UNITED STATES
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 SEPTEMBER 30, 2007
[ ] 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.)
238 RICHLAND AVENUE, WEST, 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 corporation (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 October 31, 2007 2,589,344
value $0.01 per share
INDEX
-------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at September 30, 2007
and March 31, 2007 1
Consolidated Statement of Income for the Three and
Six Months Ended September 30, 2007 and 2006 2
Consolidated Statements of Shareholders' Equity and
Comprehensive Income at September 30, 2007 and 2006 4
Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 2007 and 2006 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 28
Item 4. Controls and Procedures 28
-------------------------------------------------------------------------------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits 30
Signatures 31
-------------------------------------------------------------------------------
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
September 30, 2007 March 31, 2007
Assets: ------------------ --------------
(Unaudited) (Audited)
Cash And Cash Equivalents $ 11,814,949 $ 13,438,129
Investment And Mortgage-Backed Securities:
Available For Sale:(Amortized cost of
$201,102,488 at September 30, 2007 and
$186,970,867 at March 31, 2007) 200,436,474 185,766,296
Held To Maturity:(Fair value of
$53,825,070 at September 30, 2007 and
$63,441,641 at March 31, 2007) 54,142,926 64,138,589
----------- -----------
Total Investment And Mortgage-Backed Securities 254,579,400 249,904,885
Loans Receivable, Net: ----------- -----------
Held For Sale 1,348,642 1,529,748
Held For Investment:(Net of allowance of
$7,564,211 at September 30, 2007 and
$7,296,791 at March 31, 2007) 485,796,297 434,508,612
----------- -----------
Total Loans Receivable, Net 487,144,939 436,038,360
Accrued Interest Receivable: ----------- -----------
Loans 1,882,771 1,459,193
Mortgage-Backed Securities 572,134 550,682
Investments 1,442,174 1,181,639
Premises And Equipment, Net 18,858,741 15,895,192
Federal Home Loan Bank Stock, At Cost 9,347,300 8,209,200
Bank Owned Life Insurance 8,132,821 5,783,620
Repossessed Assets Acquired In Settlement Of Loans 522,856 24,909
Intangible Assets, Net 487,500 532,500
Goodwill 1,197,954 1,197,954
Other Assets 3,558,180 3,893,928
----------- -----------
Total Assets $ 799,541,719 $ 738,110,191
=========== ===========
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $ 555,598,721 $ 523,737,592
Advances From Federal Home Loan Bank 179,141,678 153,049,272
Other Borrowed Money 8,934,719 8,088,194
Advance Payments By Borrowers For Taxes And
Insurance 908,095 486,101
Mandatorily Redeemable Financial Instrument 1,417,312 1,417,312
Junior Subordinated Debentures 5,155,000 5,155,000
Other Liabilities 3,884,351 3,483,512
----------- -----------
Total Liabilities 755,039,876 695,416,983
----------- -----------
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 And Outstanding Shares (2,646,619
And 2,595,594, Respectively, At September 30, 2007;
And 2,637,942 And 2,609,116, Respectively, At March
31, 2007 25,901 25,814
Additional Paid-In Capital 5,009,076 4,850,029
Treasury Stock, (At Cost, 51,025 and 28,826 Shares,
at September 30, 2007 and March 31, 2007,
Respectively) (1,194,543) (651,220)
Accumulated Other Comprehensive Loss (413,303) (747,316)
Retained Earnings, Substantially Restricted 41,074,712 39,215,901
----------- -----------
Total Shareholders' Equity 44,501,843 42,693,208
----------- -----------
Total Liabilities And Shareholders' Equity $ 799,541,719 $ 738,110,191
=========== ===========
See accompanying notes to consolidated financial statements.
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended September 30,
-------------------------------
2007 2006
Interest Income: ------ ------
Loans $ 9,416,586 $ 7,756,318
Mortgage-Backed Securities 1,557,696 1,324,065
Investment Securities 1,663,976 1,184,887
Other 8,305 17,989
----------- -----------
Total Interest Income 12,646,563 10,283,259
----------- -----------
Interest Expense:
NOW And Money Market Accounts 1,672,887 1,716,286
Passbook Accounts 41,134 42,030
Certificate Accounts 3,627,239 2,436,345
Advances And Other Borrowed Money 2,053,365 1,539,665
Junior Subordinated Debentures 92,252 10,002
----------- -----------
Total Interest Expense 7,486,877 5,744,328
----------- -----------
Net Interest Income 5,159,686 4,538,931
Provision For Loan Losses 150,000 150,000
Net Interest Income After Provision For ----------- -----------
Loan Losses 5,009,686 4,388,931
Non- Interest Income:
Gain On Sale Of Loans 105,450 93,998
Service Fees On Deposit Accounts 323,423 291,635
Income From Cash Value Of Life Insurance 87,164 62,037
Commissions From Insurance Agency 173,488 209,246
Other Agency Income 26,910 10,426
Trust Income 139,850 121,556
Other 193,085 123,822
----------- -----------
Total Non-Interest Income 1,049,370 912,720
----------- -----------
General And Administrative Expenses:
Salaries And Employee Benefits 2,627,272 2,303,160
Occupancy 445,602 350,668
Advertising 87,148 61,301
Depreciation And Maintenance Of Equipment 337,091 316,326
FDIC Insurance Premiums 14,870 14,820
Amortization of Intangibles 22,500 22,500
Other 846,518 660,426
----------- -----------
Total General And Administrative Expenses 4,381,001 3,729,201
----------- -----------
Income Before Income Taxes 1,678,055 1,572,450
Provision For Income Taxes 550,479 545,451
----------- -----------
Net Income $ 1,127,576 $ 1,026,999
=========== ===========
Basic Net Income Per Common Share $ 0.43 $ 0.39
=========== ===========
Diluted Net Income Per Common Share $ 0.43 $ 0.39
=========== ===========
Cash Dividend Per Share On Common Stock $ 0.07 $ 0.06
=========== ===========
Basic Weighted Average Shares Outstanding 2,602,072 2,610,605
=========== ===========
Diluted Weighted Average Shares Outstanding 2,610,567 2,622,996
=========== ===========
See accompanying notes to consolidated financial statements.
2
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Six Months Ended September 30,
-----------------------------
2007 2006
Interest Income: ------ ------
Loans $ 18,208,165 $ 14,776,993
Mortgage-Backed Securities 3,099,406 2,767,415
Investment Securities 3,217,496 2,331,229
Other 27,902 32,472
---------- ----------
Total Interest Income 24,552,969 19,908,109
---------- ----------
Interest Expense:
NOW And Money Market Accounts 3,327,726 3,297,456
Passbook Accounts 82,949 83,906
Certificate Accounts 6,870,088 4,591,746
Advances And Other Borrowed Money 3,951,698 2,975,392
Junior Subordinated Debentures 183,077 10,002
---------- ----------
Total Interest Expense 14,415,538 10,958,502
---------- ----------
Net Interest Income 10,137,431 8,949,607
Provision For Loan Losses 300,000 300,000
Net Interest Income After Provision For ---------- ----------
Loan Losses 9,837,431 8,649,607
Non- Interest Income: ---------- ----------
Gain On Sale Of Loans 281,571 207,253
Service Fees On Deposit Accounts 650,745 569,503
Income From Cash Value Of Life Insurance 149,201 118,545
Commissions From Insurance Agency 319,161 214,635
Other Agency Income 56,168 10,426
Trust Income 238,625 217,556
Other 414,497 326,796
---------- ----------
Total Non- Interest Income 2,109,968 1,664,714
---------- ----------
General And Administrative Expenses:
Salaries And Employee Benefits 5,197,551 4,428,529
Occupancy 868,113 668,263
Advertising 189,421 135,950
Depreciation And Maintenance Of Equipment 656,616 607,795
FDIC Insurance Premiums 30,197 28,962
Amortization of Intangibles 45,000 22,500
Other 1,645,548 1,280,506
---------- ----------
Total General And Administrative Expenses 8,632,446 7,172,505
---------- ----------
Income Before Income Taxes 3,314,953 3,141,816
Provision For Income Taxes 1,091,346 1,092,445
---------- ----------
Net Income $ 2,223,607 $ 2,049,371
========== ==========
Basic Net Income Per Common Share $ 0.85 $ 0.80
========== ==========
Diluted Net Income Per Common Share $ 0.85 $ 0.79
========== ==========
Cash Dividend Per Share On Common Stock $ 0.14 $ 0.12
========== ==========
Basic Weighted Average Shares Outstanding 2,609,576 2,574,778
========== ==========
Diluted Weighted Average Shares Outstanding 2,616,718 2,587,472
========== ==========
See accompanying notes to consolidated financial statements.
3
Security Federal Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(Unaudited)
Accumulated
Additional Indirect Other
Common Paid - In Treasury Guarantee of Comprehensive Retained
Stock Capital Stock ESOP Debt Income (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 - - - - 2,049,371 2,049,371
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Gains
On Securities Available
For Sale - - - - 590,364 - 590,364
---------
Comprehensive Income - - - - - - 2,639,735
Purchase Of Treasury Stock ---------
At Cost, 3,600 shares (83,022) - - - (83,022)
Decrease In Indirect Guarantee
Of ESOP Debt - - - 215,503 - - 215,503
Exercise Of Stock Options 176 350,656 - - - - 350,832
Stock Compensation Expense - 1,921 - - - - 1,921
Cash Dividends - - - - - (309,627) (309,627)
----- --------- -------- ------------ ------------- -------- -------
Balance At September 30, 2006 $ 25,758 $4,756,687 $(321,678) $ - $ (1,496,145) $37,452,479 $40,417,101
Accumulated
Additional Indirect Other
Common Paid - In Treasury Guarantee of Comprehensive Retained
Stock Capital Stock ESOP Debt Income (Loss) Earnings Total
----- --------- -------- ------------ ------------- -------- -------
Balance At March 31, 2007 $ 25,814 $ 4,850,029 $(651,220) $ - $ (747,316) $39,215,901 $42,693,208
Net Income - - - - - 2,223,607 2,223,607
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Gains
On Securities Available
For Sale - - - - 334,013 - 334,013
Comprehensive Income - - - - - - 2,557,620
Purchase Of Treasury Stock
At Cost, 22,199 shares - - (543,323) - - - (543,323)
Employee Stock Purchase Plan
Purchases 24 48,094 - - - - 48,118
Exercise Of Stock Options 63 104,958 - - - - 105,021
Stock Compensation Expense - 5,995 - - - - 5,995
Cash Dividends - - - - - (364,796) (364,796)
----- --------- -------- ------------ ------------- -------- -------
Balance At September 30, 2007 $ 25,901 $ 5,009,076$(1,194,543) $ - $ (413,303) $41,074,712 $44,501,843
====== ========= ========= =========== =========== ========== ==========
See accompanying notes to consolidated financial statements.
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended September 30,
-----------------------------
2007 2006
Cash Flows From Operating Activities: ------ ------
Net Income $ 2,223,607 $ 2,049,371
Adjustments To Reconcile Net Income To Net
Cash Provided By Operating Activities:
Depreciation Expense 520,001 479,490
Amortization Of Intangible Assets 45,000 22,500
Stock Option Compensation Expense 5,995 1,921
Discount Accretion And Premium Amortization 112,308 225,592
Provisions For Losses On Loans And Real Estate 300,000 300,000
Gain On Sale Of Loans (281,571) (207,253)
Gain On Sale Of Real Estate (23,404) (48,678)
Amortization Of Deferred Fees On Loans (54,515) (105,427)
Proceeds From Sale Of Loans Held For Sale 17,446,108 12,465,483
Origination Of Loans For Sale (16,983,431) (12,017,749)
(Increase) Decrease In Accrued Interest
Receivable:
Loans (423,578) (253,918)
Mortgage-Backed Securities (21,452) 2,457
Investments (260,535) (58,888)
Increase In Advance Payments By Borrowers 421,994 355,850
Loss On Disposition of Premises and Equipment - 215
Other, Net 532,044 (1,085,177)
---------- ----------
Net Cash Provided By Operating Activities 3,558,571 2,125,789
---------- ----------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Available For Sale 18,400,859 19,367,854
Purchase Of Investment Securities Available
For Sale (22,552,547) (7,971,845)
Purchase Of Mortgage-Backed Securities
Available For Sale (17,778,773) (13,227,369)
Maturities Of Investment Securities Available
For Sale 7,682,194 1,513,036
Maturities Of Investment Securities Held
To Maturity 10,000,000 6,000,000
Purchase Of FHLB Stock (5,496,400) (3,432,000)
Redemption Of FHLB Stock 4,358,300 3,026,200
Increase In Loans To Customers (52,144,992) (31,829,824)
Proceeds From Sale Of Repossessed Assets 137,279 139,700
Purchase And Improvement Of Premises And
Equipment (3,483,550) (2,107,377)
Purchase Of Bank Owned Life Insurance (2,349,201) (659,545)
---------- ----------
Net Cash Used By Investing Activities (63,226,831) (29,181,170)
---------- ----------
Cash Flows From Financing Activities:
Increase In Deposit Accounts 31,861,129 7,836,129
Proceeds From FHLB Advances 203,400,000 138,579,250
Repayment Of FHLB Advances (177,307,594) (129,985,459)
Net (Repayment)Proceeds Of Other Borrowings 846,525 (505,726)
Proceeds From Junior Subordinated Debentures - 5,155,000
Dividends To Shareholders (364,796) (309,627)
Purchase Of Treasury Stock (543,323) (83,022)
Proceeds From Employee Stock Purchases 48,118 -
Proceeds From Exercise of Stock Options 105,021 350,832
---------- ----------
Net Cash Provided By Financing Activities 58,045,080 21,037,377
---------- ----------
(Continued)
5
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended September 30,
-----------------------------
2007 2006
---------- ----------
Net Decrease In Cash And Cash Equivalents (1,623,180) (6,018,004)
Cash And Cash Equivalents At Beginning Of Period 13,438,129 14,351,208
---------- ----------
Cash And Cash Equivalents At End Of Period $ 11,814,949 $ 8,333,204
========== ==========
Supplemental Disclosure Of Cash Flows Information:
Cash Paid During The Period For Interest $ 14,266,412 $ 10,726,724
Cash Paid During The Period For Income Taxes $ 1,304,290 $ 579,000
Additions To Repossessed Acquired Through
Foreclosure $ 611,833 $ -
Decrease In Unrealized Net Loss On Securities
Available For Sale, Net Of Taxes $ 334,013 $ 590,364
Issuance Of A Mandatorily Redeemable Financial
Instrument Through The Issuance Of Common Stock - 1,417,312
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")
2007 Annual Report to Shareholders when reviewing interim financial statements.
The results of operations for the six-month period ended September 30, 2007 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. 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. The Company's significant
accounting policies are described in the footnotes to the audited consolidated
financial statements at March 31, 2007 included in it's 2007 Annual Report to
Stockholders, which was filed as an exhibit to the Annual Report on Form 10-K
for the year ended March 31, 2007. Certain accounting policies involve
significant judgments and assumptions by management, which have a material
impact on the carrying value of certain assets and liabilities. The Company
considers these accounting policies to be critical accounting policies. The
judgments and assumptions the Company uses are based on historical experience
and other factors, which the Company believes 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 the carrying values of assets and liabilities and the
results of operations.
The Company believes the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates used in
preparation of the 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.
7
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
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. Acquisition
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 54,512 shares of the Company's common stock valued at $26
per share for an approximate purchase price of $1,597,312. 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.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at June 30, 2006, the date of acquisition, including
subsequent adjustments to the allocation of the purchase price.
Cash And Cash Equivalents $ 43,192
Accounts Receivable 784,247
Premises And Equipment 41,696
Other Assets 56,289
Intangible Assets 600,000
Goodwill 1,197,954
---------
Total Assets Acquired 2,723,378
---------
Notes Payable 386,185
Other Liabilities 739,881
---------
Total Liabilities Assumed 1,126,066
---------
Net Assets Acquired $ 1,597,312
=========
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.
8
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
--------------------------------------------------------
September 30, 2007
--------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ---------
Basic EPS $ 1,127,576 2,602,072 $ 0.43
Effect of Diluted
Securities:
Stock Options - 8,495 -
------------------------- -------------------- ---------
Diluted EPS $ 1,127,576 2,610,567 $ 0.43
========================= ==================== =========
For the Quarter Ended
--------------------------------------------------------
September 30, 2006
--------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ---------
Basic EPS $ 1,026,999 2,610,605 $ 0.39
Effect of Diluted
Securities:
Stock Options - 12,391 -
------------------------- -------------------- ---------
Diluted EPS $ 1,026,999 2,622,996 $ 0.39
========================= ==================== =========
For the Six Months Ended
--------------------------------------------------------
September 30, 2007
--------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ---------
Basic EPS $ 2,223,607 2,609,576 $ 0.85
Effect of Diluted
Securities:
Stock Options - 7,142 -
------------------------- -------------------- ---------
Diluted EPS $ 2,223,607 2,616,718 $ 0.85
========================= ==================== =========
For the Six Months Ended
--------------------------------------------------------
September 30, 2006
--------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ---------
Basic EPS $ 2,049,371 2,574,778 $ 0.80
Effect of Diluted
Securities:
Stock Options - 12,694 (0.01)
------------------------- -------------------- ---------
Diluted EPS $ 2,049,371 2,587,472 $ 0.79
========================= ==================== =========
9
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
6. Stock-Based Compensation
Certain officers of the Company participate in an incentive stock option plan.
Options are granted at exercise prices not less than the fair value of the
Company's common stock on the date of the grant. The following is a summary of
the activity under the Company's incentive stock option plan for the three
months and six months ended September 30, 2007:
Three Months Ended Six Months Ended
September 30, 2007 September 30, 2007
--------------------- ---------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Balance, Beginning of Period/Year 99,100 $20.55 99,600 $20.55
Options granted 3,000 24.43 3,000 24.43
Options exercised (6,300) 16.67 (6,300) 16.67
Options forfeited (4,700) 16.67 (5,200) 17.40
------- -------
Balance, September 30, 2007 91,100 $21.09 91,100 $21.09
======= =======
Options Exercisable 74,100 74,100
======= =======
Options Available For Grant 95,733 95,733
======= =======
The following table summarizes the stock-based awards granted by the Company,
the fair market value of each award granted as estimated on the date of grant
using the Black-Scholes option-pricing model, and the weighted average
assumptions used for such grants for the periods indicated:
For Awards Granted During For Awards Granted During
The Three Month Period Ended The Six Month Period Ended
September 30, September 30,
-------------------------- --------------------------
2007 2006 2007 2006
------ ------ ------ ------
Awards granted 3,000 13,500 3,000 13,500
Dividend Yield 1.52% 1.03% 1.52% 1.03%
Expected Volatility 23.90% 30.21% 23.90% 30.21%
Risk-free interest rate 5.03% 4.36% 5.03% 4.36%
Expected life 9.00 9.01 9.00 9.01
10
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
6. Stock-Based Compensation, Continued
At September 30, 2007, the Company had the following options outstanding:
Outstanding
Grant Date Options Option Price Expiration Date
------------ ----------- ------------ ---------------------
10/19/99 20,100 $16.67 9/30/05 to 9/30/09
9/1/03 3,000 $24.00 8/31/13
12/1/03 3,000 $23.65 11/30/13
1/01/04 6,500 $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 20,500 $20.55 12/31/14
1/1/06 6,000 $23.91 12/31/16
8/24/06 14,000 $23.03 8/24/16
5/24/07 2,000 $24.34 5/24/17
7/9/07 1,000 $24.61 7/9/17
7. Accounting and Reporting Changes
The following is a summary of recent authoritative pronouncements that could
impact the accounting, reporting, and / or disclosure of financial information
by the Company.
In September 2006, the FASB issued SFAS No. 157 which provides enhanced guidance
for using fair value to measure assets and liabilities. The standard also
requires expanded disclosures about the extent to which companies measure assets
and liabilities at fair value, the information used to measure fair value, and
the effect of fair value measurements on earnings. SFAS No. 157 is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years and is not expected to have
a significant impact on the Company's financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans" ("SFAS 158"), which
amends SFAS 87 and SFAS 106 to require recognition of the overfunded or
underfunded status of pension and other postretirement benefit plans on the
balance sheet. Under SFAS 158, gains and losses, prior service costs and
credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that
have not yet been recognized through net periodic benefit cost will be
recognized in accumulated other comprehensive income, net of tax effects, until
they are amortized as a component of net periodic cost. The measurement date -
the date at which the benefit obligation and plan assets are measured - is
required to be the company's fiscal year end. SFAS 158 is effective for publicly
held companies for fiscal years ending after December 15, 2006, except for the
measurement date provisions, which are effective for fiscal years ending after
December 15, 2008. The Company does not have a defined benefit pension plan.
Therefore, SFAS 158 will not impact o the Company's financial conditions or
results of operations.
11
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
7. Accounting and Reporting Changes, Continued
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115." This statement permits, but does not require, entities to
measure many financial instruments at fair value. The objective is to provide
entities with an opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. Entities electing this option will apply it
when the entity first recognizes an eligible instrument and will report
unrealized gains and losses on such instruments in current earnings. This
statement 1) applies to all entities, 2) specifies certain election dates, 3)
can be applied on an instrument-by-instrument basis with some exceptions, 4) is
irrevocable and 5) applies only to entire instruments. One exception is demand
deposit liabilities, which are explicitly excluded as qualifying for fair value.
With respect to SFAS 115, available-for-sale and held-to-maturity securities at
the effective date are eligible for the fair value option at that date.
If the fair value option is elected for those securities at the effective date,
cumulative unrealized gains and losses at that date shall be included in the
cumulative-effect adjustment and thereafter, such securities will be accounted
for as trading securities. SFAS 159 is effective for the Company on January 1,
2008. Earlier adoption is permitted in 2007 if the Company also elects to apply
the provisions of SFAS 157. The Company did not early adopt SFAS No. 159 and
believes that it is unlikely that it will expand its use of fair value
accounting upon the January 1, 2008 effective date.
In September 2006, The FASB ratified the consensuses reached by the FASB's
Emerging Issues Task Force ("EITF") relating to EITF 06-4 "Accounting for the
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements". EITF 06-4 addresses employer
accounting for endorsement split-dollar life insurance arrangements that provide
a benefit to an employee that extends to postretirement periods should recognize
a liability for future benefits in accordance with SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", or Accounting
Principles Board ("APB") Opinion No. 12, "Omnibus Opinion-1967". EITF 06-4 is
effective for fiscal years beginning after December 15, 2007. Entities should
recognize the effects of applying this Issue through either (a) a change in
accounting principle through a cumulative-effect adjustment to retained earnings
or to other components of equity or net assets in the statement of financial
position as of the beginning of the year of adoption or (b) a change in
accounting principle through retrospective application to all prior periods.
The Company's split dollar life insurance arrangements do not provide a benefit
that extends into postretirement periods. Therefore EITF 06-4 will not have an
impact on the Company's consolidated financial statements.
In September 2006, the FASB ratified the consensus reached related to EITF 06-5,
"Accounting for Purchases of Life Insurance-Determining the Amount That Could Be
Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for
Purchases of Life Insurance." EITF 06-5 states that a policyholder should
consider any additional amounts included in the contractual terms of the
insurance policy other than the cash surrender value in determining the amount
that could be realized under the insurance contract.
EITF 06-5 also states that a policyholder should determine the amount that could
be realized under the life insurance contract assuming the surrender of an
individual-life-by-individual-life policy (or certificate by certificate in a
group policy). EITF 06-5 is effective for fiscal years beginning after December
15, 2007. Although the Company does not believe the adoption of EITF 06-5 will
have a material impact on the Company's consolidated financial statements,
management is currently analyzing the impact of adoption.
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 or cash flows.
12
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
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
September 30, 2007 Amortized Unrealized Unrealized
------------------ Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
FHLB Securities $49,641,785 $ 107,994 $ 148,337 $49,601,442
Federal Farm Credit Securities 13,085,937 38,547 30,654 13,093,830
FNMA Bonds 2,875,470 943 23,936 2,852,477
FHLMC Bonds 8,654 - 14 8,640
Mortgage-Backed Securities 135,387,704 432,245 1,040,664 134,779,285
Equity Securities 102,938 - 2,138 100,800
----------- ---------- ---------- -----------
Total $201,102,488 $ 579,729 $1,245,743 $200,436,474
=========== ========== ========== ===========
Gross Gross
March 31, 2007 Amortized Unrealized Unrealized
-------------- Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
FHLB Securities $38,487,381 $ 17,627 $ 131,886 $38,373,122
Federal Farm Credit Securities 9,217,205 8,580 11,504 9,214,281
FNMA Bonds 2,942,530 - 12,141 2,930,389
FHLMC Bonds 64,071 - 94 63,977
Mortgage-Backed Securities 136,156,742 276,292 1,352,007 135,081,027
Equity Securities 102,938 562 - 103,500
----------- ---------- ---------- -----------
Total $186,970,867 303,061 1,507,632 $185,766,296
=========== ========== ========== ===========
FHLB securities, Federal Farm Credit securities, FNMA bonds, FHLMC bonds and
FNMA and FHLMC mortgage- backed securities are issued by government-sponsored
enterprises ("GSEs"). GSEs are not backed by the full faith and credit of the
United States government. Included in the tables above in mortgage-backed
securities are GNMA mortgage-backed securities, which are backed by the full
faith and credit of the United States government. At September 30, 2007, the
bank held an amortized cost and fair value of $50.3 million and $50.5 million,
respectively in GNMA mortgage-backed securities included in mortgage-backed
securities listed above.
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
September 30, 2007 Amortized Unrealized Unrealized
------------------ Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
FHLB Securities $46,997,554 $ 33,770 $ 265,014 $46,766,310
Federal Farm Credit Securities 6,990,372 - 86,612 6,903,760
Equity Securities 155,000 - - 155,000
----------- ---------- ---------- -----------
Total $54,142,926 $ 33,770 $ 351,626 $53,825,070
=========== ========== ========== ===========
Gross Gross
March 31, 2007 Amortized Unrealized Unrealized
-------------- Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
FHLB Securities 55,994,852 $ 21,560 $ 573,841 $55,442,571
Federal Farm Credit Securities 7,988,737 - 144,667 7,844,070
Equity Securities 155,000 - - 155,000
----------- ---------- ---------- -----------
Total $64,138,589 $ 21,560 $ 718,508 $63,441,641
=========== ========== ========== ===========
13
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
8. Securities, Continued
FHLB securities and Federal Farm Credit securities are issued by GSEs. These
enterprises are not backed by the full faith and credit of the United States
government.
9. Loans Receivable, Net
Loans receivable, net, at September 30, 2007 and March 31, 2007 consisted of the
following:
September 30, 2007 March 31, 2007
------------------ --------------
Residential Real Estate $ 131,661,463 $ 125,512,411
Consumer 66,476,147 63,809,478
Commercial Business & Real Estate 301,932,098 259,207,877
Loans Held For Sale 1,348,642 1,529,748
----------- -----------
501,418,350 450,059,514
----------- -----------
Less:
Allowance For Possible Loan Loss 7,564,211 7,296,791
Loans In Process 6,401,739 6,443,372
Deferred Loan Fees 307,461 280,991
----------- -----------
14,273,411 14,021,154
----------- -----------
$ 487,144,939 $ 436,038,360
=========== ===========
14
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
September 30, 2007 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, 2007. 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 September 30, 2007 and March 31, 2007
General - Total assets increased $61.4 million or 8.3% to $799.5 million at
September 30, 2007 from $738.1 million at March 31, 2007. The primary reason
for the growth in total assets was a $51.1 million or 11.7% increase in net
loans receivable to $487.1 million. For the six months ended September 30,
2007, the demand for loans was funded with decreased cash and cash equivalents
of $1.6 million or 12.1%, decreased investments and mortgage-backed securities,
held to maturity of $10.0 million or 15.6%, increased deposits of $31.9 million
or 6.1%, increased advances from the Federal Home Loan Bank ("FHLB") of $26.1
million or 17.0% and an increase in other borrowed money of $847,000 or 10.5%.
Assets - The increases and decreases in total assets were primarily concentrated
in the following asset categories:
Increase (Decrease)
-------------------
September 30, March 31,
2007 2007 Amount Percent
------ ------ ------ -------
Cash And Cash Equivalents $11,814,949 $13,438,129 $(1,623,180) (12.1)%
Investment And Mortgage-
Backed Securities -
Available For Sale 200,436,474 185,766,296 14,670,178 7.9
Investment And Mortgage-
Backed Securities - Held
To Maturity 54,142,926 64,138,589 (9,995,663) (15.6)
Loan Receivable, Net 487,144,939 436,038,360 51,106,579 11.7
Premises And Equipment, Net 18,858,741 15,895,192 2,963,549 18.6
FHLB Stock, At Cost 9,347,300 8,209,200 1,138,100 13.9
Bank Owned Life Insurance 8,132,821 5,783,620 2,349,201 40.6
Repossessed Assets Acquired in
Settlement of Loans $ 522,856 $ 24,909 $ 497,947 1,999.1%
Cash and cash equivalents decreased $1.6 million to $11.8 million at September
30, 2007 from $13.4 million at March 31, 2007. The reason for the decrease is
the Company used cash and cash equivalents to fund loans.
Investments and mortgage-backed securities increased $4.7 million or 1.9% to
$254.6 million at September 30, 2007 from $249.9 million at March 31, 2007. The
increase in investments and mortgage-backed securities is attributable to
additional purchases of mortgage- backed securities and investments and an
increase in the market value of these investments. This is offset partially by
paydowns on mortgage-backed securities and calls and maturities on
mortgage-backed securities and investments.
15
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Loans receivable, net increased $51.1 million or 11.7% to $487.1 million at
September 30, 2007 from $436.0 million at March 31, 2007. Residential real
estate loans increased $6.1 million to $131.7 million at September 30, 2007 from
$125.5 million at March 31, 2007. Consumer loans increased $2.7 million to
$66.5 million at September 30, 2007 from $63.8 million at March 31, 2007. The
increase in consumer loans is attributable to a special rate promotion that was
being advertised in print media. Commercial business and real estate loans
increased $42.7 million to $301.9 million at September 30, 2007 from $259.2
million at March 31, 2007. The increase in commercial loans was attributable to
the Company's continued focus on originating this type of loan. Loans held for
sale decreased $181,000 to $1.3 million at September 30, 2007 from $1.5 million
at March 31, 2007.
Premises and equipment, net increased $3.0 million to $18.9 million at September
30, 2007 from $15.9 million at March 31, 2007. The majority of the increase is
for furniture and equipment for our Whiskey Road branch office in Aiken, South
Carolina, and for the ongoing construction of future office sites in downtown
Columbia, South Carolina and Evans, Georgia.
FHLB stock, at cost increased $1.1 million to $9.3 million at September 30, 2007
from $8.2 million at March 31, 2007. The increase is attributable to a FHLB
requirement that the Company maintain stock equal to 0.20% of total assets at
December 31, 2006 plus a transaction component, which equals 4.5% of outstanding
advances (borrowings) from the FHLB of Atlanta.
Bank Owned Life Insurance increased $2.3 million to $8.1 million at September
30, 2007 from $5.8 million at March 31, 2007. The Company purchased additional
life insurance to provide key man life insurance for additional officers and the
cash surrender value continues to increase.
Repossessed Assets Acquired in Settlement of Loans increased $498,000 to
$523,000 at September 30, 2007 from $25,000 at March 31, 2007. The increase is
the result of three properties that were foreclosed on during the period.
Liabilities
Deposit Accounts
Balance
------------------
September 30, 2007 March 31, 2007 Increase (Decrease)
---------------- ---------------- ------------------
Weighted Weighted
Balance Rate Balance Rate Amount Percent
------- ---- ------- ---- ------ -------
Demand Accounts:
Checking $100,292,511 0.68% $105,515,095 0.63% $(5,222,584) (4.9)%
Money Market 142,824,607 4.14 145,491,774 4.14 (2,667,167) (1.8)
Regular Savings 15,940,565 0.98 17,458,680 0.98 (1,518,115) (8.7)
----------- ---- ----------- ---- ---------- -----
Total 259,057,683 2.60 268,465,549 2.55 (9,407,866) (3.5)
----------- ---- ----------- ---- ---------- -----
Certificate Accounts
0.00 - 1.99% - - -
2.00 - 2.99% 2,074,615 2,971,616 (897,001) (30.2)
3.00 - 3.99% 33,204,707 36,044,826 (2,840,119) (7.9)
4.00 - 4.99% 22,851,091 35,617,605 (12,766,514) (35.8)
5.00 - 5.99% 238,410,625 180,637,996 57,772,629 32.0
----------- ---- ----------- ---- ---------- -----
Total 296,541,038 5.09 255,272,043 4.99 41,268,995 16.2
----------- ---- ----------- ---- ---------- -----
Total Deposits $555,598,721 3.93% $523,737,592 3.74% $31,861,129 6.1%
=========== ==== =========== ==== ========== =====
16
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Advances From FHLB - FHLB advances are summarized by year of maturity and
weighted average interest rate in the table below:
Balance
------------------
September 30, 2007 March 31, 2007 Increase (Decrease)
---------------- ---------------- ------------------
Fiscal Year Due: Balance Rate Balance Rate Amount Percent
------- ---- ------- ---- ------ -------
2008 $18,200,000 4.68% $10,000,000 4.25% $8,200,000 82.0%
2009 25,000,000 4.78 25,000,000 4.75 - -
2010 10,000,000 4.88 5,000,000 3.09 5,000,000 100.0
2011 15,000,000 4.87 10,000,000 4.76 5,000,000 50.0
2012 19,700,000 4.77 19,700,000 4.47 - -
Thereafter 91,241,678 4.25 83,349,272 4.20 7,892,406 9.5
----------- ---- ----------- ---- ---------- ----
Total Advances $179,141,678 4.51% $153,049,272 4.36% $26,092,406 17.0%
=========== ==== =========== ==== ========== ====
These advances are secured by a blanket collateral agreement with the FHLB by
pledging the Bank's portfolio of residential first mortgage loans and investment
securities with approximate amortized cost and fair value of $114.5 million and
$113.9 million at September 30, 2007. Advances are subject to prepayment
penalties.
The following table shows callable FHLB advances as of the dates indicated.
These advances are also included in the above table. All callable advances are
callable at the option of the FHLB. If an advance is called, the Bank has the
option to payoff the advance without penalty, re-borrow funds on different
terms, or convert the advance to a three-month floating rate advance tied to
LIBOR.
As of September 30, 2007
------------------------------------------------------------------------------
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
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
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 03/25/13 5,000,000 4.580 1 Time Call 03/25/08
06/02/06 06/02/16 5,000,000 5.160 1 Time Call 06/02/11
07/11/06 07/11/08 5,000,000 4.800 Multi-Call 07/11/08 and
quarterly thereafter
10/25/06 12/25/11 5,000,000 4.830 1 Time Call 10/27/08
11/29/06 11/29/16 5,000,000 4.025 Multi-Call 11/29/07 and
quarterly thereafter
01/19/07 07/21/14 5,000,000 4.885 1 Time Call 07/21/11
03/09/07 03/09/12 4,700,000 4.286 Multi- Call 06/11/07 and
quarterly thereafter
05/24/07 05/24/17 7,900,000 4.375 Multi- Call 05/27/08 and
quarterly thereafter
06/29/07 06/29/12 5,000,000 4.945 1 Time Call 06/29/09
07/25/07 07/25/17 $ 5,000,000 4.396% Multi- Call 07/25/08 and
quarterly thereafter
17
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
As of March 31, 2007
------------------------------------------------------------------------------
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
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
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 06/26/07 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 06/26/07 and
quarterly thereafter
06/02/06 06/02/16 5,000,000 5.160 1 Time Call 06/02/11
07/11/06 07/11/16 5,000,000 4.800 Multi-Call 07/11/08 and
quarterly thereafter
10/25/06 10/25/11 5,000,000 4.830 1 Time Call 10/27/08
11/29/06 11/29/16 5,000,000 4.025 Multi-Call 11/29/07 and
quarterly thereafter
01/19/07 07/21/14 5,000,000 4.885 1 Time Call 07/21/11
03/09/07 03/09/12 $4,700,000 4.286% Multi-Call 06/11/07 and
quarterly thereafter
Other Borrowed Money - Other borrowed money consists of short- term retail
repurchase agreements and a revolving line of credit with another financial
institution. The retail repurchase agreements typically mature within one to
three days and have interest rates that float with market rates. The unsecured
line of credit has an interest rate equal to LIBOR plus 2.5% and matures on
September 27, 2008.
Other borrowed money increased $847,000 or 10.5% to $8.9 million at September
30, 2007 from $8.1 million at March 31, 2007. The weighted average interest rate
of these repurchase agreements was 4.41% at September 30, 2007 and 2006. As of
September 30, 2007, the line of credit had a balance of $1.0 million and no
balance at September 30, 2006. The weighted average interest rate was 7.63% at
September 30, 2007.
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
was 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.
Junior Subordinated Debentures - On September 21, 2006, Security Federal
Statutory Trust (the "Trust"), wholly-owned subsidiary of the Company, issued
and sold fixed and floating rate capital securities of the trust (the "Capital
Securities"), which are reported on the consolidated balance sheet as junior
subordinated debentures, generating proceeds of $5.0 million. The Trust loaned
these proceeds to the Company to use for general corporate purposes, primarily
to provide capital to the Bank. The Capital Securities in the transaction
accrue and pay distributions annually at a rate per annum equal to a blended
rate of 7.14% at September 30, 2007. One-half of the offering has a fixed rate
of 6.88% and the remaining half has a floating rate of three-month LIBOR plus
170 basis points, which was 7.39% at September 30, 2007. The distribution rate
payable on the Capital Securities is cumulative and payable quarterly in
arrears. The Company has the right, subject to events of default, to defer
payments of interest on the Capital Securities for a period not to exceed 20
consecutive quarterly periods, provided that no extension period may extend
beyond the maturity date of December 15, 2036. The Company has no current
intention to exercise its right to defer payments of interest on the Capital
Securities.
The Capital Securities mature or are mandatorily redeemable upon maturity on
December 15, 2036, and or upon earlier optional redemption as provided in the
indenture. The Company has the right to redeem the Capital Securities in whole
or in part, on or after
18
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
September 15, 2011. The Company may also redeem the capital securities prior to
such dates upon occurrence of specified conditions and the payment of a
redemption premium
Equity - Shareholders' equity increased $1.8 million or 4.2% to $44.5 million at
September 30, 2007 from $42.7 million at March 31, 2007. Accumulated Other
Comprehensive Loss, net of tax, decreased $334,000 to $413,000 during the six
months ended September 30, 2007. The Company's net income for the six-month
period was $2.2 million. The Board of Directors of the Company declared the
66th and 67th consecutive quarterly dividend, which was $.07 per share, in March
and August 2007, which totaled $365,000. Book value per share was $17.15 at
September 30, 2007 compared to $16.36 at March 31, 2007.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
2007 AND 2006
-------------
Net Income - Net income increased $101,000 or 9.8% to $1.1 million for the three
months ended September 30, 2007 compared to $1.0 million for the three months
ended September 30, 2006. 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 $621,000 or 13.7% to $5.2
million during the three months ended September 30, 2007, compared to $4.5
million for the same period in 2006, as a result of an increase in interest
income offset in part by an increase in interest expense. Average interest
earning assets increased $96.8 million to $740.4 million while average
interest-bearing liabilities increased $98.1 million to $693.4 million. The
interest rate spread decreased two basis points to 2.51% during the three months
ended September 30, 2007 compared to the same period in 2006.
The Company's net interest margin was 2.79% and 2.82% for the quarters ended
September 30, 2007 and 2006, respectively.
Interest Income - Total interest income increased $2.4 million or 23.0% to $12.6
million during the three months ended September 30, 2007 from $10.3 million for
the same period in 2006. Total interest income on loans increased $1.7 million
or 21.4% to $9.4 million during the three months ended September 30, 2007 as a
result of the average loan portfolio balance increasing $74.2 million and the
yield in the loan portfolio increasing 19 basis points. Interest income from
mortgage-backed securities increased $234,000 or 17.6% as a result of an
increase in the average balance of the portfolio of $2.2 million and the yield
in the portfolio increasing 64 basis points. Interest income from investment
securities increased $479,000 or 40.4% as a result of an increase in the yield
and average balance of the investment securities portfolio.
The following table compares detailed average balances, associated yields, and
the resulting changes in interest income for the three months ended September
30, 2007 and 2006:
Three Months Ended September 30,
--------------------------------------------------
2007 2006
-------------- -------------
Increase(Decrease)
In Interest And
Average Average Dividend Income
Balance Yield Balance Yield From 2006
------- ----- ------- ----- ---------
Loans Receivable, Net $475,966,703 7.91% $401,747,357 7.72% $ 1,660,268
Mortgage-Backed
Securities 133,221,287 4.68 131,036,771 4.04 233,631
Investments 130,132,175 5.11 109,458,948 4.33 479,089
Overnight Time 1,058,156 3.14 1,374,907 5.23 (9,684)
----------- ---- ----------- ---------
Total Interest-
Earning Assets $740,378,321 6.83% $643,617,983 6.39% $2,363,304
=========== ==== =========== ==== =========
19
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Interest Expense - Total interest expense increased $1.7 million or 30.3% to
$7.5 million during the three months ended September 30, 2007 compared to $5.7
million for the same period one-year earlier. The increase in total interest
expense is attributable to increases in interest rates paid, interest-bearing
deposits, and borrowings. Interest expense on deposits increased $1.1 million
or 27.3% during the period as average interest bearing deposits grew $59.4
million compared to the average balance in the three months ended September 30,
2006. In addition, the cost of deposits increased 46 basis points. Interest
expense on advances and other borrowings increased $514,000 or 33.4% as the cost
of debt outstanding increased 35 basis points during the 2007 quarter ended
September 30, 2007 compared to the same quarter in 2006. Average total
borrowings outstanding increased $34.1 million during the same period. Interest
expense on junior subordinated debentures was $92,000 for the three months ended
September 30, 2007 compared to $10,000 for the same period one year ago. The
junior subordinated debentures are the result of the Company's $5.0 million
trust preferred securities offering.
The following table compares detailed average balances, cost of funds, and the
resulting changes in interest expense for the three months ended September 30,
2007 and 2006:
Three Months Ended September 30,
--------------------------------------------------
2007 2006
-------------- -------------
Increase(Decrease)
Average Average In Interest Expense
Balance Yield Balance Yield From 2006
------- ----- ------- ----- ---------
Now And Money Market
Accounts $205,810,833 3.25% $211,401,478 3.25% $ (43,399)
Passbook Accounts 16,655,588 0.99 16,965,702 0.99 (896)
Certificates Accounts 284,506,447 5.10 219,210,108 4.45 1,190,894
FHLB Advances And Other
Borrowed Money 181,321,298 4.53 147,195,359 4.18 513,700
Junior Subordinated
Debentures 5,155,000 7.16 572,778 6.98 82,250
Total Interest-Bearing ----------- ---- ----------- ---- ---------
Liabilities $693,449,166 4.32% $595,345,425 3.86% $1,742,549
=========== ==== =========== ==== =========
20
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
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
September 30, 2007 and 2006. The following table details selected activity
associated with the allowance for loan losses for the three months ended
September 30, 2007 and 2006:
September 30, 2007 September 30, 2006
------------------ ------------------
Beginning Balance $ 7,430,692 $ 6,853,908
Provision 150,000 150,000
Charge-offs (39,290) (45,659)
Recoveries 22,809 36,374
------------------ ------------------
Ending Balance $ 7,564,211 $ 6,994,623
================== ==================
Allowance For Loan Losses As A
Percentage Of Gross Loans Receivable
And Loans Held For Sale At The End
Of The Period 1.52% 1.69%
Allowance For Loan Losses As A
Percentage Of Impaired Loans At The
End Of The Period 780.91% 516.15%
Impaired Loans 968,641 1,355,141
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 0.40% 0.25%
Loans Receivable, Net $ 487,144,939 $ 406,503,846
Non-Interest Income - Non-interest income increased $137,000 or 15.0% to $1.0
million for the three months ended September 30, 2007 from $913,000 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 Ended September 30, Increase (Decrease)
------------------------------- ------------------
2007 2006 Amounts Percent
------ ------ ------- -------
Gain On Sale Of Loans $ 105,450 $ 93,998 $ 11,452 12.2%
Service Fees On Deposit Accounts 323,423 291,635 31,788 10.9
Income From Cash Value Of
Life Insurance 87,164 62,037 25,127 40.5
Commissions From Insurance Agency 173,488 209,246 (35,758) (17.1)
Other Agency Income 26,910 10,426 16,484 158.1
Trust Income 139,850 121,556 18,294 15.0
Other 193,085 123,822 69,263 55.9
--------- ------- ------- ------
Total non-interest income $1,049,370 $912,720 $136,650 15.0%
========= ======= ======= =====
Gain on sale of loans increased $11,000 to $105,000 during the three months
ended September 30, 2007 when compared to the same period one year ago due to an
increase in the origination and sale of fixed rate residential mortgage loans.
Service fees on deposit accounts increased $32,000 to $323,000 for the quarter
ended September 30, 2007 compared to the same quarter in 2006. This increase is
primarily due to an increase in the average balance in deposit accounts during
the period. Income from cash value of life insurance was $87,000 for the three
months ended September 30, 2007 compared to $62,000 during the same period one
year ago. This increase is due to additional purchases of life insurance and an
increase in the cash surrender value of the current policies.
21
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Commissions from insurance agency income decreased $36,000 to $173,000 during
the three months ended September 30, 2007 when compared to the same period one
year ago. The decrease can be attributed primarily to changes in South Carolina
insurance laws enacted during the period that negatively impacted revenue, in
addition to a decrease in the commissions percentages earned from the insurance
companies. The Company anticipated these change and is in the process of
integrating and expanding its product lines and network to seek to increase
future earnings. Other agency income and trust income increased $35,000 to
$167,000 during the three months ended September 30, 2007 when compared to the
same period one year ago. Other miscellaneous income including credit life
insurance commissions, safe deposit rental income, annuity and stock brokerage
commissions, trust fees, and other miscellaneous fees, increased $69,000 to
$193,000 during the three months ended September 30, 2007 compared to the same
period one year ago.
Non-Interest Expense - Non-interest expense increased $652,000 or 17.5% to $4.4
million for the three months ended September 30, 2007 from $3.7 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 Ended September 30, Increase (Decrease)
------------------------------- ------------------
2007 2006 Amounts Percent
------ ------ ------- -------
Salaries And Employee Benefits $2,627,272 $2,303,160 $324,112 14.1%
Occupancy 445,602 350,668 94,934 27.1
Advertising 87,148 61,301 25,847 42.2
Depreciation And Maintenance
Of Equipment 337,091 316,326 20,765 6.6
FDIC Insurance Premiums 14,870 14,820 50 0.3
Amortization of Intangibles 22,500 22,500 - -
Other 846,518 660,426 186,092 28.2
--------- --------- ------- -----
Total Non-Interest Expenses $4,381,001 $3,729,201 $651,800 17.5%
========= ========= ======= =====
Salary and employee benefits increased $324,000 to $2.6 million for the three
months ended September 30, 2007 from $2.3 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 including absorbing the Collier-Jennings Companies'
employees and increased regulatory reporting requirements. Occupancy increased
to 27.1% to $446,000 for the three months ended September 30, 2007 from $351,000
for the same period one year ago. Advertising expense increased $26,000 to
$87,000 for the three months ended September 30, 2007 from $61,000 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. Other non-
interest expenses increased $186,000 or 28.2% to $847,000 for the three months
ended September 30, 2007 when compared to the same period one year ago.
Provision For Income Taxes - Provision for income taxes increased $5,000 or 0.9%
to $550,000 for the three months ended September 30, 2007 from $545,000 for the
same period one year ago. Income before income taxes was $1.7 million for the
three months ended September 30, 2007 compared to $1.6 million for the three
months ended September 30, 2006. The Company's combined federal and state
effective income tax rate for the current quarter was 32.8% compared to 34.7%
for the same quarter one year ago.
22
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER
--------------------------------------------------------------------------
30, 2007 AND 2006
-----------------
Net Income - Net income increased $174,000 or 8.5% to $2.2 million for the six
months ended September 30, 2007 compared to $2.0 million for the six months
ended September 30, 2006. 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 $1.2 million or 13.3% to
$10.1 million during the six months ended September 30, 2007, compared to $8.9
million for the same period in 2006, as a result of an increase in interest
income offset in part by an increase in interest expense. Average interest
earning assets increased $85.9 million to $725.4 million while average
interest-bearing liabilities increased $87.1 million to $678.4 million. The
interest rate spread was 2.52% during the six months ended September 30, 2007
and 2006.
The Company's net interest margin remained constant at 2.80% for the six months
ended September 30, 2007 and 2006.
Interest Income - Total interest income increased $4.6 million or 23.3% to $24.6
million during the six months ended September 30, 2007 from $19.9 million for
the same period in 2006. Total interest income on loans increased $3.4 million
or 23.2% to $18.2 million during the six months ended September 30, 2007 as a
result of the average loan portfolio balance increasing $68.1 million and the
yield in the loan portfolio increasing 38 basis points. Interest income from
mortgage-backed securities increased $332,000 or 12.0% 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 $35,000. Interest income from investment
securities increased $886,000 or 38.0% as a result of an increase in the yield
and average balance of the investment securities portfolio.
The following table compares detailed average balances, associated yields, and
the resulting changes in interest income for the six months ended September 30,
2007 and 2006:
Six Months Ended September 30,
----------------------------------------------
2007 2006
------------- --------------
Increase(Decrease)
In Interest And
Average Average Dividend Income
Balance Yield Balance Yield From 2006
------- ----- ------- ----- ---------
Loans Receivable, Net $461,466,930 7.89% $393,415,196 7.51% $3,431,172
Mortgage-Backed Securities 133,869,199 4.63 133,904,026 4.13 331,991
Investments 128,795,008 5.00 110,857,274 4.21 886,267
Overnight Time 1,229,756 4.54 1,271,278 5.11 (4,570)
Total Interest-Earning ----------- ---- ----------- ---- ---------
Assets $725,360,893 6.77% $639,447,774 6.23% $4,644,860
=========== ==== =========== ==== =========
23
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Interest Expense - Total interest expense increased $3.5 million or 31.5% to
$14.4 million during the six months ended September 30, 2007 compared to $11.0
million for the same period one year earlier. The increase in total interest
expense is attributable to the increases in short-term interest rates paid, and
the increase in the amount of interest-bearing deposits, and borrowings.
Interest expense on deposits increased $2.3 million or 28.9% during the period
as average interest bearing deposits grew $51.6 million compared to the average
balance in the six months ended September 30, 2006. In addition the cost of
deposits increased 55 basis points during the period. Interest expense on
advances and other borrowings increased $976,000 or 32.8% as the cost of debt
outstanding increased 40 basis points during the six months ended September 30,
2007 compared to the same period in 2006 while average borrowings outstanding
increased approximately $30.6 million. Interest expense on junior subordinated
debentures was $183,000 for the six months ended September 30, 2007 compared to
$10,000 for the same period one year ago. The junior subordinated debentures
are the result of the Company's $5.0 million trust preferred securities
offering.
The following table compares detailed average balances, cost of funds, and the
resulting changes in interest expense for the six months ended September 30,
2007 and 2006:
Six Months Ended September 30,
----------------------------------------------
2007 2006
------------- --------------
Increase(Decrease)
In Interest
Average Average Expense
Balance Yield Balance Yield From 2006
------- ----- ------- ----- ---------
Now And Money Market
Accounts $206,568,748 3.22% 212,905,689 3.10% $ 30,270
Passbook Accounts 16,885,120 0.98 17,048,654 0.98 (957)
Certificates Accounts 272,917,219 5.03 214,810,211 4.28 2,278,342
FHLB Advances And Other
Borrowed Money 176,912,171 4.47 146,307,123 4.07 976,306
Junior Subordinated
Debentures 5,155,000 7.10 286,389 6.99 173,075
Total Interest-Bearing ----------- ---- ----------- ---- ---------
Liabilities $678,438,258 4.25% 591,358,066 3.71% $3,457,036
=========== ==== =========== ==== =========
24
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
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 $300,000 during the six months ended
September 30, 2007 and 2006. The following table details selected activity
associated with the allowance for loan losses for the six months ended September
30, 2007 and 2006:
September 30, 2007 September 30, 2006
------------------ ------------------
Beginning Balance $ 7,296,791 $ 6,704,734
Provision 300,000 300,000
Charge-offs (68,411) (75,278)
Recoveries 35,831 65,167
------------------ ------------------
Ending Balance $ 7,564,211 $ 6,994,623
================== ==================
Allowance For Loan Losses As A
Percentage Of Gross Loans Receivable
And Loans Held For Sale At The End Of
The Period 1.52% 1.69%
Allowance For Loan Losses As A
Percentage Of Impaired Loans At The
End Of The Period 780.91% 516.15%
Impaired Loans 968,641 1,355,141
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 0.40% 0.25%
Loans Receivable, Net $ 487,144,939 $ 406,503,846
Non-Interest Income - Non-interest income increased $445,000 or 20.6% to $2.1
million for the six months ended September 30, 2007 from $1.7 million for the
same period one year ago. The following table provides a detailed analysis of
the changes in the components of non-interest income:
Six Months Ended September 30, Increase
----------------------------- ----------------
2007 2006 Amounts Percent
------ ------ ------- -------
Gain On Sale Of Loans $ 281,571 $ 207,253 $ 74,318 35.9%
Service Fees On Deposit Accounts 650,745 569,503 81,242 14.3
Income From Cash Value Of
Life Insurance 149,201 118,545 30,656 25.9
Commissions From Insurance Agency 319,161 214,635 104,526 48.7
Other Agency Income 56,168 10,426 45,742 438.7
Trust Income 238,625 217,556 21,069 9.7
Other 414,497 326,796 87,701 26.8
--------- --------- ------- -----
Total non-interest income $ 2,109,968 $1,664,714 $ 445,254 26.7%
========= ========= ======= =====
Gain on sale of loans increased $74,000 to $282,000 during the six months ended
September 30, 2007 when compared to the same period one year ago. This increase
is due to the increase in the origination and sale of fixed rate residential
mortgage loans that is the result of a low interest rate environment where
increases are anticipated. Service fees on deposit accounts increased $81,000 to
$651,000 for the six months ended September 30, 2007 compared to the same period
in 2006. Commissions from insurance agency and other agency income increased
$150,000 during the six months ended September 30, 2007 when compared to the
same period one year ago. This increase is due to the acquisition of the
Collier Jennings' Companies which took place at the end of the first quarter in
2006, offset partially by decreases in second quarter earnings when compared to
the same quarter in the prior year. The decreases in second quarter earnings are
due to changes in South Carolina insurance laws that negatively impacted revenue
and a decrease in commission percentages earned. Other miscellaneous income
including credit life insurance commissions, safe deposit rental income, annuity
and stock brokerage commissions, trust fees, and other miscellaneous fees,
increased $88,000 to $414,000 during the six months ended September 30, 2007
compared to the same period one year ago.
25
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Non-Interest Expense - Non-interest expense increased $1.5 million or 20.4% to
$8.6 million for the six months ended September 30, 2007 from $7.2 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:
Six Months Ended September 30, Increase
----------------------------- ----------------
2007 2006 Amounts Percent
------ ------ ------- -------
Salaries And Employee Benefits $ 5,197,551 $ 4,428,529 $ 769,022 17.4%
Occupancy 868,113 668,263 199,850 29.9
Advertising 189,421 135,950 53,471 39.3
Depreciation And Maintenance
Of Equipment 656,616 607,795 48,821 8.0
FDIC Insurance Premiums 30,197 28,962 1,235 4.3
Amortization of Intangibles 45,000 22,500 22,500 100.0
Other 1,645,548 1,280,506 365,042 28.5
--------- --------- --------- -----
Total Non-Interest Expenses $ 8,632,446 $ 7,172,505 $ 1,459,941 20.4%
========= ========= ========= =====
Salary and employee benefits increased $769,000 to $5.2 million for the six
months ended September 30, 2007 from $4.4 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 including absorbing the Collier-Jennings Companies'
employees and increased regulatory reporting requirements. Without the
acquisition of the Collier- Jennings Companies, salary and employee benefits
would have increased approximately $584,000 or 13.5%. Occupancy also increased
due to the acquisition of the Collier- Jennings Companies and additional
facilities. Advertising expense increased $53,000 to $189,000 for the six months
ended September 30, 2007 from $136,000 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 decreased $1,000 or 0.1%
to $1.1 million for the six months ended September 30, 2007 from $1.1 million
for the same period one year ago. Income before income taxes was $3.3 million
for the six months ended September 30, 2007 compared to $3.1 million for the six
months ended September 30, 2006. The Company's combined federal and state
effective income tax rate for the six month ended September 30, 2007 was 32.9%
compared to 34.8% for the same period 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 six months ended September 30, 2007 loan disbursements exceeded loan
repayments resulting in a $51.1 million or 11.7% increase in total net loans
receivable. During the six months ended September 30, 2007, deposits increased
$31.9 million, the Bank drew $1 million on a line of credit with another
financial institution and FHLB advances increased $26.1 million. The Bank had
$174.3 million in additional borrowing capacity at the FHLB at the end of the
period. At September 30, 2007, the Bank had $279.3 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.
26
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
The Company plans to continue to expand its branch network, which could cause
earnings to level off or decline for a period of time. The leveling off or
decline in earnings will be attributed to the lag that exists from the time a
branch is built to when it becomes profitable. By the end of this fiscal year,
we anticipate having invested $6.0 to $8.0 million in land, buildings, and
equipment. Within the next twenty-four months, we anticipate investing $8.0 to
$10.0 million in land, buildings, and equipment. The anticipated costs could be
affected by increased construction costs, weather delays, and/or other
uncertainties.
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 September 30,
2007:
After
After One Three Greater
Within Through Through Than
One Three Twelve Within One
(Dollars in thousands) Month Months Months One Year Year Total
------ ------- ------ -------- ------ -----
Unused lines of credit $3,285 $2,745 $41,852 $47,882 $49,205 $97,087
Standby letters of credit 92 99 710 901 40 941
----- ----- ------ ------ ------ ------
Total $3,377 $2,844 $42,562 $48,783 $49,245 $98,028
===== ===== ====== ====== ====== ======
27
Security Federal Corporation and Subsidiaries
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises principally from interest rate risk inherent in
its lending, investment, deposit and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Although the Company
manages other risks such as credit quality and liquidity risk in the normal
course of business, management considers interest rate risk to be its most
significant market risk that could potentially have the largest material effect
on the Company's financial condition and results of operations. Other types of
market risks such as foreign currency exchange rate risk and commodity price do
not arise in the normal course of the Company's business activities.
The Company's profitability is affected by fluctuations in the market interest
rate. Management's goal is to maintain a reasonable balance between exposure to
interest rate fluctuations and earnings. A sudden and substantial increase or
decrease in interest rates may adversely impact the Company's earnings to the
extent that the interest rates on interest-earning assets and interest-bearing
liabilities do not change at the same rate, to the same extent or on the same
basis. The Company monitors the impact of changes in interest rates on its net
interest income using a test that measures the impact on net interest income and
net portfolio value of an immediate change in interest rates in 100 basis point
increments and by measuring the Bank's interest sensitivity gap ("Gap"). Net
portfolio value is defined as the net present value of assets, liabilities, and
off-balance sheet contracts. Gap is the amount of interest sensitive assets
repricing or maturing over the next twelve months compared to the amount of
interest sensitive liabilities maturing or repricing in the same time period.
Recent net portfolio value reports furnished by the OTS indicate that the Bank's
interest rate risk sensitivity has increased slightly over the past year. The
Bank has rated favorably compared to thrift peers concerning interest rate
sensitivity.
For the six months ended September 30, 2007, 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%. As of the year ended March 31,
2007, the interest rate spread was 2.51%. 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
September 30, 2007 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 September 30, 2007, 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.
28
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, 2007.
Item 2 Unregistered sales of Equity Securities and Use Of Proceeds
-----------------------------------------------------------
(c)Total Number (d)Maximum Number
(a)Total of Shares of Shares that
Number of (b)Average Purchased as May Yet Be
Shares Price Paid Part of Publicly Purchased Under
Period Purchased per Share Announced Program the Program
-------- --------- --------- ----------------- -----------
July 1 - July 31, 2007 1,281 $24.56 1,281 92,731
August 1 - August 30, 2007 6,050 $24.52 6,050 86,681
September 1 - September 30,
2007 11,706 $24.45 11,706 74,975
--------------------------------------------------
Total 19,037 $24.48 19,037 74,975
==================================================
In May 2004, the Company's Board of Directors authorized a 5%
repurchase plan, or 126,000 shares of the Company's outstanding
common stock. As of September 30, 2007, 51,025 shares have been
repurchased under this program. The Company repurchased 19,037 any
shares of its outstanding Common Stock during the three months ended
September 30, 2007.
Item 3 Defaults Upon Senior Securities
-------------------------------
None
Item 4 Submission Of Matters To A Vote Of Security Holders
---------------------------------------------------
The election of directors was presented for vote to the shareholders
at the Annual Meeting held July 19, 2007. Votes for G.L. Toole III
were as follows: 2,113,602 votes for, 18,900 withheld. Votes for
Thomas L. Moore were as follows: 2,120,402 votes for, 12,100 votes
withheld. Votes for J. Chris Verenes were as follows: 2,112,602 votes
for, 19,900 votes withheld. Directors continuing in office are Harry
O. Weeks, Jr., Robert E. Alexander, William Clyburn, Roy G. Lindburg,
Timothy W. Simmons, and Clifton Weeks.
Item 5 Other Information
-----------------
None
29
Security Federal Corporation and Subsidiaries
Part II: Other Information, Continued
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 1993 Salary Continuation Agreements (4)
10.2 Amendment One to 1993 Salary Continuation Agreement (5)
10.3 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.
(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 27, 2007 as an exhibit to the Company's Annual Report on
Form 10-K and incorporated herein by reference.
30
Security Federal Corporation and Subsidiaries
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: November 14, 2007 By: /s/Timothy W. Simmons
------------------ -------------------------------
Timothy W. Simmons
President
Duly Authorized Representative
Date: November 14, 2007 By: /s/Roy G. Lindburg
------------------ -------------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
31
EXHIBIT 31.1
Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
32
Certification
I, Timothy W. Simmons, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 14, 2007
/s/Timothy W. Simmons
-------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
33
EXHIBIT 31.2
Certification of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
34
Certification
I, Roy G. Lindburg, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of
the period covered by this report based on such evaluation and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 14, 2007
/s/Roy G. Lindburg
-----------------------
Roy G. Lindburg
Chief Financial Officer
35
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
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
1350), each of the undersigned hereby certifies in his capacity as an officer of
Security Federal Corporation (the "Company") and in connection with the
Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2007 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 as
of the dates and for the periods presented in the financial statements
included in the Report.
/s/Timothy W. Simmons /s/Roy G. Lindburg
-------------------------- ------------------------------
Timothy W. Simmons Roy G. Lindburg
Chief Executive Officer Chief Financial Officer
Dated: November 14, 2007