SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2005
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD:
FROM: TO:
------------------ -----------------
COMMISSION FILE NUMBER: 0-16120
SECURITY FEDERAL CORPORATION
South Carolina 57-0858504
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1705 WHISKEY ROAD, AIKEN, SOUTH CAROLINA 29801
(Address of Principal Executive Office And Zip code)
(803) 641-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO [ ]
------- -------
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "large
accelerated filer" and "accelerated filer" in Rule 12b-2 of the
Exchange Act.
Large accelerated filed [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (defined in
Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
CLASS: OUTSTANDING SHARES AT: SHARES:
---------------- ----------------------- ------------------
Common Stock, par January 31, 2006 2,537,010
value $0.01 per share
INDEX
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PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at December
31, 2005 and March 31, 2005 1
Consolidated Statements of Income for
the Three and Nine Months Ended December
31, 2005 and 2004 2
Consolidated Statements of Shareholders'
Equity and Comprehensive Income at December
31, 2004 and 2005 4
Consolidated Statements of Cash Flows for the
Nine Months Ended December 31, 2005 and 2004 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 21
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits 22
Signatures 23
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SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information is included in the consolidated financial statements and related
notes.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, March 31,
2005 2005
------------ ------------
(Unaudited) (Audited)
Assets:
Cash And Cash Equivalents $16,462,283 $7,916,488
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized cost of
$162,259,854 at
December 31, 2005 and
$166,364,642 at March
31, 2005) 159,265,454 164,814,819
Held To Maturity: (Fair value of $73,258,830
at December 31, 2005 and
$74,770,902 at March 31,
2005) 74,991,809 76,260,904
------------- -------------
Total Investment And Mortgage-Backed
Securities 234,257,263 241,075,723
------------- -------------
Held For Sale 714,034 2,277,762
Held For Investment: (Net of allowance
of $6,570,931 at December
31, 2005 and $6,284,055 at
March 31, 2005) 354,572,533 314,611,373
------------- -------------
Total Loans Receivable, Net 355,286,567 316,889,135
------------- -------------
Accrued Interest Receivable:
Loans 1,138,126 901,872
Mortgage-Backed Securities 509,055 555,933
Investments 773,453 721,744
Premises And Equipment, Net 9,501,767 7,914,043
Federal Home Loan Bank Stock, At Cost 7,083,900 6,234,500
Repossessed Assets Acquired In Settlement
Of Loans 145,870 53,000
Other Assets 3,792,050 3,716,035
------------- -------------
Total Assets $ 628,950,334 $ 585,978,473
============= =============
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $ 450,172,398 $ 430,287,391
Advances From Federal Home Loan Bank 132,513,000 112,038,000
Other Borrowed Money 6,060,935 5,594,157
Advance Payments By Borrowers For Taxes
And Insurance 567,629 417,410
Other Liabilities 2,671,473 2,530,450
------------- -------------
Total Liabilities $ 591,985,435 $ 550,867,408
------------- -------------
Shareholders' Equity:
Serial Preferred Stock, $.01 Par Value;
Authorized Shares - 200,000; Issued
And Outstanding Shares - None $ - $ -
Common Stock, $.01 Par Value; Authorized
Shares - 5,000,000; Issued - 2,546,722
And Outstanding Shares - 2,537,178 At
December 31, 2005 And 2,543,838 And
2,522,127 At March 31, 2005 25,564 25,438
Additional Paid-In Capital 4,374,122 4,181,804
Treasury Stock, (At Cost, 9,712 and
8,077 Shares, Respectively) (200,256) (165,089)
Indirect Guarantee Of Employee Stock
Ownership Trust Debt (215,503) (276,217)
Accumulated Other Comprehensive Loss (1,857,726) (961,504)
Retained Earnings, Substantially Restricted 34,838,698 32,306,633
------------- -------------
Total Shareholders' Equity $ 36,964,899 $ 35,111,065
------------- -------------
Total Liabilities And Shareholders' Equity $ 628,950,334 $ 585,978,473
============= =============
See accompanying notes to consolidated financial statements.
1
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended December 31,
-------------------------------
2005 2004
-------------- -------------
Interest Income:
Loans $ 5,963,727 $ 4,306,895
Mortgage-Backed Securities 1,333,025 1,401,716
Investment Securities 962,379 756,877
Other 10,835 5,851
-------------- ------------
Total Interest Income 8,269,966 6,471,339
-------------- ------------
Interest Expense:
NOW And Money Market Accounts 1,358,825 1,032,212
Passbook Accounts 43,143 42,547
Certificate Accounts 1,523,634 937,371
Advances And Other Borrowed Money 1,186,344 913,355
-------------- ------------
Total Interest Expense 4,111,946 2,925,485
-------------- ------------
Net Interest Income 4,158,020 3,545,854
Provision For Loan Losses 165,000 195,000
-------------- ------------
Net Interest Income After Provision For
Loan Losses 3,993,020 3,350,854
-------------- ------------
Other Income:
Gain On Sale Of Loans 121,138 88,265
Loan Servicing Fees 53,606 47,997
Service Fees On Deposit Accounts 303,173 327,062
Other 236,412 242,996
-------------- ------------
Total Other Income 714,329 706,320
-------------- ------------
General And Administrative Expenses:
Salaries And Employee Benefits 1,847,482 1,444,615
Occupancy 331,501 268,749
Advertising 44,402 53,785
Depreciation And Maintenance Of Equipment 274,324 244,000
FDIC Insurance Premiums 14,561 14,444
Other 692,196 686,852
-------------- ------------
Total General And Administrative Expenses 3,204,466 2,712,445
-------------- ------------
Income Before Income Taxes 1,502,883 1,344,729
Provision For Income Taxes 544,908 432,878
-------------- ------------
Net Income $ 957,975 $ 911,851
============== ============
Basic Net Income Per Common Share $ 0.38 $ 0.36
============== ============
Diluted Net Income Per Common Share $ 0.37 $ 0.36
============== ============
Cash Dividend Per Share On Common Stock $ 0.04 $ 0.03
============== ============
Basic Weighted Average Shares Outstanding 2,536,304 2,527,661
============== ============
Diluted Weighted Average Shares Outstanding 2,570,767 2,556,839
============== ============
See accompanying notes to consolidated financial statements.
2
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Nine Months Ended December 31,
--------------------------------
2005 2004
------------ --------------
Interest Income:
Loans $ 16,751,933 $ 12,158,605
Mortgage-Backed Securities 4,084,033 4,170,928
Investment Securities 2,634,484 2,408,801
Other 47,122 18,580
------------ -------------
Total Interest Income 23,517,572 18,756,914
------------ -------------
Interest Expense:
NOW And Money Market Accounts 3,905,361 2,895,348
Passbook Accounts 132,262 129,515
Certificate Accounts 4,077,011 2,559,988
Advances And Other Borrowed Money 3,270,366 2,816,492
------------ -------------
Total Interest Expense 11,385,000 8,401,343
------------ -------------
Net Interest Income 12,132,572 10,355,571
Provision For Loan Losses 495,000 585,000
------------ -------------
Net Interest Income After Provision
For Loan Losses 11,637,572 9,770,571
------------ -------------
Other Income:
Gain On Sale of Investments 48,962 -
Gain On Sale Of Loans 374,701 327,088
Loan Servicing Fees 154,365 135,103
Service Fees On Deposit Accounts 875,237 952,426
Other 700,121 675,066
------------ -------------
Total Other Income 2,153,386 2,089,683
------------ -------------
General And Administrative Expenses:
Salaries And Employee Benefits 5,443,785 4,629,528
Occupancy 962,678 792,457
Advertising 113,392 128,310
Depreciation And Maintenance Of Equipment 784,443 781,022
FDIC Insurance Premiums 43,247 43,341
Other 2,024,699 1,742,929
------------ -------------
Total General And Administrative Expenses 9,372,244 8,117,587
------------ -------------
Income Before Income Taxes 4,418,714 3,742,667
Provision For Income Taxes 1,581,817 1,228,783
------------ -------------
Net Income $ 2,836,897 $ 2,513,884
============ =============
Basic Net Income Per Common Share $ 1.12 $ 1.00
============ =============
Diluted Net Income Per Common Share $ 1.11 $ 0.98
============ =============
Cash Dividend Per Share On Common Stock $ 0.12 $ 0.08
============ =============
Basic Weighted Average Shares Outstanding 2,531,885 2,523,296
============ =============
Diluted Weighted Average Shares Outstanding 2,565,949 2,558,502
============ =============
See accompanying notes to consolidated financial statements.
3
Security Federal Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Unaudited)
Accumulated
Indirect Other
Additional Guarantee Comprehen-
Common Paid-In Treasury of sive Income Retained
Stock Capital Stock ESOP Debt (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 - - - - - 2,513,884 2,513,884
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Losses
On Securities Available
For Sale - - - - (914,913) - (914,913)
-----------
Comprehensive Income - - - - - - 1,598,971
Decrease In Indirect
Guarantee Of ESOP Debt - - - 60,755 - - 60,755
Exercise Of Stock Options 105 168,130 - - - - 168,235
Cash Dividends - - - - - (202,914) (202,914)
-------- ---------- - - --------- --------- ----------- -----------
Balance At December 31,
2004 $ 25,438 $4,181,804 $ - $(276,217) $(225,158) $31,391,095 $35,096,962
======== ========== === ========= ========= =========== ===========
Accumulated
Indirect Other
Additional Guarantee Comprehen-
Common Paid-In Treasury of sive Income Retained
Stock Capital Stock ESOP Debt (Loss) Earnings Total
-------- ---------- -------- ---------- ----------- ----------- -----------
Balance At March 31, 2005 $25,438 $4,181,804 $(165,089) $(276,217) $(961,504) $32,306,633 $35,111,065
Net Income - - - - - 2,836,897 2,836,897
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Losses
On Securities Available
For Sale - - - - (865,866) - (865,866)
Plus Reclassification
Adjustments For Gains
Included In Net Income - - - - (30,356) - (30,356)
-----------
Comprehensive Income - - - - - - 1,940,675
Purchase Of Treasury Stock
At Cost, 1,635 shares - - (35,167) - - - (35,167)
Exercise Of Stock Options 126 192,318 - - - - 192,444
Decrease In Indirect
Guarantee Of ESOP Debt - - - 60,714 - - 60,714
Cash Dividends - - - - - (304,832) (304,832)
-------- ---------- --------- -------- ---------- ----------- -----------
Balance At December 31,
2005 $ 25,564 $4,374,122 $(200,256) $(215,503)$(1,857,726) $34,838,698 $36,964,899
======== ========== ========= ========= =========== =========== ===========
See accompanying notes to consolidated financial statements.
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended December 31,
--------------------------------
2005 2004
----------- ------------
Cash Flows From Operating Activities:
Net Income $ 2,836,897 $ 2,513,884
Adjustments To Reconcile Net Income
To Net Cash Provided By Operating Activities:
Depreciation Expense 731,381 630,742
Discount Accretion And Premium Amortization 762,876 929,109
Provisions For Losses On Loans And Real
Estate 495,000 585,000
Gain On Sale Of Loans (374,701) (327,088)
Gain On Sale Of Mortgage Backed Securities
Available For Sale (48,962) -
Loss (Gain) On Sale Of Real Estate 21,416 (53,661)
Amortization Of Deferred Fees On Loans (139,852) (143,244)
Proceeds From Sale Of Loans Held For Sale 24,294,189 19,590,174
Origination Of Loans For Sale (22,355,760) (18,982,328)
(Increase) Decrease In Accrued Interest
Receivable:
Loans (236,254) 23,813
Mortgage-Backed Securities 46,878 (24,904)
Investments (51,709) 145,173
Increase (Decrease) In Advance Payments
By Borrowers 150,219 (77,620)
Loss (Gain) on Disposition of Premises
and Equipment 4,469 (3,525)
Other, Net 674,086 (684,252)
------------ ------------
Net Cash Provided By Operating Activities 6,810,173 4,121,273
------------ ------------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Available For Sale 39,543,268 37,602,571
Principal Repayments On Mortgage-Backed
Securities Held To Maturity 10,407 79,558
Purchase Of Investment Securities
Available For Sale (20,046,195) -
Purchase Of Investment Securities Held
To Maturity - (22,042,025)
Purchase Of Mortgage-Backed Securities
Available For Sale (24,569,383) (49,526,672)
Maturities Of Investment Securities
Available For Sale 4,674,853 10,000,000
Maturities of Investment Securities
Held To Maturity 1,000,000 19,000,000
Proceeds From Sale Of Mortgage-Backed
Securities Available For Sale 3,797,360 -
Proceeds From Sale Of Mortgage-Backed
Securities Held To Maturity 249,650 -
Purchase Of FHLB Stock (4,697,800) (3,910,900)
Redemption Of FHLB Stock 3,848,400 2,702,900
Increase In Loans To Customers (40,527,093) (36,558,688)
Proceeds From Sale Of Repossessed Assets 96,499 335,427
Purchase And Improvement Of Premises
And Equipment (2,323,574) (1,945,254)
Proceeds from Sale of Premises And
Equipment - 3,525
------------ ------------
Net Cash Used By Investing Activities (38,943,608) (44,259,558)
------------ ------------
Cash Flows From Financing Activities:
Increase In Deposit Accounts 19,885,007 26,572,741
Proceeds From FHLB Advances 181,395,000 100,943,000
Repayment Of FHLB Advances (160,920,000) (86,866,000)
Net Proceeds (Repayments) Of Other
Borrowings 466,778 (189,458)
Dividends To Shareholders (304,832) (202,914)
Purchase Of Treasury Stock (35,167) -
Proceeds From Exercise of Stock Options 192,444 168,235
------------ ------------
Net Cash Provided By Financing Activities 40,679,230 40,425,604
------------ ------------
(Continued)
5
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended December 31,
--------------------------------
2005 2004
------------- -------------
Increase In Cash And Cash Equivalents 8,545,795 287,319
Cash And Cash Equivalents At Beginning
Of Period 7,916,488 6,749,211
----------- -----------
Cash And Cash Equivalents At End Of Period $16,462,283 $ 7,036,530
=========== ===========
Supplemental Disclosure Of Cash Flows
Information:
Cash Paid During The Period For Interest $11,161,678 $ 8,322,953
Cash Paid During The Period For Income Taxes $ 1,742,825 $ 1,699,012
Additions To Repossessed Acquired Through
Foreclosure $ 210,785 $ 358,397
Increase In Unrealized Net Loss On Securities
Available For Sale, Net Of Taxes $ (896,222) $ (914,913)
See accompanying notes to consolidated financial statements.
6
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and accounting principles generally
accepted in the United States of America; therefore, they do not include all
disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows. Such statements are unaudited but, in
the opinion of management, reflect all adjustments, which are of a normal
recurring nature and necessary for a fair presentation of results for the
selected interim periods. Users of financial information produced for interim
periods are encouraged to refer to the footnotes contained in the audited
financial statements appearing in Security Federal Corporation's (the
"Company") 2005 Annual Report to Shareholders when reviewing interim financial
statements. The results of operations for the nine-month period ended
December 31, 2005 are not necessarily indicative of the results that may be
expected for the entire fiscal year. This Quarterly Report on Form 10-Q
contains certain forward-looking statements with respect to the financial
condition, results of operations, and business of the Company. These
forward-looking statements involve certain risks and uncertainties. Factors
that may cause actual results to differ materially from those anticipated by
such forward-looking statements include, but are not limited to, changes in
interest rates, the demand for loans, the regulatory environment, general
economic conditions and inflation, and the securities markets. Management
cautions readers of this Form 10-Q not to place undue reliance on the forward-
looking statements contained herein.
2. Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, Security Federal Bank
(the "Bank"), and the Bank's wholly owned subsidiaries, Security Federal
Insurance, Inc. ("SFINS"), Security Federal Investments, Inc. ("SFINV"),
Security Federal Trust, Inc. ("SFT"), and Security Financial Services
Corporation ("SFSC"). The Bank is primarily engaged in the business of
accepting savings and demand deposits and originating mortgage and other loans
to individuals and small businesses for various personal and commercial
purposes. SFINS, SFINV, and SFT were formed during the year ended March 31,
2002 and began operation during the December 2001 quarter. SFINS is an
insurance agency offering business, health, home and life insurance. SFINV
engages primarily in investment brokerage services. SFT offers trust,
financial planning and financial management services. SFSC is currently
inactive.
3. Loans Receivable, Net
Loans receivable, net, at December 31, 2005 and March 31, 2005 consisted of
the following:
Loans held for sale were $714,034 and $2,277,762 at December 31, 2005 and
March 31, 2005, respectively.
Loans Held For Investment: December 31, 2005 March 31, 2005
------------------- ------------------
Residential Real Estate $ 122,703,867 $ 122,622,347
Consumer 56,819,276 50,844,192
Commercial Business And Real
Estate 191,357,758 162,217,200
------------- -------------
370,880,901 335,683,739
------------- -------------
Less:
Allowance For Possible Loan
Losses 6,570,931 6,284,055
Loans In Process 9,574,921 14,626,913
Deferred Loan Fees 162,516 161,398
------------- -------------
16,308,368 21,072,366
------------- -------------
$ 354,572,533 $ 314,611,373
============= =============
The following is a reconciliation of the allowance for loan losses for the
nine months ending:
December 31, 2005 December 31, 2004
--------------------- -------------------
Beginning Balance $ 6,284,055 $ 5,763,935
Provision 495,000 585,000
Charge-offs (263,752) (229,538)
Recoveries 55,628 133,298
-------------- --------------
Ending Balance $ 6,570,931 $ 6,252,695
============== ==============
7
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
4. Securities
Investment and Mortgage-Backed Securities, Held to Maturity
-----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities held to maturity are as
follows:
Gross Gross
December 31, 2005 Amortized Unrealized Unrealized
------------------ Cost Gains Losses Fair Value
------------ ---------- ---------- -----------
US Government And
Agency Obligations $ 74,991,809 - 1,732,979 73,258,830
============ ======== =========== ============
March 31, 2005
--------------
US Government And
Agency Obligations $ 76,000,847 $ - $ 1,504,761 $ 74,496,086
Mortgage-Backed
Securities 260,057 14,759 - 274,816
------------ -------- ----------- ------------
Total $ 76,260,904 $ 14,759 $ 1,504,761 $ 74,770,902
============ ======== =========== ============
Investment And Mortgage-Backed Securities, Available For Sale
-------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities available for sale are as
follows:
Gross Gross
December 31, 2005 Amortized Unrealized Unrealized
------------------ Cost Gains Losses Fair Value
------------ ---------- ---------- -----------
US Government And
Agency Obligations $ 20,837,147 $ 2,500 $ 212,949 $ 20,626,698
Mortgage-Backed
Securities 141,422,707 144,542 2,928,493 138,638,756
------------ --------- ----------- ------------
Total $162,259,854 $ 147,042 $ 3,141,442 $159,265,454
============ ========= =========== ============
March 31, 2005
--------------
US Government And
Agency Obligations $ 5,469,678 $ 4,648 $ 19,063 $ 5,455,263
Mortgage-Backed
Securities 160,894,954 457,081 1,992,479 159,359,556
------------ --------- ----------- ------------
Total $166,364,632 $ 461,729 $ 2,011,542 $164,814,819
============ ========= =========== ============
8
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
5. Deposit Accounts
A summary of deposit accounts by type with weighted average rates is as
follows:
December 31, 2005 March 31, 2005
------------------- ---------------------
Balance Rate Balance Rate
Demand Accounts: ------------------- ---------------------
Checking $ 96,577,795 0.91% $ 88,169,885 0.65%
Money Market 153,400,713 3.09% 164,088,081 2.57%
Regular Savings 17,269,681 0.98% 17,743,659 0.98%
------------ ------------
Total Demand Accounts 267,248,189 2.16% 270,001,625 1.84%
------------ ------------
Certificate Accounts:
0 - 4.99% 173,158,740 150,486,280
5.00 - 6.99% 9,765,469 9,799,486
------------ ------------
Total Certificate Accounts 182,924,209 3.67% 160,285,766 2.92%
------------ ------------
Total Deposit Accounts $450,172,398 2.77% $430,287,391 2.24%
============ ============
6. Advances From Federal Home Loan Bank ("FHLB")
FHLB advances are summarized by year of maturity and weighted average interest
rate in the table below:
December 31, 2005 March 31, 2005
---------------------- ---------------------
Fiscal Year Due: Balance Rate Balance Rate
---------------------- ---------------------
2006 $ 15,000,000 2.85% $ 40,675,000 4.09%
2007 24,150,000 3.24% 18,000,000 2.83%
2008 5,000,000 3.09% 10,000,000 2.96%
2009 20,000,000 3.28% 25,000,000 3.05%
2010 5,000,000 3.09% 5,000,000 3.09%
Thereafter 63,363,000 3.95% 13,363,000 3.21%
------------ ------------
Total Advances $132,513,000 3.53% $112,038,000 3.41%
============ ============
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 $64.7 million in investment securities at December 31, 2005.
Advances are subject to prepayment penalties.
The following table shows callable FHLB advances as of the dates indicated.
These advances are also included in the above table. All callable advances
are callable at the option of the FHLB. If an advance is called, the Bank has
the option to payoff the advance without penalty, re-borrow funds on different
terms, or convert the advance to a three-month floating rate advance tied to
LIBOR.
As of December 31, 2005
------------------------------------------------------------------------------------------------------------
Borrow Date Maturity Date Amount Int. Rate Type Call Dates
------------ --------------- --------- ----------- --------- ---------------------------------
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
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
06/24/05 06/24/15 5,000,000 3.71% 1 Time Call 06/24/10
06/24/05 06/24/10 5,000,000 3.7215% 1 Time Call 06/26/06
07/22/05 07/22/15 5,000,000 3.79% 1 Time Call 07/22/08
10/21/05 10/21/10 5,000,000 3.4306% 1 Time Call 10/23/06
11/01/05 11/10/15 5,000,000 4.40% 1 Time Call 11/10/09
11/22/05 11/23/15 5,000,000 3.9325% Multi-call 11/23/07 and quarterly thereafter
11/29/05 11/29/13 5,000,000 4.32% 1 Time Call 05/29/09
12/14/05 12/14/11 5,000,000 4.64% 1 Time Call 09/14/09
9
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
As of March 31, 2005
------------------------------------------------------------------------------------------------------------
Borrow Date Maturity Date Amount Int. Rate Type Call Dates
------------ --------------- --------- ----------- --------- ---------------------------------
11/10/00 11/10/05 5,000,000 5.85% Multi-Call 05/10/05 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 3.35% 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 2.14% 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 09/19/09 5,000,000 3.09% 1 Time Call 09/17/07
7. Regulatory Matters
The following table reconciles the Bank's shareholders' equity to its various
regulatory capital positions:
December 31, March 31,
2005 2005
(In Thousands)
-----------------------------
Bank's Shareholders' Equity $ 36,636 $ 34,690
Unrealized Loss On Available
For Sale Of Securities, Net Of Tax 1,858 962
Reduction For Goodwill And Other
Intangibles - -
-------- --------
Tangible Capital 38,494 35,652
Qualifying Core Deposits And
Intangible Assets - -
-------- --------
Core Capital 38,494 35,652
Supplemental Capital 4,700 4,236
Assets Required To Be Deducted (9) (30)
-------- --------
Risk-Based Capital $ 43,185 $ 39,858
======== ========
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at December 31, 2005:
(Dollars in Thousands)
---------------------------------------------------------
Amt. % Actual Actual Excess Excess
Required Required Amt. % Amt. %
---------------------------------------------------------
Tangible Capital $12,612 2.0% $38,494 6.10% $25,882 4.10%
Tier 1 Leverage
(Core) Capital 25,223 4.0% 38,494 6.10% 13,271 2.10%
Total Risk-Based
Capital 30,081 8.0% 43,185 11.48% 13,104 3.48%
Tier 1 Risk-Based
(Core) Capital 15,041 4.0% 38,494 10.24% 23,453 6.24%
8. Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share."
SFAS No. 128 specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock such as options, warrants, convertible
securities or contingent stock agreements if those securities trade in a
public market.
This standard specifies computation and presentation requirements for both
basic EPS and, for entities with complex capital structures, diluted EPS.
Basic EPS is computed by dividing net income by the weighted average number of
common shares outstanding. Diluted EPS is similar to the computation of basic
EPS except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued. The dilutive effect of options
outstanding under the Company's stock option plan is reflected in diluted
earnings per share by application of the treasury stock method.
10
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
For the Quarter Ended
----------------------------------------------
December 31, 2005
----------------------------------------------
Income
(Numerator) Shares
Amount (Denominator) Per Share
---------- ------------- ---------
Basic EPS $ 957,975 2,536,304 $ 0.38
Effect of Diluted
Securities:
Stock Options - 24,919 (.007)
ESOP - 9,544 (.003)
---------- ------------- --------
Diluted EPS $ 957,975 2,570,767 $ 0.37
========== ============= ========
For the Quarter Ended
----------------------------------------------
December 31, 2004
----------------------------------------------
Income
(Numerator) Shares
Amount (Denominator) Per Share
---------- ------------- ---------
Basic EPS $ 911,851 2,527,661 $ 0.36
Effect of Diluted
Securities:
Stock Options - 15,449 -
ESOP - 13,729 -
---------- ------------- --------
Diluted EPS $ 911,851 2,556,839 $ 0.36
========== ============= ========
For the Nine Months Ended
----------------------------------------------
December 31, 2005
----------------------------------------------
Income
(Numerator) Shares
Amount (Denominator) Per Share
---------- ------------- ---------
Basic EPS $ 2,836,897 2,531,885 $ 1.12
Effect of Diluted
Securities:
Stock Options - 24,471 (0.007)
ESOP - 9,593 (0.003)
----------- ------------- --------
Diluted EPS $ 2,836,897 2,565,949 $ 1.11
=========== ============= ========
For the Nine Months Ended
----------------------------------------------
December 31, 2004
----------------------------------------------
Income
(Numerator) Shares
Amount (Denominator) Per Share
---------- ------------- ---------
Basic EPS $ 2,513,884 2,523,296 $ 1.00
Effect of Diluted
Securities:
Stock Options - 22,490 (0.013)
ESOP - 12,716 (0.007)
----------- ------------- --------
Diluted EPS $ 2,513,884 2,558,502 $ 0.98
=========== ============= ========
11
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
9. Stock-Based Compensation
The Company has a stock-based employee compensation plan which is accounted
for under the recognition and measurement principles of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. No stock-based employee compensation cost is
reflected in net income, as all stock options granted under these plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share as if we had applied the fair value recognition provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based
employee compensation for the three months and nine months ended December 31,
2005 and 2004, respectively.
Three Months Ended Nine Months Ended
December 31, December 31,
2005 2004 2005 2004
--------- --------- ---------- ----------
Net income, as reported $ 957,975 $ 911,851 $2,836,897 $2,513,884
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effect $ (30,570) $ (57,124) $ (91,710) $ (171,372)
Net Income, Pro Forma $ 927,405 $ 854,727 $2,745,187 $2,342,512
Basic earnings share:
As Reported $ .38 $ .36 $ 1.12 $ 1.00
Pro Forma $ .37 $ .34 $ 1.08 $ .93
Diluted earnings share:
As reported $ .37 $ .36 $ 1.11 $ .98
Pro forma $ .36 $ .33 $ 1.07 $ .92
12
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Safe Harbor Statement
Certain matters in this Quarterly Report on Form 10-Q for the quarter ended
December 31, 2005 constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements relate to, among others, expectations of the business environment
in which the Company operates, projections of future performance, perceived
opportunities in the market, potential future credit experience, and
statements regarding the Company's mission and vision. These forward-looking
statements are based upon current management expectations, and may, therefore,
involve risks and uncertainties. The Company's actual results, performance,
or achievements may differ materially from those suggested, expressed, or
implied by forward-looking statements as a result of a wide range of factors
including, but not limited to, the general business environment, interest
rates, the South Carolina real estate market, the demand for loans,
competitive conditions between banks and non-bank financial services
providers, regulatory changes, and other risks detailed in the Company's
reports filed with the SEC, including the Annual Report on Form 10-K for the
fiscal year ended March 31, 2005. Forward-looking statements are effective
only as of the date that they are made and the Company assumes no obligation
to update this information.
Highlights
Total assets of the Company increased $43.0 million or 7.3% from $586.0
million to $629.0 million during the nine months ended December 31, 2005
primarily as a result of an increase of $8.5 million or 108.0% in cash and
cash equivalents, an increase of $38.4 million or 12.1% in net loans
receivable, and an increase of $1.6 million or 20.1% in net premises and
equipment. The increases were offset partially by a decrease of $6.8 million
or 2.8% in investments and mortgage-backed securities.
During the nine months ended December 31, 2005, residential real estate loans,
net of loans in process, increased $5.1 million or 4.8% commercial loans
increased $29.1 million or 17.9%, while consumer loans increased $6.0 million
or 11.8%. Loans held for sale decreased $1.5 million or 68.7% during the same
period.
Repossessed assets increased $93,000 to $146,000 during the nine months ended
December 31, 2005.
Non-accrual loans totaled $1.7 million at December 31, 2005 compared to $2.4
million at March 31, 2005. The Bank classifies all loans as non-accrual when
they become 90 days or more delinquent. At December 31, 2005, the Bank held
$1.3 million in impaired loans compared to $1.2 million at March 31, 2005.
The Bank includes troubled debt restructuring ("TDR") within the meaning of
SFAS No. 114, in impaired loans. At December 31, 2005, the Bank had six loans
totaling $425,000 in TDR's compared to six loans totaling $434,000 at March
31, 2005. Included in the six TDR loans at December 31, 2005 is a $204,000
commercial loan secured by equipment and a $57,000 consumer loan secured by
residential dwellings, which are both over 30 days past due. The other four
TDR's consisted of a $12,000 consumer loan secured by a second mortgage on a
residential dwelling, an $80,000 consumer loan secured by a residential
dwelling, a $18,000 unsecured commercial loan, and a $54,000 commercial loan
secured by two rental properties, all of which were current as of December 31,
2005.
Deposits increased $19.9 million or 4.6% to $450.2 million during the nine
months ended December 31, 2005 as a result of competitive
rates offered by the Bank. FHLB advances increased $20.5 million or 18.3% to
$132.5 million during the same period. Other borrowings, consisting of
commercial repurchase sweep accounts, increased $467,000 or 8.3% to $6.1
million during the nine-month period.
The Board of Directors of the Company declared the 58th, 59th, and 60th
consecutive quarterly dividend of $0.04, $0.04, $0.04 per share, in April,
July, and October 2005, respectively, which totaled $305,000. The employee
stock ownership trust of the Company paid $61,000 of principal on the employee
stock ownership plan loan during the nine-month period. Unrealized net losses
on securities available for sale, net of tax, increased $896,000 during the
nine months ended December 31, 2005 as a result of an increase in interest
rates. The Company's net income for the nine-month period ended December 31,
2005 was $2.8 million. These items, in total, increased shareholders' equity
by $1.9 million or 5.3% to $37.0 million during the nine months ended December
31, 2005. Book value per share was $14.57 at December 31, 2005 compared to
$13.92 at March 31, 2005.
13
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Liquidity and Capital Resources
In accordance with Office of Thrift Supervision ("OTS") regulations, the
Company is required to maintain sufficient liquidity to operate in a safe and
sound manner. The Company's current liquidity level is deemed adequate to
meet the requirements of normal operations, potential deposit outflows, and
loan demand while still allowing for optimal investment of funds and return on
assets.
Loan repayments and maturities of investments are a significant source of
funds, whereas loan disbursements and the purchase of investments are a
primary use of the Company's funds. During the nine months ended December 31,
2005 loan disbursements exceeded loan repayments resulting in a $38.4 million
or 12.1% increase in total net loans receivable.
Deposits and other borrowings are also an important source of funds for the
Company. During the nine months ended December 31, 2005, deposits increased
$19.9 million and FHLB advances increased $20.5 million. The Bank had $52.4
million in additional borrowing capacity at the FHLB at the end of the period.
At December 31, 2005, the Bank had $139.5 million of certificates of deposit
maturing within one year. Based on previous experience, the Bank anticipates
a significant portion of these certificates will be renewed.
Through its operations, the Bank has made contractual commitments to extend
credit in the ordinary course of its business activities. These commitments
are legally binding agreements to lend money to our customers at predetermined
interest rates for a specified period of time. At December 31, 2005, the Bank
had $30.0 million in unused consumer lines of credit, including home equity
lines and unsecured lines, $33.9 million in unused commercial lines of credit,
and $1.1 million in letters of credit committed to customers. The majority of
the $65.0 million in unused credit will not be drawn upon at the same time.
The Bank evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary, by the Bank upon
extension of credit, is based on our credit evaluation of the borrower.
Collateral varies but may include accounts receivable, inventory, property,
plant and equipment, commercial and residential real estate. The Bank manages
the credit risk on these commitments by subjecting them to normal underwriting
and risk management processes.
The following table sets forth the length of time until maturity for unused
commitments to extend credit and standby letters of credit at December 31,
2005.
After
After One Three Greater
Within Through Through Than
(Dollars One Three Twelve Within One
in thousands) Month Months Months One Year Year Total
------ ------ ------ -------- ---- -----
Unused lines
of credit $1,917 $3,244 $22,354 27,515 $36,401 $63,916
Standby letters
of credit 192 238 620 1,050 - 1,050
------ ------ ------- ------- ------- -------
Total $2,109 $3,482 $22,974 $28,565 $36,401 $64,966
====== ====== ======= ======= ======= =======
Historically, the Company's cash flows from operating activities have been
relatively stable. The cash flow from investing activities have had a trend
of increasing outflows as a result of increases in purchases of
mortgage-backed and investment securities and loan originations. The cash
flows from financing activities have had a trend of increased inflows as a
result of increases in deposits and FHLB advances. Management believes that
the Company's liquidity will continue to be supported by the Company's deposit
base and borrowing capacity during the next year.
14
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 Consolidated Financial Statements. The
Company's significant accounting policies are described in the footnotes to
the audited Consolidated Financial Statements included in its Annual Report on
Form 10-K for the year ended March 31, 2005. Certain accounting policies
involve significant judgments and assumptions by management, which have a
material impact on the carrying value of certain assets and liabilities.
Management considers these accounting policies to be critical accounting
policies. The judgments and assumptions used by management are based on
historical experience and other factors, which management believes to be
reasonable under the circumstances. Because of the nature of the judgments
and assumptions made by management, actual results could differ from these
judgments and estimates, which could have a material impact on the Company's
carrying values of assets and liabilities and results of operations.
The allowance for loan losses is a critical accounting policy that requires
the most significant judgments and estimates used in preparation of the
Company's consolidated financial statements. 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 borrow, 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 the
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 may be necessary
if economic conditions differ substantially from the assumptions used in
making these evaluations. Allowance for loan losses are subject to periodic
evaluations by various authorities and may be subject to adjustments based
upon the information that is available at the time of their examination.
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.
Accounting and Reporting Changes
The following is a summary of recent authoritative pronouncements that affect
accounting, reporting, and disclosure of financial information by the Company:
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" ("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
disclosures related to the income tax and cash flow effects resulting from
share-based payment arrangements. SFAS No. 123(R) is effective beginning as
of the first annual reporting period beginning after December 15, 2005. SFAS
No. 123(R) allows for adoption using either the modified prospective or
modified retrospective methods. The Company anticipates using the modified
prospective method when this statement is adopted in the first quarter of
2006. The Company has evaluated the impact upon adoption of SFAS No. 123(R)
and has concluded that the adoption will result in additional charges to
earnings of approximately $100,000 for the year ending March 31, 2007.
In April 2005, the Securities and Exchange Commission's Office of the Chief
Accountant and its Division of Corporation Finance issued Staff Accounting
Bulletin ("SAB") No.107 to provide guidance regarding the application of SFAS
No.123(R). SAB No. 107 provides interpretive guidance related to the
interaction between SFAS 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.
15
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Accounting and Reporting Changes, Continued
SAB No. 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 SFAS
No.123(R).
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets an amendment of APB Opinion No. 29." The standard is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged and eliminates the exception under ABP
Opinion No. 29 for an exchange of similar productive assets and replaces it
with an exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a
result of the exchange. The standard is effective for nonmonetary exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of
SFAS 153 is not expected to have a material impact on the Company's financial
position or results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3".
SFAS No. 154 establishes retrospective application as the required method for
reporting a change in accounting principle, unless it is impracticable, in
which case the changes should be applied to the latest practicable date
presented. SFAS No. 154 also requires that a correction of an error be
reported as a prior period adjustment by restating prior period financial
statements. SFAS No. 154 is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005.
In March 2004, the FASB issued Emerging Issues Task Force ("EITF") Issue 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 impairment and its application to investments classified
as either available for sale or held to maturity under SFAS No. 115 and it
also provides guidance on quantitative and qualitative disclosures. The
disclosure requirements in paragraph 21 of this Issue were effective for
annual financial statements for fiscal years ending after December 15, 2003
and were adopted by the Company effective December 31, 2003.
The recognition and measurement guidance in paragraphs 6-20 of this Issue was
to be applied to other-than-temporary impairment evaluations in reporting
periods beginning after June 15, 2004, but was delayed by FASB action in
October 2004 through the issuance of a proposed FASB Staff Position ("FSP") on
the issue. In July 2005, the FASB issued FSP FAS 115-1 and FAS 124-1--"The
Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments." This final guidance eliminated paragraphs10-18 of EITF-03-1
(paragraphs 19-20 have no material impact on the financial position or results
of operations of the Company) and will be effective for other-than-temporary
impairment analysis conducted in periods beginning after December 15, 2005.
The Company has evaluated the impact that the adoption of FSP FAS 115-1 and
FAS 124-1 and has concluded that the adoption will not have a material impact
on financial position and results of operations upon adoption.
In December 2005, the FASB issued FSP SOP 94-6-1, "Terms of Loan Products that
May Give Rise to a Concentration of Credit Risk." The disclosure guidance in
this FSP is effective for interim and annual periods ending after December 19,
2005. The FSP states that the terms of certain loan products may increase a
reporting entity's exposure to credit risk and thereby may result in a
concentration of credit risk as that term is used in SFAS No. 107, either as
an individual product type or as a group of products with similar features.
SFAS No. 107 requires disclosures about each significant concentration,
including "information about the (shared) activity, region, or economic
characteristic that identifies the concentration." The FSP suggests possible
shared characteristics on which significant concentrations may be determined
which include, but are not limited to: borrowers subject to significant
payment increases, loans with terms that permit negative amortization and
loans with high loan-to-value ratios.
This FSP requires entities to provide the disclosures required by SFAS No. 107
for loan products that are determined to represent a concentration of credit
risk in accordance with the guidance of this FSP for all periods presented.
The Company adopted this disclosure standard effective December 31, 2005.
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.
16
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Impact of Inflation and Changing Prices
The consolidated financial statements, related notes, and other financial
information presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of financial
position and operating results in terms of historical dollars without
considering changes in relative purchasing power over time due to inflation.
Unlike industrial companies, substantially all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest
rates generally have a more significant impact on a financial institution's
performance than does inflation. See "Item 3. Quantitative and Qualitative
Disclosures about Market Risk" for additional discussions of changes in
interest rates.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2005
------------------------------------------------------------------
Net Income
Net income was $958,000 for the three months ended December 31, 2005,
representing an increase in earnings of $46,000 or 5.1% from $912,000 for the
same period in 2004. The primary reasons for the increased earnings were an
increase in net interest income offset partially by increases in general and
administrative expenses and the provision for income taxes.
Net Interest Income
Net interest income increased $612,000 or 17.3% to $4.2 million during the
three months ended December 31, 2005 compared to $3.5 million for the same
period in 2004. The increase is attributable to an increase in interest
income offset in part by an increase in interest expense. Average interest
earning assets increased $55.7 million while average interest-bearing
liabilities increased $48.3 million. The interest rate spread increased 10
basis points to 2.52% during the three months ended December 31, 2005 compared
to 2.42% for the same period in 2004.
Interest income on loans increased $1.7 million or 38.5% to $6.0 million
during the three months ended December 31, 2005 as a result of the average
loan portfolio balance increasing by $62.6 million to $349.2 million and the
yield in the loan portfolio increasing 82 basis points. Because of a 24 basis
point increase in the yield in the investment portfolio, interest income from
investment, mortgage-backed, and other securities increased $142,000 or 6.6%
to $2.3 million despite a decrease in the average balance of the investment
portfolio of $6.9 million. Total interest income increased $1.8 million or
27.8% to $8.3 million for the three months ended December 31, 2005 from $6.5
million for the same period in 2004.
Total interest expense increased $1.2 million or 40.6% to $4.1 million during
the three months ended December 31, 2005 compared to $2.9 million for the same
period one-year earlier. Interest expense on deposits increased $913,000 or
45.4% to $2.9 million during the period from $2.0 million for the same period
in 2004. Average interest bearing deposits during the three months ended
December 31, 2005 grew $22.3 million to $411.3 million compared to $389.0
million in the three months ended December 31, 2004 while the cost of deposits
increased 78 basis points. Interest expense on advances and other borrowings
increased $273,000 or 29.9% to $1.2 million as the cost of debt outstanding
increased 16 basis points during the 2005 period compared to 2004 while
average total borrowings outstanding increased approximately $26.0 million.
Provision for Loan Losses
The Bank's provision for loan losses was $165,000 during the three months
ended December 31, 2005 compared to $195,000 for the quarter ended December
31, 2004. The amount of the provision is determined by management's on-going
monthly analysis of the loan portfolio. Non-accrual loans, which are loans
delinquent 90 days or more, were $1.7 million at December 31, 2005
compared to $2.4 million at March 31, 2005. The ratio of allowance for loan
losses to the Company's total loans was 1.82% at December 31, 2005 compared to
1.94% at March 31, 2005. Net charge-offs were $127,000 during the three
months ended December 31, 2005 compared to $25,000 during the same period in
2004.
17
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2005, CONTINUED
-----------------------------------------------------------------------------
Other Income
Total other income increased $8,000 or 1.1% to $714,000 during the three
months ended December 31, 2005 compared to $706,000 for the same period a year
ago, primarily as a result of increases in gain on sale of loans and loan
servicing fees offset partially by decreases in service fees on deposit
accounts and other income. Gain on sale of loans increased $33,000 or 37.2%
to $121,000 compared to the same period one year ago as the origination and
sale of fixed rate mortgages increased. Loan servicing fees increased $6,000
or 11.7% to $54,000 while service fees on deposit accounts decreased $24,000
or 7.3% to $303,000 compared to the same period one year ago. Other
miscellaneous income including credit life insurance commissions, net gain on
sale of repossessed assets, safe deposit rental income, annuity and stock
brokerage commissions, trust fees, and other miscellaneous fees decreased
$7,000 or 2.7% to $236,000 during the three months ended December 31, 2005
compared to the same period one year ago.
General and Administrative Expenses
General and administrative expenses increased $492,000 or 18.1% to $3.2
million during the three months ended December 31, 2005 compared to $2.7
million for the same period in 2004. Salaries and employee benefits expense
increased $403,000 or 27.9% to $1.8 million. Occupancy expense increased
$63,000 or 23.4% to $332,000 primarily as a result of branch renovations,
additional office space being rented and increases in landscaping costs.
Advertising expense decreased $9,000 or 17.5% to $44,000. Depreciation and
maintenance of equipment expense increased $30,000 or 12.4% to $274,000 during
the three months ended December 31, 2005 compared to the same period in 2004.
FDIC insurance premiums remained the same at $14,000 during the quarters
ending December 2005 and 2004. Other miscellaneous expense, consisting of
legal, professional, and consulting expenses, stationery and office supplies,
and other sundry expenses, increased $5,000 or 0.78% to $692,000 for the three
months ended December 31, 2005 compared to the three months ended December 31,
2004.
18
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2005
-----------------------------------------------------------------
Net Income
Net income was $2.8 million for the nine months ended December 31, 2005,
representing an increase in earnings of $323,000 or 12.9% from $2.5 million
for the same period in 2004. The primary reasons for the increased earnings
were an increase in net interest income offset partially by increases in
general and administrative expenses and the provision for income taxes.
Net Interest Income
Net interest income increased $1.8 million or 17.2% to $12.1 million during
the nine months ended December 31, 2005 compared to the same period one year
ago. The increase is attributable to an increase in interest income offset in
part by an increase in interest expense. Average interest earning assets
increased $41.9 million while average interest-bearing liabilities increased
$44.6 million. The interest rate spread increased 20 basis points to 2.51%
during the nine months ended December 31, 2005 compared to 2.31% for the same
period in 2004.
Interest income on loans increased $4.6 million or 37.8% to $16.8 million
during the nine months ended December 31, 2005 compared to the same period one
year ago as a result of the average loan portfolio balance increasing by $50.9
million to $335.8 and the yield in the loan portfolio increasing 96 basis
points. Because of a 21 basis point increase in the yield in the investment
portfolio, interest income from investment, mortgage-backed, and other
securities increased 167,000 or 2.5% to $6.8 million despite a decrease in the
average balance of the investment portfolio of $9.0 million. Total interest
income increased $4.8 million or 25.4% to $23.5 million for the nine months
ended December 31, 2005 from $18.8 million for the same period in 2004.
Total interest expense increased $3.0 million or 35.5% to $11.4 million during
the nine months ended December 31, 2005 compared to $8.4 million for the same
period one-year earlier. Interest expense on deposits increased $2.5 million
or 45.3% to $8.1 million during the period compared to $5.6 million for the
same period in 2004. Average interest bearing deposits during the nine months
ended December 31, 2005 grew $29.5 million to $410.9 million compared to
$381.4 million for the nine months ended December 31, 2004 while the cost of
deposits increased 68 basis points. Interest expense on advances and other
borrowings increased $454,000 or 16.1% to $3.3 million as the average total
borrowings outstanding increased approximately $15.1 million while the cost of
debt outstanding decreased seven basis points during the nine months ended
December 31, 2005 compared to the same period one year ago.
Provision for Loan Losses
The Bank's provision for loan losses was $495,000 during the nine months ended
December 31, 2005 compared to $585,000 for the nine months ended December 31,
2004. The amount of the provision is determined by management's on-going
monthly analysis of the loan portfolio. Non-accrual loans, which are loans
delinquent 90 days or more, were $1.7 million at December 31, 2005 compared to
$2.4 million at March 31, 2005. The ratio of allowance for loan losses to the
Company's total loans was 1.82% at December 31, 2005 compared to 1.94% at
March 31, 2005. Net charge-offs were $208,000 during the nine months ended
December 31, 2005 compared to $96,000 during the same period in 2004.
Other Income
Total other income increased $64,000 or 3.0% to $2.2 million during the nine
months ended December 31, 2005 compared to $2.1 million for the same period a
year ago, primarily as a result of increases in gain on sale of investments,
gain on sale of loans, loan servicing fees and other income offset partially
by a decrease in service fees on deposit accounts. Gain on sale of
investments was $49,000 during the nine months ended December 31, 2005
compared to no gain for the same period one year ago. Gain on sale of loans
increased $48,000 or 14.6% to $375,000 compared to the same period one year
ago as the origination and sale of fixed rate mortgages increased. Loan
servicing fees increased $19,000 or 14.3% to $154,000 while service fees on
deposit accounts decreased $77,000 or 8.1% to $875,000 compared to the same
period one year ago. Other miscellaneous income including credit life
insurance commissions, net gain on sale of repossessed assets, safe deposit
rental income, annuity and stock brokerage commissions, trust fees, and other
miscellaneous fees increased $25,000 or 3.7% to $700,000 during the nine
months ended December 31, 2005 compared to the same period one year ago.
19
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2005, CONTINUED
----------------------------------------------------------------------------
General and Administrative Expenses
General and administrative expenses increased $1.3 million or 15.5% to $9.4
million during the nine months ended December 31, 2005 compared to the same
period in 2004. Salaries and employee benefits expense increased $814,000 or
17.6% to $5.4 million. Occupancy expense increased $170,000 or 21.5% to
$963,000 primarily as a result of branch renovations, additional office space
being rented and increases in landscaping costs. Advertising expense
decreased $15,000 or 11.6% to $113,000. Depreciation and maintenance of
equipment expense increased $3,000 or 0.44% to $784,000 during the current
nine-month period compared to the same period last year. FDIC insurance
premiums remained the same at $43,000. Other miscellaneous expense,
consisting of legal, professional, and consulting expenses, stationery and
office supplies, and other sundry expenses, increased $282,000 or 16.2% to
$2.0 million for the nine months ended December 31, 2005 compared to the nine
months ended December 31, 2004.
20
Security Federal Corporation and Subsidiaries
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, investment, deposit and borrowing activities.
Management actively monitors and manages its interest rate risk exposure.
Although the Company manages other risks such as credit quality and liquidity
risk in the normal course of business, management considers interest rate risk
to be its most significant market risk that could potentially have the largest
material effect on the Company's financial condition and results of
operations. Other types of market risks such as foreign currency exchange
rate risk and commodity price do not arise in the normal course of the
Company's business activities.
The Company's profitability is affected by fluctuations in the market interest
rate. Management's goal is to maintain a reasonable balance between exposure
to interest rate fluctuations and earnings. A sudden and substantial increase
or decrease in interest rates may adversely impact the Company's earnings to
the extent that the interest rates on interest-earning assets and
interest-bearing liabilities do not change at the same rate, to the same
extent or on the same basis. The Company monitors the impact of changes in
interest rates on its net interest income using a test that measures the
impact on net interest income and net portfolio value of an immediate change
in interest rates in 100 basis point increments and by measuring the Bank's
interest sensitivity gap ("Gap"). Net portfolio value is defined as the net
present value of assets, liabilities, and off-balance sheet contracts. Gap is
the amount of interest sensitive assets repricing or maturing over the next
twelve months compared to the amount of interest sensitive liabilities
maturing or repricing in the same time period. Recent net portfolio value
reports furnished by the OTS indicate that the Bank's interest rate risk
sensitivity has increased slightly over the past year.
For the three and nine month periods ended December 31, 2005, the Bank's
interest rate spread, defined as the average yield on interest bearing assets
less the average rate paid on interest bearing liabilities was 2.52% and
2.51%, respectively. As of the year ended March 31, 2005, the interest rate
spread was 2.45%. The interest rate spread increased due growth in interest
earning assets, specifically variable rate loans outpacing growth in interest
earning liabilities. The steady increase in the prime rate also helped the
interest rate spread. If interest rates were to increase suddenly and
significantly, the Bank's net interest income and net interest spread would be
compressed significantly.
Item 4. Controls and Procedures
An evaluation of the Company's disclosure controls and procedures (as defined
in Sections 13a - 15(e) of the Securities Exchange Act of 1934) was carried
out under the supervision and with the participation of the Company's Chief
Executive Officer, Chief Financial Officer and several other members of the
Company's senior management as of the end of the period covered by this
quarterly report. The Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures as
currently in effect are effective in ensuring that the information required to
be disclosed by the Company in the reports it files or submits under the Act
is (i) accumulated and communicated to the Company's management (including the
Chief Executive Officer and Chief Financial Officer) in a timely manner, and
(ii) recorded, processed, summarized and reported within the time period
specified in the Securities and Exchange Commission's rules and forms.
In the quarter ended December 31, 2005, the Company did not make any
significant changes in its internal control over financial reporting that has
materially affected, or is reasonably likely to materially, affect these
controls.
While the Company believes the present design of its disclosure controls and
procedures is effective to achieve its goal, future events affecting its
business may cause the Company to modify its disclosure controls and
procedures. The Company does not expect that its disclosure controls and
procedures and internal control over financial reporting will prevent all
error and fraud. A control procedure, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
in controls or procedures can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any control procedure is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls become inadequate because of
changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control procedure, misstatements due to error or fraud may
occur and not be detected.
21
Security Federal Corporation and Subsidiaries
Part II: Other Information
Item 1 Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Company is a
party to legal proceedings in the ordinary course of business wherein
it enforces its security interest in mortgage loans it has made.
Item 2 Unregistered Sales of Equity Securities and Use Of Proceeds
-----------------------------------------------------------
Stock Repurchases. On May 17, 2005, the Company's Board of Directors
authorized a 5% repurchase plan, or 126,000 shares of the Company's
outstanding common stock. As of December 31, 2005, 1,635 shares have
been repurchased under this program. The Company did not repurchase
any shares of its outstanding Common Stock during the three months
ended December 31, 2005.
Item 3 Defaults Upon Senior Securities
-------------------------------
None
Item 4 Submission Of Matters To A Vote Of Security Holders
---------------------------------------------------
None
Item 5 Other Information
-----------------
None
Item 6 Exhibits
--------
3.1 Articles Of Incorporation (1)
3.2 Articles Of Amendment, Dated August 28, 1998, To Articles Of
Incorporation (2)
3.3 Bylaws (3)
10.1 Salary Continuation Agreements (4)
10.2 Amendment One To Salary Continuation Agreements (5)
10.3 Stock Option Plan (4)
10.4 1999 Stock Option Plan (6)
10.5 2002 Stock Option Plan (7)
10.6 Form of Incentive Stock Option Award Agreement (8)
10.7 Form of Non-Qualified Stock Option Award Agreement (8)
Incentive Compensation Plan (4)
31.1 Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act.
31.2 Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act.
32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley
Act.
(1) Filed as an exhibit to the Company's June 23, 1998 proxy statement and
incorporated herein by reference.
(2) Filed as an exhibit to the Company's Form 10-QSB for the quarter ended
September 30, 1998 and incorporated herein by reference.
22
Security Federal Corporation and Subsidiaries
Exhibits, Continued
(3) Filed as an exhibit to the Company's Form 8-K filed September 1, 1998 and
incorporated herein by reference.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the
year ended March 31, 1993 and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended December 30, 1993 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Registration Statement on Form S-8
filed March 2, 2002 and incorporated herein by reference.
(7) Filed as an exhibit to the Company's June 19, 2002 proxy statement and
incorporated herein by reference.
(8) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2005 and incorporated herein by
reference.
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: February 13, 2006 By: /s/ Timothy W. Simmons
-------------------- ---------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
Principal Executive Officer
Date: February 13, 2006 By: /s/ Roy G. Lindburg
-------------------- ---------------------------------------
Roy G. Lindburg
Treasurer/CFO
Principal Financial and Accounting Officer
23
EXHIBIT INDEX
-------------
31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act.
31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act.
32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act.
24
EXHIBIT 31.1
Certification of the Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
25
Certification
I, Timothy W. Simmons, President and Chief Executive Officer of Security
Federal Corporation, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: February 13, 2006
/s/ Timothy W. Simmons
--------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
26
EXHIBIT 31.2
Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
26
Certification
I, Roy G. Lindburg, Chief Financial Officer of Security Federal Corporation,
certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: February 13, 2006
/s/ Roy G. Lindburg
--------------------------------
Roy G. Lindburg
Chief Financial Officer
28
EXHIBIT 32
Certification Pursuant to Section 906 of the Sarbanes Oxley Act
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF SECURITY FEDERAL CORPORATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and in connection with this Quarterly Report on Form 10-Q that:
1. the report fully complies with the requirements of Section 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all
material respects, the company's financial condition and results of
operations.
/s/ Timothy W. Simmons /s/ Roy G. Lindburg
--------------------------- ---------------------------
Timothy W. Simmons Roy G. Lindburg
Chief Executive Officer Chief Financial Officer
Dated: February 13, 2006