates of interest.
There are unquantifiable risks resulting from possible increased costs to
the borrower as a result of periodic repricing. Despite the benefits of ARMs
to the Bank's asset/liability management program, these loans also pose
potential additional risks, primarily because as interest rates rise, the
underlying payment by the borrower rises, increasing the potential for
default. At the same time, marketability of the underlying property may be
adversely affected by higher interest rates.
When making a one- to four-family residential mortgage loan, the Bank
evaluates both the borrower's creditworthiness and his or her general ability
to make principal and interest payments and the value of the property that
will secure the loan. The Bank generally makes loans on one- to four-family
residential properties in amounts of 95% or less of the appraised value
thereof. Where loans are made in amounts which exceed 80% of the appraised
value of the underlying real estate, the Bank's general policy is to require
private mortgage insurance on the portion of the loan in excess of 80% of the
appraised value. In general, the Bank restricts its residential lending to
South Carolina and the nearby Augusta, Georgia market.
The Bank also provides construction financing for single family dwellings
both to owner-occupants and to builders for resale. Construction loans are
generally made for periods of six months to one year with either adjustable or
fixed rates. At March 31, 2005, residential construction loans on one- to
four-family dwellings totaled $19.4 million, or 5.8%, of the Bank's loan
portfolio. On loans of this type, the Bank seeks to evaluate the financial
condition and prior performance of the builder, as well as the factors
mentioned above concerning the creditworthiness of the borrower. On
construction loans offered to individuals (non-builders), the Bank offers a
construction/permanent loan. The construction portion of the loan is an
adjustable rate (typically prime plus .50%) or a fixed rate (typically prime
plus 1.0%) during the construction period. After construction, the loan then
automatically converts to an ARM loan. The borrower also has the option,
after the construction period only, to convert the loan to a fixed rate loan
which the Bank then sells on the secondary market immediately on a service
released basis.
Commercial Business and Commercial Real Estate Loans. The commercial
business and commercial real estate loans originated by the Bank are primarily
secured by business properties, churches, income property developments,
undeveloped land, business equipment, furniture and fixtures, inventory, and
receivables. At March 31, 2005, the Bank had approximately $162.2 million, or
48.0%, of the Bank's total loan portfolio, in commercial business and
commercial real estate loans. Approximately $103.4 million, or 63.7% of
commercial business and commercial real estate loans were secured primarily by
real estate at March 31, 2005. Not included in these loans are approximately
$12.7 million in acquisition and development loans. Loans secured by
commercial real estate are typically written for terms of 10 to 20 years.
Commercial loans not secured by real estate are typically based on terms of
three to 60 months. Fixed rate loans typically balloon at the end of three to
seven years. Adjustable rate loans are usually tied to the prime interest
rate or LIBOR as quoted in the Wall Street Journal, although some adjustable
rate loans are tied to LIBOR, and adjust daily, monthly or annually. Some
adjustable rate loans have interest rate caps. Most of these loans have a
five year balloon.
Commercial business and commercial real estate lending entails
significant additional credit risk when compared to residential lending.
Commercial loans typically involve large loan balances to single borrowers or
groups of related borrowers. The payment experience of these loans is
typically dependent upon the successful operation of the business or real
estate project. These risks can be significantly affected by supply and
demand conditions in the market for office and retail space and for
condominiums and apartments and to adverse conditions in the local economy.
Although commercial loans generally involve more risk than residential loans,
they also typically provide a greater yield and are more sensitive to changes
in interest rates.
The underwriting standards employed by the Bank for commercial business
and commercial real estate lending include a determination of the borrower's
current financial condition, ability to pay, past earnings and payment
history.
8
In addition, the current financial condition and payment history of all
principals are reviewed. Typically, the Bank requires the principal or owners
of a business to guarantee all loans made to their business by the Bank.
Although the creditworthiness of the business and its principals is of primary
consideration, the underwriting process also includes a comparison of the
value of the security, if any, in relation to the proposed loan amount.
Properties securing commercial loans originated by the Bank are generally
appraised at the time of the loan by appraisers designated by the Bank.
Although the Bank is permitted to invest in loans up to 100% of the appraised
value of a property on a commercial loan, the Bank currently seeks to invest
in loans with a loan to value ratio of 75% to 85%.
At March 31, 2005, the Bank did not have any commercial business or
commercial real estate loans to one borrower in excess of $5.1 million.
Federal law restricts the Bank's permissible lending limits to one borrower to
the greater of $500,000 or 15% of unimpaired capital and surplus. The Bank
has only infrequently made loans to one borrower equal to the amount federal
law allows or approximately $6.0 million as calculated at March 31, 2005.
Consumer Loans. The Bank originates consumer loans for any personal,
family or household purpose, including but not limited to the financing of
home improvements, automobiles, boats, mobile homes, recreational vehicles and
education. The Bank also makes consumer first and second mortgage loans
secured by residences. These loans typically do not qualify for sale in the
secondary market, but are generally not considered sub-prime lending. In
addition, the Bank has expanded its home equity lending program. Home equity
loans are secured by mortgage lines on the borrower's principal or second
residence. At March 31, 2005, the Bank had $16.9 million of home equity lines
of credit outstanding and $23.0 million of additional commitments of such
lines of credit. The Bank also makes secured and unsecured lines of credit
available. Although consumer loans involve a higher level of risk than one-
to four-family residential mortgage loans, they generally provide higher
yields and have shorter terms to maturity than one- to four- family
residential mortgage loans. At March 31, 2005, the Bank had total consumer
loans of $50.8 million, or 15.0% of the Bank's loan portfolio.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and
an assessment of ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income is determined
by verification of gross monthly income from primary employment, and from any
verifiable secondary income. Although creditworthiness of the applicant is of
primary consideration, the underwriting process also includes a comparison of
the value of the security, if any, in relation to the proposed loan amount.
The Bank also has a credit card program. As of March 31, 2005, 1,364
Visa credit cards had been issued by the Bank with total approved credit lines
of $3.9 million, of which $1.3 million was outstanding.
Loan Delinquencies and Defaults
- -------------------------------
General. The Bank's collection procedures provide that when a real
estate loan is approximately 20 days past due, the borrower is contacted by
mail and payment is requested. If the delinquency continues, subsequent
efforts are made to contact the delinquent borrower and establish a program to
bring the loan current. In certain instances, the Bank may modify the loan or
grant a limited moratorium on loan payments to enable the borrower to
reorganize his financial affairs. If the loan continues in a delinquent
status for 60 days or more, the Bank generally initiates foreclosure
proceedings after the customer has been notified by certified mail. At March
31, 2005, the Bank had property acquired as the result of foreclosures and
other property repossessed classified as repossessed assets valued at $53,000.
9
Delinquent Loans. The following table sets forth information concerning
delinquent mortgage and other loans at March 31, 2005. The amounts presented
represent the total remaining principal balances of the related loans (before
specific reserves for losses), rather than the actual payment amounts which
are overdue.
Real Estate Non-Real Estate
---------------------------- ----------------------------
Commercial
Residential Commercial Consumer Business
------------- ------------- ------------- -------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands, number of loans are actual)
Loans delinquent for:
30 - 59 days...... 4 $ 383 12 $1,490 64 $ 909 14 $ 665
60 - 89 days...... 1 73 1 13 9 23 -- --
90 days and over.. 6 569 10 1,547 6 140 3 174
Total delinquent ---- ------ ---- ------ ---- ------ ---- -----
loans........... 11 $1,025 23 $3,050 79 $1,072 17 $ 839
==== ====== ==== ====== ==== ====== ==== =====
Classified Assets. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered to be of
lesser quality as "substandard," "doubtful" or "loss" assets. The regulations
require savings associations to classify their own assets and to establish
prudent general allowances for loan losses for assets classified "substandard"
or "doubtful." For the portion of assets classified as "loss," an institution
is required to either establish specific allowances of 100% of the amount
classified or charge off such amount. In addition, the Office of Thrift
Supervision ("OTS") may require the establishment of a general allowance for
losses based on assets classified as "substandard" and "doubtful" or based on
the general quality of the asset portfolio of an association. See "Regulation
- - Federal Regulation of Savings Institutions."Assets which do not currently
expose the savings association to sufficient risk to warrant classification in
one of the aforementioned categories but possess potential weaknesses are
designated "special mention" by management.
At March 31, 2005, approximately $12.1 million of the Bank's loans were
classified "substandard" compared to $5.4 million at March 31, 2004. In fiscal
2005, the Bank began applying stricter standards in securitizing its loan
portfolio for classification purposes in conjunction with the formation of a
Credit Administration Department. At March 31, 2005, $2.6 million were
classified as "special mention" compared to $2.5 million at March 31, 2004.
The Bank had no loans classified as "doubtful" or "loss" at March 31, 2005.
As of March 31, 2005, there were loans totaling $434,000 which were troubled
debt restructurings within the meaning of Statement of Financial Accounting
Standard ("SFAS") No. 15. The Bank's policy is to classify all troubled debt
restructurings as substandard. The Bank's classification of assets is
consistent with OTS regulatory classifications.
Non-performing Assets. Loans are placed on non-accrual status when the
collection of principal and/or interest becomes doubtful. In addition, all
loans are placed on non-accrual status when the loan becomes 90 days or more
contractually delinquent. All consumer loans more than 90 days delinquent are
charged against the consumer loan allowance for loan losses unless there is
adequate collateral which is in the process of being repossessed or foreclosed
on. At March 31, 2005, the Bank did not have any troubled debt restructurings
which involve forgiving a portion of interest or principal on any loans or
making loans at a rate materially less than market rate. Other loans of
concern are those loans (not delinquent more than 60 days) that management has
determined need to be closely monitored as the potential exists for increased
risk on these loans in the future. Nonperforming loans are reviewed monthly
on a loan by loan basis. Charge-offs, whether partial or in full, associated
with these loans will vary based on estimates of recovery for each loan.
10
The following table sets forth the amounts and categories of risk
elements in the Bank's loan portfolio.
March 31,
------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(Dollars in Thousands)
Loans Delinquent 60
to 89 Days:
Residential................. $ 73 $ 72 $ 45 $ -- $ --
Consumer.................... 13 73 435 370 320
Commercial business
and real estate............ 13 88 311 144 274
------ ------ ------ ------ ------
Total..................... $ 99 $ 233 $ 791 $ 514 $ 594
====== ====== ====== ====== ======
Total as a percentage
of total assets.......... 0.02% 0.04% 0.18% 0.14% 0.18%
Non-Accruing Loans Delinquent
90 Days or More:
Residential................. $ 569 $ 559 $ 585 $ 761 $ --
Consumer.................... 140 243 229 350 172
Commercial business
and real estate............ 1,721 1,242 226 279 11
------ ------ ------ ------ ------
Total..................... $2,430 $2,044 $1,040 $1,390 $ 183
====== ====== ====== ====== ======
Total as a percentage
of total assets.......... 0.42% 0.39% 0.23% 0.37% 0.06%
Troubled debt restructurings. $ 434 $ 646(1) $ 674(2) $ 622 $ 587
Repossessed assets........... $ 53 $ 51 $ 151 $ 98 $ 130
Allowance for loan losses.... $6,284 $5,764 $4,911 $3,689 $2,784
- -----------
(1) $201,000 of troubled debt restructurings are included in non-accruing
loans.
(2) $210,000 of troubled debt restructurings are included in non-accruing
loans.
For the fiscal year ended March 31, 2005, the interest income which would
have been recognized with respect to non-accruing loans, had such loans been
current in accordance with their original terms and with respect to troubled
debt restructurings, had such loans been current in accordance with their
original terms, totaled $189,000 compared to $106,000 for the year ended March
31, 2004.
At March 31, 2005, non-accruing loans totaled $2.4 million, compared to
$2.0 million and $1.0 million at March 31, 2004 and 2003, respectively.
Included in non-accruing loans at March 31, 2005 were six residential real
estate loans totaling $569,000, 13 commercial loans totaling $1.7 million and
six consumer loans totaling $140,000. Of the six consumer loans on
non-accrual status at fiscal year end, no loan exceeded $60,000. Of the 13
commercial loans on non-accrual status at fiscal year end, no loan exceeded
$450,000.
The Bank had six loans totaling $434,000 at fiscal year end which were
troubled debt restructurings compared to seven loans of $646,000 at March 31,
2004. The six troubled debt restructurings were three consumer loans totaling
$345,000 secured by residential dwellings, a $13,000 consumer loan secured by
a second mortgage on a residence, a $56,000 commercial loan secured by two
rental properties, and a $20,000 unsecured commercial loan. The $13,000
consumer loan was 30 days delinquent at March 31, 2005.
At March 31, 2005, repossessed assets had an outstanding carrying value
of $53,000 and consisted of a single family dwelling, acreage, and a developed
lot.
Provision for Losses on Loans and Repossessed Assets. Security Federal
recognizes that credit losses will be experienced during the course of making
loans and that the risk of loss will vary with, among other things, the type
of loan being made, the creditworthiness of the borrower over the term of the
loan and, in the case of a secured loan, the quality of the underlying
security for the loan.
The Bank seeks to establish and maintain sufficient reserves for
estimated losses on specifically identified loans and real estate where such
losses can be estimated. Additionally, general reserves for estimated
possible losses are
11
established on specified portions of the Bank's portfolio such as consumer
loans and higher risk residential construction mortgage loans based on
management's estimate of the potential loss for loans which normally can be
classified as higher risk. Specific and general reserves are based on, among
other criteria (1) the risk characteristics of the loan portfolio, (2) current
economic conditions on a local as well as a statewide basis, (3) actual losses
experienced historically and (4) the level of reserves for possible losses in
the future. Additionally, a reserve is maintained for uncollected interest on
loans 90 days or more past due.
At March 31, 2005, total reserves relating to loans were $6.3 million.
In determining the adequacy of the reserve for loan losses, management reviews
past experience of loan charge-offs, the level of past due and non-accrual
loans, the size and mix of the portfolio, general economic conditions in the
market area, and individual loans to identify potential credit problems.
Commercial business, commercial real estate and consumer loans have increased
to $213.1 million, or 63.0% of the Bank's total loan portfolio at March 31,
2005, and it is anticipated there will be a continued emphasis on this type of
credit. Although commercial and consumer loans carry a higher level of credit
risk than conventional residential mortgage loans, the level of reserves
reflects management's continuing evaluation of this risk based on upon the
Bank's past loss experience. At fiscal year end, the Bank's ratio of loans
delinquent more than 60 days to total assets was 0.43%. These delinquent
loans are considered to be well secured and are in the process of collection.
Management uses four methods or calculations to estimate the adequacy of the
reserve using the factors mentioned above. The reserve is management's best
estimate for the reserve. There can be no guarantee that the estimate is
adequate or accurate. Management believes that reserves for loan losses are
at a level adequate to provide for inherent loan losses. Although management
believes that it has considered all relevant factors in its estimation of
future losses, future adjustments to reserves may be necessary if conditions
change substantially from the assumptions used in making the original
estimations. Regulators will from time to time evaluate the allowance for
loan losses which is subject to adjustment based upon the information
available to the regulators at the time of their examinations.
Management believes the Bank has no undue concentration of loans in any
one particular industry. At March 31, 2005, the Bank had no allowance for
losses on real estate owned.
The following table sets forth an analysis of the Bank's allowance for
loan losses.
March 31,
------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(Dollars in Thousands)
Balance at beginning
of year.................... $5,764 $4,911 $3,689 $2,784 $2,121
Provision charged to
operations................. 780 1,200 1,800 1,525 925
Charge-offs:
Residential real estate.... 29 38 17 5 4
Commercial business and
commercial real estate.... 257 164 299 229 86
Consumer................... 157 467 594 584 240
------ ------ ------ ------ ------
Total charge-offs........ 443 669 910 818 330
------ ------ ------ ------ ------
Recoveries:
Residential real estate.... -- -- -- 6 17
Commercial business........ 112 16 40 41 4
Consumer................... 71 306 292 151 47
------ ------ ------ ------ ------
Total recoveries......... 183 322 332 198 68
------ ------ ------ ------ ------
Balance at end of year...... $6,284 $5,764 $4,911 $3,689 $2,784
====== ====== ====== ====== ======
Ratio of net charge-offs
during the year to average
loans outstanding during
the year................... 0.09% 0.14% 0.24% 0.26% 0.12%
====== ====== ====== ====== ======
12
The distribution of the Bank's allowance for loan losses at the dates indicated is summarized in the
following table. The entire allowance is available to absorb losses from all loan categories.
At March 31,
----------------------------------------------------------------------------------
2005 2004 2003 2002 2001
-------------- ------------- ------------- ------------- -------------
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Residential............ $ 531 37.0% $ 500 40.1% $ 473 40.3% $ 435 41.0% $ 374 50.6%
Consumer............... 2,876 15.0 2,632 16.4 2,219 18.1 1,405 20.0 1,205 18.9
Commercial business
and commercial
real estate........... 2,877 48.0 2,632 43.5 2,219 41.6 1,849 39.0 1,205 30.5
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total................ $6,284 100.0% $5,764 100.0% $4,911 100.0% $3,689 100.0% $2,784 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Service Corporation
- -------------------
As a federally chartered savings bank, Security Federal is permitted by
OTS regulations to invest up to 3% of its assets in the stock of service
corporations, provided that any investment in excess of 2% of its assets must
be primarily for community, inner-city or community development purposes. At
March 31, 2005, Security Federal's net investment in its service corporations
(including loans to service corporations) totaled $771,000. In addition to
investments in service corporations, federal institutions are permitted to
invest an unlimited amount in operating subsidiaries engaged solely in
activities which a federal savings bank may engage in directly.
Security Federal Insurance, Inc. ("SFINS"), Security Federal Investments,
Inc. ("SFINV") and Security Federal Trust, Inc. ("SFT"). SFINS, SFINV AND
SFT, wholly owned subsidiaries of the Bank, were formed during fiscal 2002 and
began operating during the December 2001 quarter. SFINS is an insurance
agency offering business, health, home and life insurance. SFINV offers
mutual funds, annuities and discount brokerage services. SFT offers a full
range of trust and financial planning services. The operations of SFINS,
SFINV and SFT are included in the Company's Consolidated Financial Statements.
Security Financial Services Corporation ("SFSC"). SFSC was incorporated
in 1975 as a wholly owned subsidiary of the Bank. Its primary activity was
investment brokerage services. SFSC is currently inactive.
Real Estate Partnership. The Company has developed real estate through
two real estate partnerships which it purchased from SFSC at market value in
December 1995. Each project was designed primarily to develop and sell
residential lots in and around the Bank's primary lending area. One project
was completed during fiscal 1998 and the other project was completed during
fiscal 2001. The Company had no investment in the remaining project at March
31, 2005. The Company has no current plans for additional real estate
ventures.
Investment Activities
- ---------------------
Investment securities. The Bank has authority to invest in various types
of liquid assets, including U.S. Treasury obligations and securities of
various federal agencies, certificates of deposit at insured institutions,
bankers' acceptances and federal funds.
The Bank may also invest a portion of its assets in certain commercial
paper and corporate debt securities. The Bank is also authorized to invest in
mutual funds whose assets conform to the investments that a federal thrift
institution is authorized to make directly. There are various restrictions on
the foregoing investments. For example, the commercial paper must be
appropriately rated by at least two nationally recognized investment rating
services and the corporate debt securities must be appropriately rated by at
least one such service. In addition, the average maturity of an institution's
portfolio of corporate debt securities may not, at any one time, exceed six
years, and the commercial paper must mature within nine months of issuance.
Moreover, an institution's total investment in the commercial paper and
corporate debt securities of any one issuer may not exceed 1% of the
institution's assets except that an institution may invest 5% of its assets in
the shares of any appropriate mutual fund. See "Regulation - Federal
Regulation of Savings Associations."
13
As a member of the Federal Home Loan Bank ("FHLB") System, Security
Federal must maintain minimum levels of investments that are liquid assets as
defined in Federal regulations. See "Regulation Federal Regulation of
Savings Associations Federal Home Loan Bank System." Liquidity may increase
or decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans.
Historically, the Bank has maintained its liquid assets above the minimum
requirements imposed by the OTS regulations and at a level believed adequate
to meet requirements of normal daily activities, repayment of maturing debt
and potential deposit outflows. Cash flow projections are regularly reviewed
and updated to assure that adequate liquidity is provided.
The following table sets forth the composition of the Company's portfolio
of securities and other investments, not including mortgage-backed securities.
At March 31,
-----------------------------
2005 2004 2003
-------- -------- --------
(In Thousands)
Interest bearing deposit at FHLB............ $ 164 $ 303 $ 339
-------- -------- --------
Total..................................... $ 164 $ 303 $ 339
======== ======== ========
Investment Securities:
Available for Sale:
FHLB securities.......................... $ 4,970 $ 14,280 $ 47,794
Federal Farm Credit Bank securities...... -- 2,042 5,129
Freddie Mac bonds........................ 485 578 816
-------- -------- --------
Total securities available for sale.... 5,455 16,900 53,739
-------- -------- --------
Held to Maturity:
FHLB securities.......................... 67,002 57,944 18,990
Fannie Mae securities.................... -- -- 30
Federal Farm Credit Bank securities...... 8,999 13,010 2,006
-------- -------- --------
Total securities held to maturity...... 76,001 70,954 21,026
-------- -------- --------
Total securities (1)........................ 81,456 87,854 74,765
FHLB stock.................................. 6,235 4,817 2,859
-------- -------- --------
Total securities and FHLB stock (1)......... $ 87,691 $ 92,671 $ 77,624
======== ======== ========
- -----------
(1) Does not include mortgage-backed securities.
At March 31, 2005, the Company did not have any investment securities
(exclusive of obligations of the U.S. Government and federal agencies) issued
by any one entity with a total book value in excess of 10% of stockholders'
equity.
14
The following table sets forth the maturities or repricing of investment
securities and FHLB stock at March 31, 2005, and the weighted average yields
of such securities and FHLB stock (calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security).
Callable securities are shown at their likely call dates based on current
interest rates. The table was prepared using amortized cost.
Maturing or Repricing
-------------------------------------------------------------
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
------------- ------------- ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
U.S. Government
and other
agency
obligations... $9,484 3.22% $65,976 3.50% $6,011 3.85% $ -- --%
FHLB stock (1). -- -- 6,235 4.25 -- -- -- --
------ ---- ------- ---- ------ ---- ------ ----
Total........ $9,484 3.22% $72,211 3.57% $6,011 3.85% $ -- --%
====== ==== ======= ==== ====== ==== ====== =====
- -----------
(1) FHLB stock has no stated maturity date.
For information regarding the market value of the Bank's securities
portfolios, see Notes 3 and 4 of the Notes to Consolidated Financial
Statements contained in the Annual Report.
Mortgage-backed securities. Security Federal has a portfolio of
mortgage-backed securities which it holds in both an available for sale and a
held to maturity portfolio. Mortgage-backed securities can serve as
collateral for borrowings and, through repayments, as a source of liquidity.
Under the Bank's risk-based capital requirement, mortgage-backed securities
have a risk weight of 20% (or 0% in the case of Government National Mortgage
Association ("Ginnie Mae") securities) in contrast to the 50% risk weight
carried by residential loans. See "Regulation."
The following tables set forth the composition of the mortgage-backed
securities available for sale portfolio at the dates indicated.
At March 31,
--------------------------------
2005 2004 2003
-------- -------- --------
(In Thousands)
Available for Sale:
Freddie Mac....................... $ 26,146 $ 18,452 $ 15,810
Fannie Mae........................ 81,492 91,494 57,794
Ginnie Mae........................ 51,722 47,566 32,808
-------- -------- --------
Total........................... $159,360 $157,512 $106,412
======== ======== ========
The following table sets forth the composition of the mortgage-backed
securities held to maturity portfolio at the dates indicated.
At March 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
Book Value Book Value Book Value
---------- ---------- ----------
(In Thousands)
Held to Maturity:
Freddie Mac....................... $260 $350 $941
==== ==== ====
At March 31, 2005, the Company did not have any mortgage-backed
securities (exclusive of obligations of agencies of the U.S. Government)
issued by any one entity with a total book value in excess of 10% of
stockholders equity.
15
For information regarding the market values of Security Federal's
mortgage-backed securities portfolio, see Notes 3 and 4 of the Notes to
Consolidated Financial Statements contained in the Annual Report.
The following table sets forth the final maturities or initial
repricings, whichever occurs first, and the weighted average yields of the
mortgage-backed securities at March 31, 2005. Not considered in the
preparation of the table below is the effect of scheduled payments or
anticipated prepayments. The table is prepared using amortized cost.
The Earliest of Maturing or Repricing March 31, 2005
-------------------------------------------------------------------- --------------
Less Than 1 to 5 5 to 10 Over Balance
1 Year Years Years Ten Years Outstanding
-------------- -------------- -------------- -------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Fannie Mae...... $ 9,766 3.49% $27,755 3.77% $36,191 4.20% $ 8,789 4.89% $ 82,501 4.04%
Freddie Mac..... 134 5.41 13,782 3.90 9,025 4.02 3,855 5.28 26,796 4.15
Ginnie Mae...... 41,239 3.04 9,323 3.76 908 6.02 388 6.97 51,858 3.25
------- ---- ------- ----- ------- ---- ------- ---- -------- ----
Total........... $51,139 3.13% $50,860 3.80% $46,124 4.20% $13,032 5.07% $161,155 3.80%
======= ==== ======= ==== ======= ==== ======== ==== ======== ====
Sources of Funds
- ----------------
Deposit accounts have traditionally been a principal source of the Bank's
funds for use in lending and for other general business purposes. In addition
to deposits, the Bank derives funds from loan repayments, cash flows generated
from operations (including interest credited to deposit accounts), FHLB of
Atlanta advances, the sale of securities under agreements to repurchase, and
loan sales. Scheduled loan payments are a relatively stable source of funds
while deposit inflows and outflows and the related cost of such funds have
varied widely. FHLB of Atlanta advances and the sale of securities under
agreements to repurchase may be used on a short-term basis to compensate for
seasonal reductions in deposits or deposit inflows at less than projected
levels and may be used on a longer term basis in support of expanded lending
activities. The availability of funds from loan sales is influenced by
general interest rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the Annual Report.
Deposits. The Bank attracts both short-term and long-term deposits from
the general public by offering a wide assortment of account types and rates.
In recent years, market conditions have required the Bank to rely increasingly
on short-term accounts and other deposit alternatives that are more responsive
to market interest rates than the savings accounts and regulated fixed
interest rate, fixed-term certificates that were the Bank's primary source of
deposits before 1978. The Bank offers regular savings accounts, checking
accounts, various money market accounts, fixed interest rate certificates with
varying maturities, negotiated rate $100,000 or above jumbo certificates of
deposit ("Jumbo CDs") and individual retirement accounts.
At March 31, 2005, the Bank had no brokered deposits. In addition, the
Bank believes that, based on its experience over the past several years, its
savings and transaction accounts are stable sources of deposits.
16
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs for the periods indicated.
At March 31,
------------------------------------------------------
2005 2004 2003
---------------- ---------------- ----------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Interest Rate Range
- -------------------
for 2005:
- ---------
Savings accounts
0% - 1.50%........... $ 17,744 4.1% $ 17,367 4.5% $ 16,455 4.6%
NOW and other trans-
action accounts
0% - 2.47%........... 88,170 20.5 80,739 20.7 82,522 23.0
Money market funds
1.09% - 2.72%........ 164,088 38.1 158,587 40.7 102,397 28.6
Total non- -------- ----- -------- ----- -------- -----
certificates...... $270,002 62.7% $256,693 65.9% $201,374 56.2%
======== ===== ======== ===== ======== =====
Certificates:
- -------------
0.00-4.99............. $150,486 35.0% $122,599 31.5% $144,635 40.3%
5.00-6.99%............ 9,799 2.3 10,301 2.6 12,437 3.5
7.00-8.99%............ -- -- -- -- 28 --
-------- ----- -------- ----- -------- -----
Total certificates. 160,285 37.3 132,900 34.1 157,100 43.8
-------- ----- -------- ----- -------- -----
Total deposits..... $430,287 100.0% $389,593 100.0% $358,474 100.0%
======== ===== ======== ===== ======== =====
The Bank relies to a limited extent upon locally obtained Jumbo CDs to
maintain its deposit levels. At March 31, 2005, Jumbo CDs constituted 14.3%
of the Bank's total deposits. Security Federal has not relied heavily on
Jumbo CDs to manage interest rate sensitivity.
The following table sets forth the deposit flows at the Bank during the
periods indicated.
Years Ended March 31,
------------------------------
2005 2004 2003
-------- -------- --------
(Dollars in Thousands)
Opening balance...................... $389,593 $358,474 $309,038
Net deposits......................... 32,977 24,339 41,747
Interest credited.................... 7,717 6,780 7,689
-------- -------- --------
Ending balance....................... 430,287 389,593 358,474
-------- -------- --------
Net increase (decrease).............. $ 40,694 $ 31,119 $ 49,436
======== ======== ========
Percent increase (decrease).......... 10.4% 8.7% 16.0%
======== ======== ========
17
The following table shows rate and maturity information for the Bank's
certificates of deposit as of March 31, 2005.
Less
than 2.00- 3.00- 4.00- 5.00- 6.00-
2.00% 2.99% 3.99% 4.99% 5.99% 6.99% Total
----- ----- ----- ----- ----- ----- -----
(In Thousands)
Certificate
accounts maturing
in quarter ending:
June 30, 2005...... $13,876 $15,124 $ 43 $ 446 $ 3 $ -- $29,492
September 30,
2005............. 6,814 13,072 10,691 190 13 -- 30,780
December 31, 2005.. 2,513 19,018 476 68 9 -- 22,084
March 31, 2006..... 166 11,655 1,368 26 131 -- 13,346
June 30, 2006...... 69 4,409 13,987 371 -- -- 18,836
September 30, 2006. -- 11,167 2,048 356 -- -- 13,571
December 31, 2006.. -- 4,903 659 1,568 -- -- 7,130
March 31, 2007..... -- 280 255 355 1,495 -- 2,385
June 30, 2007...... -- 244 60 44 5,390 -- 5,738
September 30, 2007. -- 256 462 2,109 2,749 -- 5,576
December 31, 2007.. -- 53 744 2,435 10 -- 3,242
Thereafter......... 769 6,208 1,129 -- -- -- 8,106
------- ------- ------- ------ ------ ----- --------
Total............ $23,438 $80,950 $37,001 $9,097 $9,800 $ -- $160,286
======= ======= ======= ====== ====== ===== ========
The following table indicates the amount of the Bank's deposits of
$100,000 or more by time remaining until maturity at March 31, 2005.
Certificates Savings, NOW and
of Deposit Money Market Accounts
---------- ---------------------
(In Thousands)
Maturity Period
- ---------------
Three months or less.............. $12,953 $129,868
Over three through six months..... 15,535 --
Over six through twelve month..... 9,539 --
Over twelve months................ 23,652 --
------- --------
Total.......................... $61,679 $129,868
======= ========
Borrowings
- ----------
As a member of the FHLB of Atlanta, the Bank is required to own capital
stock in the FHLB of Atlanta and is authorized to apply for advances from the
FHLB of Atlanta. Each FHLB credit program has its own interest rate, which
may be fixed or variable, and range of maturities. The FHLB of Atlanta may
prescribe the acceptable uses to which these advances may be put, as well as
limitations on the size of the advances and repayment provisions. See Note 9
of the Notes to Consolidated Financial Statements contained in the Annual
Report for information regarding the maturities and rate structure of the
Bank's FHLB advances. Federal law contains certain collateral requirements
for FHLB advances. See "Regulation - Federal Regulation of Savings
Associations - Federal Home Loan Bank System."
At March 31, 2005, the Bank had $5.5 million in retail repurchase
agreements with an average rate of 2.54%. These repurchase agreements are
included in "Other Borrowings" in the consolidated financial statements and
the following table.
18
The following table sets forth the maximum month-end balance and average
balance of FHLB advances and other borrowings for the periods indicated.
Years Ended March 31,
-------------------------
2005 2004 2003
---- ---- ----
(In Thousands)
Maximum Balance:
FHLB advances........................... $115,258 $103,886 $57,472
Other borrowings........................ 5,915 6,213 6,735
Average Balance:
FHLB advances........................... $105,272 $ 72,995 $42,123
Other borrowings........................ 5,488 5,361 5,663
The following table sets forth information as to the Bank's borrowings
and the weighted average interest rates thereon at the dates indicated.
At March 31,
-------------------------
2005 2004 2003
---- ---- ----
(Dollars in Thousands)
Balance:
FHLB advances........................... $112,038 $96,336 $49,772
Other borrowings........................ 5,594 5,477 4,193
Weighted Average Interest Rate:
At Fiscal Year End:
FHLB advances........................... 3.41% 3.59% 4.50%
Other borrowings........................ 2.54 0.93 1.17
During Fiscal Year:
FHLB advances........................... 3.54% 3.87% 5.31%
Other borrowings........................ 1.53 0.97 1.57
Competition
- -----------
The Bank serves the counties of Aiken and Lexington, South Carolina
through its eleven branch offices located in Aiken, North Augusta,
Graniteville, Langley, Clearwater, Wagener, Lexington, and West Columbia,
South Carolina.
Security Federal faces strong competition both in originating loans and
in attracting deposits. Competition in originating loans comes primarily from
other thrift institutions, commercial banks, mortgage bankers and credit
unions who also make loans in the Bank's market area. The Bank competes for
loans principally on the basis of the interest rates and loan fees it charges,
the types of loans it makes and the quality of services it provides to
borrowers.
The Bank faces substantial competition in attracting deposits from other
thrift institutions, commercial banks, money market and mutual funds, credit
unions and other investment vehicles. The ability of the Bank to attract and
retain deposits depends on its ability to provide an investment opportunity
that satisfies the requirements of investors as to rate of return, liquidity,
risk and other factors. The Bank attracts a significant amount of deposits
through its branch offices primarily from the communities in which those
branch offices are located. Therefore, competition for those deposits is
principally from other thrift institutions and commercial banks located in the
same communities. The Bank competes for these deposits by offering a variety
of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges
at each.
19
The authority to offer money market deposits, and expanded lending and
other powers authorized for thrift institutions by federal law, have resulted
in increased competition for both deposits and loans between thrift
institutions and other financial institutions such as commercial banks and
credit unions.
REGULATION
The following is a brief description of certain laws and regulations
which are applicable to the Company and the Bank. The description of these
laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified
in its entirety by reference to the applicable laws and regulations.
Legislation is introduced from time to time in the United States Congress
that may affect the operations of the Company and the Bank. In addition, the
regulations governing the Company and the Bank may be amended from time to
time by the OTS. Any such legislation or regulatory changes in the future
could have an adverse effect. We cannot predict whether any such changes may
occur.
General
The Bank, as a federally-chartered savings institution, is subject to
federal regulation and oversight by the OTS extending to all aspects of its
operations. The Bank also is subject to regulation and examination by the
Federal Deposit Insurance Corporation ("FDIC"), which insures the deposits of
the Bank to the maximum extent permitted by law, and requirements established
by the Federal Reserve Board. Federally-chartered savings institutions are
required to file periodic reports with the OTS and are subject to periodic
examinations by the OTS and the FDIC. The investment and lending authority of
savings institutions are prescribed by federal laws and regulations, and these
institutions are prohibited from engaging in any activities not permitted by
the laws and regulations. This regulation and supervision primarily is
intended for the protection of depositors and not for the purpose of
protecting shareholders.
The OTS regularly examines the Bank and prepares reports for the
consideration of the Bank's Board of Directors on any deficiencies that it may
find in the Bank's operations. The FDIC also has the authority to examine the
Bank in its roles as the administrator of the Savings Association Insurance
Fund ("SAIF"). The Bank's relationship with its depositors and borrowers also
is regulated to a great extent by both federal and state laws, especially in
matters such as the ownership of savings accounts and the form and content of
the Bank's mortgage requirements. Any change in these regulations, whether by
the FDIC, the OTS or Congress, could have a material adverse impact on the
Company, the Bank and their operations.
Federal Regulation of Savings Institutions
Office of Thrift Supervision. The OTS has extensive authority over the
operations of savings institutions. As part of this authority, the Bank is
required to file periodic reports with the OTS and is subject to periodic
examinations by the OTS and the FDIC. When these examinations are conducted
by the OTS and the FDIC, the examiners may require the Bank to provide for
higher general or specific loan loss reserves. All savings institutions are
subject to a semi-annual assessment, based upon the institution's total
assets, to fund the operations of the OTS. The OTS also has extensive
enforcement authority over all savings institutions and their holding
companies, including the Bank and the Company. This enforcement authority
includes, among other things, the ability to assess civil money penalties,
issue cease-and-desist or removal orders and initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or untimely
reports filed with the OTS. Except under certain circumstances, public
disclosure of final enforcement actions by the OTS is required.
In addition, the investment, lending and branching authority of the Bank
is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by these laws. For example, no savings institution
may invest in non-investment grade corporate debt securities. In addition,
the permissible level of investment by federal institutions in loans secured
by non-residential real property may not exceed 400% of total capital, except
with approval of the OTS.
20
Federal savings institutions are also generally authorized to branch
nationwide. The Bank is in compliance with the noted restrictions.
All savings institutions are required to pay assessments to the OTS to
fund the agency's operations. The general assessments, paid on a semi-annual
basis, are determined based on the savings institution's total assets,
including consolidated subsidiaries. The Bank's OTS assessment for the fiscal
year ended March 31, 2005 was $115,000.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs that administer the home financing
credit function of savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of
the FHLB System. It makes loans or advances to members in accordance with
policies and procedures, established by the Board of Directors of the FHLB,
which are subject to the oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient
collateral as determined by the FHLB. In addition, all long-term advances are
required to provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Atlanta. At March 31, 2005, the Bank had $6.2 million in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past two fiscal
years these dividends have averaged 3.66% and were 3.75% for the fiscal year
ended March 31, 2005.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low- and
moderately-priced housing programs through direct loans or interest subsidies
on advances targeted for community investment and low- and moderate-income
housing projects. These contributions have affected adversely the level of
FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of the Bank's FHLB stock may result in a
corresponding reduction in the Bank's capital.
Deposit Insurance. The Bank is a member of the SAIF, which is
administered by the FDIC. Deposits are insured up to the applicable limits by
the FDIC and this insurance is backed by the full faith and credit of the
United States government.
As insurer, the FDIC imposes deposit insurance premiums and is authorized
to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging
in any activity the FDIC determines by regulation or order to pose a serious
risk to the SAIF. The FDIC also has the authority to initiate enforcement
actions against savings institutions, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it determines
that an institution has engaged in unsafe or unsound practices or is in an
unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of
Tier 1, or core capital, to risk-weighted assets ("Tier 1 risk-based capital")
of at least 6% and a risk-based capital ratio of at least 10%) and considered
healthy pay the lowest premium while institutions that are less than
adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less
than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. Risk classification
of all insured institutions is made by the FDIC for each semi-annual
assessment period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than
the designated reserve ratio of 1.25% of SAIF insured deposits. In setting
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
21
Since January 1, 1997, the premium schedule for Bank Insurance Fund
("BIF") and SAIF insured institutions has ranged from 0 to 27 basis points.
However, SAIF and BIF insured institutions are required to pay a Financing
Corporation assessment in order to fund the interest on bonds issued to
resolve thrift failures in the 1980s equal to approximately 1.50 points for
each $100 in domestic deposits annually. These assessments, which may be
revised based upon the level of BIF and SAIF deposits, will continue until the
bonds mature.
Prompt Corrective Action. The OTS is required to take certain
supervisory actions against undercapitalized savings institutions, the
severity of which depends upon the institution's degree of
undercapitalization. Generally, an institution that has a ratio of total
capital to risk-weighted assets of less than 8%, a ratio of Tier I (core)
capital to risk-weighted assets of less than 4%, or a ratio of core capital to
total assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized."
An institution that has a total risk-based capital ratio less than 6%, a
Tier I capital ratio of less than 3% or a leverage ratio that is less than 3%
is considered to be "significantly undercapitalized" and an institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to
be "critically undercapitalized." Subject to a narrow exception, the OTS is
required to appoint a receiver or conservator for a savings institution that
is "critically undercapitalized." OTS regulations also require that a capital
restoration plan be filed with the OTS within 45 days of the date a savings
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company in an amount of up to the
lesser of 5% of the institution's assets or the amount which would bring the
institution into compliance with all capital standards. In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS also could take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
At March 31, 2005, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS.
Qualified Thrift Lender Test. All savings institutions, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
institution to have at least 65% of its total assets, as defined by
regulation, in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. As an alternative, the savings
institution may maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code ("Code"). Under either test,
such assets primarily consist of residential housing related loans and
investments. At March 31, 2005, the Bank met the test and its QTL percentage
was 97%.
Any savings institution that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If such an association has not yet requalified or converted to a national
bank, its new investments and activities are limited to those permissible for
both a savings institution and a national bank, and it is limited to national
bank branching rights in its home state. In addition, the association is
immediately ineligible to receive any new FHLB borrowings and is subject to
national bank limits for payment of dividends. If such association has not
requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. If any association that fails the QTL test is
controlled by a holding company, then within one year after the failure, the
holding company must register as a bank holding company and become subject to
all restrictions on bank holding companies. See "- Savings and Loan Holding
Company Regulations."
Capital Requirements. Federally-insured savings institutions, such as the
Bank, are required to maintain a minimum level of regulatory capital. The OTS
has established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings institutions. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual institutions on a
case-by-case basis.
22
The OTS capital regulations require tangible capital of at least 1.5% of
adjusted total assets, as defined by regulation. Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At March 31, 2005, the Bank had no intangible assets in the
form of mortgage servicing rights.
At March 31, 2005, the Bank had tangible capital of $35.7 million, or
6.1% of tangible assets, which is approximately $26.8 million above the
minimum requirement of 1.5% of tangible assets as of that date.
The capital standards also require core capital equal to at least 4.0% of
adjusted total assets unless an institution's supervisory condition is such to
allow it to maintain a 3.0% ratio. Core capital generally consists of
tangible capital plus certain intangible assets, including a limited amount of
purchased credit card relationships. At March 31, 2005, the Bank's mortgage
service rights were subject to these tests. At March 31, 2005, the Bank had
core capital equal to $35.7 million, or 6.1% of adjusted total assets, which
is $12.2 million above the minimum requirement of 4.0% in effect on that date.
The OTS also requires savings institutions to have core capital equal to
4.0% of risk-weighted assets ("Tier 1 risk-based"). At March 31, 2005, the
Bank had Tier 1 risk-based capital of $35.7 million or 10.5% of risk-weighted
assets, which is approximately $22.1 million above the minimum on that date.
The OTS also requires savings institutions to have total capital of at least
8% of risk-weighted assets. Total capital consists of core capital, as
defined above, and supplementary capital. Supplementary capital consists of
certain permanent and maturing capital instruments that do not qualify as core
capital and general valuation loan and lease loss allowances up to a maximum
of 1.25% of risk-weighted assets. Supplementary capital may be used to
satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings institution to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, are multiplied by a risk weight, ranging from
0% to 100%, based on the risk inherent in the type of asset. For example, the
OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to- four family first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by Fannie Mae
or Freddie Mac.
On March 31, 2005, the Bank had total risk-based capital of approximately
$39.9 million, including $35.7 million in core capital and $4.2 million in
qualifying supplementary capital, and risk-weighted assets of $338.9 million,
or total capital of 11.8% of risk-weighted assets. This amount was $12.7
million above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances,
required to take certain actions against savings institutions that fail to
meet their capital requirements. The OTS is generally required to take action
to restrict the activities of an "undercapitalized association", which is an
institution with less than either a 4.0% core capital ratio, a 4.0% Tier 1
risked-based capital ratio or an 8.0% risk-based capital ratio). Any such
institution must submit a capital restoration plan and until the plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized
institutions. As a condition to the approval of the capital restoration plan,
any company controlling an undercapitalized institution must agree that it
will enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings institution that fails to comply with its capital plan or has
Tier 1 risk-based or core capital ratios of less than 3.0% or a risk-based
capital ratio of less than 6.0% and is considered "significantly
undercapitalized" will be made subject to one or more additional specified
actions and operating restrictions which may cover all aspects of its
operations and may include a forced merger or acquisition of the institution.
An institution that becomes "critically undercapitalized" because it has a
tangible capital ratio of 2.0% or less is subject to further mandatory
restrictions on its activities in addition to those applicable to
significantly undercapitalized institutions. In addition, the OTS must
23
appoint a receiver, or conservator with the concurrence of the FDIC, for a
savings institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized institution is also
subject to the general enforcement authority of the OTS and the FDIC,
including the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an institution into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an
unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on its operations and
profitability.
Limitations on Capital Distributions. OTS regulations impose various
restrictions on savings institutions with respect to their ability to make
distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account.
Generally, savings institutions, such as the Bank, that before and after
the proposed distribution are well-capitalized, may make capital distributions
during any calendar year equal to up to 100% of net income for the year-to-
date plus retained net income for the two preceding years. However, an
institution deemed to be in need of more than normal supervision by the OTS
may have its dividend authority restricted by the OTS. The Bank may pay
dividends to the Company in accordance with this general authority.
Savings institutions proposing to make any capital distribution need not
submit written notice to the OTS prior to the distribution unless they are a
subsidiary of a holding company or would not remain well-capitalized following
the distribution. Savings institutions that do not, or would not meet their
current minimum capital requirements following a proposed capital distribution
or propose to exceed these net income limitations, must obtain OTS approval
prior to making the distribution. The OTS may object to the distribution
during that 30-day period based on safety and soundness concerns. See "-
Capital Requirements."
Activities of Associations and Their Subsidiaries. When a savings
institution establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the institution controls, the savings
institution must notify the FDIC and the OTS 30 days in advance and provide
the information each agency may, by regulation, require. Savings institutions
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings institution of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the institution or is
inconsistent with sound banking practices or with the purposes of the Federal
Deposit Insurance Act. Based upon that determination, the FDIC or the OTS has
the authority to order the savings institution to divest itself of control of
the subsidiary. The FDIC also may determine by regulation or order that any
specific activity poses a serious threat to the SAIF. If so, it may require
that no SAIF member engage in that activity directly.
Transactions with Affiliates. Savings institutions must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
institution were a Federal Reserve member bank. Generally, transactions
between a savings institution or its subsidiaries and its affiliates are
required to be on terms as favorable to the association as transactions with
non-affiliates. In addition, certain of these transactions, such as loans to
an affiliate, are restricted to a percentage of the institution's capital.
Affiliates of the Bank include the Company and any company which is under
common control with the Bank. In addition, a savings institution may not lend
to any affiliate engaged in activities not permissible for a bank holding
company or acquire the securities of most affiliates. The OTS has the
discretion to treat subsidiaries of savings institutions as affiliates on a
case by case basis.
On April 1, 2003, the Federal Reserve's Regulation W, which
comprehensively amends sections 23A and 23B of the Federal Reserve Act, became
effective. The Federal Reserve Act and Regulation W are applicable to savings
institutions such as the Bank. The Regulation unifies and updates staff
interpretations issued over the years, incorporates
24
several new interpretative proposals (such as to clarify when transactions
with an unrelated third party will be attributed to an affiliate) and
addresses new issues arising as a result of the expanded scope of nonbanking
activities engaged in by banks and bank holding companies in recent years and
authorized for financial holding companies under the Gramm-Leach-Bliley
Financial Services Modernization Act of 1999.
OTS regulations prohibit a savings institution from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and from purchasing the securities of any affiliate, other
than a subsidiary.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions
on loans to such persons and their related interests. Among other things,
such loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
Community Reinvestment Act. Under the Community Reinvestment Act, every
FDIC-insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
Community Reinvestment Act does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the Community
Reinvestment Act. The Community Reinvestment Act requires the OTS, in
connection with the examination of the Bank, to assess the institution's
record of meeting the credit needs of its community and to take that record
into account in its evaluation of certain applications, such as a merger or
the establishment of a branch, by the Bank. An unsatisfactory rating may be
used as the basis for the denial of an application by the OTS. Due to the
heightened attention being given to the Community Reinvestment Act in the past
few years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was examined for Community
Reinvestment Act compliance and received a rating of satisfactory in its
latest examination.
Affiliate Transactions. The Company and the Bank are separate and
distinct legal entities. Various legal limitations restrict the Bank from
lending or otherwise supplying funds to the Company, generally limiting any
single transaction to 10% of the Bank's capital and surplus and limiting all
such transactions to 20% of the Bank's capital and surplus. These
transactions also must be on terms and conditions consistent with safe and
sound banking practices that are substantially the same as those prevailing at
the time for transactions with unaffiliated companies.
Federally insured savings institutions are subject, with certain
exceptions, to certain restrictions on extensions of credit to their parent
holding companies or other affiliates, on investments in the stock or other
securities of affiliates and on the taking of such stock or securities as
collateral from any borrower. In addition, these institutions are prohibited
from engaging in certain tie-in arrangements in connection with any extension
of credit or the providing of any property or service.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers or
directors, receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $25,000 per
day, or $1.1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not
taken by the Director, the FDIC has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.
Environmental Issues Associated with Real Estate Lending. The
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), a federal statute, generally imposes strict liability on all prior
and present "owners and operators" of sites containing hazardous waste.
However, Congress asked to protect secured creditors by providing that the
term "owner and operator" excludes a person whose ownership is limited to
protecting its security interest in the site. Since the enactment of the
CERCLA, this "secured creditor exemption" has been the subject of
25
judicial interpretations which have left open the possibility that lenders
could be liable for cleanup costs on contaminated property that they hold as
collateral for a loan.
To the extent that legal uncertainty exists in this area, all creditors,
including the Bank, that have made loans secured by properties with potential
hazardous waste contamination (such as petroleum contamination) could be
subject to liability for cleanup costs, which costs often substantially exceed
the value of the collateral property.
Privacy Standards. On November 12, 1999, the Gramm-Leach-Bliley Financial
Services Modernization Act of 1999 ("GLBA") was signed into law. The purpose
of this legislation is to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers.
The Bank is subject to OTS regulations implementing the privacy
protection provisions of the GLBA. These regulations require the Bank to
disclose its privacy policy, including identifying with whom it shares
"non-public personal information," to customers at the time of establishing
the customer relationship and annually thereafter.
The regulations also require the Bank to provide its customers with
initial and annual notices that accurately reflect its privacy policies and
practices. In addition, the Bank is required to provide its customers with the
ability to "opt-out" of having the Bank share their non-public personal
information with unaffiliated third parties before they can disclose such
information, subject to certain exceptions.
The Bank is subject to regulatory guidelines establishing standards for
safeguarding customer information. These regulations implement certain
provisions of the GLBA. The guidelines describe the agencies' expectations for
the creation, implementation and maintenance of an information security
program, which includes administrative, technical and physical safeguards
appropriate to the size and complexity of the institution and the nature and
scope of its activities. The standards set forth in the guidelines are
intended to insure the security and confidentiality of customer records and
information, protect against any anticipated threats or hazards to the
security or integrity of such records and protect against unauthorized access
to or use of such records or information that could result in substantial harm
or inconvenience to any customer.
Anti-Money Laundering and Customer Identification. In response to the
terrorist events of September 11, 2001, the Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001 (the "USA Patriot Act") was signed into law on October 26, 2001.
The USA Patriot Act gives the federal government new powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. The Bank Secrecy Act, Title III of the USA Patriot
Act takes measures intended to encourage information sharing among bank
regulatory agencies and law enforcement bodies. Further, certain provisions of
Title III impose affirmative obligations on a broad range of financial
institutions. Title III and the related OTS regulations impose the following
requirements on financial institutions:
* establishment of anti-money laundering programs;
* establishment of a program specifying procedures for obtaining
identifying information from customers seeking to open new accounts,
including verifying the identity of customers within a reasonable
period of time;
* establishment of enhanced due diligence policies, procedures and
controls designed to detect and report money laundering; and
* prohibitions on correspondent accounts for foreign shell banks and
compliance with record keeping obligations with respect to
correspondent accounts of foreign banks.
Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal Reserve Act
and Bank Merger Act applications. The Bank's policies and procedures have been
updated to reflect the requirements of the USA Patriot Act, which had a
minimal impact on business and customers.
26
Savings and Loan Holding Company Regulations
- --------------------------------------------
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight of the OTS. Accordingly, the Company is
required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
present a serious risk to the subsidiary savings institution.
Mergers and Acquisitions. The Company must obtain approval from the OTS
before acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company or acquiring such an
institution or holding company by merger, consolidation or purchase of its
assets. In evaluating an application for the Company to acquire control of a
savings institution, the OTS would consider the financial and managerial
resources and future prospects of the Company and the target institution, the
effect of the acquisition on the risk to the insurance funds, the convenience
and the needs of the community and competitive factors.
Activities Restrictions. As a unitary savings and loan holding company,
the Company generally is not subject to activity restrictions. The Company and
its non-savings institution subsidiaries are subject to statutory and
regulatory restrictions on their business activities specified by federal
regulations, which include performing services and holding properties used by
a savings institution subsidiary, activities authorized for savings and loan
holding companies as of March 5, 1987, and non-banking activities permissible
for bank holding companies pursuant to the Bank Holding Company Act of 1956 or
authorized for financial holding companies pursuant to the GLBA.
If the Bank fails the QTL test, the Company must, within one year of that
failure, register as, and will become subject to, the restrictions applicable
to bank holding companies. See "- Federal Regulation of Savings Institutions
- - Qualified Thrift Lender Test."
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley Act") was signed into law on July 30, 2002 in response to
public concerns regarding corporate accountability in connection with the
recent accounting scandals at Enron and WorldCom. The stated goals of the
Sarbanes-Oxley Act are to increase corporate responsibility, to provide for
enhanced penalties for accounting and auditing improprieties at publicly
traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities laws. The
Sarbanes-Oxley Act generally applies to all companies, both U.S. and non-U.S.,
that file or are required to file periodic reports with the Securities and
Exchange Commission ("SEC") under the Securities Exchange Act of 1934,
including the Company.
The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules, requires the SEC and
securities exchanges to adopt extensive additional disclosure, corporate
governance and related rules. The Sarbanes-Oxley Act represents significant
federal involvement in matters traditionally left to state regulatory systems,
such as the regulation of the accounting profession, and to state corporate
law, such as the relationship between a board of directors and management and
between a board of directors and its committees.
TAXATION
Federal Taxation
- ----------------
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income.
27
The Bank's deductions with respect to "qualifying real property loans," which
are generally loans secured by certain interest in real property, were
computed using an amount based on the Bank's actual loss experience, or a
percentage equal to 8% of the Bank's taxable income, computed with certain
modifications and reduced by the amount of any permitted additions to the
non-qualifying reserve. Due to the Bank's loss experience, the Bank generally
recognized a bad debt deduction equal to 8% of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new
rules eliminated the 8% of taxable income method for deducting additions to
the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also required that all institutions recapture
all or a portion of their bad debt reserves added since the base year (last
taxable year beginning before January 1, 1988). The Bank has no post-1987
reserves subject to recapture. For taxable years beginning after December 31,
1995, the Bank's bad debt deduction will be determined under the experience
method using a formula based on actual bad debt experience over a period of
years. The unrecaptured base year reserves will not be subject to recapture
as long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continue to be subject
to provisions of present law referred to below that require recapture in the
case of certain excess distributions to shareholders.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Company, these distributions will be considered to
result in distributions from the balance of its bad debt reserve as of
December 31, 1987 (or a lesser amount if the Bank's loan portfolio decreased
since December 31, 1987) and then from the supplemental reserve for losses on
loans ("Excess Distributions"), and an amount based on the Excess
Distributions will be included in the Bank's taxable income. Nondividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid out
of the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a
distribution from the Bank's bad debt reserve. The amount of additional
taxable income created from an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, after the Conversion, the Bank makes a "nondividend
distribution," then approximately one and one-half times the Excess
Distribution would be includable in gross income for federal income tax
purposes, assuming a 34% corporate income tax rate (exclusive of state and
local taxes). See "Regulation" for limits on the payment of dividends by the
Bank. The Bank does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Bank, whether or
not an Alternative Minimum Tax is paid.
Dividends-Received Deduction. The Company may exclude from its income
100% of dividends received from the Bank as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
Audits. The Company, the Bank and its consolidated subsidiaries have
been audited or their books closed without audit by the IRS with respect to
consolidated federal income tax returns through March 31, 1999. See Note 10
of the Notes to Consolidated Financial Statements contained in the Annual
Report for additional information regarding income taxes.
28
State Taxation
- --------------
South Carolina has adopted the Code as it relates to savings banks,
effective for taxable years beginning after December 31, 1986. The Bank is
subject to South Carolina income tax at the rate of 6%. The Bank has not been
audited by the State of South Carolina during the past five years.
The Company's income tax returns have not been audited by federal or
state authorities within the last five years. For additional information
regarding income taxes, see Note 10 of the Notes to Consolidated Financial
Statements contained in the Annual Report.
Item 2. Properties
- -------------------
At March 31, 2005, Security Federal owned the buildings and land for its
main office, five of its branch offices, and the operations center, leased the
land and owned the improvements thereon for one of its offices, and leased
the remaining five offices. The property related to the offices owned by
Security Federal had a depreciated cost (including land) of approximately $4.9
million at March 31, 2005. At March 31, 2005, the aggregate net book value of
leasehold improvements (excluding furniture and equipment) associated with
leased premises was $1.2 million. See Note 6 of the Notes to Consolidated
Financial Statements contained in the Annual Report.
The following table sets forth the net book value of the offices owned
(including land) and leasehold improvements on properties leased by Security
Federal at March 31, 2005.
Lease Date
Expir- Facility Gross
Owned or ation Opened/ Square Net Book
Location Leased Date Acquired Footage Value
- ---------------------------- ------ ---- -------- ------- -----
Main Office:
1705 Whiskey Road S.
Aiken, South Carolina Owned N/A 1980 10,000 $276,000
Full Service Branch Offices
100 Laurens Street, N.W.
Aiken, South Carolina Leased 2013 1959 4,500 5,200
313 East Martintowne Road
North Augusta, South
Carolina Owned (1) N/A 1973 4,356 614,000
1665 Richland Avenue, W.
Aiken, South Carolina Owned N/A 1984 1,942 294,000
Montgomery & Canal Streets
Masonic Shopping Center
Graniteville, South Carolina Leased 2007 1993 (2) 3,576 315,000
2812 Augusta Road
Langley, South Carolina Owned N/A 1993 (2) 2,509 127,000
Highway 125 and Highways 1
and 78
Midland Valley Shopping Center
Clearwater, South Carolina Leased 2003 1993 (2) 2,287 68,000
29
Lease Date
Expir- Facility Gross
Owned or ation Opened/ Square Net Book
Location Leased Date Acquired Footage Value
- ---------------------------- ------ ---- -------- ------- -----
118 Main Street North
Wagener, South Carolina Owned N/A 1993(2) 3,600 $ 208,000
Wal-Mart Superstore
2035 Whiskey Road
Aiken, South Carolina Leased 2001 1996 517 86,000
1185 Sunset Boulevard
West Columbia, South
Carolina Leased 2015 2000 10,000 764,000
5446 Sunset Boulevard
Lexington, South Carolina Owned (3) N/A 2003 9,200 1,668,000
Operations Center:
871 East Pine Log Road
Aiken, South Carolina Owned N/A 1988 10,000 824,000
- -------------
(1) Security Federal has a lease with options through 2063.
(2) Represents acquisition date.
(3) Security Federal has a lease on the land for this office which expires in
2018, but has options through 2063.
Item 3. Legal Proceedings
-----------------
The Company is involved as plaintiff or defendant in various legal
actions arising in the course of its business. It is the opinion of
management, after consultation with counsel, that the resolution of these
legal actions will not have a material adverse effect on the Company's
financial condition and results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended March 31, 2005.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
------------------------------------------------------------------
and Issuer Purchases of Equity Securities
-----------------------------------------
The information contained in the section captioned "Shareholders
Information - Price Range of Common Stock" and "- Dividends" in the Annual
Report is incorporated herein by reference.
Stock Repurchases. The Company repurchased 8,077 shares of its
outstanding Common Stock at a cost of $165,089 during the fourth quarter of
the year ended March 31, 2005. In May 2004, the Company announced the
authorization to purchase up to 5% of its outstanding shares, or approximately
126,000 shares, subject to market conditions.
30
Item 6. Selected Financial Data
-----------------------
The information contained in the section captioned "Selected Consolidated
Financial and Other Data" in the Annual Report is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Market risk is the risk of loss from adverse changes in market prices and
rates. Our market risk arises principally from interest rate risk inherent in
our lending, investing, deposit and borrowings activities. Management
actively monitors and manages its interest rate risk exposure. In addition to
other risks that we manage in the normal course of business, such as credit
quality and liquidity, management considers interest rate risk to be a
significant market risk that could have a potentially have a material effect
on our financial condition and result of operations. The information
contained in the section captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset and Liability
Management" in the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Report of Independent and Registered Accounting Firm*
Consolidated Balance Sheets, March 31, 2005 and 2004*
Consolidated Statements of Income For the Years Ended March 31, 2005,
2004 and 2003*
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income For the Years Ended March 31, 2005, 2004 and 2003*
Consolidated Statements of Cash Flows For the Years Ended March 31, 2005,
2004 and 2003*
Notes to Consolidated Financial Statements*
Quarterly Financial Data (unaudited)*
* Contained in the Annual Report filed as an exhibit hereto and
incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
None.
Item 9A. Controls and Procedures
-----------------------
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of
the Company's disclosure controls and procedures (as defined in Section
13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) was carried out
under the supervision and with the participation of the Company's Chief
Executive Officer, Chief Financial Officer and several other members of the
Company's senior management as of the end of the period covered by this
report. The Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures as currently
in effect are effective in ensuring that the information required to be
disclosed by the Company in the reports it files or submits under the Act is
(i) accumulated and communicated to the Company's management (including the
Chief Executive Officer and Chief Financial Officer) in a timely manner, and
(ii) recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
(b) Changes in Internal Controls: In the year ended March 31, 2005, 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.
31
Item 9B. Other Information
-----------------
There was no information to be disclosed by the Company in a report on
Form 8-K during the fourth quarter of fiscal 2005 that was not so disclosed.
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The information contained under the sections captioned "Election of
Directors" and "Executive Officers Who Are Not Directors of the Company or the
Bank" in the Proxy Statement are incorporated herein by reference.
Audit Committee Financial Expert. The Audit Committee of the Company is
composed of Directors Harry O. Weeks (Chairperson), Clyburn and Moore. Each
member of the Audit Committee is "independent" as defined in the Nasdaq Stock
Market listing standards. The Board of Directors has determined there is no
"audit committee financial expert" as defined by the SEC. The Board believes
that the current members of the Audit Committee are qualified to serve based
on their collective experience and background. Each member of the Audit
Committee is independent as that term is used in Item 7(d)(3)(iv) of Schedule
14A promulgated under the Exchange Act.
Code of Ethics. The Board of Directors adopted a Code of Ethics for the
Company's officers (including its senior financial officers), directors, and
employees. The Code is applicable to the Company's principal executive
officer and senior financial officers, and requires individuals to maintain
the highest standards of professional conduct. A copy of the Code of Ethics
is available upon request from the Company. Requests should be made to:
Secretary, Security Federal Corporation, P.O. Box 810, Aiken, South Carolina
29802.
Item 11. Executive Compensation
----------------------
The information contained in the section captioned "Executive Officers"
in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
------------------------------------------------------------------
Related Stockholder Matters
---------------------------
The information contained in the section captioned "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is
incorporated herein by reference.
Equity Compensation Plan Information. The following table sets forth
certain information with respect to securities to be issued under the
Company's equity compensation plans as of March 31, 2005.
Number of
securities
remaining
available for
Number of future issuance
securities to under equity
be issued upon Weighted-average compensation
exercise of exercise price plans (excluding
outstanding of outstanding securities
options, warrants options, warrants reflected
Plan category and rights and rights in column (a))
- ---------------------- ---------- ---------- --------------
(a) (b) (c)
Equity compensation
plans approved by
security holders...... 135,292 $19.09 17,000
Equity compensation
plans not approved
by security holders... N/A N/A N/A
------- ------- -------
Total............ 135,292 $19.09 17,000
======= ======= =======
32
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The information contained in the section captioned "Certain Transactions"
in the Proxy Statement is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
--------------------------------------
The information contained under the section captioned "Independent
Auditors" is included in the Company's Proxy Statement and is incorporated
herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
------------------------------------------
(a) 1. Financial Statements.
---------------------
For a list of the financial statements filed as part of this
report see Part II - Item 8.
2. Financial Statement Schedules.
------------------------------
All schedules have been omitted as the required information is
either inapplicable or contained in the Consolidated Financial
Statements or related Notes contained in the Annual Report filed
as an exhibit hereto.
3. Exhibits:
--------
3.1 Articles of Incorporation, as amended (1)
3.2 Bylaws (2)
4 Instruments defining the rights of security holders,
including indentures (3)
10.1 Executive Compensation Plans and Arrangements:
10.2 Salary Continuation Agreements (4)
10.3 Amendment One to Salary Continuation Agreements (5)
10.4 1999 Stock Option Plan (2)
10.5 1987 Stock Option Plan (4)
10.6 2002 Stock Option Plan (6)
10.7 2004 Employee Stock Purchase Plan (7)
10.8 Incentive Compensation Plan (4)
13 Annual Report to Stockholders
21 Subsidiaries of Registrant
23 Consent of Elliott Davis, LLC
31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act
32 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act
-----------
(1) Filed on June 26, 1998, as an exhibit to the Company's Proxy
Statement and incorporated herein by reference.
(2) Filed on March 2, 2000, as an exhibit to the Company's
Registration Statement on Form S-8 and incorporated herein
by reference.
(3) Filed on August 12, 1987, as an exhibit to the Company's
Registration Statement on Form 8-A and incorporated herein
by reference.
(4) Filed on June 28, 1993, as an exhibit to the Company's
Annual Report on Form 10-KSB and incorporated herein by
reference.
33
(5) Filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1993 and
incorporated herein by reference.
(6) Filed on June 19, 2002, as an exhibit to the Company's Proxy
Statement and incorporated herein by reference.
(7) Filed on June 18, 2004, as an exhibit to the Company's Proxy
Statement and incorporated herein by reference.
34
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: June 29, 2005 By: /s/ Timothy W. Simmons
-----------------------------------
Timothy W. Simmons
President, Chief Executive Officer
and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Timothy W. Simmons June 29, 2005
-------------------------------------------------
Timothy W. Simmons
President, Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/ Roy G. Lindburg June_29, 2005
-------------------------------------------------
Roy G. Lindburg
Treasurer, Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
By: /s/ T. Clifton Weeks June 29, 2005
-------------------------------------------------
T. Clifton Weeks
Chairman of the Board and Director
By: /s/ J. Chris Verenes June_29, 2005
-------------------------------------------------
J. Chris Verenes
President of the Bank and Director of
the Company and the Bank
By: /s/ Gasper L. Toole III June 29, 2005
-------------------------------------------------
Gasper L. Toole III
Director
By: /s/ Harry O. Weeks Jr. June 29, 2005
-------------------------------------------------
Harry O. Weeks Jr.
Director
By: /s/ Robert E. Alexander June 29, 2005
-------------------------------------------------
Robert E. Alexander
Director
By: /s/Thomas L. Moore June 29, 2005
-------------------------------------------------
Thomas L. Moore
Director
By: /s/William Clyburn June 29, 2005
-------------------------------------------------
William Clyburn
Director
INDEX TO EXHIBITS
Exhibit Number
- --------------
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Elliott Davis, LLC
31.1 Certification of Chief Executive Officer of Security Federal
Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of Chief Financial Officer of Security Federal
Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Certification of Chief Executive Officer and Chief Financial
Officer of Security Federal Corporation Pursuant to Section 906
of the Sarbanes-Oxley Act
Exhibit 13
Annual Report to Stockholders
Annual Report
March 31st, 2005
Security
Federal
Corporation
CONTENTS
Letter to Shareholders 3
Financial Highlights 4-6
Selected Consolidated Financial and Other Data 7
Management's Discussion and Analysis
of Financial Condition and Results of Operations 8
Report of Elliott Davis, LLC, Independent Auditors 23
Consolidated Balance Sheets 24
Consolidated Statements of Income 25
Consolidated Statements of Shareholders' Equity 26
& Comprehensive Income
Consolidated Statements of Cash Flows 27-28
Notes to Consolidated Financial Statements 29-49
Shareholders Information 50-51
Security Federal Bank Board of Directors 52-54
& Management Team
Security Federal Bank's Financial Service Subsidiaries 55
Doing what is right.
Security Federal had another solid year. We increased our lead in market
share in Aiken County, and continue to make significant advances in the South
Carolina Midlands' market. We will be opening our new Aiken south side branch
in December, and have plans to open several new branches in the Midlands in
the next three years. Our Financial Services subsidiaries-Insurance,
Investments and Trust-are beginning to develop an outstanding reputation. We
are committed to growing our Financial Services in the Security Federal
tradition-focusing on what is in the best interest of our customer.
We are growing, but we realize that we are going to have to continue to
develop differentiators that make us stand apart from our competition. Our
employees are providing the difference for us-focusing on the customers' needs
and doing what's right. We realize that we are going to have to continue to
work harder to be successful against the larger banks. We are committed to
doing that by continuing to build on the special relationship we have with our
customers and by providing localized expertise that larger banks have
difficulty providing. We are committed to building on the tradition of service
that this bank has provided since 1922.
Fellow Shareholders:
In keeping with our conservative but steady growth strategy, Security Federal
Corporation, holding company of Security Federal Bank, is pleased to announce
an increase in operating earnings for the year ending March 31, 2005.
Security Federal Corporation announced earnings totaling $3.5 million or $1.39
per share (basic) for the year ending March 31, 2005 compared to $4.3 million
or $1.70 per share (basic) for the year ending March 31, 2004. The Bank sold
a branch during the year ending March 31, 2004, which increased net income
after tax by approximately $820,000 for that year. Excluding the gain from
the branch sale, which occurred in February 2004, earnings increased $62,000
or 2% for the year ending March 31, 2005. Comparative earnings per share
(basic) were $1.39 and $1.37 for the years ending March 31, 2005 and 2004
respectively. Factors contributing to the increase in earnings included an
increase in net interest income of $660,000 or 5% and a decrease in the
provision for loan losses of $420,000 or 35%, both of which were partially
offset by a decrease in the gain on sale of mortgage loans of $894,000 or 67%.
The reduction in the gain on sale of mortgages was a result of the general
decline in mortgage loan originations. General and administrative expenses
increased $48,000 or less than 1%.
Total assets increased 11% to $586.0 million, net loans receivable increased
22% to $316.9 million, and deposits increased 10% to $430.3 million at March
31, 2005 compared to March 31, 2004, respectively.
Moving forward, we will continue building on our foundation by leveraging our
core market strengths, the quality of our people and the exceptional service
they provide to our customers.
Sincerely, Sincerely,
/s/T. Clifton Weeks /s/Timothy W. Simmons
- ------------------------------- -----------------------------------
T. Clifton Weeks Timothy W. Simmons
Chairman President & Chief Executive Officer
3
Financial Highlights
- ------------------------------------------------------------------------------
Years Ended March 31st
2005 2004
Net Income $ 3,505,495 $ 4,263,163
Earnings Per Share - Basic 1.39 1.70
Book Value Per Share 13.92 13.30
Total Interest Income 25,589,649 23,011,005
Total Interest Expense 11,524,745 9,606,100
Net Interest Income Before Provision
For Loan Losses 14,064,904 13,404,905
Provision For Loan Losses 780,000 1,200,000
Net Income After Provision For Loan Losses 13,284,904 12,204,905
Net Interest Margin 2.60% 2.84%
Total Loans Originated 244,843,000 228,263,000
Adjustable Rate Loans As A Percentage
Of Total Gross Loans 59.9% 52.1%
4
Financial Highlights
- ------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
Net Income (In Thousands) $3,505 $4,263 $3,231 $2,510 $2,127
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
Total Assets (In Millions) $ 586 $ 528 $ 445 $ 376 $ 331
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
Return on Equity 10.28% 13.67% 11.37% 9.97% 9.98%
Allowance for Loan Losses (1) 2005 2004 2003 2002 2001
------ ------ ------ ------ ------
1.94% 2.17% 1.98% 1.55% 1.19%
(1) Allowance for losses as a percentage of total loans.
5
Financial Highlights
- ------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
Book Value Per Share $13.92 $13.30 $11.98 $10.18 $ 9.43
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
Earnings Per Share - Basic $1.39 $ 1.70 $ 1.29 $ 1.00 $ 0.85
Security Federal Corporation Stock Prices
3/2005 3/2004 9/2003 3/2003 9/2002 3/2002 9/2001 3/2001 9/2000 3/2000 9/1999 3/1999 9/1998
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
23.00 21.00 24.50 20.26 22.33 21.67 21.00 20.00 18.33 18.00 17.17 15.00 8.33
3/1998 9/1997 3/1997 9/1996 3/1996 9/1995 3/1995 9/1994 3/1994 9/1993 3/1993 9/1992 3/1992
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
7.33 7.33 5.17 4.83 4.54 4.13 3.65 3.53 3.37 2.83 2.75 2.59 2.54
9/1991 3/1991 9/1990 3/1990 9/1989 3/1989 9/1988 3/1988
- ------ ------ ------ ------ ------ ------ ------ ------
2.46 2.46 2.52 2.40 1.89 1.83 1.42 1.75
6
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Selected Consolidated Financial Statements
At Or For The Year Ended March 31,
-------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Balance Sheet Data (Dollars In Thousands, Except Per Share Data)
- --------------------
Total Assets $585,978 $528,005 $444,904 $376,320 $330,642
Cash And Cash Equivalents 7,916 6,749 8,239 11,528 12,616
Investment And Mortgage-
Backed Securities 241,076 245,715 182,117 118,898 74,405
Total Loans Receivable,
Net (1) 316,889 259,895 243,156 234,319 230,997
Deposits 430,287 389,593 358,474 309,038 257,410
Advances From Federal Home
Loan Bank 112,038 96,336 49,772 33,108 42,704
Total Shareholders' Equity 35,111 33,472 30,040 25,401 23,500
Income Data
- --------------------
Total Interest Income 25,590 23,011 23,660 24,632 24,153
Total Interest Expense 11,525 9,606 10,016 12,211 13,871
-------- -------- -------- -------- --------
Net Interest Income 14,065 13,405 13,644 12,421 10,282
Provision For Loan Losses 780 1,200 1,800 1,525 925
-------- -------- -------- -------- --------
Net Interest Income
After Provision For
Loan Losses 13,285 12,205 11,844 10,896 9,357
Other Income 2,704 5,235 3,811 3,465 2,739
General And Administrative
Expense 10,773 10,725 10,483 10,337 8,851
Income Taxes 1,711 2,452 1,941 1,514 1,118
-------- -------- -------- -------- --------
Net Income $ 3,505 $ 4,263 $ 3,231 $ 2,510 $ 2,127
======== ======== ======== ======== ========
Per Common Share Data
- ---------------------
Net Income Per Common
Share (Basic) $ 1.39 $ 1.70 $ 1.29 $ 1.00 $ 0.85
======== ======== ======== ======== ========
Cash Dividends Declared $ 0.11 $ 0.08 $ 0.0602 $ 0.0536 $ 0.0536
======== ======== ======== ======== ========
Other Data
- --------------------
Interest Rate Spread
Information:
Average During Period 2.40% 2.66% 3.19% 3.42% 3.00%
End Of Period 2.45% 2.59% 3.00% 3.48% 3.11%
Net Interest Margin
(Net Interest Income/
Average Earning Assets) 2.60% 2.84% 3.46% 3.73% 3.38%
Average Interest-Earning
Assets To Average Interest-
Bearing Liabilities 109.07% 109.05% 110.47% 108.80% 108.39%
Equity To Total Assets 5.99% 6.34% 6.75% 6.75% 7.11%
Non-Performing Assets
To Total Assets (2) 0.42% 0.40% 0.27% 0.40% 0.11%
Return On Assets (Ratio
Of Net Income To
Average Total Assets) 0.63% 0.87% 0.79% 0.71% 0.66%
Return On Equity (Ratio Of Net
Income To Average Equity) 10.28% 13.67% 11.37% 9.97% 9.98%
Equity To Assets Ratio
(Ratio Of Average Equity
To Average Total Assets) 6.09% 6.36% 6.90% 7.14% 6.62%
Dividend Pay-Out Ratio
On Common Shares 7.96% 4.75% 4.69% 5.37% 6.33%
Number Of Full-Service
Offices 11 11 11 11 11
(1) INCLUDES LOANS HELD FOR SALE.
(2) NON-PERFORMING ASSETS CONSIST OF NON-ACCRUAL LOANS AND REPOSSESSED
ASSETS.
7
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The following discussion is presented to provide the reader with an
understanding of the financial condition and results of operations of Security
Federal Corporation and its subsidiaries. The investment and other activities
of the parent company, Security Federal Corporation (the "Company"), have had
no significant impact on the results of operations for the periods presented
in the financial statements. The information presented in the following
discussion of financial results is indicative of the activities of Security
Federal Bank (the "Bank"), a wholly owned subsidiary of the Company. The Bank
is a federally chartered thrift that was founded in 1922. The Bank also has
three wholly owned subsidiaries, Security Federal Insurance Inc., Security
Federal Investments Inc., and Security Federal Trust Inc. that were formed in
the fiscal year ended March 31, 2002. Unless the context indicates otherwise,
references to the Company shall include the Bank and its subsidiaries.
The principal business of the Bank is accepting deposits from the general
public and originating consumer and commercial business loans as well as
mortgage loans that enable borrowers to purchase or refinance one to four
family residential real estate. The Bank also originates construction loans
on single-family residences, multi-family dwellings and projects, and
commercial real estate, as well as loans for the acquisition, development and
construction of residential subdivisions and commercial projects.
The Bank's net income is dependent on its interest rate spread which is the
difference between the average yield earned on its loan and investment
portfolios and the average rate paid on its deposits and borrowings. The
Bank's interest spread is impacted by interest rates, deposit flows, and loan
demands. Levels of non-interest income and operating expense are also
significant factors in earnings.
Forward-Looking Statements
This document, including information included or incorporated by reference,
contents, and future filings by the Company on Form 10-K, Form 10-Q, and Form
8-K, and future oral and written statements by the Company and its management
may contain forward-looking statements about the Company and its subsidiaries
which we believe are within the meaning of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements include, without
limitation: statements with respect to anticipated future operating and
financial performance; growth opportunities; interest rates; acquisition and
divestiture opportunities; and synergies, efficiencies, and cost-savings.
Words such as "may," "could," "should," "would," "believe," "anticipate,"
"estimate," "expect," "intend," "plan," and similar expressions are intended
to identify these forward-looking statements. Forward-looking statements by
the Company and its management are based on beliefs, plans, objectives, goals,
expectations, anticipations, estimates, and intentions of management and are
not guarantees of future performance. Factors which could affect results
include interest rate trends, the general economic climate in the Company's
market area and the nation as a whole, the ability of the Company to control
costs and expenses, deposit flows, demand for mortgages and other loans, real
estate values and vacancy rates, competition, pricing, loan delinquency rates
and changes in federal regulation. These factors should be considered in
evaluating "forward-looking statements," and undue reliance should not be
placed on any such statements. The Company disclaims any obligation to update
or revise any forward-looking statements based on the occurrence of future
events, the receipt of new information, or otherwise. The important factors
we discuss below and elsewhere in this document, identified in our filings
with the Securities and Exchange Commission ("SEC"), and presented by our
management from time to time could cause actual results to differ materially
from those indicated by the forward-looking statements made in this document.
Critical Accounting Policies
The Company has adopted various accounting policies which govern the
application of accounting principles generally accepted in the United States
in the preparation of the Company's financial statements. The significant
accounting policies of the Company are described in Note 1 of the Notes to the
Consolidated Financial Statements.
Certain accounting policies involve significant judgements and assumptions by
management, which have a material impact on the carrying value of certain
assets and liabilities; management considers such accounting policies to be
critical accounting policies. The judgements and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of
the judgements and assumptions made by management, actual results could differ
from these judgements and estimates that could have a material impact on the
carrying values of assets and liabilities and the results of operations of the
Company.
8
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Critical Accounting Policies, Continued
Of these significant accounting policies, the Company considers its policies
regarding the allowance for loan losses to be its most critical accounting
policy because of the significant degree of management judgement involved in
determining the amount of allowance for loan losses. The Company has
developed policies and procedures for assessing the adequacy of the allowance
for loan losses, recognizing that this process requires a number of
assumptions and estimates with respect to its loan portfolio. The Company's
assessments may be impacted in future periods by changes in economic
conditions, the impact of regulatory examinations, and the discovery of
information with respect to borrowers, which is not known to management at the
time of the issuance of the consolidated financial statements. Refer to the
discussion under the section entitled "Financial Condition" and "The Provision
for Loan Losses" section in the "Comparison of the Years Ended March 31, 2005
and 2004" herein for a further discussion of the Company's estimation process
and methodology related to the allowance for loan losses.
Asset and Liability Management
The Bank's program of asset and liability management seeks to limit the Bank's
vulnerability to material and prolonged increases or decreases in interest
rates, or "interest rate risk." The principal determinant of the exposure of
the Bank's earnings to interest rate risk is the timing difference ("gap")
between the repricing or maturity of the Bank's interest-earning assets and
the repricing or maturity of its interest-bearing liabilities. If the
maturities of the Bank's assets and liabilities were perfectly matched and the
interest rates borne by its assets and liabilities were equally flexible and
moved concurrently (neither of which is the case), the impact on net interest
income of any material and prolonged changes in interest rates would be
minimal.
A negative gap position generally has an adverse effect on net interest income
during periods of rising interest rates. A negative one-year gap position
occurs when the dollar amount of rate sensitive liabilities maturing or
repricing within one year exceeds the dollar amount of rate sensitive assets
maturing or repricing during that same period. As a result, during periods of
rising interest rates, the interest paid on interest-bearing liabilities will
increase faster than interest received from earning assets, thus reducing net
interest income. The reverse is true in periods of declining interest rates
resulting generally in an increase in net interest income.
The Bank's Board of Directors reviews the Interest Rate Exposure Report
generated for the Bank by the Office of Thrift Supervision. This report
measures the interest rate sensitivity of the Bank's net portfolio value
("NPV") on a quarterly basis under different interest rate scenarios. The
Bank's sensitivity measure is well within the Bank's policy on changes in NPV.
The Bank's asset and liability policies are directed toward maximizing
long-term profitability while managing acceptable interest rate risk within
the Bank's policies.
At March 31, 2005, the negative mismatch of interest-earning assets repricing
or maturing within one year with interest-bearing liabilities repricing or
maturing within one year was $98.6 million or 16.9% of total assets compared
to $87.0 million or 16.5% at March 31, 2004. The increase in the negative gap
was attributable to an overall $47.6 million increase in interest-bearing
liabilities repricing within one year compared to an increase of $35.9 million
in financial assets repricing within one year. Certificates of deposits and
Borrowings re-pricing within one year increased $6.1 million and $32.4
million, respectively, at March 31, 2005. In addition, money market, savings,
and interest-bearing checking accounts increased a total of $9.0 million.
These accounts are assumed to reprice within one year, where in actuality,
they may not be quite that interest rate sensitive. Many financial
institutions use decay rates that spread those accounts out over several
interest rate time periods. Financial assets repricing within
one year had only a modest increase, despite an abundance of adjustable rate
commercial loans added to the loan portfolio, as a
result of a rise in short-term treasury rates, which lengthened the
anticipated call dates on the Company's callable investments. For
more information on the Bank's repricing position at March 31, 2005, see the
tables on pages 11 and 12.
9
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Asset and Liability Management, Continued
During the past year, the Bank originated, for investment purposes,
approximately $43.6 million in adjustable rate residential real
estate loans ("ARM's"), which are held for investment and not sold. The Bank's
loan portfolio included $202.4 million of adjustable rate consumer loans,
commercial loans, and mortgage loans or, approximately 59.9% of total gross
loans at March 31, 2005. During fiscal 2005, the Bank originated a total of
$163.7 million in consumer and commercial loans, which are usually short term
in nature. During fiscal 2005, 92.2% of total new loan originations on loans
held for investment were comprised of consumer, commercial, and ARM's compared
to 93.5% of originations of loans held for investment in fiscal 2004. The
Bank's portfolio of consumer and commercial loans was $213.1 million at March
31, 2005, $166.8 million at March 31, 2004, and $153.6 million at March 31,
2003. Consumer and commercial loans combined were 63.0% of total loans at
March 31, 2005, 59.9% at March 31, 2004, and 59.7% at March 31, 2003.
The Bank originated $15.2 million, $11.8 million, and $10.5 million in fixed
rate residential loans as loans held for investment, most of which were
residential lot loans with terms of two to five years, in fiscal 2005, 2004,
and 2003, respectively. At March 31, 2005, these fixed rate residential lot
loans, including fixed rate construction loans with terms of one year or less,
amounted to $21.8 million or 6.5% of the total loan portfolio compared to
$32.5 million or 11.7% at the end of the previous fiscal year. At March 31,
2005, the Bank held approximately $9.5 million in longer term fixed rate
residential mortgage loans. These loans, which amounted to 2.8% of the total
loan portfolio, had converted from ARM loans to fixed rate loans during the
previous 36 months. These fixed rate loans have remaining maturities ranging
from 10 to 27 years. The Bank has approximately $16.4 million remaining in
convertible ARM loans that could convert to fixed rate loans over the next 24
months. On new originations, the Bank sells virtually all of its 15 and 30
year fixed rate mortgage loans at origination. In fiscal 2001, the Bank
decided to no longer service loans for the Federal Home Loan Mortgage
Corporation ("Freddie Mac") or other institutional investors, because of the
fixed cost of servicing those loans, while the income stream generated by that
portfolio was decreasing as a result of prepayments. Thus, during fiscal
2005, 2004, 2003, and 2002, the Bank sold its new fixed rate residential loan
originations exclusively on a service-released basis. Fixed rate residential
loans sold to Freddie Mac and other institutional investors, on a
service-released basis, totaled $26.0 million in fiscal 2005, $63.5 million in
fiscal 2004, $80.3 million in fiscal 2003, and $84.5 million in fiscal 2002.
The decrease in loans sold in fiscal 2005 was due to the general decline in
mortgage loan originations.
Certificates of deposit of $100,000 or more, referred to as "Jumbo
Certificates," are normally considered to be interest rate sensitive because
of their relatively short maturities. Many financial institutions have used
Jumbo Certificates to manage interest rate sensitivity and liquidity. The
Bank has not relied on Jumbo Certificates for liquidity or asset liability
management. As of March 31, 2005, the Bank had $61.7 million outstanding in
Jumbo Certificates compared to $47.0 million at March 31, 2004. The Bank has
no brokered deposits.
The following table sets forth the maturity schedule of certificates of
deposit with balances of $100,000 or greater at March 31, 2005.
At March 31, 2005
(In thousands)
Within 3 Months $ 12,953
After 3, Within
6 Months 15,535
After 6, Within
12 Months 9,539
After 12 Months 23,652
--------------
$ 61,679
==============
10
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Asset and Liability Management, Continued
The following table sets forth the Bank's interest-bearing liabilities and
interest-earning assets repricing or maturing within one year. The table on
the following page presents the Bank's entire interest-bearing liabilities and
interest-earning assets into repricing or maturity time periods. Both tables
present adjustable rate loans in the periods they are scheduled to reprice,
not mature. Both tables also assume investments reprice at the earlier of
maturity; the likely call date, if any, based on current interest rates; or
the next scheduled interest rate change, if any. NOW accounts, money market
accounts, and regular savings accounts are deemed to reprice in the less than
three-months category.
At March 31
------------------------
2005 2004
--------- ---------
(Dollars in Thousands)
Loans (1) $ 215,751 $ 146,932
Mortgage-Backed Securities:
Held To Maturity 79 103
Available For Sale 69,800 68,421
Investment Securities:
Held To Maturity 7,000 25,974
Available For Sale 1,784 16,900
Other Interest-Earning Assets 164 303
--------- ---------
Total Interest Rate Sensitive
Assets Repricing Within 1 Year $ 294,578 $ 258,633
--------- ---------
Deposits 336,881 321,785
FHLB Advances And Other Borrowed
Money 56,269 23,813
--------- ---------
Total Interest Rate Sensitive
Liabilities Repricing Within 1
Year $ 393,150 $ 345,598
--------- ---------
Gap $ (98,572) $ (86,965)
========= =========
Interest Rate Sensitive Assets/
Interest Rate Sensitive Liabilities 74.93% 74.84%
Gap As A Percent Of Total Assets (16.9)% (16.5)%
(1) LOANS ARE NET OF UNDISBURSED FUNDS AND LOANS IN PROCESS.
11
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Asset and Liability Management, Continued
The following table sets forth the interest sensitivity of the Bank's assets
and liabilities at March 31, 2005, on the basis of the factors and
assumptions set forth in the table on the previous page.
(Dollars in Thousands)
< Three 3-12 1-3 3-5 5-10 > 10
Months Months Years Years Years Years Total
-------- -------- ------- ------- ------- ------- --------
Interest-Earnings Assets
- ------------------------
Loans (1) $ 141,325 $ 74,426 $ 67,496 $ 28,684 $ 7,097 $ 4,306 $323,334
Mortgage-Backed Securities:
Held To Maturity, At Cost 21 58 152 29 - - 260
Available For Sale, At Fair
Value 29,375 40,425 56,542 18,566 11,966 2,486 159,360
Investment Securities: (2)
Held To Maturity, At Cost 1,000 6,000 33,068 27,931 8,002 - 76,001
Available For Sale, At Fair
Value 180 1,604 2,855 500 316 - 5,455
FHLB Stock, At Cost - - 6,235 - - - 6,235
Other Interest-Earning Assets 164 - - - - - 164
--------- -------- -------- -------- -------- -------- --------
Total Financial Assets $ 172,065 $122,513 $166,348 $ 75,710 $ 27,381 $ 6,792 $570,809
========= ======== ======== ======== ======== ======== ========
Interest-Bearing Liabilities
- ----------------------------
Deposits:
Certificate Accounts $ 29,492 $ 66,215 $ 58,785 $ 5,794 $ - $ - $160,286
NOW Accounts 59,342 - - - - - 59,342
Money Market Accounts 164,088 - - - - - 164,088
Passbook Accounts 17,744 - - - - - 17,744
Borrowings 18,269 38,000 46,000 15,000 363 - 117,632
--------- -------- -------- -------- -------- -------- --------
Total Interest-Bearing
Liabilities $ 288,935 $104,215 $104,785 $ 20,794 $ 363 $ - $519,092
========= ======== ======== ======== ======== ======== ========
Current Period Gap $(116,870) $ 18,298 $ 61,563 $ 54,916 $ 27,018 $ 6,792 $ 51,717
Cumulative Gap $(116,870) $(98,572) $(37,009) $ 17,907 $ 44,925 $ 51,717 $ 51,717
Cumulative Gap As A Percent
Of Total Assets (19.9)% (16.8)% (6.3)% 3.1% 7.7% 8.8% 8.8%
(1) LOANS ARE NET OF UNDISBURSED FUNDS AND LOANS IN PROCESS.
(2) CALLABLE SECURITIES ARE SHOWN AT THEIR LIKELY CALL DATES BASED ON MANAGEMENT'S ESTIMATES AT MARCH 31,
2005.
In evaluating the Bank's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing tables must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates. Additionally, the interest rates
of certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates. Loan repayment rates and withdrawals of deposits
will likely differ substantially from the assumed rates previously set forth
in the event of significant changes in interest rates due to the option of
borrowers to prepay their loans and the ability of depositors to withdraw
funds prior to maturity. Further, certain assets, such as ARMs, have features
that restrict changes in interest rates on a short-term basis as well as over
the life of the asset.
12
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition
Total assets at March 31, 2005 were $586.0 million, an increase of $58.0
million or 11.0% from March 31, 2004. This increase was the result of an
increase in net loans receivable offset partially by a slight decrease in
total investment and mortgage-backed securities.
Total net loans receivable were $316.9 million at March 31, 2005, an increase
of $57.0 million or 21.9% from $259.9 million at March 31, 2004. Residential
real estate loans increased $12.9 million or 11.8% to $122.6 million at March
31, 2005. Typically, long term, newly originated fixed rate mortgage loans
are not retained in the portfolio but are sold immediately. ARMs are
typically retained in the portfolio. At March 31, 2005, the Bank held 74.9%
of its residential mortgage loans in ARMs, while it had 25.1% in fixed rate
mortgages. Consumer loans increased $5.2 million or 11.4% while commercial
business and commercial real estate loans increased $41.1 million or 33.9% to
$162.2 million at fiscal year end from $121.1 million at March 31, 2004. A
large portion of the increased activity in commercial lending took place in
the Midlands area of South Carolina including Columbia, Lexington, and West
Columbia. A significant portion of these loans are acquisition and
development loans. Loans held for sale, which were $2.3 million at March 31,
2005, increased $574,000 from the previous fiscal year end. Total investments
and mortgage-backed securities decreased $4.6 million or 1.9% to help fund the
growth in the loan portfolio.
Repossessed assets increased $2,000 to $53,000 at March 31, 2005 from $51,000
at March 31, 2004. Repossessed assets at March 31, 2005 consisted of one
single-family dwelling, acreage, and a developed lot.
Non-accrual loans totaled $2.4 million at March 31, 2005 compared to $2.0
million a year earlier. Non-accrual loans averaged $2.3 million in fiscal
2005 compared to $1.8 million during fiscal 2004. The Bank classifies all
loans as non-accrual when they become 90 days or more delinquent. The Bank
had six loans that were troubled debt restructurings totaling $434,000 at
March 31, 2005 compared to seven loans totaling $646,000 at March 31, 2004.
One $13,000 consumer loan secured by a second mortgage on a residential
dwelling was 30 days delinquent at March 31, 2005. The other five troubled
debt restructurings, which were current in payments on March 31, 2005,
consisted of three consumer loans secured by first mortgages on residential
dwellings totaling $345,000, a $56,000 commercial loan secured by two rental
properties, and a $20,000 unsecured commercial loan. All troubled debt
restructurings are also considered impaired. At March 31, 2005, the Bank held
$1.2 million in impaired loans compared to $1.4 million at March 31, 2004.
The Bank reviews its loan portfolio and allowance for loan losses on a monthly
basis. Future additions to the Bank's allowance for loan losses are dependent
on, among other things, the performance of the Bank's loan portfolio, the
economy, changes in real estate values, and interest rates. There can be no
assurance that additions to the allowance will not be required in future
periods. Management continually monitors its loan portfolio for the impact of
local economic changes. The ratio of allowance for loan losses to total loans
was 1.94% at March 31, 2005 compared to 2.17% at March 31, 2004.
Deposits at the Bank increased $40.7 million or 10.5% to $430.3 million at
March 31, 2005 from $389.6 million at March 31, 2004. The Bank was very
successful in attracting certificate of deposit accounts and, to a lesser
extent, money market accounts with aggressive pricing and advertising.
Advances from the Federal Home Loan Bank ("FHLB") increased to $112.0 million
at March 31, 2005 from $96.3 million a year earlier, an increase of $15.7
million. Other borrowed money, which consists of retail repurchase
agreements, increased $117,000 or 2.1% to $5.6 million at March 31, 2005 from
to $5.5 million at March 31, 2004.
Total shareholders' equity was $35.1 million at March 31, 2005, an increase of
$1.6 million or 4.9% from $33.5 million a year earlier. The increase was
attributable to net income of $3.5 million, proceeds from the exercise of
stock options of $168,000, and a decrease in the employee stock ownership debt
of $61,000, offset partially by a net decrease in accumulated other
comprehensive income of $1.7 million, the purchase of $165,000 of treasury
stock, and $279,000 in dividends paid.
13
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The following table presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table also distinguishes between the
changes related to higher or lower outstanding balances and the changes due to
the volatility of interest rates. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to: (1) changes in rate (changes in rate multiplied by prior year
volume); (2) changes in volume (changes in volume multiplied by prior year
rate); and (3) net change (the sum of the prior columns). For purposes of
this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change attributable to
volume and the change attributable to rate.
Fiscal Year 2005 Compared To 2004 Fiscal Year 2004 Compared To 2003
--------------------------------- ---------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In Thousands)
Interest-Earning Assets:
Loans: (1)
Real Estate Loans $ 542 $(576) $ (34) $ 142 $ (864) $ (722)
Other Loans 1,672 (265) 1,407 448 (1,206) (758)
------- ----- ------ ------- ------- -------
Total Loans 2,214 (841) 1,373 590 (2,070) (1,480)
Mortgage-Backed Securities (2) 948 158 1,106 2,160 (1,134) 1,026
Investments (2) 156 (68) 88 396 (562) (166)
Other Interest-Earning Assets 1 11 12 (21) (7) (28)
------- ----- ------ ------- ------- -------
Total Interest-Earning Assets $ 3,319 $(740) $2,579 $ 3,125 $(3,773) $ (648)
======= ===== ====== ======= ======= =======
Interest-Bearing Liabilities:
Deposits:
Certificate Accounts $ (38) $ 154 $ 116 $ (324) $(1,196) $(1,520)
NOW Accounts 2 (11) (9) 32 (10) 22
Money Market Accounts 669 214 883 1,041 (441) 600
Savings Accounts 4 (5) (1) 19 (82) (63)
------- ----- ------ ------- ------- -------
Total Deposits 637 352 989 768 (1,729) (961)
Borrowings 1,120 (190) 930 1,310 (759) 551
------- ----- ------ ------- ------- -------
Total Interest-Bearing
Liabilities 1,757 162 1,919 2,078 (2,488) (410)
------- ----- ------ ------- ------- -------
Effect On Net Income $ 1,562 $(902) $ 660 $ 1,047 $(1,285) $ (238)
======= ===== ====== ======= ======= =======
(1) INTEREST ON NON-ACCRUAL LOANS IS NOT INCLUDED IN INCOME, ALTHOUGH THEIR LOAN BALANCES ARE INCLUDED IN
AVERAGE LOANS OUTSTANDING.
(2) SECURITIES AVAILABLE FOR SALE ARE COMPUTED USING THEIR HISTORICAL COST.
14
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations, Continued
The following table presents the total dollar amount of interest income from
average interest-earning assets for the periods indicated and the resultant
yields as well as the interest expense on average interest-bearing liabilities
expressed both in dollars and rates. No tax equivalent adjustments were made.
Averages For Fiscal Years Ended March 31,
-----------------------------------------------------------------------------------
Yield/ 2005 2004 2003
Rate At -------------------------- -------------------------- -------------------------
March 31, Average Yield/ Average Yield/ Average Yield/
2005 Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- ------- -------- ------ ------- -------- ------ ------- -------- ------
(Dollars in Thousands)
Interest-Earning
Assets:
Mortgage Loans 5.28% $102,365 $ 5,523 5.40% $ 92,824 $ 5,557 5.99% $ 90,729 $ 6,279 6.92%
Other Loans 7.04% 179,251 11,299 6.30% 152,922 9,892 6.47% 146,581 10,650 7.27%
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total Loans(1) 6.32% 281,616 16,822 5.97% 245,746 15,449 6.29% 237,310 16,929 7.13%
Mortgage-Backed
Securities(2) 3.80% 167,582 5,585 3.33% 139,025 4,479 3.22% 77,911 3,453 4.43%
Investments(2) 3.55% 89,813 3,155 3.51% 85,480 3,067 3.59% 75,468 3,233 4.28%
Other Interest-
Earning Assets 2.78% 1,647 28 1.70% 1,542 16 1.04% 3,478 44 1.27%
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total Interest-
Earning Assets 5.07% $540,658 $25,590 4.73% $471,793 $23,011 4.88% $394,167 $23,659 6.00%
==== ======== ======= ==== ======== ======= ==== ======== ======= ====
Interest-Bearing
Liabilities:
Certificate
Accounts 2.92% $142,459 $ 3,598 2.53% $143,986 $ 3,482 2.42% $154,614 $ 5,002 3.24%
NOW Accounts 0.97% 58,092 345 0.59% 57,825 354 0.61% 52,455 332 0.63%
Money Market
Accts. 2.57% 166,735 3,601 2.16% 135,190 2,718 2.01% 86,093 2,118 2.46%
Savings
Accounts 0.98% 17,657 173 0.98% 17,291 174 1.01% 15,859 237 1.49%
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total Interest-
Bearing
Accounts 2.40% 384,943 7,717 2.01% 354,292 6,728 1.90% 309,021 7,689 2.49%
Other
Borrowings 2.54% 5,488 84 1.53% 5,361 52 0.97% 5,663 89 1.57%
FHLB Advances 3.41% 105,272 3,724 3.54% 72,995 2,826 3.87% 42,123 2,238 5.31%
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total Interest-
Bearing
Liabilities 2.62% $495,703 $11,525 2.33% $432,648 $ 9,606 2.22% $356,807 $10,016 2.81%
==== ======== ======= ==== ======== ======= ==== ======== ======= ====
Net Interest
Income $14,065 $13,405 $13,643
======= ======= =======
Interest Rate
Spread 2.45% 2.40% 2.66% 3.19%
==== ==== ==== ====
Net Yield On
Earning Assets 2.60% 2.84% 3.46%
==== ==== ====
(1) INTEREST ON NON-ACCRUAL LOANS IS NOT INCLUDED IN INCOME, ALTHOUGH THEIR LOAN BALANCES ARE INCLUDED IN
AVERAGE LOANS OUTSTANDING.
(2) SECURITIES AVAILABLE FOR SALE ARE COMPUTED USING THEIR HISTORICAL COST.
15
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of the Years Ended March 31, 2005 and 2004
General
The Company's earnings were $3.5 million for the year ended March 31, 2005,
compared to $4.3 million for the year ended March 31, 2004. The Bank sold a
branch office in the year ended March 31, 2004, which increased earnings for
that year by $820,000 after tax. Without the branch sale, earnings for fiscal
2005 would have increased $62,000 or 1.8% over the previous year.
Net Interest Income
Net interest income increased $660,000 or 4.9% to $14.1 million in fiscal 2005
from $13.4 million in fiscal 2004. The increase was attributable to an
increase in average interest earning assets of $68.9 million, despite a
shrinking interest rate spread. The Bank's interest rate spread decreased 26
basis points to 2.40% during fiscal 2005. The yield of average earning assets
decreased 15 basis points to 4.73%, while the cost of average interest bearing
liabilities increased 11 basis points to 2.33%.
Interest income on loans increased $1.4 million to $16.8 million during the
year ended March 31, 2005 from $15.4 million during fiscal 2004. The increase
was attributable to an increase in average total loans outstanding of $35.9
million, offset partially by a 32 basis point decrease in the overall yield
earned on the Bank's loans during fiscal 2005. Interest income on investment
securities, mortgage-backed securities, and other investments increased $1.2
million as a result of a $33.0 million, or 14.6% increase in aggregate average
balances during fiscal 2005 compared with fiscal 2004. The yields on
aggregate investments and mortgage-backed securities increased four basis
points in fiscal 2005 compared to fiscal 2004.
Interest expense on deposits increased $989,000 or 14.7% to $7.7 million
during the year ended March 31, 2005 from $6.7 million during the year ended
March 31, 2004. Average interest bearing deposits increased $30.7 million
while the average cost of those deposits increased 11 basis points during the
year. Interest expense on FHLB advances and other borrowings increased
$930,000 or 32.3% to $3.8 million during fiscal 2005 from $2.9 million during
fiscal 2004. The increase was a result of an increase in average FHLB
advances outstanding during the year of $32.4 million offset partially by a
decrease in the weighted average interest rate paid on FHLB advances of 33
basis points to 3.54%.
Provision for Loan Losses
The Company's provision for loan losses decreased $420,000 to $780,000 during
the year ended March 31, 2005 from $1.2 million in fiscal 2004. The amount of
the provision is determined by management's on-going monthly analysis of the
loan portfolio. Management uses three methods to measure the estimate of the
adequacy of the allowance for loan losses. These methods incorporate
percentage of classified loans, five-year averages of historical loan losses
in each loan category and current economic trends, and the assignment of
percentage targets of reserves in each loan category. Management has used all
three methods for the past six fiscal years. Non-accrual loans, which are
loans delinquent 90 days or more, were $2.4 million at March 31, 2005 compared
to $2.0 million at March 31, 2004. Net charge-offs were $260,000 in fiscal
2005 compared to $347,000 in fiscal 2004. The ratio of the allowance for loan
losses to total loans at March 31, 2005 was 1.94% compared to 2.17% at March
31, 2004. Management believes the allowance for loan losses is adequate based
on its best estimates of the losses inherent in the loan portfolio, although
there can be no guarantee as to these estimates. In addition, bank regulatory
agencies may require additions to the allowance for loan losses based on their
judgments and estimates as part of their examination process. Because the
allowance for loan losses is an estimate, there can be no guarantee that
actual loan losses would not exceed the allowance for loan losses or that
additional increases in the allowance for loan losses will not be required in
the future.
16
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Other Income
Other income decreased $2.5 million from $5.2 million during fiscal 2004 to
$2.7 million during fiscal 2005 as a result of the gain on the sale of the
Denmark, South Carolina branch, which took place in fiscal 2004, of $1.5
million before tax and contingencies and a decrease in the gain on sale of
mortgage loans of $894,000. Without the branch sale, other income would have
decreased $1.0 million or 8.9%. Gain on sale of loans decreased to $436,000
during fiscal 2005 from $1.3 million in fiscal 2004 as a result of the general
decline in mortgage loan originations. Loan servicing fees decreased $34,000
or 15.8% to $180,000 during fiscal 2005 as a result of a reduction in late
charge fees collected. Service fees on deposit accounts decreased $125,000 or
9.3% to $1.2 million as a result of an increase in the average interest rate
used to offset commercial analysis charges on business demand accounts. Other
miscellaneous income including trust fees, life and casualty commissions,
annuity and investment brokerage commissions, credit life insurance, and other
miscellaneous income increased $51,000 or 6.3% to $863,000 during fiscal 2005.
The Bank's three financial subsidiaries, Security Federal Insurance, Inc.,
Security Federal Investments, Inc., and Security Federal Trust, Inc., began
operating in the latter part of the fiscal year ended March 31, 2002.
Security Federal Insurance, Inc. is an insurance agency handling property and
casualty insurance and life and health insurance. It became profitable during
the fiscal year ended March 31, 2004. Security Federal Investments, Inc.
markets mutual funds, discount brokerage, and annuities. Security Federal
Trust, Inc., is a full-service trust company. Security Federal Investments,
Inc. and Security Federal Trust, Inc. have not yet
attained profitability.
General and Administrative Expenses
General and administrative expenses increased $48,000 or 0.5% to $10.8 million
during the year ended March 31, 2005 from $10.7 million for the same period
one year earlier. Compensation and employee benefits increased $233,000 or
3.9% to $6.3 million as a result of normal annual salary adjustments.
Occupancy expense increased $101,000 or 10.2% to $1.1 million as a result of
the depreciation of renovations of three branch offices and a full year of
depreciation on a branch renovated in fiscal 2004. Advertising expense
decreased $28,000 or 13.4% to $183,000 while depreciation and maintenance of
equipment expense decreased $39,000 or 3.6% to $1.0 million. FDIC insurance
premiums increased $2,000 or 4.0% to $58,000. Other miscellaneous expenses,
which encompasses repossessed assets expense, legal, professional, and
consulting expenses, stationery and office supplies, and other sundry expenses
decreased $220,000 or 9.3% during fiscal 2005.
Income Taxes
The provision for income taxes decreased $741,000 to $1.7 million or 30.1%
during the year ended March 31, 2005 compared to $2.4 million for the year
ended March 31, 2004, a result of a decrease in taxable income. The effective
tax rate was 32.8% for fiscal 2005 and 36.5% for fiscal 2004.
17
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of the Years Ended March 31, 2004 and 2003
General
The Company earned record net income of $4.3 million for the year ended March
31, 2004, an increase of $1.0 million or 31.9% over net income of for the year
ended March 31, 2003. This marked the seventh consecutive year of record
earnings. The primary reason for the increased earnings was a branch sale
that netted $820,000 after tax and contingencies and a decrease in the
provision for loan losses of $600,000 offset in part by a decrease of $326,000
in the gain on sale of mortgage loans and an increase of $242,000 in general
and administrative expenses. Without the branch sale, earnings for fiscal
2004 would have been a record $3.4 million or a 6.6% increase from the
previous year.
Net Interest Income
Net interest income decreased $239,000 or 1.8% to $13.4 million in fiscal 2004
from $13.6 million in fiscal 2003. The decrease was attributable to a
shrinking interest rate spread. The Bank's interest rate spread decreased 53
basis points to 2.66% during fiscal 2004. The yield of average earning assets
decreased 112 basis points to 4.88%, while the cost of average interest
bearing liabilities decreased 59 basis points to 2.22%.
Interest income on loans decreased $1.5 million to $15.4 million during the
year ended March 31, 2004 from $16.9 million during fiscal 2003. The decrease
was attributable to the decrease in overall interest rates charged on the
Bank's loans during fiscal 2004 and a decrease in the yields earned on average
total loans of 0.84%. Average total loan balances during fiscal 2004 compared
to fiscal 2003 increased $8.4 million. Interest income on investment
securities, mortgage-backed securities, and other investments increased
$832,000 as a result of a $69.2 million, or 44.1% increase in aggregate
average balances during fiscal 2004 compared with fiscal 2003. Consistent
with general market conditions, the yields on aggregate investments and
mortgage-backed securities decreased by 94 basis points in fiscal 2004
compared to fiscal 2003.
Interest expense on deposits decreased $961,000 or 12.5% to $6.7 million
during the year ended March 31, 2004 from $7.7 million for the year ended
March 31, 2003. Average interest bearing deposits increased $45.3 million
while the average cost of those deposits decreased 59 basis points during the
year. Interest expense on FHLB advances and other borrowings increased
$551,000 or 23.7% to $2.9 million during fiscal 2004 compared to 2003. The
increase was a result of an increase in average FHLB advances outstanding
during the year of $30.9 million offset partially by a decrease in the
weighted average interest rate paid on FHLB advances of 144 basis points.
Provision for Loan Losses
The Company's provision for loan losses decreased $600,000 to $1.2 million
during the year ended March 31, 2004 from $1.8 million in fiscal 2003. During
fiscal 2003, the bank's internal review mechanism had identified several loans
as potential problem loans. Management provided extra funding to the
allowance for loan losses to cover these loans. The amount of the provision
is determined by management's on-going monthly analysis of the loan portfolio.
Management uses three methods to measure the estimate of the adequacy of the
allowance for loan losses. These methods incorporate percentage of classified
loans, five-year averages of historical loan losses in each loan category and
current economic trends, and the assignment of percentage targets of reserves
in each loan category. Management has used all three methods for the past
five fiscal years.
Non-accrual loans, which are loans delinquent 90 days or more, were $2.0
million at March 31, 2004 compared to $1.0 million at March 31, 2003. Net
charge-offs were $347,000 in fiscal 2004 compared to $578,000 in fiscal 2003.
The ratio of the allowance for loan losses to total loans at March 31, 2004
was 2.17% compared to 1.98% at March 31, 2003. Management believes the
allowance for loan losses is adequate based on its best estimates of the
losses inherent in the loan portfolio, although there can be no guarantee as
to these estimates. In addition, bank regulatory agencies may require
additions to the allowance for loan losses based on their judgments and
estimates as part of their examination process. Because the allowance for
loan losses is an estimate, there can be no guarantee that actual loan losses
would not exceed the allowace for loan losses or that additional increases in
the allowance for loan losses will not be required in the future.
18
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Other Income
Other income increased $1.4 million from $3.8 million during fiscal 2003 to
$5.2 million during fiscal 2004 as a result of the before tax and
contingencies gain on the sale of the Denmark, South Carolina branch of $1.5
million. Without the branch sale, other income would have decreased $98,000
or 2.6%. Gain on sale of loans decreased $326,000 to $1.3 million during
fiscal 2004 from $1.6 million during fiscal 2003 a result of a decline in
re-finances in the mortgage industry. Loan servicing fees increased $5,000 or
2.2% during fiscal 2004. Service fees on deposit accounts increased $78,000
or 6.2% to $1.3 million, a result of growth in demand deposit accounts. Other
miscellaneous income including trust fees, life and casualty insurance
commissions, annuity and investment brokerage commissions, credit life
insurance, and other miscellaneous income increased $142,000 or 21.3% to
$811,000 during fiscal 2004 from $669,000 during fiscal 2003. The Bank's
three financial subsidiaries, Security Federal Insurance, Inc., Security
Federal Investments, Inc., and Security Federal Trust, Inc., began operating
in the latter part of the fiscal year ended March 31, 2002. Security Federal
Insurance, Inc. is an insurance agency handling property and casualty
insurance and life and health insurance. It became profitable during the
fiscal year ended March 31, 2004. Security Federal Investments, Inc. markets
mutual funds, discount brokerage, and annuities. Security Federal Trust,
Inc., is a full-service trust company. Security Federal Investments, Inc. and
Security Federal Trust, Inc have not yet attained profitability.
General and Administrative Expenses
General and administrative expenses increased $242,000 or 2.3% to $10.7
million during the year ended March 31, 2004 from $10.5 million during the
same period one year earlier primarily as a result of a $200,000 contingency
expensed for the sale of the Denmark, South Carolina branch office. Without
that expense, general and administrative expenses would have increased only
$42,000 or 0.4%. Compensation and employee benefits increased $69,000 or 1.2%
to $6.0 million as a result of normal annual salary adjustments. Occupancy
expense increased $172,000 or 21.1% to $985,000 as a result of the opening of
the new Lexington, South Carolina branch office. Advertising expense
decreased $5,000 while depreciation and maintenance of equipment expense
increased $32,000 or 3.0% and FDIC insurance premiums increased $3,000 or
5.3% to $56,000. Amortization of intangibles expense decreased $185,000 to
zero for fiscal 2004. At March 31, 2004, the Company has no intangible assets
on its balance sheet. Excluding the branch sale contingency expense of
$200,000, other miscellaneous expenses, which encompasses repossessed assets
expense, legal, professional, and consulting expenses, stationery and office
supplies, and other sundry expenses decreased $43,000 or 1.9% during fiscal
2004.
Income Taxes
The provision for income taxes increased $511,000 to $2.4 million during the
year ended March 31, 2004 from $1.9 million for the year ended March 31, 2003,
as a result of an increase in taxable income. The effective tax rate was
36.5% for fiscal 2004 and 37.5% for fiscal 2003.
19
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Regulatory Capital
The following table reconciles the Bank's shareholders' equity to its various
regulatory capital positions:
March 31,
----------------------
2005 2004
------ ------
(In Thousands)
Shareholders' Equity (1) (2) $35,652 $32,140
Reduction For Goodwill And Other Intangibles - -
------- -------
Tangible Capital 35,652 32,140
------- -------
Qualifying Core Deposit Intangibles - -
Core Capital 35,652 32,140
------- -------
Supplemental Capital 4,236 3,412
Less Assets Required To Be Deducted 30 54
------- -------
Total Risk-Based Capital $39,858 $35,498
======= =======
(1) FOR FISCAL 2005 AND 2004, EXCLUDES UNREALIZED LOSS OF $962,000 AND
UNREALIZED GAIN OF $690,000, RESPECTIVELY ON AVAILABLE FOR SALE
SECURITIES.
(2) FOR FISCAL 2005 AND 2004, EXCLUDES EQUITY OF THE COMPANY.
The following table compares the Bank's capital levels relative to regulatory
requirements at March 31, 2005:
Amount Percent Actual Actual Excess Excess
Required Required Amount Percent Amount Percent
-------- -------- ------ ------- ------- -------
(Dollars in Thousands)
Tangible Capital $11,736 2.0% $35,652 6.1% $23,916 4.1%
Tier 1 Leverage
(Core) Capital 23,472 4.0% 35,652 6.1% 12,180 2.1%
Tier 1 Risk-Based
(Core) Capital 13,555 4.0% 35,652 10.5% 22,097 6.5%
Total Risk-Based
Capital 27,110 8.0% 39,858 11.8% 12,748 3.8%
20
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
Liquidity refers to the ability of the Bank to generate sufficient cash flows
to fund current loan demand, repay maturing borrowings, fund maturing deposit
withdrawals, and meet operating expenses. The Bank's primary sources of funds
include loan repayments, loan sales, increased deposits, advances from the
FHLB, and cash flow generated from operations. The need for funds varies
among periods depending on funding needs as well as the rate of amortization
and prepayment on loans. The use of FHLB advances varies depending on loan
demand, deposit inflows, and the use of investment leverage strategies to
increase net interest income.
The principal use of the Bank's funds is the origination of mortgages and
other loans and the purchase of investments and mortgage-backed securities.
Loan originations on loans held for investment were $229.1 million in fiscal
2005 compared to $180.9 million in fiscal 2004 and $145.3 million in fiscal
2003. The bulk of the increase in originations in fiscal 2005 was due
primarily to an increase in commercial loan originations, which increased
$45.9 million. Purchases of investments and mortgage-backed securities were
$79.3 million in fiscal 2005 compared to $200.9 million in fiscal 2004 and
$168.2 million in fiscal 2003. Another use of the Bank's funds is the
building and renovation of branch offices. The Bank plans to consider
expanding its branch network in Aiken and Lexington Counties during the next
few years.
Outstanding loan commitments for the Bank's residential mortgage loan
portfolio amounted to $180,000 at March 31, 2005 compared to $429,000 at March
31, 2004. Those commitments were for adjustable rate mortgage loans in which
the commitment generally expires in 45 days. In addition, unused lines of
credit on home equity loans, credit cards, and commercial loans amounted to
$58.2 million at March 31, 2005. Home equity loans are made on a floating
rate basis with final maturities of 10 to 15 years. Credit cards are
generally made on a floating rate basis, and are renewed annually or every
other year. Management does not anticipate that the percentage of funds drawn
on unused lines of credit will increase substantially over amounts currently
utilized. In addition to the above commitments, the Bank has undisbursed
loans-in-process of $14.6 million at March 31, 2005, which will disburse over
an average of 90 days. These commitments to originate loans and future
advances of lines of credit are expected to be provided from loan
amortizations and prepayments, deposit inflows, maturing investments, and
short-term borrowing capacity.
Management believes that liquidity during fiscal 2005 can be met through the
Bank's deposit base, which increased $40.7 million during fiscal 2005, and
from maturing investments. Also, the Bank has another $63.5 million in unused
borrowing capacity at FHLB.
Historically the Bank's cash flow from operating activities has been
relatively stable. The cash flows from investing activities varies with the
need to invest excess funds or utilize leverage strategies with the purchase
of mortgage-backed and investment securities. The cash flows from financing
activities varies with the need for FHLB advances. See "Consolidated
Statements of Cash Flows" in the Consolidated Financial Statements contained
herein.
21
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Contractual Obligations
In the normal course of business, the Company enters into contractual
obligations that meet various business needs. These contractual obligations
include time deposits to customers, borrowings from the FHLB of Atlanta and
lease obligations for facilities. See Notes 6, 8, and 9 of the Notes to the
Consolidated Financial Statements included herein for additional information.
The following table summarizes the Company's long-term contractual obligations
at March 31, 2005:
Less than One to Three to
One Year Three Years Five Years Thereafter Total
--------- ----------- ---------- ---------- --------
(In Thousands)
Time deposits $ 95,707 $ 58,785 $ 5,794 $ - $160,286
FHLB Advances 50,675 46,000 15,000 363 112,038
Operating Lease
Obligations 273 546 537 1,719 3,075
Purchase
Obligation -
Building
Contract - - - - -
-------- -------- ------- ------ --------
Total $146,655 $105,331 $21,331 $2,082 $275,399
======== ======== ======= ====== ========
Off-Balance Sheet Arrangements
In the normal course of business, the Company makes off-balance sheet
arrangements, including credit commitments to its customers to meet their
financial needs. These arrangements involve, to varying degrees, elements of
credit and interest rate risk not recognized in the consolidated statement of
financial condition. The bank makes personal, commercial, and real estate
lines of credit available to customers and does issue standby letters of
credit.
Commitments to extend credit to customers are subject to the Bank's normal
credit policies and are essentially the same as those involved in extending
loans to customers. See Note 13 of the Notes to the Consolidated Financial
Statements included herein for additional information.
Impact of Inflation and Changing Prices
The consolidated financial statements, related notes, and other financial
information presented herein have been prepared in accordance with Generally
Accepted Accounting Principles ("GAAP") that require the measurement of
financial position and operating results in terms of historical dollars
without considering changes in relative purchasing power over time due to
inflation. Unlike most industrial companies, substantially all of the assets
and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Security Federal Corporation and Subsidiaries
Aiken, South Carolina
We have audited the accompanying consolidated balance sheets of Security
Federal Corporation and Subsidiaries as of March 31, 2005 and 2004, and the
related consolidated statements of income, shareholders' equity and
comprehensive income and cash flows for each of the years in the three year
period ended March 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Security Federal Corporation and Subsidiaries as of March 31, 2005 and
2004, and the consolidated results of their operations and their cash flows
for each of the years in the three year period ended March 31, 2005, in
conformity with accounting principles generally accepted in the United States
of America.
/s/ Elliott Davis, LLC
Elliott Davis, LLC
Columbia, South Carolina
May 9, 2005
23
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31,
------------------------------
2005 2004
------------ -------------
ASSETS:
Cash And Cash Equivalents $ 7,916,488 $ 6,749,211
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized Cost of
$166,364,642 and $173,300,028 at March
31, 2005 and 2004, Respectively) 164,814,819 174,411,819
Held To Maturity: (Fair Value of $74,770,902
and $71,686,256 at March 31, 2005 and 2004,
Respectively) 76,260,904 71,303,507
------------- -------------
Total Investment And Mortgage-Backed Securities 241,075,723 245,715,326
------------- -------------
Loans Receivable, Net:
Held For Sale 2,277,762 1,703,869
Held For Investment: (Net of Allowance of
$6,284,055 and $5,763,935 at March 31, 2005
and 2004, Respectively) 314,611,373 258,190,791
------------- -------------
Total Loans Receivable, Net 316,889,135 259,894,660
------------- -------------
Accrued Interest Receivable:
Loans 901,872 902,589
Mortgage-Backed Securities 555,933 549,541
Investments 721,744 778,725
------------- -------------
Total Accrued Interest Receivable 2,179,549 2,230,855
------------- -------------
Premises And Equipment, Net 7,914,043 6,562,734
Federal Home Loan Bank Stock, At Cost 6,234,500 4,816,800
Repossessed Assets Acquired In Settlement
Of Loans 53,000 50,869
Other Assets 3,716,035 1,984,598
------------- -------------
Total Assets $ 585,978,473 $ 528,005,053
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposit Accounts $ 430,287,391 $ 389,592,645
Advances From Federal Home Loan Bank 112,038,000 96,336,000
Other Borrowings 5,594,157 5,477,023
Advance Payments By Borrowers For Taxes
And Insurance 417,410 317,421
Other Liabilities 2,530,450 2,810,049
------------- -------------
Total Liabilities 550,867,408 494,533,138
------------- -------------
Commitments (Notes 6 and 13)
Shareholders' Equity:
Serial Preferred Stock, $.01 Par Value;
Authorized 200,000 Shares; Issued And
Outstanding, None - -
Common Stock, $.01 Par Value; Authorized
5,000,000 Shares, Issued 2,543,838
And Outstanding Shares, 2,522,127 at March 31,
2005 And 2,533,291 And 2,516,191 at
March 31, 2004 25,438 25,333
Additional Paid-In Capital 4,181,804 4,013,674
Treasury Stock, (At Cost 8,077 shares) (165,089) -
Indirect Guarantee Of Employee Stock
Ownership Trust Debt (276,217) (336,972)
Accumulated Other Comprehensive Income (Loss) (961,504) 689,755
Retained Earnings, Substantially Restricted 32,306,633 29,080,125
------------- -------------
Total Shareholders' Equity 35,111,065 33,471,915
------------- -------------
Total Liabilities And Shareholders' Equity $ 585,978,473 $ 528,005,053
============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended March 31,
--------------------------------------
2005 2004 2003
----------- ----------- -----------
Interest Income:
Loans $16,821,470 $15,448,987 $16,929,226
Mortgage-Backed Securities 5,584,979 4,479,444 3,453,195
Investment Securities 3,155,436 3,066,824 3,233,033
Other 27,764 15,750 44,379
----------- ----------- -----------
Total Interest Income 25,589,649 23,011,005 23,659,833
----------- ----------- -----------
Interest Expense:
NOW And Money Market Accounts 3,945,513 3,071,306 2,450,502
Passbook Accounts 173,250 174,353 236,657
Certificate Accounts 3,597,761 3,482,214 5,002,233
FHLB Advances And Other
Borrowed Money 3,808,221 2,878,227 2,326,872
----------- ----------- -----------
Total Interest Expense 11,524,745 9,606,100 10,016,264
----------- ----------- -----------
Net Interest Income 14,064,904 13,404,905 13,643,569
Provision For Loan Losses 780,000 1,200,000 1,800,000
----------- ----------- -----------
Net Interest Income After Provision
For Loan Losses 13,284,904 12,204,905 11,843,569
----------- ----------- -----------
Other Income:
Gain On Sale Of Investment
Securities - 7,700 4,245
Gain On Sale Of Loans 435,635 1,329,729 1,656,152
Loan Servicing Fees 179,656 213,437 208,791
Service Fees On Deposit Accounts 1,226,118 1,351,175 1,272,782
Gain On Sale Of Branch - 1,521,401 -
Other 862,565 811,323 669,143
----------- ----------- -----------
Total Other Income 2,703,974 5,234,765 3,811,113
----------- ----------- -----------
General And Administrative Expenses:
Compensation And Employee Benefits 6,255,794 6,023,215 5,953,904
Occupancy 1,086,017 985,378 813,113
Advertising 182,699 210,962 216,204
Depreciation And Maintenance Of
Equipment 1,047,815 1,086,930 1,055,181
Amortization Of Intangibles - - 185,210
FDIC Insurance Premiums 57,830 55,596 52,793
Other 2,142,636 2,362,783 2,206,237
----------- ----------- -----------
Total General And Administrative
Expenses 10,772,791 10,724,864 10,482,642
----------- ----------- -----------
Income Before Income Taxes 5,216,087 6,714,806 5,172,040
Provision For Income Taxes 1,710,592 2,451,643 1,940,879
----------- ----------- -----------
Net Income $ 3,505,495 $ 4,263,163 $ 3,231,161
=========== =========== ===========
Net Income Per Common Share (Basic) $ 1.39 $ 1.70 $ 1.29
=========== =========== ===========
Net Income Per Common Share
(Diluted) $ 1.37 $ 1.66 $ 1.26
=========== =========== ===========
Cash Dividend Per Share On
Common Stock $ 0.11 $ 0.08 $ 0.0602
=========== =========== ===========
Weighted Average Shares
Outstanding (Basic) 2,524,123 2,513,319 2,508,774
=========== =========== ===========
Weighted Average Shares
Outstanding (Diluted) 2,561,437 2,560,710 2,558,607
=========== =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
For the Years Ended March 31, 2005, 2004 and 2003
Accumulated
Additional Indirect Other
Common Paid -In Treasury Guarantee Comprehensive Retained
Stock Capital Stock of ESOP Debt Income (Loss) Earnings Total
-------- ---------- --------- ------------ ------------- --------- -----------
Balance At March 31,2002 $16,842 $3,985,312 $ - $(358,297) $ (183,335) $21,940,041 $25,400,563
Net Income - - - - 3,231,161 3,231,161
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Gains
On Securities Available
For Sale - - - 1,630,552 - 1,630,552
Reclassification Adjustment
For Gains Included In Net
Income - - - (2,632) - (2,632)
Comprehensive Income - - - - - 4,859,081
Exercise of Stock Options 23 18,473 18,496
3-For- 2 Stock Split 8,433 (8,555) (122)
Increase in Indirect
Guarantee Of ESOP Debt - - (86,388) - - (86,388)
Cash Dividends - - - - (151,677) (151,677)
------- ---------- ------- --------- ---------- ----------- -----------
Balance At March 31, 2003 $25,298 $3,995,230 $ - $(444,685) $1,444,585 $25,019,525 $30,039,953
======= ========== ======= ========= ========== =========== ===========
- ------------------------------------------------------------------------------------------------------------
Accumulated
Additional Indirect Other
Common Paid -In Treasury Guarantee Comprehensive Retained
Stock Capital Stock of ESOP Debt Income (Loss) Earnings Total
-------- ---------- --------- ------------ ------------- --------- -----------
Balance At March 31,
2003 $25,298 $3,995,230 $ - $(444,685) $1,444,585 $25,019,525 $30,039,953
Net Income - - - - 4,263,163 4,263,163
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Losses
On Securities Available
For Sale - - - (750,056) - (750,056)
Reclassification Adjustment
For Gains Included In Net
Income - - - (4,774) - (4,774)
Comprehensive Income - - - - - 3,508,333
Exercise of Stock Options 35 18,444 18,479
Decrease in Indirect
Guarantee Of ESOP Debt - - 107,713 - - 107,713
Cash Dividends - - - - (202,563) (202,563)
Balance At March 31, ------- ---------- -------- --------- -------- ----------- -----------
2004 $25,333 $4,013,674 $ - $(336,972) $689,755 $29,080,125 $33,471,915
======= ========== ======== ========= ======== =========== ===========
- -----------------------------------------------------------------------------------------------------------
Accumulated
Additional Indirect Other
Common Paid -In Treasury Guarantee Comprehensive Retained
Stock Capital Stock of ESOP Debt Income (Loss) Earnings Total
-------- ---------- --------- ------------ ------------- --------- -----------
Balance At March 31,
2004 $25,333 $4,013,674 $ - $(336,972) $ 689,755 $29,080,125 $33,471,915
Net Income - - - - - 3,505,495 3,505,495
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Losses
On Securities Available
For Sale - - - - (1,651,259) - (1,651,259)
Comprehensive Income - - - - - - 1,854,236
Purchase of Treasury Stock
At cost, 8,077 shares (165,089)
(165,089)
Exercise of Stock Options 105 168,130 168,235
Decrease in Indirect
Guarantee Of ESOP Debt - - - 60,755 - - 60,755
Cash Dividends - - - - - (278,987) (278,987)
Balance At March 31, ------- ---------- --------- --------- --------- ----------- -----------
2005 $25,438 $4,181,804 $(165,089) $(276,217) $(961,504) $32,306,633 $35,111,065
======= ========== ========= ========= ========= =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended March 31,
-------------------------------------------
2005 2004 2003
----------- ----------- -----------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income $ 3,505,495 $ 4,263,163 $ 3,231,161
Adjustments To Reconcile Net
Income To Net Cash Provided By
Operating Activities:
Depreciation 859,808 844,641 825,253
Amortization Of Intangibles - - 185,210
Discount Accretion And Premium
Amortization 1,193,221 828,444 327,329
Provisions For Losses On Loans
And Real Estate 780,000 1,200,000 1,800,000
Gain On Sales Of Loans (435,635) (1,329,729) (1,656,152)
Gain On Sales Of Investment
Securities - (7,700) (4,245)
(Gain) Loss On Sale Of Real
Estate (50,329) (85,713) (68,419)
Amortization Of Deferred Fees
On Loans (184,642) (187,937) (209,430)
(Gain) Loss On Disposition Of
Premises And Equipment (3,525) (1,815) 1,811
Proceeds From Sale Of Loans
Held For Sale 26,392,654 64,827,155 82,001,517
Origination Of Loans For Sale (26,530,912) (61,530,797) (81,849,945)
(Increase) Decrease In Accrued
Interest Receivable:
Loans 717 66,894 273,139
Mortgage-Backed Securities (6,392) (107,641) (158,125)
Investments 56,981 (110,990) (17,701)
(Decrease) Increase In Advance
Payments By Borrowers 99,989 37,996 32,276
Other, Net (1,708,142) 359,259 (749,680)
------------ ------------- ------------
Net Cash Provided By Operating
Activities 3,969,288 9,065,230 3,963,999
------------ ------------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase Of Mortgage-Backed
Securities Available For Sale (53,211,974) (110,002,424) (80,157,881)
Principal Repayments On
Mortgage-Backed Securities
Available For Sale 47,852,116 55,003,975 30,444,934
Principal Repayments On
Mortgage-Backed Securities
Held To Maturity 89,769 591,457 431,751
Purchase Of Investment
Securities Held To Maturity (26,041,400) (90,880,070) (20,995,471)
Purchase Of Investment
Securities Available For Sale (2,015,626) - (67,041,485)
Maturities Of Investment
Securities Available For Sale 13,111,305 36,242,259 75,281,684
Maturities Of Investment
Securities Held To Maturity 21,000,000 40,995,331 133,025
Proceeds From Sales Of
Investment Securities Available
For Sale - - 985,938
Proceeds From Sale of Mortgage-
Backed Securities Available
For Sale - 2,413,515 -
Purchase Of FHLB Stock (4,967,800) (5,338,000) (1,017,500)
Redemption Of FHLB Stock 3,550,100 3,379,800 828,200
Increase In Loans Receivable (56,631,543) (22,245,974) (9,796,818)
Proceeds From Sale Of
Repossessed Assets 432,595 781,537 847,009
Purchase And Improvement Of
Premises And Equipment (2,211,117) (2,419,827) (1,187,871)
Proceeds From Sale of
Premises and Equipment 3,525 1,815 -
Net Cash Outflow From Sale
of Branch - (9,930,521) -
------------ ------------- ------------
Net Cash Used By Investing
Activities (59,040,050) (101,407,127) (71,244,485)
------------ ------------- ------------
(Continued)
27
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the Years Ended March 31,
------------------------------------------
2005 2004 2003
----------- ------------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Increase In Deposit Accounts 40,694,746 43,188,959 49,435,999
Proceeds From FHLB Advances 148,738,000 226,425,000 119,200,000
Repayment Of FHLB Advances (133,036,000) (179,861,000) (102,536,000)
Proceeds (Repayment) Of
Other Borrowings, Net 117,134 1,283,543 (1,975,931)
Purchase Of Fractional
Shares Due To Stock Split - - (122)
Proceeds From Exercise Of
Stock Options 168,235 18,479 18,496
Purchase of Treasury Stock (165,089) - -
Dividends To Shareholders (278,988) (202,563) (151,677)
------------ ------------ ------------
Net Cash Provided By Financing
Activities 56,238,039 90,852,418 63,990,765
------------ ------------ ------------
Net Increase (Decrease) In
Cash And Cash Equivalents 1,167,278 (1,489,479) (3,289,721)
Cash And Cash Equivalents At
Beginning Of Year 6,749,211 8,238,690 11,528,411
------------ ------------ ------------
Cash And Cash Equivalents At
End Of Year $ 7,916,489 $ 6,749,211 $ 8,238,690
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash Paid During The Period For:
Interest $ 11,413,369 $ 9,740,893 $ 10,246,814
============ ============ ============
Income Taxes $ 2,221,012 $ 2,076,388 $ 2,710,335
============ ============ ============
Supplemental Schedule Of Non
Cash Transactions:
Additions To Repossessed Assets $ 384,397 $ 595,243 $ 874,040
============ ============ ============
Increase (Decrease) In
Unrealized Net Gain On
Securities Available For Sale,
Net Of Taxes $ (1,651,259) $ (754,830) $ 1,627,920
============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies
- ------------------------------------
The following is a description of the more significant accounting and
reporting policies used in the preparation and presentation of the
accompanying consolidated financial statements. All significant intercompany
transactions have been eliminated in consolidation.
(a) Basis of Consolidation and Nature of Operations
-----------------------------------------------
The accompanying consolidated financial statements include the
accounts of Security Federal Corporation (the "Company") and its
wholly owned subsidiary, Security Federal Bank (the "Bank") and the
Bank's wholly owned subsidiaries, Security Federal Insurance
("SFINS"), Security Federal Investments ("SFINV"), Security Federal
Trust ("SFT"), and Security Financial Services Corporation ("SFSC").
The Bank is primarily engaged in the business of accepting savings
and demand deposits and originating mortgage loans and other loans
to individuals and small businesses for various personal and
commercial purposes. SFINS, SFINV, and SFT were formed during
fiscal 2002 and began operating during the December 2001 quarter.
SFINS is an insurance agency offering business, health, home and
life insurance. SFINV engages primarily in investment brokerage
services. SFT offers trust, financial planning and financial
management services.
(b) Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks, interest-bearing balances in other
banks, and federal funds sold. Cash equivalents have original
maturities of three months or less.
(c) Investment and Mortgage-Backed Securities
----------------------------------------
Investment securities, including mortgage-backed securities, are
classified in one of three categories: held to maturity, available
for sale, or trading. Management determines the appropriate
classification of debt securities at the time of purchase.
Investment securities are classified as held to maturity when the
Company has the positive intent and ability to hold the securities
to maturity. These securities are recorded at cost and adjusted for
amortization of premiums and accretion of discounts over the
estimated life of the security using a method that approximates a
level yield. Prepayment assumptions on mortgage-backed securities
are anticipated.
Management classifies investment securities that are not considered
to be held to maturity as available for sale. These type of
investments are stated at fair value with unrealized gains and
losses, net of tax, reported in a separate component of
shareholders' equity ("accumulated other comprehensive income
(loss)"). Gains and losses from sales of investment and
mortgage-backed securities available for sale are determined using
the specific identification method. The Company has no trading
securities.
The Bank maintained liquid assets in excess of the amount required
by regulations. Liquid assets consist primarily of cash, time
deposits, and certain investment securities.
(d) Loans Receivable Held for Investment
------------------------------------
Loans are stated at their unpaid principal balance. Interest income
is computed using the simple interest method and is recorded in the
period earned.
(e) Allowance for Loan Losses
-------------------------
The Company provides for loan losses using the allowance method.
Accordingly, all loan losses are charged to the related allowance
and all recoveries are credited to the allowance for loan losses.
Additions to the allowance for loan losses are provided by charges
to operations based on various factors which, in Management's
judgment, deserve current recognition in estimating possible losses.
Such factors considered by Management include the fair value of the
underlying collateral; stated guarantees by the borrower, if
applicable, the borrower's ability to repay from other economic
resources, growth and composition of the loan portfolios, the
relationship of the allowance for loan losses to outstanding loans,
loss experience, delinquency trends, and general economic
conditions. Management evaluates the carrying value of the loans
periodically and the allowance is adjusted accordingly. While
Management uses the best information available to make evaluations,
future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making
these evaluations. Allowances for loan losses are subject to
periodic evaluations by various regulatory authorities and may be
subject to adjustments based upon the information that is available
at the time of their examinations.
29
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
The Company values impaired loans at the loan's fair value if it is
probable that the Company will be unable to collect all amounts due
according to the terms of the loan agreement at the present value
of expected cash flows, the market price of the loan, if available,
or the value of the underlying collateral. Expected cash flows are
required to be discounted at the loan's effective interest rate.
When the ultimate collectibility of an impaired loan's principal is
in doubt, wholly or partially, all cash receipts are applied to
principal. When this doubt does not exist, cash receipts are
applied under the contractual terms of the loan agreement first to
interest then to principal. Once the recorded principal balance
has been reduced to zero, future cash receipts are applied to
interest income to the extent that any interest has been foregone.
Further cash receipts are recorded as recoveries of any amounts
previously charged off.
(f) Loans Receivable Held for Sale
------------------------------
Loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses are provided for in a valuation
allowance by charges to operations.
(g) Repossessed Assets Acquired in Settlement of Loans
--------------------------------------------------
Repossessed assets represent real estate and other assets acquired
through foreclosure or repossession and are initially recorded at
the lower of cost (principal balance of the former mortgage loan
less any specific valuation allowances) or estimated fair value
less costs to sell. Subsequent improvements are capitalized.
Costs of holding real estate, such as property taxes, insurance,
general maintenance and interest expense, are expensed as a period
cost. Fair values are reviewed regularly and allowances for
possible losses are established when the carrying value of the
asset owned exceeds the fair value less estimated costs to sell.
Fair values are generally determined by reference to an outside
appraisal.
(h) Premises and Equipment
----------------------
Premises and equipment are carried at cost, net of accumulated
depreciation. Depreciation of premises and equipment is amortized
on a straight-line method over the estimated useful life of the
related asset. Estimated lives are seven to 30 years for buildings
and improvements and generally three to 10 years for furniture,
fixtures and equipment. Maintenance and repairs are charged to
current expense. The cost of major renewals and improvements are
capitalized.
(i) Income Taxes
------------
Deferred tax expense or benefit is recognized for the net change
during the year in the deferred tax liability or asset. That amount
together with income taxes currently payable is the total amount of
income tax expense or benefit for the year. Deferred taxes are
provided for in differences in financial reporting bases for assets
and liabilities compared with their tax bases. Generally, a
current tax liability or asset is established for taxes presently
payable or refundable and a deferred tax liability or asset is
established for future tax items. A valuation allowance, if
applicable, is established for deferred tax assets that may not be
realized. Tax bad debt reserves in excess of the base year amount
(established as taxable years ending March 31, 1988 or later) would
create a deferred tax liability. Deferred income taxes are
provided for in differences between the provision for loan losses
for financial statement purposes and those allowed for income tax
purposes.
(j) Loan Fees and Costs Associated with Originating Loans
-----------------------------------------------------
Loan fees received, net of direct incremental costs of originating
loans, are deferred and amortized over the contractual life of the
related loan. The net fees are recognized as yield adjustments by
applying the interest method. Prepayments are not anticipated.
30
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
(k) Interest Income
---------------
Interest on loans is accrued and credited to income monthly based on
the principal balance outstanding and the contractual rate on the
loan. The Company places loans on non-accrual status when they
become greater than 90 days delinquent or when, in the opinion of
management, full collection of principal or interest is unlikely.
The Company provides an allowance for uncollectible accrued interest
on loans that are contractually 90 days delinquent for all interest
accrued prior to the loan being placed on non-accrual status. The
loans are returned to an accrual status when full collection of
principal and interest appears likely.
(l) Advertising Expense
-------------------
Advertising and public relations costs are generally expensed as
incurred. External costs relating to direct mailing costs are
expensed in the period in which the direct mailing are sent.
Advertising and public relations costs of $182,699, $210,962 and
$216,204, were included in the Company's results of operations for
2005, 2004, and 2003, respectively.
(m) Fair Value of Financial Instruments
-----------------------------------
The Company discloses the fair value of on- and off-balance sheet
financial instruments when it is practicable to do so. Fair values
are based on quoted market prices, where available, on estimates of
present value, or on other valuation techniques. These estimates
are made at a specific point in time, are subjective in nature, and
involve uncertainties and significant judgment. In addition, the
Company does not disclose the fair value of non-financial
instruments. Accordingly, the aggregate fair values presented do
not represent the underlying fair value of the Company.
Fair value approximates carrying value for the following financial
instruments due to the short-term nature of the instrument: cash and
cash equivalents.
Securities are valued using quoted fair market prices.
Fair value for the Company's off-balance sheet financial instruments
is based on the discounted present value of the estimated future
cash flows.
Fair value for variable rate loans that reprice frequently, loans
held for sale, and loans that mature in less than three months is
based on the carrying value. Fair value for fixed rate mortgage
loans, personal loans, and other loans (primarily commercial)
maturing after three months is based on the discounted present value
of the estimated future cash flows. Discount rates used in these
computations approximate the rates currently offered for similar
loans of comparable terms and credit quality.
Fair value for demand deposit accounts and interest-bearing accounts
with no fixed maturity date is equal to the carrying value.
Certificates of deposit accounts and securities sold under
repurchase agreements maturing within one year are valued at their
carrying value. The fair value of certificates of deposit accounts
and securities sold under repurchase agreements after one year are
estimated by discounting cash flows from expected maturities using
current interest rates on similar instruments. Fair value for
long-term FHLB advances is based on discounted cash flows using the
Company's current incremental borrowing rate. Discount rates used
in these computations approximate rates currently offered for
similar borrowings of comparable terms and credit quality.
31
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(n) Stock-Based Compensation
------------------------
At March 31, 2005, the Company sponsored stock-based compensation
plans, which are described more fully in Note 12. The Company has
elected the disclosure - only provision of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been
recognized for the stock option plan. Had compensation cost for the
Company's stock option plan been determined based on the fair value
at the grant date consistent with the provisions of SFAS No. 123,
the Company's net income and earnings per share amounts as of the
year ended March 31 would have been reduced to the pro forma amounts
indicated below.
2005 2004 2003
---------- --------- -----------
Net Income, As Reported $3,505,495 4,263,163 3,231,161
Deduct: Total stock-based employee
compensation expense determined
under fair-value based method for
all awards, net of tax $ (150,807) (159,187) (135,831)
Net Income, Pro Forma $3,354,688 4,103,976 3,095,330
Net Income Per Common
Share (Basic), As Reported $ 1.39 1.70 1.29
Net Income Per Common Share
(Basic), Pro Forma $ 1.33 1.63 1.23
Net Income Per Common Share
(Diluted), As Reported $ 1.37 1.66 1.26
Net Income Per Common Share
(Diluted), Pro Forma $ 1.31 1.60 1.21
(o) Earnings Per Share
------------------
Net income per share is computed by dividing consolidated net income
by the weighted average number of common shares outstanding during
the period. The treasury stock method is used to compute the
dilutive effect of stock options in the diluted weighted average
number of common shares. All per share data has been restated to
reflect the 3-for-2 stock split that occurred during the year ended
March 31, 2003.
For the Year Ended
March 31, 2005 March 31, 2004
------------------------------ ------------------------------
Per Share Per Share
Income Shares Amounts Income Shares Amounts
---------- --------- ------- ---------- --------- -------
Basic EPS $ 3,505,495 2,524,123 $ 1.39 $ 4,263,163 2,513,319 $ 1.70
Dilutive
effect of:
Stock Options - 22,726 (0.012) - 28,959 (0.024)
ESOP - 14,588 (0.008) - 18,432 (0.016)
----------- ---------- ------ ----------- ---------- ------
Diluted EPS $ 3,505,495 2,561,437 $ 1.37 $ 4,263,163 2,560,710 $ 1.66
=========== ========== ====== =========== ========== ======
For the Year Ended
March 31, 2003
------------------------------------
Per share
Income Shares amounts
----------- --------- -----------
Basic EPS $3,231,161 2,508,774 $ 1.29
Dilutive effect of:
Stock Options - 33,166 (0.02)
ESOP - 16,667 (0.01)
----------- --------- ------
Diluted EPS $ 3,231,161 2,558,607 $ 1.26
=========== ========= ======
(p) Use of Estimates
----------------
The preparation of financial statements in conformity with GAAP
requires Management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial
statements and the reported amounts of income and expenses during
the reporting periods. Actual results could differ from those
estimates.
32
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(q) Recently Issued Accounting Standards
------------------------------------
The following is a summary of recent authoritative pronouncements
that affect accounting, reporting, and disclosure of financial
information by the Company:
In April 2005, the Securities and Exchange Commission's ("SEC")
Office of the Chief Accountant and its Division of Corporation
Finance has released Staff Accounting Bulletin (SAB) No. 107 to
provide guidance regarding the application of FASB Statement No. 123
(revised 2004), "Share-Based Payment". Statement No. 123(R) covers a
wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SAB 107
provides interpretive guidance related to the interaction between
Statement No. 123(R) and certain SEC rules and regulations, as well
as the staff's views regarding the valuation of share-based payment
arrangements for public companies. SAB 107 also reminds public
companies of the importance of including disclosures within filings
made with the SEC relating to the accounting for share-based payment
transactions, particularly during the transition to Statement No.
123(R).
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting
for Nonmonetary Transactions". The amendments made by SFAS No. 153
are based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged.
Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it
with a broader exception for exchanges of nonmonetary assets that do
not have commercial substance. Previously, Accounting Principles
Board ("APB") Opinion No. 29 required that the accounting for an
exchange of a productive asset for a similar productive asset or an
equivalent interest in the same or similar productive asset should
be based on the recorded amount of the asset relinquished. APB
Opinion No. 29 provided an exception to its basic measurement
principle (fair value) for exchanges of similar productive assets.
SFAS No. 153 is effective for nonmonetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring
in fiscal periods beginning after the date of issuance. The
provisions of this statement shall be applied prospectively. The
adoption of this statement is not expected to have a material impact
on the financial condition or operating results of the Company.
In December 2004, the FASB issued SFAS No, 123 (revised 2004),
"Share-Based Payments" (SFAS No. 123(R)"). SFAS No. 123(R) will
require companies to measure all employee stock-based compensation
awards using a fair value method and record such expense in its
financial statements. In addition, the adoption of SFAS No. 123(R)
requires additional accounting and disclosure related to the income
tax and cash flow effects resulting form share-based payments
arrangements. SFAS No. 123 (R) is effective beginning as of the
first interim or annual reporting period beginning after June 15,
2005. The Company is currently evaluating the impact that the
adoption of SFAS No. 123(R) will have on its financial position,
results of operations and cash flow.
In March 2004, the SEC issued Staff Accounting Bulletin ("SAB") No.
105, "Application of Accounting Principles to Loan Commitments", to
inform registrants of the Staff's view that the fair value of the
recorded loan commitments should not consider the expected future
cash flows related to the associated servicing of the future loan.
The provisions of SAB No. 105 must be applied to the loan
commitments accounted for as derivatives that are entered into after
March 31, 2004. The Staff will not object to the application of
existing accounting practices to loan commitments accounted for as
derivatives that are entered into on or before March 31, 2004, with
appropriate disclosures. The Company adopted the provisions of SAB
No. 105 on April 1, 2004. The adoption of SAB No. 105 did not have
a material impact on the Company's financial condition or results of
operations.
33
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
In December 2003, the FASB issued FIN No. 46 (revised),
"Consolidation of Variable Interest Entities" ("FIN No.46(R)"),
which addresses consolidation by business enterprises of variable
interest entities. FIN No. 46(R) requires a variable interest
entity to be consolidation 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(R) also requires
disclosure about variable interest entities that a company is
not required to consolidate, but in which it has a significant
variable interest. FIN No. 46(R) provides guidance for determining
whether an entity qualifies as a variable interest entity by
considering, among other considerations, whether the entity lacks
sufficient equity holders lack adequate decision-making ability.
The consolidation requirements of FIN No. 46(R) applied immediately
to variable interest created after January 31, 2003. The
consolidation requirements applied to the Company's existing
variable entities in the first reporting ending after March 15,
2004. Certain of the disclosure requirements applied to all
financial statements issued after December 31, 2003, regardless of
when the variable interest entity was established. The adoption of
FIN No. 46(R) did not have any impact on the Company's financial
position or results of operations.
In November 2003, the Emerging Issues Task Force ("EITF") reached a
consensus that certain quantitative and qualitative disclosures
should be required for debt and marketable equity securities
classified as available-for-sale or held-to-maturity under SFAS No.
115 and SFAS No. 124 that are impaired at the balance sheet data but
for which other-than-temporary impairments has not been recognized.
Accordingly the EITF issued EITF No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments". This issue addresses the meaning of other-than-
temporary impairments and its application to investments classified
as either available-for-sale or held-to-maturity under SFAS No. 115
and provides guidance on quantitative and qualitative disclosures.
The disclosure requirements of EITF No. 03-1 are effective for
financial statements for fiscal years ending after June 15, 2004.
The effective date for the measurement and recognition guidance of
EITF No. 03-1 has been delayed. The FASB staff has issued a
proposed Board-directed FASB Staff Position ("FSP"), FSP EITF
03-1-a, "Implementation Guidance for the Application of Paragraph 16
of Issue No. 03-1". The proposed FSP would provide implementation
guidance with respect to debt securities that are impaired due to
interest rates and/or sector spreads and analyzed for other-than-
temporary impairments under the measurement and recognition
requirements of EITF No. 03-1. The delay of the effective date for
the measurement and recognition requirements of EITF No. 03-1 will
be superseded concurrent with the final issuance of FSP EITF 03-1-a.
Adopting the disclosure provisions of EITF No. 03-1 did not have any
impact on the Company's financial position or results of operations.
Other accounting standards that have been issued or proposed by the
FASB or other standards-setting bodies that do not require adoption
until a future date are not expected to have a material impact on
the consolidated financial statements upon adoption.
(r) Risks and Uncertainties
-----------------------
In the normal course of its business, the Company encounters two
significant types of risk: economic and regulatory. There are three
main components of economic risk: interest rate risk, credit risk,
and market risk. The Company is subject to interest rate risk to
the degree that its interest-bearing liabilities mature or
reprice at different speeds, or on different bases, than its
interest-earning assets. Credit risk is the risk of default on the
Company's loan portfolio that results from borrowers' inability or
unwillingness to make contractually required payments. Market risk
reflects changes in the value of collateral underlying loans
receivable, the valuation of real estate held by the Company, and
the valuation of loans held for sale and mortgage-backed securities
available for sale. The Company is subject to the regulations of
various government agencies. These regulations can and do change
significantly from period to period. The Company also undergoes
periodic examinations by the regulatory agencies, which may subject
it to further changes with respect to asset valuations, amounts of
required loss allowances, and operating restrictions, resulting form
the regulators' judgements based on information available to them at
the time of their examination.
(s) Reclassifications
------------------
Certain amounts in prior years' consolidated financial statements
have been reclassified to conform to current year classifications.
34
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(2) Branch Sale
-----------
In February 2004, the Bank sold its Denmark, South Carolina branch to
South Carolina Bank and Trust, N.A. of Orangeburg, South Carolina.
Included in the sale, were approximately $13.6 million in deposits, $1.9
million in loans, and the branch building, furniture, and equipment. The
Bank recorded a $1.5 million in gain on sale of branch, which includes
gains on all the items in the previous sentence. Gain on sale of branch
is in "Other Income" as a separate line item in the income statement.
The Bank also booked $200,000 as a contingency expense on the sale, which
is included in the line item called "Other Expense" in the "General and
Administrative Expenses" section of the income statement. The Bank has
possible contingent liabilities for three years. The Bank netted
approximately $820,000 after tax and contingencies on
the transaction.
(3) Investment and Mortgage-Backed Securities, Available for Sale
-------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and
fair values of investment and mortgage-backed securities available for
sale are as follows:
March 31, 2005
-------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair value
-------------- ---------- --------- ------------
FHLB Securities $ 4,984,803 $ 4,060 $ 19,063 $ 4,969,800
FHLMC Bonds 484,875 588 - 485,463
Mortgage-Backed
Securities 160,894,954 457,081 1,992,479 159,359,556
------------- --------- ----------- -------------
$ 166,364,632 $ 461,729 $ 2,011,542 $ 164,814,819
============= ========= =========== =============
March 31, 2004
-------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair value
-------------- ----------- --------- ------------
FHLB Securities $ 14,019,302 $ 260,728 $ - $ 14,280,030
Federal Farm Credit
Securities 2,019,623 22,567 - 2,042,190
FHLMC Bonds 564,643 13,043 - 577,686
Mortgage-Backed
Securities 156,696,460 1,437,219 621,766 157,511,913
------------- ----------- --------- -------------
$ 173,300,028 $ 1,733,557 $ 621,766 $ 174,411,819
============= =========== ========= =============
The amortized cost and fair value of investment and mortgage-backed
securities available for sale at March 31, 2005 are shown below by
contractual maturity. Expected maturities will differ from contractual
maturities because borrowers have the right to prepay obligations with or
without call or prepayment penalties.
Amortized Cost Fair Value
--------------- --------------
Less Than 1 Year $ 1,000,000 $ 1,004,060
1-5 Years 3,463,715 3,464,302
More Than 5 Years 1,005,963 986,901
Mortgage-Backed Securities 160,894,954 159,359,556
-------------- --------------
$ 166,364,632 $ 164,814,819
============== ==============
35
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) Investment and Mortgage-Backed Securities, Available for Sale, Continued
-----------------------------------------------------------------------
At March 31, 2005, investment and mortgage-backed securities available
for sale of $31.3 million were pledged as collateral for certain deposit
accounts. In addition, the Bank had pledged $12.3 million of investment
and mortgage-backed securities as collateral for FHLB advances and other
borrowings.
There were no sales of securities in the year ended March 31, 2005. The
Bank received approximately $2.4 million, and $986,000 in proceeds from
sales of available for sale securities with approximately $7,700, and
$4,200 recorded in gross gains and no gross losses in the years ended
March 31, 2004 and 2003, respectively.
The following table shows gross unrealized losses and fair value,
aggregated by investment category, and length of time that individual
available for sale securities have been in a continuous unrealized loss
position, at March 31, 2005.
Less than 12 Months 12 Months or More Total
--------------------- ------------------- ---------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- -------- ---------- ------- ----------- --------
Agency
securities $ 986,901 $ 19,063 $ - $ - $ 986,901 $ 19,063
Mortgage-
backed
securities 99,049,697 1,344,661 28,186,471 647,821 127,236,168 1,992,482
Securities classified as available-for-sale are recorded at fair market
value. Approximately 32.2% of the unrealized losses, or thirty
individual securities, consisted of securities in a continuous loss
position for twelve months or more. The Company has the ability and
intent to hold these securities until such time as the value recovers or
the securities mature. The Company believes, based in industry analyst
reports and credit ratings, that the deterioration in value is
attributable to changes in market interest rates and is not in the credit
quality of the issuer and therefore, these losses are not considered
other-than-temporary.
(4) Investment and Mortgage-Backed Securities, Held to Maturity
-----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and
fair values of investment and mortgage-backed securities held to maturity
are as follows:
March 31, 2005
-------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair value
-------------- ---------- --------- ------------
FHLB Securities $ 67,002,146 $ - $ 1,266,080 $ 65,736,066
Federal Farm
Credit Securities 8,998,701 - 238,681 8,760,020
Mortgage-
Backed Securities 260,057 14,759 - 274,816
------------ -------- ----------- ------------
$ 76,260,904 $ 14,759 $ 1,504,761 $ 74,770,902
============ ======== =========== ============
March 31, 2004
-------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair value
-------------- ---------- --------- -----------
FHLB Securities 57,943,983 $ 315,901 $ 86,661 $ 58,173,223
Federal Farm
Credit Securities 13,009,727 132,504 1,881 13,140,350
Mortgage-
Backed Securities 349,797 22,886 - 372,683
------------- --------- -------- ------------
$ 71,303,507 $ 471,291 $ 88,542 $ 71,686,256
============= ========= ======== ============
36
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(4) Investment and Mortgage-Backed Securities, Held to Maturity, Continued
----------------------------------------------------------------------
The amortized cost and fair value of investment and mortgage-backed
securities held to maturity at March 31, 2005, by contractual maturity,
are shown below. Expected maturities will differ from contractual
maturities due to call features on certain investments.
Amortized Cost Fair Value
--------------- -------------
Less Than 1 Year $ - $ -
1-5 Years 32,981,926 32,533,495
More Than 5 Years 43,018,921 41,962,591
Mortgage-Backed
Securities 260,057 274,816
------------- -------------
$ 76,260,904 $ 74,770,902
============= =============
At March 31, 2005, investment and mortgage-backed securities held to
maturity of $9.6 million were pledged as collateral for certain deposit
accounts. In addition, the Bank had pledged $41.4 million of investment
and mortgage-backed securities as collateral for FHLB advances and other
borrowings.
The following table shows gross unrealized losses and fair value,
aggregated by investment category, and length of time that individual
held to maturity securities have been in a continuous unrealized loss
position, at March 31, 2005.
Less than 12 Months 12 Months or More Total
--------------------- ------------------- ---------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----------- -------- ---------- ------- ----------- --------
Agency
securities $61,890,751 $1,099,878 $9,605,960 $404,884 $71,496,711 $1,504,761
Approximately 26.9% of the unrealized losses, or ten individual
securities, consisted of securities in a continuous loss position for
twelve months or more. The Company's held-to-maturity portfolio is
recorded at amortized cost. The Company has the ability and intends to
hold these securities to maturity. The Company believes, based on
industry analysis reports and credit ratings, that the deterioration in
value is attributable to changes in market interest rates and not in
credit quality of the issuer and therefore, these losses are not
considered other-than-temporary.
(5) Loans Receivable, Net
---------------------
Loans receivable, net, at March 31 consisted of the following:
2005 2004
------------ -----------
Residential Real Estate Loans $ 122,622,347 $ 109,722,301
Consumer Loans 50,844,192 45,641,450
Commercial Business And Real
Estate Loans 162,217,200 121,111,848
Loans Held For Sale 2,277,762 1,703,869
------------- -------------
337,961,501 278,179,468
------------- -------------
Less:
Allowance For Loan Losses 6,284,055 5,763,935
Loans In Process 14,626,913 12,356,346
Deferred Loan Fees 161,398 164,527
------------- -------------
21,072,366 18,284,808
------------- -------------
Total Loans Receivable, Net $ 316,889,135 $ 259,894,660
============= =============
37
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(5) Loans Receivable, Net, Continued
--------------------------------
Changes in the allowance for loan losses for the years ended March 31 are
summarized as follows:
2005 2004 2003
----------- ----------- -----------
Balance At Beginning
Of Year $ 5,763,935 $ 4,911,224 $ 3,689,079
Provision For Loan
Losses 780,000 1,200,000 1,800,000
Charge Offs (443,131) (669,591) (909,494)
Recoveries 183,252 322,302 331,639
----------- ----------- -----------
Total Allowance For
Loan Losses $ 6,284,055 $ 5,763,935 $ 4,911,224
=========== =========== ===========
The following table sets forth the amount of the Company's non-accrual
loans and the status of the related interest income at March 31.
2005 2004
------------ ------------
Non-Accrual Loans $ 2,430,000 $ 2,044,000
============ ============
Interest Income That Would
Have Been Recognized Under
Original Terms $ 189,000 $ 106,000
============ ============
At March 31, 2005 and 2004, impaired loans amounted to $1.2 million and
$1.4 million, respectively. Losses on impaired loans are accounted for
in the allowance for loan loss. For the years ended March 31, 2005 and
2004, the average recorded investment in impaired loans was $1.3 million
for both periods.
The Bank blanket pledges its portfolio of single-family mortgage loans to
secure FHLB advances.
38
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(6) Premises and Equipment, Net
---------------------------
Premises and equipment, net, at March 31 are summarized as follows:
2005 2004
---------- ----------
Land $1,506,053 426,163
Buildings And Improvements 7,918,516 7,254,127
Furniture And Equipment 6,340,847 5,874,011
15,765,416 13,554,301
Less Accumulated
Depreciation (7,851,373) (6,991,567)
---------- ----------
Total Premises And Equipment,
Net $7,914,043 6,562,734
========== ==========
Depreciation expense for the years ended March 31, 2005, 2004, and 2003
was approximately $860,000, $845,000, and $825,000, respectively.
The Bank has entered into non-cancelable operating leases related to
buildings and land. At March 31, 2005, future minimum payments under
non-cancelable operating leases with initial or remaining terms of one
year or more are as follows(by fiscal year):
2006 $ 294,255
2007 273,125
2008 272,794
2009 269,155
2010 268,341
Thereafter 1,719,101
-----------
$ 3,096,771
===========
Total rental expense amounted to $289,000, $278,000, and $209,000 for the
years ended March 31, 2005, 2004 and 2003, respectively. Five lease
agreements with monthly expenses of $7,083, $4,163, $2,113, $743, and
$700 have multiple renewal options totaling 45, 10, 10, 40, and 20
years, respectively.
(7) FHLB Stock
----------
Every federally insured savings institution is required to invest in FHLB
stock. No ready market exists for this stock and it has no quoted fair
value. However, because redemption of this stock has historically been
at par, it is carried at cost.
The Bank, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount equal to
a membership component, which is 0.20% of total assets at the prior
December 31, plus a transaction component which equals 4.5% of
outstanding advances (borrowings) from the FHLB of Atlanta. The Bank is
in compliance with this requirement with an investment in FHLB of Atlanta
stock of $6.2 million as of March 31, 2005.
39
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(8) Deposits
--------
Deposits outstanding by type of account are summarized as follows:
At March 31, 2005 At March 31, 2004
--------------------------------- -------------------------------
Interest Interest
Weighted Rate Weighted Rate
Rate Range Amount Rate Range
------------ ---- ---------- ------------ ---- ---------
Checking
Accounts $ 88,169,885 0.65% 0.00-2.47% $ 80,738,298 0.47% 0.00-1.74%
Money Market
Accts. 164,088,081 2.57% 1.09-2.72% 158,587,076 1.97% 1.00-2.03%
Passbook
Accounts 17,743,659 0.98% 0.00-1.50% 17,367,047 0.98% 0.00-1.50%
------------ ---- --------- ------------ ---- ---------
Total 270,001,625 1.84% 0.00-2.72% 256,692,421 1.43% 0.00-2.03%
------------ ---- --------- ------------ ---- ---------
Certificate
Accounts:
0.00-4.99% 150,486,280 122,599,195
5.00-6.99% 9,799,486 10,301,029
------------ ------------
Total 160,285,766 2.92% 0.90-6.55% 132,900,224 2.26% 0.90-6.55%
------------ ---- --------- ------------ ---- ---------
Total
Deposits $430,287,391 2.24% 0.00-6.55% $389,592,645 1.71% 0.00-6.55%
============ ==== ========= ============ ==== ==========
The aggregate amount of short-term certificates of deposit with a minimum
denomination of $100,000 was $61.7 million and $47.0 million at March 31,
2005 and 2004, respectively. The amounts and scheduled maturities of all
certificates of deposit at March 31 are as follows:
March 31,
-------------------------------
2005 2004
------------ ------------
Within 1 Year $ 95,707,286 $ 89,632,381
After 1 Year, Within 2 40,973,203 9,736,807
After 2 Years, Within 3 17,811,991 14,831,103
After 3 Years, Within 4 4,680,838 15,338,730
After 4 Years, Within 5 1,112,448 3,361,203
Thereafter - -
------------ ------------
$160,285,766 $132,900,224
============ ============
40
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(9) Advances From Federal Home Loan Bank (FHLB) And Other Borrowings
----------------------------------------------------------------
Advances from the FHLB at March 31 are summarized by year of maturity and
weighted average interest rate below:
2005 2004
----------------------- -----------------------
Weighted Weighted
Amount Rate Amount Rate
------------ -------- ------------ --------
Year Ending March 31
2005 $ - - $ 13,336,000 4.92%
2006 40,675,000 4.09% 33,000,000 4.09%
2007 18,000,000 2.83% 10,000,000 2.66%
2008 10,000,000 2.96% 10,000,000 2.96%
2009 25,000,000 3.05% 30,000,000 2.96%
Thereafter 18,363,000 3.18% - -
------------ ---- ------------ ----
$112,038,000 3.41% $ 96,336,000 3.59%
============ ==== ============ ====
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 $53.6 million of investment securities. Advances are
subject to prepayment penalties.
The following tables show callable FHLB advances as of the dates
indicated. These advances are also included in the above table. All
callable advances are callable at the option of the FHLB. If an advance
is called, the Bank has the option to payoff the advance without penalty,
re-borrow funds on different terms, or convert the advance to a
three-month floating rate advance tied to LIBOR.
As of March 31, 2005
- ------------------------------------------------------------------------------
Borrow Maturity Int.
Date Date Amount Rate Type Call Dates
- -------- -------- ----------- ------ ---------- ---------------------
11/10/00 11/10/05 $ 5,000,000 5.85% Multi-Call 5/10/05 and quarterly
thereafter
09/04/02 09/04/07 5,000,000 2.82% 1 Time Call 09/06/05
11/07/02 11/07/12 5,000,000 3.354% 1 Time Call 11/07/07
10/24/03 10/24/08 10,000,000 2.705% Multi-Call 10/24/06 and quarterly
thereafter
12/10/03 12/10/08 5,000,000 2.16% Multi-Call 12/12/05 and quarterly
thereafter
02/20/04 02/20/14 5,000,000 3.225% 1 Time Call 02/20/09
04/16/04 04/16/14 3,000,000 3.33% 1 Time Call 04/16/08
09/16/04 09/16/09 5,000,000 3.09% 1 Time Call 09/17/07
As of March 31, 2004
- ------------------------------------------------------------------------------
Borrow Maturity Int.
Date Date Amount Rate Type Call Dates
- -------- -------- ----------- ------ ---------- ---------------------
11/10/00 11/10/05 $ 5,000,000 5.85% Multi-Call 5/10/04 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 06/10/04 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 12/10/08 5,000,000 2.16% Multi-Call 12/12/05 and quarterly
thereafter
02/20/04 02/20/14 5,000,000 3.225% 1 Time Call 02/20/09
At March 31, 2005, the Bank had $63.5 million in additional borrowing
capacity at the FHLB.
The Bank had $5.6 million and $5.5 million in other borrowings (non-FHLB
advances) at March 31, 2005 and 2004, respectively. These borrowings
consisted of repurchase agreements with certain commercial demand deposit
customers for sweep accounts. The interest rate paid on these borrowings
floats monthly with the 13 week Treasury bill. At March 31, 2005 and
2004, the interest rate paid on these borrowings was 2.54% and 0.93%,
respectively. The Bank had pledged $27.3 million in investment
securities at March 31, 2005 and $36.4 million at March 31, 2004,
respectively, as collateral for these borrowings.
41
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(10) Income Taxes
------------
Income tax expense is comprised of the following:
For the Years Ended March 31,
-------------------------------------
2005 2004 2003
----------- ---------- ----------
Current:
Federal $ 1,610,169 2,948,661 2,380,675
State 163,495 356,824 247,582
----------- ---------- ----------
Total Current Tax Expense 1,773,664 3,305,485 2,628,257
----------- ---------- ----------
Deferred:
Federal (55,791) (653,360) (525,982)
State (7,281) (200,482) (161,396)
----------- ---------- ----------
Total Deferred Tax Expense (63,072) (853,842) (687,378)
----------- ---------- ----------
Total Income Tax Expense $ 1,710,592 2,451,643 1,940,879
=========== ========== ==========
The Company's income taxes differ from those computed at the statutory
federal income tax rate, as follows:
For the Years Ended March 31,
-------------------------------------
2005 2004 2003
----------- ----------- -----------
Tax At Statutory Income Tax Rate $ 1,773,470 $ 2,283,034 $ 1,758,494
State Tax And Other (62,878) 168,609 182,385
----------- ----------- -----------
Total Income Tax Expense $ 1,710,592 $ 2,451,643 $ 1,940,879
=========== =========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below.
At March 31,
--------------------------
2005 2004
---------- ----------
Deferred Tax Assets:
Provision For Loan Losses $2,513,622 $2,305,574
Goodwill Tax Basis Over Financial
Statement Basis 364,672 466,440
Net Fees Deferred For Financial
Reporting 190,053 190,114
Unrealized Loss on Securities
Available for Sale 588,310 -
Other 178,533 173,311
---------- ----------
Total Gross Deferred Tax Assets 3,835,190 3,135,439
---------- ----------
Deferred Tax Liabilities:
Unrealized Gain On Securities
Available For Sale - 422,036
FHLB Stock Basis Over Tax Basis 133,367 133,367
Depreciation 211,287 265,318
Other 102,400 -
---------- ----------
Total Gross Deferred Tax Liability 447,054 820,721
---------- ----------
Net Deferred Tax Asset $3,388,136 $2,314,718
========== ==========
The balance of the change in the net deferred tax asset results from the
current period deferred tax benefit of $63,072. The net deferred tax
asset is included in other assets in the accompanying consolidated
balance sheets.
No valuation allowance for deferred tax assets was required at March 31,
2005 and 2004. The realization of net deferred tax assets may be based
on utilization of carrybacks to prior taxable periods, anticipation of
future taxable income in certain periods, and the utilization of tax
planning strategies. Management has determined that the net deferred tax
asset can be supported based upon these criteria.
42
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(11) Regulatory Matters
------------------
The Bank is subject to various regulatory capital requirements that are
administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and discretionary
actions by regulators that could have a material adverse effect on the
Company. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classifications are also subject to qualitative judgements by regulators
with regard to components, risk weightings, and other factors.
As of March 31, 2005 and 2004, the Bank was categorized as "well
capitalized" under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Bank had to maintain total
risk-based capital, Tier 1 risk-based capital, and Tier 1 leverage ratios
at 10%, 6%, and 5%, respectively. There are no conditions or events that
management believes have changed the Bank's classification.
The Bank's regulatory capital amounts and ratios are as follows as of the
dates indicated:
To Be Well
Capitalized Under
For Prompt Corrective
Capital Action
Actual Adequacy Provisions
------------ ------------- -------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
March 31, 2005
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets) $35,652 10.5% 13,555 4.0% 20,332 6.0%
Total Risk-Based Capital
(To Risk Weighted Assets) $39,858 11.8% 27,110 8.0% 33,887 10.0%
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets) $35,652 6.1% 23,472 4.0% 29,341 5.0%
Tangible Capital
(To Tangible Assets) $35,652 6.1% 11,736 2.0% 29,341 5.0%
March 31, 2004
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets) $32,140 11.8% 10,917 4.0% 16,376 6.0%
Total Risk-Based Capital
(To Risk Weighted Assets) $35,498 13.0% 21,834 8.0% 27,293 10.0%
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets) $32,140 6.1% 21,093 4.0% 26,366 5.0%
Tangible Capital
(To Tangible Assets) $32,140 6.1% 10,546 2.0% 26,366 5.0%
The payment of dividends by the Company depends primarily on the ability
of the Bank to pay dividends to the Company. The payment of dividends by
the Bank to the Company is subject to substantial restrictions and would
require prior notice to the Office of Thrift Supervision ("OTS").
43
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Statements
(12) Employee Benefit Plans
----------------------
The Company is participating in a multiple employer defined contribution
employee benefit plan covering substantially all employees with six
months or more of service. The Company matches a portion of the
employees' contributions and the plan has a discretionary profit sharing
provision. The total employer contributions were $36,000, $256,000, and
$215,000 for the years ended March 31, 2005, 2004, and 2003,
respectively.
The Company has an Employee Stock Ownership Plan ("ESOP") for the
exclusive benefit of employee participants. The discretionary
contributions for the years ended March 31, 2005, 2004, and 2003 were
$75,000, $75,000, and $123,000, respectively. The ESOP from time to time
borrows funds from financial institutions to purchase the Company's
stock. The balance of the loan was $276,000 and $337,000 at March 31,
2005 and 2004, respectively. The Company carries the debt as a liability
and a reduction in equity, although the Company neither endorses nor
guarantees the loan. The loan is repaid by Company contributions to the
trustee, who in turn makes the loan payment to the financial institution.
Certain officers of the Company participate in an incentive stock option
plan. Options are granted at exercise prices not less than the fair
value of the Company's common stock on the date of the grant. The
following is a summary of the activity under the Company's incentive
stock option plan for the years ended March 31, 2005, 2004, and 2003.
2005 2004 2003
----------------- ----------------- -----------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------- ----------------- -----------------
Balance, Beginning
of Year 131,639 $ 18.23 114,366 $ 15.77 122,334 $ 15.31
Options granted 32,000 20.89 31,000 22.97 6,000 22.39
Options exercised 10,547 15.95 3,467 5.33 3,468 5.33
Options forfeited 17,800 19.58 10,260 6.51 10,500 17.62
------- ------- -------
Balance, March 31 135,292 $ 19.09 131,639 $ 18.23 114,366 $ 15.77
======= ======= =======
At March 31, 2005, the Company had the following options outstanding:
Outstanding Option Earliest Date
Grant Date Options Price Exercisable Expiration Date
- ---------- ----------- ------ ------------------ --------------------
1/07/97 3,092 $ 5.33 1/1/05 to 1/1/06 12/31/05 to 12/31/06
10/19/99 68,700 $16.67 4/1/05 to 10/01/08 9/30/05 to 9/30/09
1/16/03 1,500 $22.39 1/1/08 to 1/1/12 12/31/12
9/1/03 3,000 $24.00 9/1/08 to 9/1/12 8/31/13
12/1/03 3,000 $23.65 12/1/08 to 12/1/12 11/30/13
1/01/04 11,000 $24.22 1/1/09 to 1/1/13 12/31/13
3/8/04 13,000 $21.43 3/1/09 to 3/1/13 2/28/14
6/7/04 2,000 $24.00 6/1/09 to 6/1/13 5/31/14
1/1/05 28,000 $20.55 1/1/10 to 1/1/14 12/31/14
1/1/05 2,000 $22.61 1/1/09 to 12/31/09 12/31/09
44
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(12) Employee Benefit Plans, Continued
---------------------------------
The options listed on the previous page vest over ten years with the
first vesting earned after five years and 20% vesting earned evenly in
years six through ten except for the 2,000 shares granted on January 1,
2005 which fully vest on January 1, 2009. All options, issued prior to
January 16, 2003, which vest must be exercised within one year of
vesting, except those granted during the year ended March 31, 2004 or
later, which may be exercised anytime between the beginning of the sixth
year and the end of the tenth year after the grant date. There were
10,000 options available for granting at March 31, 2005.
The incentive stock option plan adopted by the Company includes a
provision for tandem stock appreciation rights ("SARs"). Options granted
after March 31, 2002, were not granted in tandem with SAR's, while
options granted before March 31, 2002 were granted in tandem with SAR's.
Upon vesting, these stock appreciation rights are exercisable in lieu of
the stock options granted to the employee. Upon exercise, the employee
chooses the option or SAR feature, and the tandem instrument is
cancelled. The Company accounts for incentive stock options and tandem
SARs under Accounting Principles Board ("APB") Option No. 25, "Accounting
for Stock Issued to Employees". APB No. 25 states that compensation cost
for a combination plan permitting an employee to elect one part should be
measured according to the terms that an employee is mostly likely to
elect based on the facts available each period. Due to the personal
income tax implications of SARs under the Internal Revenue Code,
employees have historically elected to exercise options rather than the
SARs. Accordingly, the Company has elected to measure compensation cost
for stock options as required by APB No. 25, rather than for the SARs.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions for grants: Dividend yield of $.08 per share for
options granted during the years ended 2005, 2004 and 2003, expected
volatility of 21.2% for options granted in 2005, 21.4% for options
granted in 2004, and 10.7% for options granted in 2003, risk-free
interest rate of 4.82% for options granted in 2004, 3.74% to 4.45% for
options granted in 2004, and 3.35% for options granted in 2003, and
expected lives of 6 to10 years.
(13) Commitments and Contingencies
-----------------------------
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company
is a defendant in certain claims and legal actions arising in the
ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these
matters is not expected to have a material adverse effect on the
consolidated financial condition of the Company.
In conjunction with its lending activities, the Bank enters into various
commitments to extend credit and issue letters of credit. Loan
commitments (unfunded loans and unused lines of credit) and letters of
credit are issued to accommodate the financing needs of the Bank's
customers. Loan commitments are agreements by the Bank to lend at a
future date, so long as there are no violations of any conditions
established in the agreement. Letters of credit commit the Bank to make
payments on behalf of customers when certain specified events occur.
Financial instruments where the contract amount represents the Bank's
credit risk include commitments under pre-approved but unused lines of
credit of $55.6 million and $39.4 million, undisbursed loans in process
totaled $14.6 million and $12.4 million, and letters of credit of $1.2
million and $562,000 at March 31, 2005 and 2004, respectively. At March
31, 2005 and 2004, the fair value of standby letters of credit was
immaterial.
These loan and letter of credit commitments are subject to the same
credit policies and reviews as loans on the balance sheet. Collateral,
both the amount and nature, is obtained based upon management's
assessment of the credit risk. Since many of the extensions of credit
are expected to expire without being drawn, the total commitment amounts
do not necessarily represent future cash requirements. In addition to
these loan commitments noted above, the Bank had unused credit card loan
commitments of $2.6 million and $2.5 million at March 31, 2005 and 2004,
respectively. Outstanding commitments on mortgage loans not yet closed
amounted to $180,000 and $429,000 at March 31, 2005 and 2004,
respectively. These commitments, which are funded subject to certain
limitations, extend over varying periods of time with the majority being
funded within 45 days. At March 31, 2005 and 2004, the Bank had
outstanding commitments to sell approximately $2.3 and $1.7 million of
loans, respectively which encompassed the Bank's held for sale loans.
The Bank also has commitments to sell mortgage loans not yet closed, on a
best efforts basis. Best efforts means the Bank suffers no penalty if
they are unable to deliver the loans to the potential buyers. The fair
value of the Bank's commitment to originate mortgage loans at committed
interest rates and to sell such loans to permanent investors is
insignificant.
45
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(14) Related Party Transactions
--------------------------
At March 31, 2005, the total aggregate indebtedness to the Bank by
executive officers and directors of the Bank and Company, whose
individual indebtedness exceeded $60,000, at any time over the period
since April 1, 2003,was $519,000. There was $102,000 in additional loans
to executive officers and directors whose individual indebtedness
exceeded $60,000 during fiscal 2005. Repayments on these loans totaled
approximately $100,000. Loans to all employees, officers, and directors
of the Company, in the aggregate constituted approximately 7.96% of the
total shareholders' equity of the Company at March 31, 2005. At March
31, 2005, deposits from executive officers and directors of the Bank and
Company and their related interest in aggregate approximated $2.5
million.
The Company rents office space from a company in which a director and an
officer of the Company and the Bank have an ownership interest. The Bank
incurred expenses of $41,000, $30,000, and $29,000 for rent for the years
ended March 31, 2005, 2004 and 2003, respectively. Management is of the
opinion that the transactions with respect to office rent are made on
terms that are comparable to those which would be made with unaffiliated
persons.
(15) Security Federal Corporation Condensed Financial Statements (Parent
------------------------------------------------------------------
Company Only)
------------
The following is condensed financial information of Security Federal
Corporation (Parent Company only). The primary asset is its investment
in the Bank subsidiary and the principal source of income for the Company
is equity in undistributed earnings from the Bank.
Condensed Balance Sheet Data
At March 31,
---------------------------
2005 2004
----------- -----------
Assets:
Cash $ 669,550 $ 956,582
Investment In Security Federal Bank 34,690,893 32,829,876
Income Tax Receivable From Bank 35,947 31,538
----------- -----------
Total Assets $35,396,390 $33,817,996
=========== ===========
Liability And Shareholders' Equity:
Accounts Payable $ 9,108 $ 9,109
Indirect Guarantee of ESOP Debt 276,217 336,972
Shareholders' Equity 35,111,065 33,471,915
----------- -----------
Total Liabilities And Shareholders' Equity $35,396,390 $33,817,996
=========== ===========
Condensed Statements of Income Data
For the Years Ended March 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------
Income:
Equity In Earnings Of Security
Federal Bank $3,512,277 $4,260,347 $3,232,989
Miscellaneous Income - 10,000 -
---------- ---------- ----------
3,512,277 4,270,347 3,232,989
Expenses:
Other Expenses 6,782 7,184 1,828
---------- ---------- ----------
Net Income $3,505,495 $4,263,163 $3,231,161
========== ========== ==========
46
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(15) Security Federal Corporation Condensed Financial Statements (Parent
-------------------------------------------------------------------
Company Only), Continued
------------------------
Condensed Statements of Cash Flow Data
For the Years Ended March 31,
--------------------------------------
2005 2004 2003
---------- ---------- ----------
Operating Activities:
Net Income $3,505,495 $4,263,163 $3,231,161
Adjustments To Reconcile Net Income
To Net Cash Provided By (Used
In) Operating Activities:
Equity In Earnings Of Security
Federal Bank (3,512,277) (4,260,347) (3,232,989)
(Increase) Decrease In Income Taxes
Receivable And Other Assets (4,409) 1,644 (1,123)
Decrease In Accounts Payable - (10,000) (2,936)
---------- ---------- ----------
Net Cash Provided By (Used In)
Operating Activities (11,191) (5,540) (5,887)
---------- ---------- ----------
Investing Activities:
Dividend Received From Security
Federal Bank - $1,000,000 -
---------- ---------- ----------
Net Cash Provided By Investing
Activities - $1,000,000 -
---------- ---------- ----------
Financing Activities:
Exercise of Stock Options 168,235 18,479 18,496
Purchase of Treasury Stock, At Cost (165,089) - (122)
Dividends Paid (278,987) (202,563) (151,677)
---------- ---------- ----------
Net Cash Provided By (Used In)
Financing Activities (275,841) (184,084) (133,303)
---------- ---------- ----------
Net Increase (Decrease) In Cash (287,032) 810,376 (139,190)
Cash At Beginning Of Year 956,582 146,206 285,396
---------- ---------- ----------
Cash At End Of Year $ 669,550 $ 956,582 $ 146,206
========== ========== ==========
(16) Carrying Amounts and Fair Value of Financial Instruments
--------------------------------------------------------
The carrying amounts and fair value of financial instruments are
summarized below:
At March 31,
---------------------------------------------
2005 2004
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- --------- ----------
(In Thousands)
Financial Assets:
Cash And Cash Equivalents $ 7,916 $ 7,916 $ 6,749 $ 6,749
Investment And Mortgage-
Back Securities $241,076 $239,586 $245,715 $246,098
Loans Receivable, Net $316,889 $320,990 $259,895 $260,042
Federal Home Loan Bank
Stock $ 6,235 $ 6,235 $ 4,817 $ 4,817
Financial Liabilities:
Deposits:
Checking, Savings, and
Money Market Accounts $270,002 $270,002 $256,692 $256,692
Certificate Accounts $160,286 $159,805 $132,900 $117,389
Advances From Federal
Home Loan Bank $112,038 $111,209 $ 96,336 $104,653
Other Borrowed Money $ 5,594 $ 5,594 $ 5,477 $ 5,477
47
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(16) Carrying Amounts and Fair Value of Financial Instruments, Continued
-------------------------------------------------------------------
At March 31, 2005, the Bank had $74.2 million of off-balance sheet
financial commitments. These commitments are to originate loans and
unused consumer lines of credit and credit card lines. Because these
obligations are based on current market rates, if funded, the original
principal is considered to be a reasonable estimate of fair value.
Fair value estimates are made at a specific point in time, based on
relevant market data and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale the Bank's entire holdings of a particular
financial instrument. Because no active market exists for a significant
portion of the Bank's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current
economic conditions, current interest rates and prepayment trends, risk
characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in any of these assumptions used in calculating fair
value would also significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Bank has
significant assets and liabilities that are not considered financial
assets or liabilities including deposit franchise values, loan servicing
portfolios, deferred tax liabilities, and premises and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of these estimates. The
values used are provided from the Office of Thrift Supervison's interest
rate risk model.
The Company has used management's best estimate of fair value on the
above assumptions. Thus, the fair values presented may not be the
amounts, which could be realized, in an immediate sale or settlement of
the instrument. In addition, any income taxes or other expenses that
would be incurred in an actual sale or settlement are not taken into
consideration in the fair value presented.
48
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(17) Quarterly Financial Data (Unaudited)
------------------------------------
Unaudited condensed financial data by quarter for fiscal year 2005 and
2004 is as follows (amounts, except per share data, in thousands):
Quarter ended
-----------------------------------------------------------
2004-2005 June 30, 2004 Sept. 30, 2004 Dec. 31, 2004 Mar. 31, 2005
------------- -------------- ------------- -------------
Interest Income $ 6,044 $ 6,242 $ 6,471 $ 6,833
Interest Expense 2,596 2,880 2,925 3,123
---------- ---------- ---------- ----------
Net Interest Income 3,448 3,362 3,546 3,710
Provision for Loan
Losses 195 195 195 195
---------- ---------- ---------- ----------
Net Interest Income
after Provision for
Loan Losses 3,253 3,167 3,351 3,515
Non-interest Income 659 724 706 614
Non-interest Expense 2,694 2,711 2,712 2,655
---------- ---------- ---------- ----------
Income before
Income Tax 1,218 1,180 1,345 1,474
Provision for
Income taxes 416 380 433 482
---------- ---------- ---------- ----------
Net Income $ 802 $ 800 $ 912 $ 992
========== ========== ========== ==========
Basic Net Income
per Common Share $ 0.32 $ 0.32 $ 0.36 $ 0.39
========== ========== ========== ==========
Diluted Net Income
per Common Share $ 0.31 $ 0.31 $ 0.36 $ 0.39
========== ========== ========== ==========
Basic Weighted
Average Shares
Outstanding 2,522,600 2,519,627 2,527,661 2,526605
========== ========== ========== ==========
Diluted Weighted
Average Shares
Outstanding 2,562,892 2,555,774 2,556,839 2,565,645
========== ========== ========== ==========
Quarter ended
-----------------------------------------------------------
2003-2004 June 30, 2003 Sept. 30, 2003 Dec. 31, 2003 Mar. 31, 2004
------------- -------------- ------------- -------------
Interest Income $ 5,614 $ 5,504 $ 5,883 $ 6,010
Interest Expense 2,388 2,298 2,413 2,507
---------- ---------- ---------- ----------
Net Interest Income 3,226 3,206 3,470 3,503
Provision for Loan
Losses 300 300 300 300
---------- ---------- ---------- ----------
Net Interest Income
after Provision
for Loan Losses 2,926 2,906 3,170 3,203
Non-interest Income 1,200 1,059 796 2,180
Non-interest Expense 2,649 2,577 2,560 2,938
---------- ---------- ---------- ----------
Income before Income
Tax 1,477 1,388 1,406 2,445
Provision for Income
taxes 554 498 503 897
---------- ---------- ---------- ----------
Net Income $ 923 $ 890 $ 903 $ 1,548
========== ========== ========== ==========
Basic Net Income per
Common Share $ 0.37 $ 0.35 $ 0.36 $ 0.62
========== ========== ========== ==========
Diluted Net Income
per $ 0.36 $ 0.35 $ 0.35 $ 0.60
========== ========== ========== ==========
Basic Weighted
Average Shares
Outstanding 2,510,526 2,512,600 2,513,958 2,516,191
========== ========== ========== ==========
Diluted Weighted
Average Shares
Outstanding 2,558,299 2,568,601 2,561,891 2,554,050
========== ========== ========== ==========
49
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
SHAREHOLDERS INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held at 2:00 p.m., Thursday, July
21, 2005 at the City of Aiken Municipal Conference Center, 215 The Alley,
Aiken, South Carolina.
STOCK LISTING
The Company's stock is traded on the Over-The-Counter-Bulleting Board under
the symbol "SFDL." The stock began trading on the Bulletin Board in October
2003.
PRICE RANGE OF COMMON STOCK
The table below shows the range of high and low bid prices. These prices
represent actual transactions and do not include retail markups, markdowns or
commissions. Market makers include Sterne, Agee, and Leach, Inc., Trident
Securities, Inc., A.G. Edwards and Sons, Inc., Hill, Thompson, and Magid, and
Monroe Securities, Inc.
Quarter Ending High Low
-------------- ------ ------
06-30-03 $20.98 $20.98
09-30-03 $24.50 $22.25
12-31-03 $25.50 $23.25
03-31-04 $25.40 $19.75
06-30-04 $27.00 $19.75
09-30-04 $23.60 $21.50
12-31-04 $21.95 $20.25
03-31-05 $24.00 $19.75
The prices in the table above are adjusted for a 3-for-2 stock split, in the
form of a stock dividend, which occurred in the fiscal year ended March 31,
2003.
As of March 31, 2005, the Company had approximately 480 shareholders and
2,543,838 outstanding shares of common stock.
DIVIDENDS
The first quarterly dividend on the stock was paid to shareholders on March
15, 1991. Dividends will be paid upon the determination of the Board of
Directors that such payment is consistent with the long-term interest of the
Company. The factors affecting this determination include the Company's
current and projected earnings, operating results, financial condition,
regulatory restrictions, future growth plans, and other relevant factors. The
Company declared and paid dividends of $0.0133 per share for each of the four
quarters of the fiscal year ended March 31, 2002. In fiscal year ended March
31, 2003, the Company paid cash dividends of $0.0133 for the first three
quarters of the fiscal year. After the 3-for-2 stock split which occurred
during the quarter ended March 31, 2003, the Company paid $0.02 per share cash
dividend for that quarter. The cash dividends are stated on a post split
basis. The Company paid $0.02 per share cash dividends for each of the
quarters during fiscal 2003-2004 and the first quarter of fiscal 2004-2005.
The Company paid $0.03 per share cash dividend in each of the last three
quarters of 2004-2005.
The ability of the Company to pay dividends depends primarily on the ability
of the Bank to pay dividends to the Company. The Bank may not declare or pay
a cash dividend on its stock or repurchase shares of its stock if the offset
thereof would be to cause its regulatory capital to be reduced below the
amount required for the liquidation account or to meet applicable regulatory
capital requirements. Pursuant to the OTS regulations, Tier 1 Associations
(associations that before and after the proposed distribution meet or exceed
their fully phased-in capital requirements) may make capital distributions
during any calendar year equal to 100% of net income for the year-to-date plus
50% of the amount by which the association's total capital exceeds its fully
phased-in capital requirement as measured at the beginning of the capital
year. However, a Tier 1 Association deemed to be in need of more than normal
supervision by the OTS may be downgraded to a Tier 2 or Tier 3 Association as
a result of such a determination. The Bank is also required to give the OTS
30 days notice prior to the declaration of a dividend. Unlike the Bank, there
is no regulatory restriction on the payment of dividends by the Company;
however, it is subject to the requirements of South Carolina. South Carolina
generally prohibits the Company from paying dividends if, after giving effect
to a proposed dividend: (1) the Company would be unable to pay its debts as
they become due in the normal course of business, or (2) the Company's total
assets would be less than its total liabilities plus the sum that would be
needed to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those receiving the dividend.
50
A familiar face.
The Board of Directors of Security Federal Corporation is pleased to announce
the recent promotion of Roy G. Lindburg to Executive Vice President, Treasurer
and Chief Financial Officer of Security Federal Corporation and its
subsidiaries.
Having already served the bank for over 10 years as Treasurer and CFO, Roy has
done an excellent job managing the bank's investment portfolio maximizing the
spread between assets and liabilities while maintaining adequate liquidity and
minimim interest rate risk. A Certified Public Accountant with over 21 years
of banking experience, Roy is a member of the University of South Carolina
Aiken School of Business Advisory Board as well as a Member of the South
Carolina Bankers Association Asset/Liability Committee. Roy also serves as a
Deacon at Grace Brethren Church.
We are very fortunate to have such an experienced and committed associate as a
key member of our team.
Roy G. Lindburg,
Executive Vice President,
Treasurer and Chief Financial Officer
Shareholder Information
- ------------------------------------------------------------------------------
Annual and Other Reports
The Company is required to file an annual report on Form 10-K for its fiscal
year ended March 31, 2005 with the Securities and Exchange Commission. Copies
of Form 10-K, Security Federal Corporation's annual report, and the Company's
quarterly reports may be obtained from and inquiries may be addressed to Mrs.
Ruth L. Vance of Security Federal Corporation.
GENERAL TRANSFER SPECIAL
INQUIRIES AGENT COUNSEL
Mrs. Ruth L. Vance Security Federal Breyer & Associates, PC
Security Federal Corporation Suite 785
Corp. 1705 Whiskey Road, S 8180 Greensboro Drive
1705 Whiskey Road, S P.O. Box 810 McLean, VA 22102
P.O. Box 810 Aiken, SC 29802-0810
Aiken, SC 29802-0810
Phone: 803-641-3000
Toll free: 866-851-3000
INDEPENDENT
AUDITORS
Elliott Davis, LLC
211 York Street, N.E.
Suite One
P.O. Box 930
Aiken, SC 29802-0930
51
Board of Directors
- -----------------------------------------------------------------------------
BOARD OF DIRECTORS
T. Clifton Weeks Sen. Thomas L. Moore Harry O. Weeks, Jr.
Chairman President Business Dev. Executive
Security Federal Corp. Boiler Efficiency, Inc. Hutson-Etherredge Co.
Aiken, SC Clearwater, SC Aiken, SC
Dr. Robert E. Alexander Timothy W. Simmons J. Chris Verenes
Chancellor Emeritus President/CEO President
Univ. of SC at Aiken Security Federal Corp. Security Federal Bank
Aiken, SC Aiken, SC Aiken, SC
Hon. William Clyburn G. L. Toole, III Roy G. Lindburg
Member of the South Carolina Attorney-At-Law Executive Vice President
House of Representatives Aiken, SC Treasurer/CFO
Aiken, SC Security Federal
Corporation
Aiken, SC
- ------------------------------------------------------------------------------
Directors Emeriti:
Walter E. Brooker, Sr.
President, Brooker's Inc.
Denmark, SC
Robert E. Johnson
Corporate Secretary
Attorney-At-Law (Retired)
Aiken, SC
52
Bank Advisory Board
- ------------------------------------------------------------------------------
NORTH AUGUSTA-----------------------------------------------------------------
P. Richard Borden Rev. G.L. Brightharp Helen H. Butler
Owner Owner Retired Banker
Borden Pest Control G.L. Brightharp & Sons Mortuary North Augusta, SC
North Augusta, SC North Augusta, SC
William M. Hixon Sen. Thomas L. Moore John P. Potter
Owner President Director of
Hixon Realty Boiler Efficiency, Inc. Finance
North Augusta, SC Clearwater, SC City of North
Augusta
North Augusta, SC
WAGENER-----------------------------------------------------------------------
M. Judson Busbee Chad G. Ingram Mary T. Lybrand Michael L. Miller
Owner Vice President Retired Banker Anesthesiologist
Busbee Hardware New World Enterprises Wagener, SC Palmetto Health
Wagener, SC Wagener, SC Richland Memorial
Hosp.
Columbia, SC
Richard H. Sumpter
Retired Educator
Wagener, SC
MIDLAND VALLEY----------------------------------------------------------------
Charles A. Hilton Rev. Nathaniel Irvin, Sr. Gloria Busch-Johnson
General Manager Pastor Consultant
Breezy Hill Old Storm Branch Aiken, SC
Water& Sewer Baptist Church
Graniteville, SC Clearwater, SC
Sen. Thomas L. Moore Glenda K. Napier Carlton B. Shealy
President Co-Owner Owner
Boiler Efficiency, Inc. Napier Funeral Home C. Shealy Realty Builders &
Clearwater, SC Graniteville, SC Developers
North Augusta, SC
WEST COLUMBIA-LEXINGTON-------------------------------------------------------
Eleanor Powell Clark Sandra Dooley Parker L. Todd Sease
Owner/Operator Attorney Partner
B & E Enterprises Inc. Dooley, Dooley, Spence, Jumper, Carter, Sease
dba McDonald's Parker & Hipp, PA Architects, PA
Columbia, SC Lexington, SC West Columbia, SC
L. Ed Kirkland, Jr. Sen. Nikki G. Setzler Dianne Light
Owner/Agent Sr. Partner Owner
L. Ed Kirkland & Co., LLC Setzler & Scott, PA Diane's on Devine
Columbia, SC Law Firm & Dipmato's Deli
West Columbia, SC Columbia, SC
Jan Hook-Stamps Donald T. Martin
Owner Controller, CPA
Southern Anesthesia & Nexsen, Pruet, Jacobs
Surgical Co. Pollard, LLP
West Columbia, SC Columbia, SC
53
Management Team
- ------------------------------------------------------------------------------
T. Clifton Weeks Chairman of Security Federal Corporation
Timothy W. Simmons Chairman and Chief Executive Officer, Security Federal
Bank
G. L. Toole, III Vice President
Robert E. Johnson Corporate Secretary
J. Chris Verenes President, Security Federal Bank
Roy G. Lindburg Executive Vice President, Treasurer and Chief
Financial Officer
Joseph C. Taylor Vice President, Senior Operations Officer
Francis M. Thomas, Jr. Senior Vice President - Aiken Area Executive
Marian A. Shapiro Senior Vice President - Midlands Area Executive
Sandra M. Bartlett Vice President - Human Resources
Kathryn Y. Carr Vice President - Special Assets
Carol P. McCleskey Vice President - Branch Administration
Audrey Varn Vice President, Senior Trust Officer
Matthew B. Fry Audit Department Manager
Gabriele C. Dukes Vice President - Financial Counseling/Community
Development
Rodney K. Ingle Vice President - Business Development/Commercial Loans
Janice S. Hauerwas Vice President - Mortgage Loan Originator
Gregory D. Warfield Vice President - Mortgage Loan Originator
William O. Boyte, III Vice President - Construction Lending - Midlands Area
James E. Bristow Vice President - Business Development/Commercial Loans
Paul T. Rideout Vice President - Business Development/Commercial Loans
H. Stanley Price Vice President - Business Development/Commercial Loans
Elsie K. Dicks Vice President - Credit Administration
Etta A. Petroff Assistant Vice President - Mortgage Loan
Production/Secondary Marketing
Andrea P. Haltiwanger Assistant Vice President - Marketing
Ruth L. Vance Assistant Secretary and Assistant Vice President
Margaret A. Hurt Assistant Treasurer - Accounting
Laura B. Conway Assistant Vice President - Operations
Kathi J. Snipes Assistant Vice President - Financial Counseling
Patricia B. Moseley Assistant Vice President - Loan and Credit Card
Servicing
Ann C. Johnson Assistant Vice President - Purchasing and Facilities
Management
Barbara J. Davis Assistant Vice President - Mortgage Loan Underwriter
Marilyn C. Hensley Assistant Vice President - Special Assets
Jason S. Redd Assistant Vice President - Trust, Investments &
Insurance
Branch Locations--------------------------------------------------------------
Whiskey Road, Aiken, SC
Dana S. Hall, Assistant Vice President/Manager
North Augusta, SC
Kathy S. Williamson, Assistant Vice President/Manager
Laurens Street, Aiken, SC
Vicky W. Moseley, Assistant Vice President/Manager
Richland Avenue, Aiken, SC
Nicole W. Simmons, Assistant Vice President/Manager
Wal-Mart, Aiken, SC
Tonya Key, Manager
Graniteville, SC
Shane M. Bagby, Assistant Vice President/Manager
Langley, SC
Pat W. Guglieri, Assistant Vice President/Manager
Clearwater, SC
Gail W. Dotson, Assistant Vice President/Manager
Wagener, SC
Sharon M. Swift, Assistant Vice President/Manager
West Columbia, SC
Mary B. Clark, Assistant Vice President/Manager
Lexington, SC
Nancy P. Hutto, Assistant Vice President/Manager
54
Family Tree
- ------------------------------------------------------------------------------
Security
Federal
Corporation
-----------
Security
Federal
Bank
- ------------------------------------------------------------------------------
Security Security Security
Federal Federal Federal
--------------- --------------- --------------
Trust, Inc. Investments, Inc. Insurance, Inc.
55
Exhibit 21
Subsidiaries of the Registrant
State of Percentage
Parent Subsidiary Incorporation of Ownership
- ------ ---------- ------------- ------------
Security Federal
Corporation Security Federal Bank United States 100%
Security Federal
Bank Security Federal Insurance South Carolina 100%
Security Federal Investments South Carolina 100%
Security Federal Trust South Carolina 100%
Security Financial Services South Carolina 100%
Corporation
Exhibit 23
Consent of Elliott Davis, LLC
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Security Federal Corporation
We consent to incorporation by reference in the Registration Statement
No. 33-80008, 333-3150 and 333-102337 on Form S-8 of our report dated May 9,
2005, relating to the consolidated balance sheet of Security Federal
Corporation and subsidiaries as of March 31, 2005 and the related consolidated
statements of income, shareholders' equity and cash flows for the year then
ended, which report appears in the March 31, 2005 annual report on Form 10-K.
/s/ Elliott Davis, LLC
Columbia, South Carolina
June 23, 2005
Exhibit 31.1
Certification Required
by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934
I, Timothy W. Simmons, certify that:
1. I have reviewed this annual report on Form 10-K of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 29, 2005
/s/Timothy W. Simmons
------------------------------
Timothy W. Simmons
President and Chief Executive Officer
Exhibit 31.2
Certification Required
by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934
I, Roy G. Lindburg, certify that:
1. I have reviewed this annual report on Form 10-K of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 29, 2005
/s/Roy G. Lindburg
------------------------------
Roy G. Lindburg
Treasurer and Chief Financial Officer
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF SECURITY FEDERAL CORPORATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form
10-K, that:
1. the report fully complies with the requirements of Sections 13(a)
and 15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all
material respects, the company's financial condition and results of
operations.
/s/Timothy W. Simmons /s/Roy G. Lindburg
- ------------------------------------- -------------------------------------
Timothy W. Simmons Roy G. Lindburg
President and Chief Executive Officer Treasurer and Chief Financial Officer
Dated: June 29, 2005