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 JUNE 30, 2006
( ) 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
(Exact name of Registrant as specified in Its Charter)
South Carolina 57-0858504
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
238 RICHLAND AVENUE, WEST, AIKEN, SOUTH CAROLINA 29801
(Address of Principal Executive Office) (Zip code)
(803) 641-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
------ -----
Indicate by check mark whether the registrant is 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 July 31, 2006 2,608,617
value $0.01 per share
INDEX
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PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements :
Consolidated Balance Sheets at June 30,
2006 and March 31, 2006 1
Consolidated Statements of Income for the Three
Months Ended June 30, 2006 and 2005 2
Consolidated Statements of Shareholders' Equity and
Comprehensive Income at June 30, 2005 and 2006 3
Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2006 and 2005 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 20
Item 4. Controls and Procedures 20
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits 21
Signatures 22
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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
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets
June 30, 2006 March 31, 2006
------------------ ---------------
Assets: (Unaudited) (Audited)
Cash And Cash Equivalents $ 11,078,009 $ 14,351,208
Investment And Mortgage-Backed
Securities:
Available For Sale:
(Amortized cost of $163,391,871 at
June 30, 2006 and $166,808,236 at
March 31, 2006) 158,731,338 163,445,066
Held To Maturity: (Fair value of
$69,623,220 at June 30, 2006 and
$73,084,450 at March 31, 2006) 71,987,413 74,987,805
------------- -------------
Total Investment And Mortgage-Backed
Securities 230,718,751 238,432,871
------------- -------------
Loans Receivable, Net:
Held For Sale 2,476,068 1,320,644
Held For Investment: (Net of allowance
of $6,853,908 at June 30, 2006 and
$6,704,734 at March 31, 2006) 395,359,383 373,788,432
------------- -------------
Total Loans Receivable, Net 397,835,451 375,109,076
------------- -------------
Accrued Interest Receivable:
Loans 1,238,672 1,096,014
Mortgage-Backed Securities 499,662 508,432
Investments 892,910 945,620
Premises And Equipment, Net 12,272,082 11,662,976
Federal Home Loan Bank Stock, At Cost 7,763,900 7,149,800
Bank Owned Life Insurance 5,597,509 5,000,001
Repossessed Assets Acquired In
Settlement Of Loans 20,000 91,022
Other Assets 7,705,728 4,330,795
------------- -------------
Total Assets $ 675,622,674 $ 658,677,815
============= =============
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $ 480,647,530 $ 479,229,339
Advances From Federal Home Loan Bank 144,585,523 131,363,000
Other Borrowed Money 6,864,849 7,289,773
Advance Payments By Borrowers For Taxes
And Insurance 674,298 501,998
Mandatorily Redeemable Financial
Instrument 1,440,270 -
Other Liabilities 3,528,277 2,691,946
------------- -------------
Total Liabilities $ 637,740,747 $ 621,076,056
------------- -------------
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 - 2,613,629
And Outstanding Shares - 2,602,317 At
June 30, 2006 And 2,558,234 And 2,537,378
At March 31, 2006 25,582 25,582
Additional Paid-In Capital 4,404,110 4,404,110
Treasury Stock, (At Cost, 11,312 shares) (238,656) (238,656)
Indirect Guarantee Of Employee Stock
Ownership Trust Debt - (215,503)
Accumulated Other Comprehensive Loss (2,891,401) (2,086,509)
Retained Earnings, Substantially Restricted 36,582,292 35,712,735
------------- -------------
Total Shareholders' Equity $ 37,881,927 $ 37,601,759
------------- -------------
Total Liabilities And Shareholders'
Equity $ 675,622,674 $ 658,677,815
============= =============
See accompanying notes to consolidated financial statements.
1
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended June 30,
------------------------------
2006 2005
------------ ------------
Interest Income:
Loans $ 7,020,675 $ 5,185,122
Mortgage-Backed Securities 1,443,350 1,393,287
Investment Securities 1,146,342 819,557
Other 14,483 14,227
----------- ------------
Total Interest Income 9,624,850 7,412,193
----------- ------------
Interest Expense:
NOW And Money Market Accounts 1,581,170 1,253,183
Passbook Accounts 41,876 44,199
Certificate Accounts 2,155,401 1,212,583
Advances And Other Borrowed Money 1,435,727 979,237
----------- ------------
Total Interest Expense 5,214,174 3,489,202
----------- ------------
Net Interest Income 4,410,676 3,922,991
Provision For Loan Losses 150,000 165,000
----------- ------------
Net Interest Income After Provision For
Loan Losses 4,260,676 3,757,991
----------- ------------
Non-Interest Income:
Net Gain On Sale Of Investments - 17,540
Gain On Sale Of Loans 113,255 135,310
Service Fees On Deposit Accounts 277,868 283,197
Income from cash value of life insurance 56,508 -
Other 304,363 254,328
----------- ------------
Total Other Income 751,994 690,375
----------- ------------
Non-Interest Expense:
Salaries And Employee Benefits 2,125,369 1,760,947
Occupancy 317,595 311,847
Advertising 74,649 25,469
Depreciation And Maintenance Of Equipment 291,469 251,801
FDIC Insurance Premiums 14,142 14,519
Other 620,080 631,541
----------- ------------
Total Non-Interest Expense 3,443,304 2,996,124
----------- ------------
Income Before Income Taxes 1,569,366 1,452,242
Provision For Income Taxes 546,994 523,000
----------- ------------
Net Income $ 1,022,372 $ 929,242
=========== ============
Basic Net Income Per Common Share $ 0.40 $ 0.37
=========== ============
Diluted Net Income Per Common Share $ 0.40 $ 0.36
=========== ============
Cash Dividend Per Share On Common Stock $ 0.06 $ 0.04
=========== ============
Basic Weighted Average Shares Outstanding 2,538,951 2,530,389
=========== ============
Diluted Weighted Average Shares Outstanding 2,564,893 2,556,205
=========== ============
See accompanying notes to consolidated financial statements.
2
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, 2005 $ 25,438 $ 4,181,804 $(165,089) $(276,217) $(961,504) $32,306,633 $35,111,065
Net Income - - - - 929,242 929,242
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Gains
On Securities Available
For Sale - - - - 403,917 - 403,917
Plus Reclassification
Adjustments for Gains
Included in Net Income - - - - 10,875 - 10,875
-----------
Comprehensive Income - - - - - - 1,344,034
Purchase of Treasury Stock
At Cost, 1,200 Shares (25,800) (25,800)
Exercise Of Stock Options 6 9,996 10,002
Decrease In Indirect
Guarantee Of ESOP Debt - - - 60,714 - - 60,714
Cash Dividends - - - - - (101,449) (101,449)
-------- ---------- --------- --------- --------- ----------- -----------
Balance At June 30, 2005 $ 25,444 $4,191,800 $(190,889) $(215,503) $(546,712) $33,134,426 $36,398,566
======== ========== ========= ========= ========= =========== ===========
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, 2006 $ 25,582 $4,404,110 $(238,656) $(215,503) $(2,086,509) $ 35,712,735 $37,601,759
Net Income - - - - 1,022,372 1,022,372
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Losses
On Securities Available
For Sale - - - - (804,892) - (804,892)
-----------
Comprehensive Income - - - - - - 217,480
Decrease In Indirect
Guarantee Of ESOP Debt - - - 215,503 - - 215,503
Cash Dividends - - - - - (152,815) (152,815)
-------- ----------- --------- ------- ------------ ----------- -----------
Balance At June 30, 2006 $ 25,582 $4,404,110 $(238,656) $ - $ (2,891,401) $36,582,292 $37,881,927
======== =========== ========= ======= ============ =========== ===========
See accompanying notes to consolidated financial statements.
3
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended June 30,
--------------------------------
2006 2005
----------- ------------
Cash Flows From Operating Activities:
Net Income $ 1,022,372 $ 929,242
Adjustments To Reconcile Net Income To
Net Cash (Used) Provided By
Operating Activities:
Depreciation Expense 232,989 241,003
Discount Accretion And Premium Amortization 122,918 259,436
Provisions For Losses On Loans And Real Estate 150,000 165,000
Gain On Sale Of Loans (113,255) (135,310)
Gain On Sale Of Mortgage Backed Securities
Available For Sale - (17,540)
(Gain) Loss On Sale Of Real Estate (48,678) 14,230
Amortization Of Deferred Fees On Loans (63,989) (48,034)
Proceeds From Sale Of Loans Held For Sale 6,154,987 8,285,951
Origination Of Loans For Sale (7,197,156) (6,622,045)
(Increase) Decrease In Accrued Interest
Receivable:
Loans (142,658) (8,484)
Mortgage-Backed Securities 8,770 20,508
Investments 52,710 90,377
Increase In Advance Payments By Borrowers 172,300 180,196
Other, Net (390,544) 471,610
----------- ------------
Net Cash (Used) Provided By Operating
Activities (39,234) 3,826,140
----------- ------------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Available For Sale 9,666,628 12,417,076
Principal Repayments On Mortgage-Backed
Securities Held To Maturity - 5,230
Purchase Of Investment Securities Available
For Sale (2,976,845) (8,998,000)
Purchase Of Mortgage-Backed Securities
Available For Sale (4,614,465) (5,596,261)
Proceeds From Sale Of Mortgage-Backed
Securites Available For Sale - 1,968,194
Maturities Of Investment Securities
Available For Sale 1,218,707 2,190,338
Maturities of Investment Securities
Held To Maturity 3,000,000 -
Purchase Of FHLB Stock (1,813,100) (1,575,000)
Redemption Of FHLB Stock 1,199,000 1,449,000
(Increase) Decrease In Loans To Customers (21,656,962) (18,529,421)
Proceeds From Sale Of Repossessed Assets 119,700 16,384
Purchase And Improvement Of Premises And
Equipment (842,095) (335,492)
Purchase Of Bank Owned Life Insurance (597,508) -
----------- ------------
Net Cash Used By Investing Activities (17,296,940) (16,987,952)
----------- ------------
Cash Flows From Financing Activities:
Increase In Deposit Accounts 1,418,191 10,917,946
Proceeds From FHLB Advances 77,845,000 48,195,000
Repayment Of FHLB Advances (64,622,477) (45,270,000)
Net Proceeds Of Other Borrowings (424,924) 892,086
Dividends To Shareholders (152,815) (101,449)
Purchase Of Treasury Stock - (25,800)
Proceeds From Exercise of Stock Options - 10,002
----------- ------------
Net Cash Provided By Financing Activities 14,062,975 14,617,785
----------- ------------
(Continued)
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited) Continued
Three Months Ended June 30,
---------------------------------
2006 2005
------------ -----------
Net (Decrease) Increase In Cash And
Cash Equivalents (3,273,199) 1,455,973
Cash And Cash Equivalents At Beginning
Of Period 14,351,208 7,916,488\
------------ -----------
Cash And Cash Equivalents At End Of Period $ 11,078,009 $ 9,372,461
============ ===========
Supplemental Disclosure Of Cash Flows
Information:
Cash Paid During The Period For Interest $ 5,109,698 $ 3,442,441
Cash Paid During The Period For Income
Taxes $ - $ 51,195
Additions To Repossessed Assets Acquired
Through Foreclosure $ - $ 54,614
Decrease (Increase) In Unrealized Net
Gain On Securities Available For Sale,
Net Of Taxes $ (804,892) $ 414,792
Issuance Of A Mandatorily Redeemable
Financial Instrument Through The
Issuance Of Common Stock $ 1,440,270 -
See accompanying notes to consolidated financial statements.
5
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") 2006 Annual Report to Shareholders when reviewing interim
financial statements. The results of operations for the three-month period
ended June 30, 2006 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 Security Federal Corporation (the "Company") and its wholly owned
subsidiary, Security Federal Bank (the "Bank"), and the Bank's wholly owned
subsidiaries, Security Federal Insurance, Inc. ("SFINS"), Security Federal
Investments, Inc. ("SFINV"), Security Federal Trust, Inc. ("SFT"),
and Security Financial Services Corporation ("SFSC"). The Bank is primarily
engaged in the business of accepting savings and demand deposits and
originating mortgage and other loans to individuals and small businesses for
various personal and commercial purposes. SFINS, SFINV, and SFT were formed
during fiscal 2002 and began operation during the December 2001 quarter.
SFINS is an insurance agency offering business, health, home and life
insurance. SFINV engages primarily in investment brokerage services. SFT
offers trust, financial planning and financial management services. SFSC is
currently inactive.
3. 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 our financial statements. Our significant accounting
policies are described in the footnotes to the audited consolidated financial
statements at March 31, 2006 included in our 2006 Annual Report to
Stockholders, which was filed as an exhibit to our Annual Report on Form 10-K
for the year ended March 31, 2006. Certain accounting policies involve
significant judgments and assumptions by management, which have a material
impact on the carrying value of certain assets and liabilities. We consider
these accounting policies to be critical accounting policies. The judgments
and assumptions we use are based on historical experience and other factors,
which we believe to be reasonable under the circumstances. Because of the
nature of the judgments and assumptions we make, actual results could differ
from these judgments and estimates which could have a material impact on our
carrying values of assets and liabilities and our results of operations.
We believe the allowance for loan losses is a critical accounting policy that
requires the most significant judgments and estimates used in preparation of
our 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.
6
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
3. Critical 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
and 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.
4. Acquistion
On June 30, 2006, the Company completed the acquisition of the insurance and
premium finance businesses of Collier-Jennings Financial Corporation and it
subsidiaries Collier-Jennings, Inc., The Auto Insurance Store, Inc., and
Collier-Jennings Premium Pay Plans, Inc (the "Collier-Jennings Companies").
The purpose of the acquisition was to expand the insurance services and
increase non-interest income. The shareholder of the Collier-Jennings
Companies received $180,000 in cash and approximately 55,000 shares of the
Company's common stock valued at $26 per share for an approximate purchase
price of $1,620,270. The Company will release the shares to the shareholder
of the Collier-Jennings Companies over a three-year period. The stock is
mandatorily redeemable by the shareholder of Collier-Jennings Companies at his
option in cumulative increments of 20% per year for a five- year period at the
greater of $26 per share or one and one-half times the book value of the
Company's stock.
5. 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 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.
7
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
5. Earnings Per Share, Continued
The following table provides a reconciliation of the numerators and
denominators of the basic and diluted EPS computations:
For the Quarter Ended
----------------------------------------------
June 30, 2006
----------------------------------------------
Income
(Numerator) Shares
Amount (Denominator) Per Share
---------- ------------- ---------
Basic EPS $ 1,022,372 2,538,951 $ 0.400
Effect of Diluted
Securities:
Stock Options - 17,971 -
ESOP - 7,971 -
----------- ---------- ---------
Diluted EPS $ 1,022,372 2,564,893 $ 0.400
=========== ========== =========
For the Quarter Ended
----------------------------------------------
June 30, 2005
----------------------------------------------
Income
(Numerator) Shares
Amount (Denominator) Per Share
---------- ------------- ---------
Basic EPS $ 929,242 2,530,389 $ 0.370
Effect of Diluted
Securities:
Stock Options - 20,227 (0.008)
ESOP - 5,589 (0.002)
--------- --------- ---------
Diluted EPS $ 929,242 2,556,205 $ 0.360
========= ========= =========
6. Stock-Based Compensation
On April 1, 2006, the Company adopted the fair value recognition provisions of
Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 123(R), Accounting for Stock-Based
Compensation, to account for compensation costs under its stock option plans.
The Company previously utilized the intrinsic value method under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (as
amended) ("APB 25"). Under the intrinsic value method prescribed by APB 25,
no compensation costs were recognized for the Company's stock options because
the option exercise price in its plans equals the market price on the date of
grant. Prior to January 1, 2006, the Company only disclosed the pro forma
effects on net income and earnings per share as if the fair value recognition
provisions of SFAS 123(R) had been utilized.
In adopting SFAS No. 123, the Company elected to use the modified prospective
method to account for the transition from the intrinsic value method to the
fair value recognition method. Under the modified prospective method,
compensation cost is recognized from the adoption date forward for all new
stock options granted and for any outstanding unvested awards as if the fair
value method had been applied to those awards as of the date of grant. The
following table illustrates the effect on net income and earnings per share as
if the fair value based method had been applied to all outstanding and
unvested awards in each period.
8
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
6. Stock-Based Compensation, Continued
Three Months Ended June 30,
--------------------------------
2006 2005
----------- ------------
Net income as reported $ 1,022,372 $ 929,242
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects - -
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects - (30,570)
----------- -----------
Pro forma net income including stock-based
compensation cost based on fair-value method $ 1,022,372 $ 898,672
=========== ===========
Earnings per share:
Basic - as reported $ 0.40 $ 0.37
=========== ===========
Basic - pro forma $ 0.40 $ 0.36
=========== ===========
Diluted - as reported $ 0.40 $ 0.36
=========== ===========
Diluted - pro forma $ 0.40 $ 0.35
=========== ===========
The following is a summary of the activity under the Company's incentive stock
option plan for the quarter ended June 30, 2006.
Three
Months
Ended June
30,2006
----------------------
Weighted
Average
Exercise
Shares Price
----------------------
Balance, Beginning of Year 118,046 $ 19.50
Options granted - -
Options exercised - -
Options forfeited - -
---------
Balance, March 31 118,046 $ 19.50
=========
Options Exercisable 118,046 $ 19.50
=========
Options Available For Grant 13,750
=========
9
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
6. Stock-Based Compensation, Continued
At June 30, 2006, the Company had the following options outstanding:
Outstanding
Grant Date Options Option Price Expiration Date
---------------- ---------------- ---------------- ----------------
1/07/97 1,546 $5.33 12/31/05 to 12/31/06
10/19/99 51,000 $16.67 9/30/05 to 9/30/09
1/16/03 1,500 $22.39 12/31/12
9/1/03 3,000 $24.00 8/31/13
12/1/03 3,000 $23.65 11/30/13
1/01/04 8,500 $24.22 12/31/13
3/8/04 13,000 $21.43 2/28/14
6/7/04 2,000 $24.00 5/31/14
1/1/05 26,000 $20.55 12/31/14
1/1/05 2,000 $22.61 12/31/15
1/1/06 6,500 $22.91 12/31/16
7. 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 February 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments an
amendment of FASB Statements No. 133 and 140." This Statement amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This Statement resolves issues addressed in
SFAS No. 133 Implementation Issue No. D1, "Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets." SFAS No. 155 is
effective for all financial instruments acquired or issued after the beginning
of an entity's first fiscal year that begins after September 15, 2006. The
Company does not believe that the adoption of SFAS No. 155 will have a
material impact on its financial position, results of operations and cash
flows.
10
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
7. Accounting and Reporting Changes, Continued
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets an amendment of FASB Statement No. 140." This Statement
amends FASB No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," with respect to the accounting for
separately recognized servicing assets and servicing liabilities. SFAS No. 156
requires an entity to recognize a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into
a servicing contract; requires all separately recognized servicing assets and
servicing liabilities to be initially measured at fair value, if practicable;
permits an entity to choose its subsequent measurement methods for each class
of separately recognized servicing assets and servicing liabilities; at its
initial adoption, permits a one-time reclassification of available-for-sale
securities to trading securities by entities with recognized servicing rights,
without calling into question the treatment of other available-for-sale
securities under Statement 115, provided that the available-for-sale
securities are identified in some manner as offsetting the entity's exposure
to changes in fair value of servicing assets or servicing liabilities that a
servicer elects to subsequently measure at fair value; and requires separate
presentation of servicing assets and servicing liabilities subsequently
measured at fair value in the statement of financial position and additional
disclosures for all separately recognized servicing assets and servicing
liabilities. An entity should adopt SFAS No. 156 as of the beginning of its
first fiscal year that begins after September 15, 2006. The Company does not
believe the adoption of SFAS No. 156 will have a material impact on its
financial position, results of operations and cash flows.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on
the Company's financial position, results of operations and cash flows.
8. Securities
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
June 30, 2006 Amortized Unrealized Unrealized
------------------ Cost Gains Losses Fair Value
------------ ---------- ---------- -----------
US Government and
Agency Obligations $ 30,229,301 $ - $ 579,950 $ 29,649,351
Mortgage-Backed
Securities 133,059,632 50,935 4,131,330 128,979,237
Equity Securities 102,938 - 188 102,750
------------ -------- ---------- ------------
Total $163,391,871 $ 50,935 $4,711,468 $158,731,338
============ ======== ========== ============
March 31, 2006
--------------
US Government and
Agency Obligations $ 28,466,546 $ - $ 311,234 $ 28,155,312
Mortgage-Backed
Securities 138,238,752 126,648 3,178,584 135,186,816
Equity Securities 102,938 - - 102,938
------------ -------- ---------- ------------
Total $166,808,236 $126,648 $3,489,818 $163,445,066
============ ======== ========== ============
11
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
8.Securities, Continued
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
June 30, 2006 Amortized Unrealized Unrealized
------------------ Cost Gains Losses Fair Value
------------ ---------- ---------- -----------
US Government and
Agency Obligations $ 71,987,413 $ - $2,364,193 $ 69,623,220
============ ========= ========== ============
March 31, 2006
------------------
------------ --------- ---------- ------------
US Government and
Agency Obligations $ 74,987,805 $ - $1,903,355 $ 73,084,450
============ ========= ========== ============
9. Loans Receivable, Net
Loans receivable, net, at June 30, 2006 and March 31, 2006 consisted of the
following:
June 30, 2006 March 31, 2006
----------------- -----------------
Residential Real Estate $ 124,288,489 $ 122,026,298
Consumer 60,350,671 58,612,669
Commercial Business & Real Estate 225,358,542 209,214,332
Loans Held For Sale 2,476,068 1,320,644
----------------- -----------------
412,473,770 391,173,943
----------------- -----------------
Less:
Allowance For Possible Loan Loss 6,853,908 6,704,734
Loans In Process 7,512,708 9,185,133
Deferred Loan Fees 271,703 175,000
----------------- -----------------
14,638,319 16,064,867
----------------- -----------------
$ 397,835,451 $ 375,109,076
================= =================
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
June 30, 2006 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 Securities and Exchange Commission, including the
Annual Report on Form 10-K for the fiscal year ended March 31, 2006.
Forward-looking statements are effective only as of the date that they are
made and the Company assumes no obligation to update this information
Comparison Of Financial Condition At June 30, 2006 and March 31, 2006
General - Total assets increased $16.9 million or 2.6% to $675.6 million at
June 30, 2006 from $658.7 million at March 31, 2006. The primary reason for
the growth in total assets was a $22.7 million or 6.1% increase in net loans
receivable to $397.8 million. For the quarter ending June 30, 2006, the
demand for loans was funded with decreased investments and mortgage-backed
securities, available for sale of $4.7 million or 2.9% and investments and
mortgage-backed securities, held to maturity of $3.0 million or 4.0% and
increased deposits of $1.4 million and advances from the Federal Home Loan
Bank ("FHLB") of $13.2 million or 10.1%.
Assets - The increases and decreases in total assets were primarily
concentrated in the following asset categories:
Increase (Decrease)
-----------------------
June 30, 2006 March 31, 2006 Amount Percent
------------- -------------- ---------- ---------
Cash And Cash
Equivalents $ 11,078,009 $ 14,351,208 $ (3,273,199) (22.8)%
Investment And
Mortgage-Backed
Securities -
Available For
Sale 158,731,338 163,445,066 (4,713,728) (2.9)
Investment And
Mortgage-Backed
Securities-Held -
To Maturity 71,987,413 74,987,805 (3,000,392) (4.0)
Loan Receivable, Net 397,835,451 375,109,076 22,726,375 6.1
Premises And
Equipment, Net 12,272,082 11,662,976 609,106 5.2
FHLB Stock, At Cost 7,763,900 7,149,800 614,100 8.6
Bank Owned Life
Insurance 5,597,509 5,000,001 597,508 12.0
Other Assets 7,705,728 4,330,795 3,374,933 77.9
Cash and cash equivalents decreased $3.3 million to $11.1 million at June 30,
2006 from $14.4 million at March 31, 2006. The reason for the decrease is
that the Company used cash and cash equivalents to fund loans.
Investments and mortgage-backed securities decreased $7.7 million or 3.2% to
$230.7 million at June 30, 2006 from $238.4 million at March 31, 2006. The
decrease in investments and mortgage-backed securities is attributable to
paydowns on mortgage-backed securities, calls and maturities on investments,
and a decrease in market value on mortgage-backed securities and investments,
offset partially by purchases of mortgage-backed securities and investments.
13
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Loans receivable, net increased $22.7 million or 6.1% to $397.8 million at
June 30, 2006 from $375.1 million at March 31, 2006. Residential real estate
loans increased $2.3 million to $124.3 million at June 30, 2006 from $122.0
million at March 31, 2006. Consumer loans increased $1.8 million to $60.4
million at June 30, 2006 from $58.6 at March 31, 2006. The increase in
consumer loans is attributable to a special rate promotion that is being
advertised in print media. Commercial business and real estate loans
increased $16.2 million to $225.4 million at June 30, 2006 from $209.2 million
at March 31, 2006. The increase in commercial loans is attributable to the
Company's continued focus on originating this type of loan. Loans held for
sale increased $1.2 million to $2.5 million at June 30, 2006 from $1.3 million
at March 31, 2006.
Premises and equipment, net increased $609,000 to $12.3 million at June 30,
2006 from $11.7 million at March 31, 2006. The majority of the increase is
for furniture and equipment.
FHLB stock, at cost increased $614,000 to $7.8 million at June 30, 2006 from
$7.2 million at March 31, 2006. The increase is attributable to a FHLB
requirement that the Company maintain stock equal to 0.20% of total assets at
December 31, 2005 plus a transaction component, which equals 4.5% of
outstanding advances (borrowings) from the FHLB of Atlanta.
Bank Owned Life Insurance increased $598,000 to $5.6 million at June 30, 2006
from $5.0 million at March 31, 2006. The Company purchased additional life
insurance during the quarter ending June 30, 2006 to provide key man life
insurance for additional officers.
Other assets increased $3.4 million to $7.7 million at June 30, 2006 from $4.3
million at March 31, 2006. The majority of the increase is the result of the
acquisition of the Collier-Jennings Companies. Accounts receivable,
intangible assets and goodwill associated with the acquisition of the
Collier-Jennings Companies are included in other assets.
Liabilities
Deposit Accounts
Balance
--------------------
June 30, 2006 March 31, 2006 Increase (Decrease)
------------------- ------------------ --------------------
Weighted Weighted
Balance Rate Balance Rate Amount Percent
----------- ---- ------------ ---- ------------ -------
Demand Accounts:
Checking $ 98,678,589 0.98% $105,347,713 0.97% $(6,669,124) (6.3)%
Money Market 148,885,581 3.83 151,494,548 3.50 (2,608,967) (1.7)
Regular Savings 17,001,856 0.98 17,795,109 0.98 (793,253) (4.5)
------------ ---- ------------ ---- ---------- ------
Total 264,566,026 2.58 274,637,370 2.36 (10,071,344) (3.7)
------------ ---- ------------ ---- ---------- ------
Certificate Accounts
0.00 - 1.99% - 59,797 (59,797) (100.0)
2.00 - 2.99% 17,970,170 26,836,415 (8,866,245) (33.0)
3.00 - 3.99% 52,830,050 72,831,817 (20,001,767) (27.5)
4.00 - 4.99% 114,493,335 94,240,989 20,252,346 21.5
5.00 - 5.99% 30,787,949 10,622,951 20,164,998 189.8
------------ ---- ------------ ---- ---------- ------
Total 216,081,504 4.28 204,591,969 3.98 11,489,535 5.6
------------ ---- ------------ ---- ---------- ------
Total Deposits $480,647,530 3.35% $479,229,339 3.05% $1,418,191 0.3%
============ ==== ============ ==== ========== ======
14
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Advances From FHLB FHLB advances are summarized by year of maturity and
weighted average interest rate in the table below:
Balance
--------------------
June 30, 2006 March 31, 2006 Increase (Decrease)
------------------- ------------------ --------------------
Fiscal Year Due: Balance Rate Balance Rate Balance Percent
----------- ---- ------------ ---- ------------ -------
2007 26,225,000 4.43% 18,000,000 2.83% $8,225,000 45.69%
2008 5,000,000 3.09 5,000,000 3.09 - -
2009 20,000,000 3.28 20,000,000 3.28 - -
2010 5,000,000 3.09 5,000,000 3.09 - -
2011 15,000,000 4.61 20,000,000 4.37 (5,000,000) (25.00)
Thereafter 73,360,523 4.15 63,363,000 4.04 9,997,523 15.78
------------ ----- ------------ ----- ----------- ------
Total Advances $144,585,523 4.06% $131,363,000 3.74% $13,222,523 10.07%
============ ===== ============ ===== =========== ======
These advances are secured by a blanket collateral agreement with the FHLB by
pledging the Bank's portfolio of residential firs mortgage loans and
investment securities with approximate amortized cost and fair value of $81.3
million and $78.8 million at June 30, 2006. 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 June 30, 2006
------------------------------------------------------------------------------------------------------------
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 3.330 1 Time Call 04/16/08
09/16/04 09/16/09 5,000,000 3.090 1 Time Call 09/17/07
06/24/05 06/24/15 5,000,000 3.710 1 Time Call 06/24/10
07/22/05 07/22/15 5,000,000 3.790 1 Time Call 07/22/08
10/21/05 10/21/10 5,000,000 4.325 1 Time Call 10/23/06
11/10/05 11/10/15 5,000,000 4.400 1 Time Call 11/10/09
11/23/05 11/23/15 5,000,000 3.933 Multi-Call 11/23/07 and quarterly thereafter
11/29/05 11/29/13 5,000,000 4.320 1 Time Call 05/29/09
12/14/05 12/14/11 5,000,000 4.640 1 Time Call 09/14/09
01/12/06 01/12/16 5,000,000 4.450 1 Time Call 01/12/11
03/01/06 03/03/14 5,000,000 4.720 1 Time Call 03/03/10
03/24/06 03/24/16 5,000,000 4.120 Multi-Call 03/26/07 and quarterly thereafter
03/24/06 03/25/13 5,000,000 4.580 1 Time Call 03/25/08
04/21/06 04/22/13 5,000,000 4.530 Multi-Call 04/23/07 and quarterly thereafter
06/02/06 06/02/16 5,000,000 5.16% 1 Time Call 06/02/11
15
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
As of March 31, 2006
------------------------------------------------------------------------------------------------------------
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 3.330 1 Time Call 04/16/08
09/16/04 09/16/09 5,000,000 3.090 1 Time Call 09/17/07
06/24/05 06/24/15 5,000,000 3.710 1 Time Call 06/24/10
06/24/05 06/24/10 5,000,000 4.092 1 Time Call 06/24/06
07/22/05 07/22/15 5,000,000 3.790 1 Time Call 07/22/08
10/21/05 10/21/10 5,000,000 3.864 1 Time Call 10/23/06
11/10/05 11/10/15 5,000,000 4.400 1 Time Call 11/10/09
11/23/05 11/23/15 5,000,000 3.933 Multi-Call 11/23/07 and quarterly thereafter
11/29/05 11/29/13 5,000,000 4.320 1 Time Call 05/29/09
12/14/05 12/14/11 5,000,000 4.640 1 Time Call 09/14/09
01/12/06 01/12/16 5,000,000 4.450 1 Time Call 01/12/11
03/24/06 03/24/16 5,000,000 4.120 Multi-Call 03/26/07 and quarterly thereafter
03/24/06 03/25/13 5,000,000 4.580 1 Time Call 03/25/08
03/01/06 03/03/14 5,000,000 4.720% 1 Time Call 03/03/10
Mandatorily Redeemable Financial Instrument On June 30, 2006, the Company
recorded a $1.4 million mandatorily redeemable financial instrument as a
result of the acquisition of the Collier-Jennings Companies. See Note 4,
"Acquisition". The shareholder of Collier-Jennings Companies received cash
and issued stock to settle the acquisition. The Company will release the
shares to the shareholder of Collier-Jennings Companies over a three-year
period. The stock is mandatorily redeemable by the shareholder of
Collier-Jennings Companies in cumulative increments of 20% per year for a
five-year period at the greater of $26 per share or one and one-half times the
book value of the Company's stock.
Equity - Shareholders' equity increased $280,000 or 1.0% to $37.9 million at
June 30, 2006 from $37.6 million at March 31, 2006. The employee stock
ownership trust of the Company paid $216,000 of principal on the employee
stock ownership plan loan during the three-month period. Accumulated Other
Comprehensive Loss, net of tax, increased $805,000 to $2.9 million during the
three months ended June 30, 2006. The Company's net income for the
three-month period was $1.0 million. The Board of Directors of the Company
declared the 62nd consecutive quarterly dividend, which was $.06 per share, in
April 2006, which totaled $153,000. Book value per share was $14.56 at June
30, 2006 compared to $14.82 at March 31, 2006.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30,
2006 AND 2005
---------------------------------------------------------------------------
Net Income - Net income increased $93,000 or 10.0% to $1.0 million for the
three months ended June 30, 2006 compared to $929,000 for the three months
ended June 30, 2005. The primary reason for the increased earnings was an
increase in net interest income and non-interest income offset partially by an
increase in non-interest expenses.
Net Interest Income - Net interest income increased $488,000 or 12.4% to $4.4
million during the three months ended June 30, 2006, compared to $3.9 million
for the same period in 2005, as a result of an increase in interest income
offset in part by an increase in interest expense. Average interest earning
assets increased $59.3 million to $635.4 million while average
interest-bearing liabilities increased $61.1 million to $587.3 million. The
interest rate spread increased one basis point to 2.51% during the three
months ended June 30, 2006 compared to the same period in 2005. The Company's
net interest margin increased 2 basis points to 2.78% for the quarter ended
June 30, 2006 from 2.76% for the same quarter last year. The increase in net
interest margin is primarily attributable to loan growth. Interest Income -
Total interest income increased $2.2 million or 29.9% to $9.6 million during
the three months ended June 30, 2006 from $7.4 million for the same period in
2005. Total interest income on loans increased $1.8 million or 35.4% to $7.0
million during the three months ended June 30, 2006 as a result of the average
loan portfolio balance increasing $60.1 million and the yield in the loan
portfolio increasing 90 basis points. Interest income from mortgage-backed
securities increased $50,000 or 3.6% as a result of an increase in the yield
in the mortgage-backed portfolio despite a decrease in the average balance of
the portfolio of $17.7 million. Interest income from investment securities
increased $327,000 or 39.9% as a result of an increase in the yield and
average balance of the investment securities portfolio.
16
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following table compares detailed average balances, associated yields, and
the resulting changes in interest income for the three months ended June 30,
2006 and 2005:
Three Months Ended June 30,
----------------------------------------------------------
2006 2005
------------------- -------------------
Increase/
(Decrease)
In Interest And
Average Average Dividend Income
Balance Yield Balance Yield From 2005
----------- ----- ----------- ----- ----------------
Loans Receivable,
Net $384,991,473 7.29% $324,841,826 6.39% $ 1,835,553
Mortgage-Backed
Securities 136,802,790 4.22 154,508,432 3.61 50,063
Investments 112,271,060 4.08 94,738,838 3.46 326,785
Overnight Time 1,302,992 4.45 1,932,020 2.95 256
------------ ---- ------------ ----- -----------
Total Interest-
Earning Assets $635,368,315 6.06% $576,021,116 5.15% $ 2,212,657
============ ==== ============ ===== ===========
Interest Expense - Total interest expense increased $1.7 million or 49.4% to
$5.2 million during the three months ended June 30, 2006 compared to $3.5
million for the same period one-year earlier. The increase in total interest
expense is attributable to the increases in short-term interest rates,
interest-bearing deposits, and borrowings. Interest expense on deposits
increased $1.3 million or 50.5% during the period as average interest bearing
deposits grew $30.1 million compared to the average balance in the three
months ended June 30, 2005 while the cost of deposits increased 98 basis
points. Interest expense on advances and other borrowings increased $456,000
or 46.6% as the cost of debt outstanding increased 53 basis points during the
2006 period compared to 2005 while average total borrowings outstanding
increased approximately $31.0 million.
The following table compares detailed average balances, cost of funds, and the
resulting changes in interest expense for the three months ended June 30, 2006
and 2005:
Three Months Ended June 30,
----------------------------------------------------------
2006 2005
------------------- -------------------
Increase/
(Decrease)
In Interest And
Average Average Dividend Income
Balance Yield Balance Yield From 2005
----------- ----- ----------- ----- ----------------
Now And Money
Market Accounts $214,426,429 2.95% $231,490,912 2.17% $ 327,987
Passbook Accounts 17,132,517 0.98 18,090,035 0.98 (2,323)
Certificates
Accounts 210,361,963 4.10 162,230,838 2.99 942,818
FHLB Advances And
Other Borrowed
Money 145,409,127 3.95 114,404,114 3.42 456,490
------------ ----- ----------- ----- -----------
Total Interest-
Bearing
Liabilities $587,330,036 3.55% $526,215,899 2.65% $ 1,724,972
============ ==== ============ ==== ===========
Provision for Loan Losses - 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 seven
fiscal years.
The Bank's provision for loan losses was $150,000 during the three months
ended June 30, 2006 compared to $165,000 for the quarter ended June 30, 2005.
The $15,000 or 9.1% decrease reflects the Company's current credit quality and
reduction in classified assets, impaired loans and net charge-offs. The
following table details selected activity associated with the allowance for
loan losses for the three months ended June 30, 2006 and 2005:
17
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
June 30, 2006 June 30, 2005
---------------- -----------------
Beginning Balance $ 6,704,734 $ 6,284,055
Provision 150,000 165,000
Charge-offs (29,619) (29,904)
Recoveries 28,793 9,749
------------- --------------
Ending Balance $ 6,853,908 $ 6,428,900
============= ==============
Allowance For Loan Losses As A
Percentage Of Gross Loans Receivable
And Loans Held For Sale At The End Of
The Period 1.69% 1.89%
Allowance For Loan Losses As A
Percentage Of Impaired Loans At The
End Of The Period 508.93% 738.95%
Impaired Loans 1,346,727 870,000
Nonaccrual Loans And 90 Days Or More
Past Due Loans As A Percentage Of Loans
Receivable And Loans Held For Sale At The
End Of The Period 0.27% 0.49%
Loans Receivable, Net $397,835,451 $375,109,076
Non-Interest Income - Non-interest income increased $62,000 or 8.9% to
$752,000 for the three months ended June 30, 2006 from $690,000 for the same
period one year ago. The following table provides a detailed analysis of the
changes in the components of non-interest income:
Three Months Increase/
Ended June 30, (Decrease)
------------------ -----------------------
2006 2005 Amounts Percent
-------- ------ --------- ----------
Gain On Sale Of Investments $ - $ 17,540 $(17,540) (100.0)%
Gain On Sale Of Loans 113,255 135,310 (22,055) (16.3)
Service Fees On Deposit
Accounts 277,868 283,197 (5,329) (1.9)
Income from cash value of
life insurance 56,508 - 56,508 100.0
Other 304,363 254,328 50,035 19.7
-------- -------- ------- -----
Total non-interest income $751,994 $690,375 $61,619 8.9%
======== ======== ======= =====
Income from cash value of life insurance was $57,000 for the three months
ended June 30, 2006 compared no income for the same period one year ago. This
increase is the result of the Company purchasing bank owned life insurance for
certain officers of the Company. Other miscellaneous income including credit
life insurance commissions, safe deposit rental income, annuity and stock
brokerage commissions, trust fees, and other miscellaneous fees increased
$50,000 to $304,000 during the three months ended June 30, 2006 compared to
the same period one year ago.
Non-Interest Expense - Non-interest expense increased $447,000 or 14.9% to
$3.4 million for the three months ended June 30, 2006 from $3.0 million for
the same period one year ago. The following table provides a detailed
analysis of the changes in the components of non-interest expense:
Three Months Increase/
Ended June 30, (Decrease)
------------------ -----------------------
2006 2005 Amounts Percent
-------- ------ --------- ----------
Salaries And Employee Benefits $2,125,368 $1,760,947 $364,422 20.7%
Occupancy 317,595 311,847 5,748 1.8
Advertising 74,649 25,469 49,180 193.1
Depreciation And Maintenance
Of Equipment 291,469 251,801 39,668 15.8
FDIC Insurance Premiums 14,142 14,519 (377) (2.6)
Other 620,080 631,541 (11,461) (1.8)
---------- ---------- -------- ------
Total Non-Interest Expenses $1,569,366 $2,996,124 447,180 14.9%
========== ========== ======== ======
18
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Salary and employee benefits increased $364,000 to $2.1 million for the three
months ended June 30, 2006 from $1.8 million for the same period one year ago.
The majority of the increase is the result of hiring additional staff to
handle the Company's growth and increased regulatory reporting requirements.
Advertising expense increased $49,000 to $74,000 for the three months ended
June 30, 2006 from $25,000 for the same period one year ago. The increase is
attributable to the Company using more print media advertising to attract
deposits and consumer loans.
Provision For Income Taxes - Provision for income taxes increased $24,000 or
4.6% to $547,000 for the three months ended June 30, 2006 from $523,000 for
the same period one year ago. Income before income taxes was $1.6 million for
the three months ended June 30, 2006 compared to $1.5 million for the three
months ended June 30, 2005. The Company's combined federal and state
effective income tax rate for the current quarter was 34.9% compared to 36.0%
for the same quarter one year ago.
Liquidity Commitments, Capital Resources , and Impact of Inflation and
Changing Prices
Liquidity - The Company actively analyzes and manages the Bank's liquidity
with the objective of maintaining an adequate level of liquidity and to ensure
the availability of sufficient cash flows to support loan growth, fund deposit
withdrawals, fund operations, and satisfy other financial commitments. See
the "Consolidated Statements of Cash Flows" contained in Item 1 Financial
Statements, herein.
The primary sources of funds are customer deposits, loan repayments, loan
sales, maturing investment securities, and advances from the FHLB. The
sources of funds, together with retained earnings and equity, are used to make
loans, acquire investment securities and other assets, and fund continuing
operations. While maturities and the scheduled amortization of loans are a
predictable source of funds, deposit flows and mortgage repayments are greatly
influenced by the level of interest rates, economic conditions, and
competition. Management believes that the Company's current liquidity
position and its forecasted operating results are sufficient to fund all of
its existing commitments.
During the three ended June 30, 2006 loan disbursements exceeded loan
repayments resulting in a $22.7 million or 6.1% increase in total net loans
receivable. During the three months ended June 30, 2006, d posits increased
$1.4 million and FHLB advances increase $10.1 million. The Bank had $57.4
million in additional borrowing capacity at the FHLB at the end of the period.
At June 30, 2006, the Bank had $179.8 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.
Off-Balance Sheet Commitments - The Company is a party to financial
instruments with off-balance sheet risk in the normal course of business to
meet the financing needs of its customers. These financial instruments
generally include commitments to originate mortgage, commercial and consumer
loans, and involve to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet. The Company's
maximum exposure to credit loss in the event of nonperformance by the borrower
is represented by the contractual amount of those instruments. Since some
commitments may expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Company uses the
same credit policies in making commitments as it does for on-balance sheet
instruments. Collateral is not required to support commitments.
The following table sets forth the length of time until maturity for unused
commitments to extend credit and standby letters of credit at June 30, 2006.
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 $ 1,709 $ 3,029 $ 38,199 42,937 $36,204 $79,141
Standby letters
of credit 13 2 810 825 100 925
------- ------- -------- ------- ------- -------
Total $ 1,722 $ 3,031 $ 39,009 $43,762 $36,304 $80,066
======= ======= ======== ======= ======= =======
19
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Capital - Consistent with our objective to operate a sound and profitable
financial institution, the Company has maintained and will continue to focus
on maintaining a "well capitalized" rating from our regulatory authorities.
In addition, the Company is subject to certain capital requirements set by our
regulatory agencies. At June 30, 2006, the Company exceeded all regulatory
capital requirements.
The following table reconciles the Bank's stockholder's equity to its various
regulatory capital positions:
June 30, 2006 March 31, 2006
(Dollars in Thousands)
--------------------------------------
Bank's Stockholder's Equity $ 37,605 $ 37,387
Unrealized Loss (Gain) On
Available For Sale Of Securities,
Net Of Tax 2,891 2,086
Reduction For Goodwill And Other
Intangibles - -
Tangible Capital 40,496 39,473
Qualifying Core Deposits And
Intangible Assets - -
Core Capital 40,496 39,473
Supplemental Capital 5,317 5,104
Assets Required To Be Deducted (22) (9)
-------- --------
Risk-Based Capital $ 45,791 $ 44,568
======== ========
The following table compares the Bank's capital levels relative to the
applicable regulatory requirements at June 30, 2006:
(Dollars in Thousands)
---------------------------------------------------------
Amt. % Actual Actual Excess Excess
Required Required Amt. % Amt. %
---------------------------------------------------------
Tangible Capital $ 13,466 2.0% $ 40,496 5.99% $ 27,030 3.99%
Tier 1 Leverage
(Core) Capital 27,047 4.0% 40,496 5.99% 13,449 1.99%
Tier 1 Risk-Based
(Core) Capital 17,014 4.0% 40,496 9.52% 23,482 5.52%
Total Risk-Based
Capital 34,028 8.0% 45,791 10.77% 11,763 2.77%
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 discussion of changes in interest rates.
20
Security Federal Corporation and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, investment, deposit and borrowing activities.
Management actively monitors and manages its interest rate risk exposure.
Although the Company manages other risks such as credit quality and liquidity
risk in the normal course of business, management considers interest rate risk
to be its most significant market risk that could potentially have the largest
material effect on the Company's financial condition and results of
operations. Other types of market risks such as foreign currency exchange
rate risk and commodity price do not arise in the normal course of the
Company's business activities.
The Company's profitability is affected by fluctuations in the market interest
rate. Management's goal is to maintain a reasonable balance between exposure
to interest rate fluctuations and earnings. A sudden and substantial increase
or decrease in interest rates may adversely impact the Company's earnings to
the extent that the interest rates on interest-earning assets and
interest-bearing liabilities do not change at the same rate, to the same
extent or on the same basis. The Company monitors the impact of changes in
interest rates on its net interest income using a test that measures the
impact on net interest income and net portfolio value of an immediate change
in interest rates in 100 basis point increments and by measuring the Bank's
interest sensitivity gap ("Gap"). Net portfolio value is defined as the net
present value of assets, liabilities, and off-balance sheet contracts. Gap is
the amount of interest sensitive assets repricing or maturing over the next
twelve months compared to the amount of interest sensitive liabilities
maturing or repricing in the same time period. Recent net portfolio value
reports furnished by the OTS indicate that the Bank's interest rate risk
sensitivity has increased slightly over the past year. The Bank has rated
favorably compared to thrift peers concerning interest rate sensitivity.
For the three month period ended June 30, 2006, 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 2.51%. As of the year
ended March 31, 2006, the interest rate spread was 2.48%. The interest rate
spread increased due to the growth of loan receivables. Loan receivables
earn a higher yield than investment securities. However, if interest rates
were to increase suddenly and significantly, the Bank's net interest income
and net interest spread would be compressed.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Rule 13a - 15(e)
of the Securities Exchange Act of 1934 ("Act")) was carried out under the
supervision and with the participation of the Company's Chief Executive
Officer, Chief Financial Officer and several other members of the Company's
senior management as of the end of the period covered by this quarterly
report. The Company's Chief Executive Officer and Chief Financial Officer
concluded that at June 30, 2006 the Company's disclosure controls and
procedures were effective in ensuring that the information required to be
disclosed by the Company in the reports it files or submits under the Act is
(i) accumulated and communicated to the Company's management (including the
Chief Executive Officer and Chief Financial Officer) in a timely manner, and
(ii) recorded, processed, summarized and reported within the time period
specified in the Securities and Exchange Commission's rules and forms.
(b) Changes in Internal Controls: In the quarter ended June 30, 2006, 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.
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 1A Risk Factors
------------
There have been no material changes in the risk factors previously
disclosed in the Company's Annual Report on Form 10-K for the year
ended March 31, 2006.
Item 2 Unregistered sales of Equity Securities and Use Of Proceeds
-----------------------------------------------------------
None. 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 June 30, 2006, 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
June 30, 2006.
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, 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 1993 Salary Continuation Agreements (4)
10.3 Amendment One to 1993 Salary Continuation Agreement (5)
10.4 Form of 2006 Salary Continuation Agreement(6)
10.4 1999 Stock Option Plan (2)
10.5 1987 Stock Option Plan (4)
10.6 2002 Stock Option Plan (7)
10.7 2004 Employee Stock Purchase Plan (8)
10.8 Incentive Compensation Plan (4)
10.9 Form of Security Federal Bank Salary Continuation Agreement (9)
10.10 Form of Security Federal Split Dollar Agreement (9)
14 Code of Ethics (10)
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 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.
(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.
22
Security Federal Corporation and Subsidiaries
Exhibits, Continued
(6) Filed on May 24, 2006 as an exhibit to the Company's Current Report on
Form 8-K dated May 18, 2006 and incorporated herein by reference.
(7) Filed on June 19, 2002, as an exhibit to the Company's Proxy Statement
and incorporated herein by reference.
(8) Filed on June 18, 2004, as an exhibit to the Company's Proxy Statement
and incorporated herein by reference.
(9) Filed on May 24, 2006 as an exhibit to the Current Report on Form 8-K
and incorporated herein by reference.
(10) Filed on June 29, 2006 as an exhibit to the Company's Annual Report on
Form 10-K 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: August 14, 2006 By:/s/Timothy W. Simmons
--------------- --------------------------
Timothy W. Simmons
President
Duly Authorized Representative
Date: August 14, 2006 By:/s/Roy G. Lindburg
--------------- --------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
23
EXHIBIT 31.1
Certification of the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act
24
Certification
I, Timothy W. Simmons, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the 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: August 14, 2006
/s/Timothy W. Simmons
-------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
25
EXHIBIT 31.2
Certification of the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act
26
Certification
I, Roy G. Lindburg, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the 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: August 14, 2006
/s/Roy G. Lindburg
-------------------------------------
Roy G. Lindburg
Treasurer and Chief Financial Officer
27
EXHIBIT 32
Certification Pursuant to Section 906 of the Sarbanes-oxley Act
28
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 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 financial condition and results of
operations of Security Federal Corporation.
/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: August 14, 2006
29