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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-16120
SECURITY FEDERAL CORPORATION
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(Exact name of registrant as specified in its charter)
South Carolina 57-08580504
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1705 Whiskey Road South, Aiken, South Carolina 29803
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 641-3000
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Securities registered pursuant to Section 12(b)
of the Act: None
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Securities registered pursuant to Section 12(g) Common Stock, par value
of the Act: $0.01 per share
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
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Indicate by check mark whether disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. [X]
As of June 17, 2002, there were issued and outstanding 1,671,459 shares
of the registrant's Common Stock. The aggregate market value of the voting
stock held by non-affiliates of the registrant, computed by reference to the
average of the bid and asked price of such stock as of June 17, 2002, was
$40.3 million. (The exclusion from such amount of the market value of the
shares owned by any person shall not be deemed an admission by the registrant
that such person is an affiliate of the registrant).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Registrant's Annual Report to Stockholders for the
Fiscal Year Ended March 31, 2002. (Parts I and II)
2. Portions of the Registrant's Proxy Statement for the 2002 Annual
Meeting of Stockholders. (Part III)
PART I
ITEM 1. BUSINESS
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Security Federal Corporation
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Security Federal Corporation (the "Company") was incorporated under the
laws of the State of Delaware in July 1987 by authorization of the Board of
Directors of Security Federal Bank ("Security Federal" or the "Bank") for the
purpose of becoming a savings and loan holding company that acquired all of
the outstanding stock of Security Federal issued upon the conversion of
Security Federal from the mutual to the stock form (the "Conversion").
Effective August 17, 1998, the Company changed its state of incorporation from
Delaware to South Carolina.
As a South Carolina corporation, the Company is authorized to engage in
any activity permitted by South Carolina General Corporation Law. The Company
is a unitary savings and loan holding company. Through the unitary holding
company structure, it is possible to expand the size and scope of the
financial services offered beyond those currently offered by the Bank. The
holding company structure also provides the Company with greater flexibility
than the Bank would have to diversify its business activities, through
existing or newly formed subsidiaries, or through acquisitions or mergers of
stock thrift institutions as well as other companies. There are no current
arrangements, understandings or agreements regarding any such acquisition.
Future activities of the Company, other than the continuing operations of
Security Federal, will be funded through dividends from Security Federal and
through borrowings from third parties. See "Regulation -- Savings and Loan
Holding Company Regulation" and "Taxation." Activities of the Company may also
be funded through sales of additional securities or income generated by other
activities of the Company. At this time, there are no plans regarding such
sales of additional securities or such activities.
At March 31, 2002, the Company had assets of approximately $376.3
million, deposits of approximately $309.0 million and shareholders' equity of
approximately $25.4 million.
The executive office of the Company is located at 1705 Whiskey Road
South, Aiken, South Carolina 29803, telephone (803) 641-3000.
Security Federal Bank
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General. Security Federal, a federally chartered stock savings bank, is
headquartered in Aiken, South Carolina. Security Federal, which has 11 branch
offices in Aiken, Bamberg and Lexington Counties, was originally chartered
under the name Aiken Building and Loan Association on March 27, 1922. The
association received its federal charter and changed its name to Security
Federal Savings and Loan Association of Aiken on March 7, 1962, and later
changed its name to Security Federal Savings Bank of South Carolina, on
November 11, 1986. Effective April 8, 1996, the Bank changed its name to
Security Federal Bank. The Bank converted from the mutual to the stock form
of organization on October 30, 1987. Security Federal increased its branch
network to nine in October 1993 with the completion of its acquisition of four
former NationsBank of South Carolina, N.A. branches located in Aiken County.
In February 1996, Security Federal opened a new branch office in the Aiken
Walmart Superstore, which became the Bank's tenth location. The Bank opened a
branch in West Columbia in December 2001, which provides the Bank with the
opportunity to expand its market area.
The principal business of Security Federal is the acceptance of savings
deposits from the general public and the origination of mortgage loans to
enable borrowers to purchase or refinance one- to four-family residential real
estate. The Bank also makes loans secured by multi-family residential and
commercial real estate and consumer and commercial loans. In addition, the
Bank originates construction loans on single family residences, multi-family
dwellings and projects, commercial real estate, and loans for the acquisition,
development and construction of residential subdivisions and commercial
projects.
1
Security Federal's income is derived primarily from interest and fees
earned in connection with its lending activities, and its principal expenses
are interest paid on savings deposits and borrowings and operating expenses.
Through a real estate partnership and Willow Woods Associates, the
Company was involved in real estate development. The partnership sold its
remaining lots in March 2001, and was completely liquidated by March 31, 2002.
Selected Consolidated Financial Information
- -------------------------------------------
This information is incorporated by reference to page 3 of the 2002
Annual Report to Stockholders ("Annual Report").
Yields Earned and Rates Paid
- ----------------------------
This information is incorporated by reference to page 10 of the Annual
Report.
Rate/Volume Analysis
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This information is incorporated by reference to page 9 of the Annual
Report.
Lending Activities
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General. The primary source of revenue for the Bank is interest and fee
income from lending activities. The principal lending activity of the Bank is
making conventional first mortgage real estate loans to enable borrowers to
purchase or refinance one- to four-family residential real property. The Bank
also makes loans secured by multi-family residential and commercial real
estate and consumer and commercial loans. The Bank continues to emphasize the
origination of adjustable rate residential mortgage loans, subject to market
conditions, for retention in its portfolio. In addition, the Bank originates
construction loans on single family residences, multi-family dwellings and
projects, commercial real estate, and loans for the acquisition, development
and construction of residential subdivisions and commercial projects.
Adjustable rate mortgage loans ("ARMs") constituted approximately 26.9%
of the Bank's total outstanding loan portfolio at March 31, 2002.
The loan-to-value ratio, maturity and other provisions of loans made by
the Bank reflect its policy of making the maximum loan permissible consistent
with applicable regulations, established lending policies and market
conditions. The Bank requires title insurance (or acceptable legal opinions
on smaller loans secured by real estate) and fire insurance, and flood
insurance where applicable, on loans secured by improved real estate.
2
Loan Portfolio Composition. The following table sets forth information concerning the composition of
the Bank's loan portfolio in dollar amounts in percentages, by type of loan and by type of security, and
presents a reconciliation of total loans receivable before net items.
At March 31,
---------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
TYPE OF LOAN:
- -------------
Fixed Rate Loans
- ----------------
Residential real
estate........... $ 35,012 14.0% $ 34,070 13.9% $ 13,408 6.6% $ 7,586 4.7% $ 9,981 7.0%
Commercial business
and commercial
real estate...... 55,845 22.4 42,877 17.5 39,756 19.6 27,812 17.3 21,863 15.3
Consumer.......... 33,185 13.3 32,447 13.3 28,984 14.2 28,492 17.7 29,257 20.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total fixed rate
loans.......... 124,042 49.7 109,394 44.7 82,148 40.4 63,890 39.7 61,101 42.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Adjustable rate loans
- ---------------------
Residential real
estate (1)....... 67,220 26.9 89,913 36.7 86,040 42.3 59,507 36.9 37,701 26.4
Commercial business
and commercial
real estate...... 41,551 16.7 31,643 12.9 22,306 11.0 24,514 15.3 26,593 18.7
Consumer.......... 16,667 6.7 13,830 5.7 12,735 6.3 13,140 8.1 17,242 12.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total adjustable
rate loans..... 125,438 50.3 135,386 55.3 121,081 59.6 97,161 60.3 81,536 57.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans..... 249,480 100.0% 244,780 100.0% 203,229 100.0% 161,051 100.0% 142,637 100.0%
===== ===== ===== ===== =====
Less
- ----
Loans in process.. 11,288 10,739 7,832 7,151 3,176
Deferred fees and
discounts........ 184 260 275 199 225
Allowance for loan
losses........... 3,689 2,784 2,121 1,715 1,512
-------- -------- -------- -------- --------
Total loans
receivable..... $234,319 $230,997 $193,001 $151,986 $137,724
======== ======== ======== ======== ========
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(1) Includes $734,000, $1.8 million, $2.2 million, $1.6 million and $1.8 million in multi-family
dwellings for fiscal years ended March 31, 2002, 2001, 2000, 1999 and 1998, respectively. Includes
residential construction loans.
3
At March 31,
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2002 2001 2000 1999 1998
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
TYPE OF SECURITY:
- ----------------
Real Estate Loans:
Residential real
estate (1)....... $ 86,486 34.7% $104,819 42.8% $ 82,754 40.7% $ 52,860 32.8% $ 44,232 31.0%
Construction...... 15,746 6.3 19,164 7.8 16,694 8.2 14,233 8.8 3,450 2.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate
loans........... 102,232 41.0 123,983 50.6 99,448 48.9 67,093 41.6 47,682 33.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Commercial business
and commercial real
estate............ 97,396 39.0 74,520 30.5 62,062 30.6 52,326 32.5 48,456 34.0
Consumer loans:
Deposit account... 2,160 0.9 2,516 1.0 1,304 0.6 1,213 0.8 1,275 0.9
Home equity....... 16,052 6.4 13,758 5.6 13,849 6.8 15,818 9.8 20,202 14.1
Home improvement.. 16,390 6.6 17,424 7.1 14,730 7.3 14,903 9.3 16,088 11.3
Other............. 15,250 6.1 12,579 5.2 11,836 5.8 9,698 6.0 8,934 6.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer
loans........... 49,852 20.0 46,277 18.9 41,719 20.5 41,632 25.9 46,499 32.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans.... 249,480 100.0% 244,780 100.0% 203,229 100.0% 161,051 100.0% 142,637 100.0%
===== ===== ===== ===== =====
Less:
Loans in process... 11,288 10,739 7,832 7,151 3,176
Deferred fees and
discounts......... 184 260 275 199 225
Allowance for loan
losses............ 3,689 2,784 2,121 1,715 1,512
-------- -------- -------- -------- --------
Total loans
receivable....... $234,319 $230,997 $193,001 $151,986 $137,724
======== ======== ======== ======== ========
- -------------
(1) Includes $734,000, $1.8 million, $2.2 million, $1.6 million and $1.8 million in multi-family
dwellings at March 31, 2002, 2001, 2000, 1999 and 1998, respectively.
4
The following schedule illustrates the cash flow of Security Federal's
loan portfolio at March 31, 2002. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period when the
contract is due. This schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
At March 31, 2002
Commercial
Business and
Residential Commercial
Real Estate(1) Consumer(2) Real Estate Total
-------------- ----------- ------------ ---------
(Dollars in Thousands)
Six months or less(3)... $10,576 $ 5,875 $21,336 $ 37,787
Over six months to one
year................... 7,903 5,620 15,392 28,915
Over one year to three
years.................. 5,015 12,173 28,185 45,373
Three to five years..... 4,004 7,216 22,577 33,797
Over five to ten years.. 12,930 8,967 5,308 27,205
Over ten to twenty
years.................. 38,241 10,001 4,598 52,840
More than twenty years.. 12,275 -- -- 12,275
------- ------- ------- --------
Total(4).............. $90,944 $49,852 $97,396 $238,192
======= ======= ======= ========
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(1) Includes multi-family dwellings.
(2) Includes home improvement loans and equity line of credit loans.
(3) Includes demand loans, loans having no stated maturity and overdraft
loans.
(4) Loan amounts are net of undisbursed funds for loans in process of $11.3
million.
The total amount of loans due after March 31, 2003, which have
predetermined or fixed interest rates is $59.0 million, while the total amount
of loans due after such date which have floating or adjustable interest rates
is $112.5 million.
Loan Originations, Purchases and Sales. The following table shows the
loan origination, purchase, sale and repayment activities of the Bank for the
periods indicated.
Year Ended March 31,
--------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in Thousands)
Originated(1):
Adjustable rate -
residential real
estate................ $ 41,672 $ 36,998 $ 44,382 $ 36,906 $ 12,080
Fixed rate -
residential real
estate................ 9,147 6,316 6,193 6,020 3,444
Consumer 26,916 20,297 17,080 19,564 20,103
Commercial business
and commercial real
estate................ 50,468 31,623 34,847 25,249 13,698
-------- -------- -------- -------- --------
Total consumer/
commercial business
real estate......... 77,384 51,920 51,927 44,813 33,801
-------- -------- -------- -------- --------
Total loans
originated........ $128,203 $ 95,234 $102,502 $ 87,739 $ 49,325
======== ======== ======== ======== ========
(table continued on following page)
5
Year Ended March 31,
--------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in Thousands)
Purchased.............. -- -- -- -- -
Sold(1):
Fixed rate - residential
real estate........... $ -- $ -- $ 631 $ 5,644 $ 3,396
Adjustable rate-
residential real
estate................ -- -- -- --
Principal repayments... 123,493 53,683 59,693 63,680 53,507
(Increase) decrease in
other items, net...... (1,378) (3,555) (1,163) (4,153) (1,467)
Net increase
(decrease)............ $ 3,332 $37,996 $41,015 $14,262 $(9,045)
- --------------
(1) Does not include loans in the amount of $51.4 million, $29.5 million,
$16.0 million, $28.1 million and $7.9 million that were originated with
prior commitments to be purchased by institutional investors and sold
during the fiscal years ended March 31, 2002, 2001, 2000, 1999 and 1998,
respectively.
In addition to interest earned on loans, the Bank receives loan
origination fees or "points" for originating loans. Loan points are a
percentage of the principal amount of the mortgage loan which are charged to
the borrower for the creation of the loan.
The Bank's loan origination fees generally range from 1% to 2% on
conventional residential mortgages, commercial real estate loans and
commercial business loans. The total fee income (including amounts amortized
to income as yield adjustments) for the fiscal year ended March 31, 2002 was
$971,000.
Loan origination and commitment fees are volatile sources of income.
Such fees vary with the volume and type of loans and commitments made and
purchased and with competitive conditions in mortgage markets, which in turn
are governed by the demand for and availability of money.
The following table shows deferred loan origination fees recognized as
income by the Bank expressed as a percentage of the dollar amount of total
mortgage loans originated (and retained in the Bank's portfolio) and purchased
during the periods indicated and the dollar amount of deferred loan
origination fees at the end of each respective period.
At or for the Year Ended March 31,
----------------------------------
2002 2001 2000
---- ---- ----
(Dollars in Thousands)
Net deferred loan origination fees
earned during the period(1)............ $224 $149 $65
Mortgage loan origination fees earned
as a percentage of total loans
originated during the period........... 0.2% 0.2% 0.1%
Net deferred loan origination fees in
loan portfolio at end of period........ $184 $260 $275
- -------------
(1) Includes amounts amortized to interest income as yield adjustments.
Does not include fees earned on loans sold.
The Bank also receives other fees and charges related to existing loans,
conversion fees, assumption fees, late charges, and other fees collected in
connection with a change in borrower or other loan modifications.
6
Security Federal currently sells substantially all conforming fixed-rate
loans with terms of 15 years or greater in the secondary mortgage market.
These loans are sold in order to provide a source of funds and as one of the
strategies available to close the gap between the maturities of its
interest-earning assets and interest-bearing liabilities. Currently, most
fixed-rate, long-term mortgage loans are being originated based on Fannie Mae
("FNMA") and Freddie Mac ("FHLMC") underwriting standards.
Secondary market sales have been made primarily to FHLMC, or other banks
or investors. FHLMC is a quasi-governmental agency that purchases residential
mortgage loans from federally insured financial institutions and certain other
lenders. All loans sold to FHLMC are without recourse to Security Federal and
essentially all other loans sold to other investors are without recourse. For
the past few years, substantially all loans have been sold on a service
released basis. Previous to that, some loans sold to FHLMC, FNMA, and one
other investor, had been sold service retained, whereby Security Federal would
collect a .25% to .375% servicing fee on the principal balance of the loan
serviced. However, the pricing on loans sold service released is more
favorable to the borrower. Because of that, Security Federal's loan serviced
for others portfolio was ever shrinking. Due to the fixed costs of servicing
that portfolio, Security Federal sold its loan serviced for others portfolio
for a before tax, net gain of approximately $400,000 in the last quarter of
fiscal 2001. At March 31, 2001, Security Federal was sub-servicing this
portfolio of approximately $47.0 million for the buyer, which transfer took
place in April 2001. In fiscal 2002, Security Federal sold $84.5 million on a
service released basis on the secondary market. Loans closed but not yet
settled with FHLMC or other investors, are carried in the Bank's "loans held
for sale" portfolio. At March 31, 2002, the Bank held $2.2 million of loans
held for sale. All of such loans were originated for investors based upon
prior commitments to purchase the loans at a set price. As a result, these
loans present no market risk to Security Federal. These loans are normally
delivered and paid for within 30 days after the date of closing.
The Bank also originates and holds fixed rate construction loans or fixed
rate lot loans. The construction loans are for one year terms. Lot loans are
financed on a two, three, or five year balloon term. At March 31, 2002, the
Bank held $35.0 million or 14.0% of the total loan portfolio in these fixed
rate loans in its residential portfolio.
Loan Solicitation and Processing. The Bank actively solicits mortgage
loan applications from existing customers, real estate agents, builders, real
estate developers and others. The Bank also receives mortgage loan
applications as a result of customer referrals and from walk-in customers.
Detailed loan applications are obtained to determine the borrower's
creditworthiness and ability to repay, and the more significant items on these
applications are verified through the use of credit reports, financial
statements and confirmations. After analysis of the loan application and
property or collateral involved, including an appraisal of the property
(residential appraisals are obtained through independent fee appraisers), the
lending decision is made in accordance with the underwriting guidelines of the
Bank. These guidelines are generally consistent with FHLMC and FNMA
guidelines for residential real estate loans. With respect to commercial real
estate loans, the Bank also reviews the capital adequacy of the business, the
income potential of the property, the ability of the borrower to repay the
loan and honor its other obligations, and general economic and industry
conditions.
Upon receipt of a loan application and all required related information
from a prospective borrower, the loan application is submitted for approval or
rejection. The residential mortgage loan underwriters approve loans which
meet FHLMC and FNMA underwriting requirements, not to exceed $275,000 per
loan, and the government loan direct endorser approves Federal Housing
Administration ("FHA") loans not to exceed $132,000 and Veterans'
Administration ("VA") loans not to exceed $203,000. The Chairman, Chief
Executive Officer, President of the Bank or Senior Consumer/Commercial Loan
Officer approve loans of $250,000 or less, except as set forth above. Loans
in excess of $250,000 require approval of any two of the above and any loan in
an amount in excess of $350,000 must be approved by the Bank's Executive
Committee, which operates as the Bank's Loan Committee. The loan approval
limits shown are the aggregate of all loans to any one borrower or entity.
7
The general policy of Security Federal is to issue loan commitments to
qualified borrowers for a specified time period. These commitments are
generally for a period of 45 days or less. With management approval,
commitments may be extended for a longer period. The total outstanding amount
of mortgage loan commitments issued by Security Federal as of March 31, 2002,
was approximately $272,000 (excluding undisbursed portions of construction
loans in process). Security Federal also had outstanding commitments
available on retail lines of credit (including home equity and other consumer
loans) totaling $23.2 million as of March 31, 2002. See Note 13 of Notes to
Consolidated Financial Statements contained in the Annual Report.
Permanent Residential Mortgage Lending. Residential real estate mortgage
loans constituted approximately 34.7% of the Bank's total outstanding loan
portfolio at March 31, 2002.
Security Federal offers a variety of ARMs which offer adjustable rates of
interest, payments, loan balances or terms to maturity which vary according to
specified indices. The Bank's ARMs generally have a loan term of 15 to 30
years with rate adjustments every one to three years during the term of the
loan. Most of the Bank's ARMs contain a 100 or 200 basis point limit as to
the maximum amount of change in the interest rate at any adjustment period and
a 500 or 600 basis point limit over the life of the loan. The Bank generally
originates ARMs to hold in its portfolio. Such loans are generally made
consistent with FHLMC and FNMA guidelines. At March 31, 2002, residential
ARMs totaled $67.2 million, or 26.9% of the Bank's loan portfolio. For the
year ended March 31, 2002, the Bank originated $50.8 million in residential
real estate loans, 82.0% of which had adjustable rates of interest.
There are unquantifiable risks resulting from possible increased costs to
the borrower as a result of periodic repricing. Despite the benefits of ARMs
to the Bank's asset/liability management program, such loans also pose
potential additional risks, primarily because as interest rates rise, the
underlying payment by the borrower rises, increasing the potential for
default. At the same time, marketability of the underlying property may be
adversely affected by higher interest rates.
When making a one- to four-family residential mortgage loan, the Bank
evaluates both the borrower's creditworthiness and his or her general ability
to make principal and interest payments and the value of the property that
will secure the loan. The Bank generally makes loans on one- to four-family
residential properties in amounts of 95% or less of the appraised value
thereof. Where loans are made in amounts which exceed 80% of the appraised
value of the underlying real estate, the Bank's general policy is to require
private mortgage insurance on a portion of the loan. In general, the Bank
restricts its residential lending to South Carolina and the nearby Augusta,
Georgia market.
The Bank also provides construction financing for single family dwellings
both to owner-occupants and to builders for resale. Construction loans are
generally made for periods of six months to one year. Typically, interest
rates on interim construction loans are made on a fixed-rate basis. At March
31, 2002, residential construction loans on one- to four-family dwellings
totaled $15.7 million, or 6.3% of the Bank's loan portfolio. In addition to
the factors mentioned above concerning the creditworthiness of the borrower,
on loans of this type the Bank seeks to evaluate the financial condition and
prior performance of the builder.
Commercial Business and Commercial Real Estate Loans. The commercial
business and commercial real estate loans originated by the Bank are primarily
secured by business properties, churches, income property developments,
undeveloped land, business equipment, furniture and fixtures, inventory, and
receivables. At March 31, 2002, the Bank had approximately $97.4 million or
39.0% of the Bank's total loan portfolio, in commercial business and
commercial real estate loans. Approximately $57.0 million or 58.5% of
commercial business and commercial real estate loans were secured primarily by
real estate at March 31, 2002. Loans secured by commercial real estate are
typically written for terms of 10 to 20 years. Commercial loans not secured
by real estate are typically based on terms of three to 60 months. Fixed rate
loans typically balloon at the end of three to seven years. Adjustable rate
loans are usually tied to the prime interest rate as quoted in the Wall Street
Journal and adjust monthly or annually.
8
Commercial business and commercial real estate lending entails
significant additional credit risk when compared to residential lending.
Commercial loans typically involve large loan balances to single borrowers or
groups of related borrowers. The payment experience of such loans is
typically dependent upon the successful operation of the business or real
estate project. These risks can be significantly affected by supply and
demand conditions in the market for office and retail space and for
condominiums and apartments and to adverse conditions in the local economy.
Although commercial loans generally involve more risk than residential loans,
they also typically earn more yield and are more sensitive to changes in
interest rates.
The underwriting standards employed by the Bank for commercial business
and commercial real estate lending include a determination of the borrower's
current financial condition, ability to pay, past earnings and payment
history. In addition, the current financial condition and payment history of
all principals are reviewed. Normally, the Bank requires the principal or
owners of a business to guarantee all loans made to their business by the
Bank. Although the creditworthiness of the business and its principals is of
primary consideration, the underwriting process also includes a comparison of
the value of the security, if any, in relation to the proposed loan amount.
Properties securing commercial loans originated by the Bank are appraised
at the time of the loan by appraisers designated by the Bank. Although the
Bank is permitted to invest in loans up to 100% of the appraised value of a
property on a commercial loan, the Bank currently seeks to invest in loans
with a loan to value ratio of 75% to 80%.
At March 31, 2002, the Bank did not have any commercial business or
commercial real estate loans to one borrower in excess of $4.0 million.
Federal law restricts the Bank's permissible lending limits to one borrower to
the greater of $500,000 or 15% of unimpaired capital and surplus. The Bank
has only infrequently made loans to one borrower equal to the amount federal
law allows or approximately $4.3 million as calculated at March 31, 2002.
Consumer Loans. The Bank originates consumer loans for any personal,
family or household purpose, including but not limited to the financing of
home improvements, automobiles, boats, mobile homes, recreational vehicles and
education. In addition, the Bank has expanded its home equity lending
program. Home equity loans are secured by mortgage lines on the borrower's
principal or second residence. At March 31, 2002, the Bank had $12.4 million
of home equity lines of credit outstanding and $21.0 million of additional
commitments of such lines of credit. The Bank also makes secured and
unsecured lines of credit available. Although consumer loans involve a higher
level of risk than one- to four-family residential mortgage loans, they
generally carry higher yields and have shorter terms to maturity than one- to
four-family residential mortgage loans. The Bank has increased its
origination of consumer loans during the past several years and at March 31,
2002, the Bank had total consumer loans of $49.9 million, or 20.0% of the
Bank's loan portfolio.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and
an assessment of ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income is determined
by verification of gross monthly income from primary employment, and
additionally from any verifiable secondary income. Although credit-
worthiness of the applicant is of primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.
The Bank also has a credit card program. As of March 31, 2002, 1,228
Visa credit cards had been issued by the Bank with total approved credit lines
of $3.1 million, of which $955,000 was outstanding.
Loan Delinquencies and Defaults
- -------------------------------
General. The Bank's collection procedures provide that when a real
estate loan is approximately 20 days past due, the borrower is contacted by
mail and payment is requested. If the delinquency continues, subsequent
efforts are made to contact the delinquent borrower and establish a program to
bring the loan current. In certain instances, the Bank may modify the loan or
grant a limited moratorium on loan payments to enable the borrower to
reorganize his financial
9
affairs. If the loan continues in a delinquent status for 60 days or more,
the Bank generally initiates foreclosure proceedings after the customer has
been notified by certified mail. At March 31, 2002, the Bank had property
acquired as the result of foreclosures, in-substance foreclosure or by deed in
lieu of foreclosure and other property repossessed classified as repossessed
assets valued at $98,000.
Delinquent Loans. The following table sets forth information concerning
delinquent mortgage and other loans at March 31, 2002. The amounts presented
represent the total remaining principal balances of the related loans (before
specific reserves for losses), rather than the actual payment amounts which
are overdue.
Real Estate Non-Real Estate
------------------------------------- ------------------------------------
Commercial
Residential Commercial Consumer Business
----------------- ----------------- ---------------- -----------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
Loans delinquent for:
30 - 59 days............ 11 $ 570 5 $366 154 $2,178 14 $300
60 - 89 days............ -- -- -- -- 27 370 5 144
90 days and over........ 4 761 6 214 18 350 3 65
-- ------ -- ---- --- ------ - ----
Total delinquent loans.. 15 $1,331 11 $580 199 $2,898 22 $509
== ====== == ==== === ====== == ====
Classified Assets. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered to be of
lesser quality as "substandard," "doubtful" or "loss" assets. The regulation
requires savings associations to classify their own assets and to establish
prudent general allowances for loan losses for assets classified "substandard"
or "doubtful." For the portion of assets classified as "loss", an institution
is required to either establish specific allowances of 100% of the amount
classified or charge off such amount. In addition, the Office of Thrift
Supervision ("OTS") may require the establishment of a general allowance for
losses based on assets classified as "substandard" and "doubtful" or based on
the general quality of the asset portfolio of an association. Assets which do
not currently expose the savings association to sufficient risk to warrant
classification in one of the aforementioned categories but possess potential
weaknesses are designated "special mention" by management.
At March 31, 2002, approximately $2.6 million of the Bank's assets were
classified "substandard." The Bank had no loans classified as "special
mention," "doubtful" or "loss " at March 31, 2002. As of March 31, 2002,
there were loans totaling $622,000 which were troubled debt restructurings
within the meaning of Statement of Financial Accounting Standard ("SFAS") No.
15 of which none were classified substandard. The Bank's policy is to
classify all troubled debt restructurings as substandard. The Bank's
classification of assets is consistent with OTS regulatory classifications.
Non-performing Assets. Loans are placed on non-accrual status when the
collection of principal and/or interest becomes doubtful. In addition, all
loans are placed on non-accrual status when the loan becomes 90 days or more
contractually delinquent. All consumer loans more than 90 days delinquent are
charged against the consumer loan allowance for loan losses unless there is
adequate collateral which is in the process of being repossessed or foreclosed
on. The Bank has had no troubled debt restructurings which involve forgiving
a portion of interest or principal on any loans or making loans at a rate
materially less than that of market rates. Other loans of concern are those
loans (not delinquent more than 60 days) that management has determined need
to be closely monitored as the potential exists for increased risk on these
loans in the future. Nonperforming loans are reviewed monthly on a loan by
loan basis. Specific reserves associated with these loans will vary based on
estimates of recovery for each loan.
10
The following table sets forth the amounts and categories of risk
elements in the Bank's loan portfolio.
March 31,
--------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in Thousands)
Loans Delinquent 60 to 89
Days:
Residential............. $ -- $ -- $ 163 $ 226 $ 79
Consumer................ 370 320 95 64 113
Commercial business and
real estate............ 144 274 43 18 195
------ ------ ------ ------ ------
Total................. 514 $ 594 $ 301 $ 308 $ 387
====== ====== ====== ====== ======
Total as a percentage
of total assets...... 0.14% 0.18% 0.10% 0.12% 0.18%
Non-Accruing Loans
Delinquent
90 Days or More:
Residential............. 761 $ -- $ 335 $ 362 $ 570
Consumer................ 350 172 386 307 432
Commercial business and
real estate............ 279 11 169 513 1,032
------ ------ ------ ------ ------
Total................. $1,390 $ 183 $ 890 $1,182 $2,034
====== ====== ====== ====== ======
Total as a percentage
of total assets...... 0.37% 0.06% 0.29% 0.46% 0.94%
Troubled debt
restructurings.......... $ 622 $ 587 $ 784 $ 706(1) $ 763(2)
Repossessed assets....... $ 98 $ 130 $ 332 $ 154 $ 165
Allowance for loan
losses.................. $3,689 $2,784 $2,121 $1,715 $1,512
- ----------------
(1) $155,000 of troubled debt restructurings are included in non-accruing
loans.
(2) $86,000 of troubled debt restructurings are included in non-accruing
loans.
For the fiscal year ended March 31, 2002, the interest income which would
have been recognized with respect to non-accruing loans, had such loans been
current in accordance with their original terms and with respect to troubled
debt restructurings, had such loans been current in accordance with their
original terms, totaled $58,000, compared to $13,000 for the year ended March
31, 2001.
At March 31, 2002, non-accrual loans totaled $1.4 million compared to
$183,000 and $890,000 at March 31, 2001 and 2000, respectively. Until March
31, 1998, the Bank had classified all loans as non-accrual when they were 60
days or more delinquent. Beginning March 31, 1998, the Bank has classified
all loans as non-accrual when they are 90 days or more delinquent as is more
common industry practice. Included in non-accruing loans at March 31, 2002
were four residential real estate loans totaling $761,000 and nine commercial
loans totaling $279,000 and 18 consumer loans totaling $350,000. Of the 18
consumer loans on non-accrual status at fiscal year end, no loan exceeded
$75,000. Of the nine commercial loans on non-accrual status at fiscal year
end, no loan exceeded $100,000.
The Bank had four loans totaling $622,000 at fiscal year end which were
troubled debt restructurings compared to three loans of $587,000 at March 31,
2001. None of the four troubled debt restructurings were 30 days or more
delinquent or on a non-accrual status. The four troubled debt restructurings
were a consumer loan of $60,000 secured by a residential dwelling, a $16,000
commercial loan secured by a second mortgage on a residence, a $57,000
commercial loan secured by two rental properties, and a $489,000 commercial
loan secured by commercial real estate.
At March 31, 2002, repossessed assets had an outstanding carrying value
of $98,000 and consisted of one parcel of land and three vehicles.
11
Provision for Losses on Loans and Repossessed Assets. Security Federal
recognizes that credit losses will be experienced during the course of making
loans and that the risk of loss will vary with, among other things, the type
of loan being made, the creditworthiness of the borrower over the term of the
loan and, in the case of a secured loan, the quality of the underlying
security for the loan.
The Bank seeks to establish and maintain sufficient reserves for
estimated losses on specifically identified loans and real estate where such
losses can be estimated. Additionally, general reserves for estimated
possible losses are established on specified portions of the Bank's portfolio
such as consumer loans and higher risk residential construction mortgage loans
based on management's estimate of the potential loss for loans which normally
can be classified as higher risk. Specific and general reserves are based on,
among other criteria (1) the risk characteristics on the loan portfolio, (2)
current economic conditions on a local as well as a statewide basis, (3)
actual losses experienced historically, and (4) the level of reserves for
possible losses in the future. Additionally, a reserve is maintained for
uncollected interest on loans 90 days or more past due.
At March 31, 2002, total reserves relating to loans were $3.7 million.
In determining the adequacy of the reserve for loan losses, management reviews
past experience of loan charge-offs, the level of past due and non-accrual
loans, the size and mix of the portfolio, general economic conditions in the
market area, and individual loans to identify potential credit problems.
Commercial business, commercial real estate and consumer loans have increased
to $147.2 million, or 59.0% of the Bank's total loan portfolio at March 31,
2002, and it is anticipated there will be a continued emphasis on this type of
credit. Although commercial business and consumer loans carry a higher level
of credit risk than conventional residential mortgage loans, the level of
reserves reflects management's continuing evaluation of this risk based on
upon the Bank's past loss experience. At fiscal year end, the Bank's ratio of
loans delinquent more than 60 days to total assets was 0.51%. These
delinquent loans are considered to be well secured and are in the process of
collection. Management believes that reserves for loan losses are at a level
adequate to provide for inherent loan losses. Although management believes
that it has considered all relevant factors in its estimation of future
losses, future adjustments to reserves may be necessary if conditions change
substantially from the assumptions used in making the original estimations.
Regulators will from time to time evaluate the allowance for loan losses which
are subject to adjustments based upon the information available to the
regulators at the time of their examinations.
Management believes the Bank has no undue concentration of loans in any
one particular industry. At March 31, 2002, the Bank had no allowance for
losses on real estate owned.
12
The following table sets forth an analysis of the Bank's allowance for
loan losses.
At March 31,
--------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of
year..................... $2,784 $2,121 $1,715 $1,512 $1,768
Provision charged to
operations............... 1,525 925 750 600 780
Charge-offs:
Residential real estate.. 5 4 -- 2 --
Commercial business and
commercial real estate.. 229 86 114 193 660
Consumer................. 584 240 269 235 633
------ ------ ------ ------ ------
Total charge-offs...... 818 330 383 430 1,293
------ ------ ------ ------ ------
Recoveries:
Residential real estate.. 6 17 -- -- --
Commercial business...... 41 4 1 2 56
Consumer................. 151 47 38 31 201
------ ------ ------ ------ ------
Total recoveries....... 198 68 39 33 257
------ ------ ------ ------ ------
Balance at end of year.... $3,689 $2,784 $2,121 $1,715 $1,512
====== ====== ====== ====== ======
Ratio of net charge-offs
during the year to
average loans outstanding
during the year.......... 0.26% 0.12% 0.20% 0.28% 0.72%
====== ====== ====== ====== ======
13
The distribution of the Bank's allowance for loan losses at the dates indicated is summarized in the
following table. The entire allowance is available to absorb losses from all loan categories.
At March 31,
----------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ---------------- ----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Residential....... $ 435 41.0% $ 374 50.6% $ 258 48.9% $ 198 41.6% $ 140 33.4%
Consumer.......... 1,405 20.0 1,205 18.9 870 20.5 647 25.9 551 32.6
Commercial business
and commercial
real estate...... 1,849 39.0 1,205 30.5 993 30.6 870 32.5 821 34.0
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total........... $3,689 100.0% $2,784 100.0% $2,121 100.0% $1,715 100.0% $1,512 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
14
Service Corporation
- -------------------
As a federally chartered savings bank, Security Federal is permitted by
OTS regulations to invest up to 3% of its assets in the stock of service
corporations. Provided that any investment in excess of 2% of its assets must
be primarily for community, inner-city or community development purposes. At
March 31, 2002, Security Federal's net investment in its service corporations
(including loans to service corporations) totaled $414,000. In addition to
investments in service corporations, federal institutions are permitted to
invest an unlimited amount in operating subsidiaries engaged solely in
activities which a federal savings bank may engage in directly.
Security Federal Insurance ("SFINS"), Security Federal Investments
("SFINV") and Security Federal Trust ("SFT"). SFINS, SFINV AND SFT, wholly
owned subsidiaries of the Bank, were formed during fiscal 2002 and began
operating during the December 2001 quarter. SFINS is an insurance agency
offering business, health, home and life insurance. SFINS had a net loss of
$125,000 for the fiscal year ended March 31, 2002 and total assets of $7,100
at that date. SFINV engages primarily in investment brokerage services.
SFINV had a net loss of $149,000 for the fiscal year ended March 31, 2002 and
total assets of $90,000 at that date. SFT offers trust, financial planning and
financial management services. SFT had a net loss of $99,000 for the fiscal
year ended March 31, 2002 and total assets of $74,000 at that date. The
operations of SFINS, SFINV and SFT are included in the Company's Consolidated
Financial Statements.
Security Financial Services Corporation ("SFSC"). SFSC was incorporated
in 1975 as a wholly owned subsidiary of the Bank. Its primary activity was
investment brokerage services. SFSC is currently inactive.
Real Estate Partnership. The Company has developed real estate through
two real estate partnerships which it purchased from SFSC at market value in
December 1995. Each project was designed primarily to develop and sell
residential lots in and around the Bank's primary lending area. One project
was completed during fiscal 1998 and the other project was completed during
fiscal 2001. The Company had no investment in the remaining project at March
31, 2002. The Company has no current plans for additional real estate
ventures.
Investment Activities
- ---------------------
Investment securities. The Bank has authority to invest in various types
of liquid assets, including U.S. Treasury obligations and securities of
various federal agencies, certificates of deposit at insured institutions,
bankers' acceptances and federal funds.
The Bank may also invest a portion of its assets in certain commercial
paper and corporate debt securities. The Bank is also authorized to invest in
mutual funds whose assets conform to the investments that a federal thrift
institution is authorized to make directly. There are various restrictions on
the foregoing investments. For example, the commercial paper must be
appropriately rated by at least two nationally recognized investment rating
services and the corporate debt securities must be appropriately rated by at
least one such service. In addition, the average maturity of an institution's
portfolio of corporate debt securities may not, at any one time, exceed six
years, and the commercial paper must mature within nine months of issuance.
Moreover, an institution's total investment in the commercial paper and
corporate debt securities of any one issuer may not exceed 1% of the
institution's assets except that an institution may invest 5% of its assets in
the shares of any appropriate mutual fund. See "Regulation -- Federal
Regulation of Savings Associations."
As a member of the Federal Home Loan Bank ("FHLB") System, Security
Federal must maintain minimum levels of investments that are liquid assets as
defined in Federal regulations. See "Regulation -- Federal Regulation of
Savings Associations -- Federal Home Loan Bank System." Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans.
15
Historically, the Bank has maintained its liquid assets above the minimum
requirements imposed by the OTS regulations and at a level believed adequate
to meet requirements of normal daily activities, repayment of maturing debt
and potential deposit outflows. Cash flow projections are regularly reviewed
and updated to assure that adequate liquidity is provided. As of March 31,
2002, the Bank's liquidity ratio (liquid assets as a percentage of net
withdrawable savings and current borrowings) was approximately 29%.
The following table sets forth the composition of the Company's portfolio
of securities and other investments, not including mortgage-backed securities.
At March 31,
----------------------------
2002 2001 2000
---- ---- ----
(In Thousands)
Interest bearing deposit at FHLB......... $ 5,205 $ 5,586 $ 1,069
------- ------- -------
Total.................................. $ 5,205 $ 5,586 $ 1,069
======= ======= =======
Investment Securities:
Available for sale:
GNMA bond.............................. -- $ 1,975 $ --
U.S. Treasury obligations.............. -- -- 1,001
FHLB securities........................ 50,829 26,253 41,484
Federal Farm Credit Bank securities.... 8,526 5,022 9,716
FHLMC bonds............................ 2,002 2,039 1,965
------- ------- -------
Total securities available for sale... 61,357 35,289 54,166
------- ------- -------
Held to Maturity:
FHLB securities........................ -- -- --
FNMA securities........................ 163 266 266
FHLMC bonds............................ -- -- --
------- ------- -------
Total securities held to maturity..... 163 266 266
------- ------- -------
Total securities(1)...................... 61,520 35,555 54,432
FHLB stock............................... 2,669 3,431 2,606
------- ------- -------
Total securities and FHLB stock (1)...... $64,189 $38,986 $57,038
======= ======= =======
- -------------------
(1) Does not include mortgage-backed securities.
At March 31, 2002, the Company did not have any investment securities
(exclusive of obligations of the U.S. Government and federal agencies) issued
by any one entity with a total book value in excess of 10% of stockholders'
equity.
16
The following table sets forth the maturities or repricing of investment securities and FHLB stock at
March 31, 2002, and the weighted average yields of such securities and FHLB stock (calculated on the basis
of the cost and effective yields weighted for the scheduled maturity of each security). Callable securities
are shown at their likely call dates based on current interest rates.
Maturing or Repricing
---------------------------------------------------------------------------
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
--------------- ----------------- ---------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
U.S. Government and other
agency obligations......... 17,781 4.57% 44,366 4.62% -- -- -- --
FHLB stock (1).............. -- -- 2,669 5.75 -- -- -- -
------ ---- ------ ---- --- --- --- ---
Total..................... 17,781 4.57% 47,035 4.69% -- -- -- -
====== ==== ====== ==== === === === ===
(1) FHLB stock has no stated maturity date.
For information regarding the market value of the Bank's securities
portfolios, see Notes 2 and 3 of Notes to Consolidated Financial Statements
contained in the Annual Report.
The Bank has sold securities under an agreement to repurchase when it is
a cost effective method to acquire funds. The Bank did not engage in such
transactions during fiscal 2002. See "-- Borrowings."
Mortgage-backed securities. Security Federal has a portfolio of
mortgage-backed securities which it holds in both an available for sale and a
held to maturity portfolio. Such mortgage-backed securities can serve as
collateral for borrowings and, through repayments, as a source of liquidity.
Under the Bank's risk-based capital requirement, mortgage-backed securities
have a risk weight of 20% (or 0% in the case of Government National Mortgage
Association ("GNMA") securities) in contrast to the 50% risk weight carried by
residential loans. See "Regulation."
The Bank had $14.5 million, $10.2 million, $10.7 million and $9.4 million
of mortgage-backed securities issued by FHLMC at March 31, 2002, 2001 and
2000, respectively. The Bank had $28.2 million in mortgage-backed securities
issued by FNMA and $14.7 million issued by GNMA at March 31, 2002, compared to
$12.0 million in mortgage-backed securities issued by FNMA and $16.6 million
issued by GNMA at March 31, 2001, and $14.1 million in mortgage-backed
securities issued by FNMA and $12.2 million issued by GNMA at March 31, 2000.
At March 31,
--------------------------------
2002 2001 2000
---- ---- ----
(Dollars in Thousands)
Available for Sale:
FHLMC............................ $13,099 $ 8,195 $ 8,304
FNMA............................. 28,239 12,031 14,120
GNMA............................. 14,667 16,596 12,231
------- ------- -------
Total............................ $56,005 $36,822 $34,655
======= ======= =======
17
The following table sets forth the composition of the mortgage-backed
securities held to maturity portfolio at the dates indicated.
At March 31,
----------------------------------------
2002 2001 2000
---------- ---------- ----------
Book Value Book Value Book Value
---------- ---------- ----------
(Dollars in Thousands)
Held to Maturity:
FHLMC............................ $1,373 $2,028 $2,444
====== ====== ======
At March 31, 2002, the Company did not have any mortgage-backed
securities (exclusive of obligations of agencies of the U.S. Government)
issued by any one entity with a total book value in excess of 10% of
stockholders equity.
For information regarding the market values of Security Federal's
mortgage-backed securities portfolio, see Notes 2 and 3 of the Notes to
Consolidated Financial Statements contained in the Annual Report.
The following table sets forth the maturities or repricings and the weighted average yields of the
mortgage-backed securities at March 31, 2002. Not considered in the preparation of the table below is the
effect of prepayments. The table is prepared using amortized cost.
Maturing or Repricing March 31, 2002
-----------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over Balance
1 Year Years Years Ten Years Outstanding
-------------- -------------- -------------- -------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
FNMA................... $11,719 5.50% $ 8,795 5.95% $ 7,530 5.53% $ -- -- $28,044 5.65%
FHLMC.................. 262 6.89 10,830 5.91 3,364 5.90 -- -- 14,456 5.93
GNMA................... 7,570 5.54 3,783 6.20 3,194 5.11 -- -- 14,547 5.62
------- ---- ------- ---- ------- ---- ---- --- ------- ----
Total.................. $19,551 5.53% $23,408 5.97% $14,088 5.52% $ -- --% $57,047 5.71%
======= ==== ======= ==== ======= ==== ==== === ======= ====
Sources of Funds
- ----------------
Deposit accounts have traditionally been a principal source of the Bank's
funds for use in lending and for other general business purposes. In addition
to deposits, the Bank derives funds from loan repayments, cash flows generated
from operations (including interest credited to deposit accounts), FHLB of
Atlanta advances, the sale of securities under agreements to repurchase, and
loan sales. Scheduled loan payments are a relatively stable source of funds
while deposit inflows and outflows and the related cost of such funds have
varied widely. FHLB of Atlanta advances and the sale of securities under
agreements to repurchase may be used on a short-term basis to compensate for
seasonal reductions in deposits or deposit inflows at less than projected
levels and may be used on a longer term basis in support of expanded lending
activities. The availability of funds from loan sales is influenced by
general interest rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the Annual Report.
In addition, the Bank originates loans for other financial institutions
and FHLMC with their prior commitment to purchase the loan at a set price.
The amount of these loans originated and sold depends primarily on loan
demand. During fiscal 2002, the Bank originated $51.4 million of such loans
for other financial institutions. See "-- Loan Originations, Purchases and
Sales."
Deposits. The Bank attracts both short-term and long-term deposits from
the general public by offering a wide assortment of account types and rates.
In recent years, market conditions have required the Bank to rely increasingly
on short-term accounts and other deposit alternatives that are more responsive
to market interest rates than the passbook accounts and regulated fixed
interest rate, fixed-term certificates that were the Bank's primary source of
deposits before
18
1978. The Bank offers regular passbook accounts, checking accounts, various
money market accounts, fixed interest rate certificates with varying
maturities, negotiated rate $100,000 or above jumbo certificates of deposit
("Jumbo CDs") and individual retirement accounts.
At March 31, 2002, the Bank had no brokered deposits. In addition, the
Bank believes that, based on its experience over the past several years, its
passbook and transaction accounts are stable sources of deposits.
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs for the periods indicated.
At March 31,
----------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Interest Rate Range:
- -------------------
Passbook accounts
0 % - 2.50%......... $ 15,107 4.9% $ 12,911 5.0% $ 13,203 5.8%
NOW and other
transaction accounts
0% - 4.89%.......... 71,907 23.2 61,453 23.9 58,305 25.5
Money market funds
2.20% - 5.13%....... 74,075 24.0 49,856 19.4 51,636 22.5
-------- ----- -------- ----- -------- -----
Total non-
certificates..... $161,089 52.1% $124,220 48.3% $123,144 53.8%
======== ===== ======== ===== ======== =====
Certificates:
- ------------
0.00-4.99%........... $127,068 41.1 $ 10,021 3.9 $ 15,575 6.8
5.00-6.99%........... 19,982 6.5 112,040 43.5 90,104 39.4
7.00-8.99%........... 899 0.3 11,129 4.3 -- -
-------- ----- -------- ----- -------- -----
Total
certificates..... 147,949 47.9 $133,190 51.7% $105,679 46.2%
-------- ----- -------- ----- -------- -----
Total deposits.... $309,038 100.0% $257,410 100.0% $228,823 100.0%
======== ===== ======== ===== ======== =====
The Bank relies to a limited extent upon locally obtained Jumbo CDs to
maintain its deposit levels. At March 31, 2002, Jumbo CDs constituted 14.7%
of the Bank's total deposits. Security Federal has not relied heavily on
Jumbo CDs to manage interest rate sensitivity.
The following table sets forth the deposit flows at the Bank during the
periods indicated.
Years Ended March 31,
----------------------------------------
2002 2001 2000
---- ---- ----
(Dollars in Thousands)
Opening balance........... $ 257,410 $ 228,823 $ 216,533
Deposits.................. 1,116,106 1,058,611 1,015,561
Withdrawals............... (1,074,461) (1,039,969) (1,011,879)
Interest credited......... 9,983 9,945 8,608
----------- ----------- -----------
Ending balance............ 309,038 257,410 228,823
----------- ----------- -----------
Net increase (decrease)... $ 51,628 $ 28,587 $ 12,290
=========== =========== ===========
Percent increase
(decrease)............... 20.1% 12.5% 5.7%
==== ==== ===
19
The following table shows rate and maturity information for the Bank's certificates of deposit as of
March 31, 2002.
Less than 2.00- 3.00- 4.00- 5.00- 6.00- 7.00-
2.00% 2.99% 3.99% 4.99% 5.99% 6.99% 7.99% Total
--------- ------ ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Certificate accounts
maturing in quarter
ending:
June 30, 2002........... 2,293 25,291 4,548 7,470 4,079 3,366 344 47,391
September 30, 2002...... 1,607 15,419 8,609 4,428 3,047 2,406 57 35,573
December 31, 2002....... 22 9,192 10,912 2,455 772 723 408 24,484
March 31, 2003.......... -- 5,582 9,748 1,527 482 1,124 64 18,527
June 30, 2003........... -- 1,940 5,711 306 295 820 26 9,098
September 30, 2003...... -- 2,499 410 894 94 174 -- 4,071
December 31, 2003....... -- 264 674 138 64 17 -- 1,157
March 31, 2004.......... -- 206 417 195 22 288 -- 1,128
June 30, 2004........... -- 29 86 102 100 -- -- 317
September 30, 2004...... -- -- 89 660 77 -- -- 826
December 31, 2004....... -- -- 140 139 35 -- -- 314
Thereafter -- -- 104 2,963 1,888 108 -- 5,063
----- ------ ------ ------ ------ ----- --- -------
Total................. 3,922 60,422 41,448 21,277 10,955 9,026 899 147,949
===== ====== ====== ====== ====== ===== === =======
The following table indicates the amount of the Bank's deposits of
$100,000 or more by time remaining until maturity at March 31, 2002.
Passbook, NOW and
Certificates of Deposit Money Market Accounts
----------------------- ---------------------
(Dollars in Thousands)
Maturity Period
- ---------------
Three months or less.... $18,932 $58,940
Over three through six
months................. 11,211 --
Over six through twelve
months................. 9,895 --
Over twelve months...... 5,447 --
------- -------
Total................. $45,485 $58,940
======= =======
Borrowings
- ----------
As a member of the FHLB of Atlanta, the Bank is required to own capital
stock in the FHLB of Atlanta and is authorized to apply for advances from the
FHLB of Atlanta. Each FHLB credit program has its own interest rate, which
may be fixed or variable, and range of maturities. The FHLB of Atlanta may
prescribe the acceptable uses to which these advances may be put, as well as
limitations on the size of the advances and repayment provisions. See Note 9
of Notes to Consolidated Financial Statements contained in the Annual Report
for disclosure regarding the maturities and rate structure of the Bank's FHLB
advances. Federal law contains certain collateral requirements for FHLB
advances. See "Regulation -- Federal Regulation of Savings Associations --
Federal Home Loan Bank System."
Occasionally, the Bank has used the sale of securities under agreements
to repurchase as a source of funds. The securities sold pursuant to these
agreements consist of mortgage loans which have been convened to FHLMC
participation certificates. The Bank has sold securities under agreements to
repurchase to both FHLMC and Wachovia
20
Bank and Trust Company. These funds are used whenever its costs are favorable
compared to alternative sources of funds. At March 31, 2002, the Bank had no
wholesale repurchase agreements outstanding. At March 31, 2002, the Bank had
$6.2 million in retail repurchase agreements with an average rate of 1.73%.
These repurchase agreements are included in "Other Borrowings" in the
consolidated financial statements.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances at the dates indicated.
Years Ended March 31,
-----------------------------------
2002 2001 2000
---- ---- ----
(Dollars in Thousands)
Maximum Balance:
FHLB advances................. $43,058 $68,620 $50,611
Average Balance:
FHLB advances................. $35,351 $58,555 $31,909
The following table sets forth information as to the Bank's borrowings
and the weighted average interest rates thereon at the dates indicated.
At Ended March 31,
-----------------------------------
2002 2001 2000
---- ---- ----
(Dollars in Thousands)
Balance:
FHLB advances................. $33,108 $42,704 $50,611
Weighted Average Interest Rate:
At Fiscal Year End:
FHLB advances................ 6.09% 5.99% 5.99%
During Fiscal Year:
FHLB advances................ 5.98% 6.42% 5.65%
Competition
- -----------
The Bank serves the counties of Aiken, Bamberg, and Lexington, South
Carolina through its eleven branch offices located in Aiken, Denmark, North
Augusta, Graniteville, Langley, Clearwater, Wagener, and West Columbia, South
Carolina. On October 21, 1993 the Bank expanded its market area through the
acquisition of four branch offices of NationsBank of South Carolina, N.A. The
branches are located in Langley, Graniteville, Clearwater and Wagener, Aiken
County, South Carolina. In December 2000, the Bank opened its West Columbia
office.
Security Federal faces strong competition both in originating loans and
in attracting deposits. Competition in originating loans comes primarily from
other thrift institutions, commercial banks, mortgage bankers and credit
unions who also make loans in the Bank's market area. The Bank competes for
loans principally on the basis of the interest rates and loan fees it charges,
the types of loans it makes and the quality of services it provides to
borrowers.
The Bank faces substantial competition in attracting deposits from other
thrift institutions, commercial banks, money market and mutual funds, credit
unions and other investment vehicles. The ability of the Bank to attract and
retain deposits depends on its ability to provide an investment opportunity
that satisfies the requirements of investors as to rate of return, liquidity,
risk and other factors. The Bank attracts a significant amount of deposits
through its branch offices primarily from the communities in which those
branch offices are located. Therefore, competition for those deposits is
principally from other thrift institutions and commercial banks located in the
same communities. The Bank competes for these deposits by offering a variety
of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges
at each.
21
The authority to offer money market deposits, and expanded lending and
other powers authorized for thrift institutions by federal law, have resulted
in increased competition for both deposits and loans between thrift
institutions and other financial institutions such as commercial banks and
credit unions.
REGULATION
General
- -------
The Bank is subject to extensive regulation, examination and supervision
by the OTS as its chartering agency, and the FDIC, as the insurer of its
deposits. The activities of federal savings institutions are governed by the
Home Owners' Loan Act ("HOLA") and, in certain respects, the Federal Deposit
Insurance Act ("FDIA"), and the regulations issued by the OTS and the FDIC to
implement these statutes. These laws and regulations delineate the nature and
extent of the activities in which federal savings associations may engage.
Lending activities and other investments must comply with various statutory
and regulatory capital requirements. In addition, the Bank's relationship
with its depositors and borrowers is also regulated to a great extent,
especially in such matters as the ownership of deposit accounts and the form
and content of the Bank's mortgage documents. The Bank must file reports with
the OTS and the FDIC concerning its activities and financial condition in
addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS to review the Bank's
compliance with various regulatory requirements. The regulatory structure
also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies,
including policies with respect to the classification of assets and the
establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or Congress, could have
a material adverse impact on the Company, the Bank and their operations.
Federal Regulation of Savings Associations
- ------------------------------------------
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS has extensive authority over the operations of savings
associations. Among other functions, the OTS issues and enforces regulations
affecting federally insured savings associations and regularly examines these
institutions.
All savings associations are required to pay assessments to the OTS to
fund the agency's operations. The general assessments, paid on a semi-annual
basis, are determined based on the savings association's total assets,
including consolidated subsidiaries. The Bank's OTS assessment for the fiscal
year ended March 31, 2002 was $79,000.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner.
The Bank, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount equal to the
greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or (ii) 1/20 of its advances (i.e., borrowings)
from the FHLB of Atlanta. The Bank is in compliance with this requirement
with an investment in FHLB of Atlanta stock of $2.7 million at March 31, 2002.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB of Atlanta.
22
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These contributions
have adversely affected the level of FHLB dividends paid in the past and could
do so in the future. These contributions also could have an adverse effect on
the value of FHLB stock in the future.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. The FDIC maintains two separate insurance
funds: the Bank Insurance Fund ("BIF") and the Savings Association Insurance
Fund ("SAIF"). The Bank's deposit accounts are insured by the FDIC under the
SAIF to the maximum extent permitted by law. As insurer of the Bank's
deposits, the FDIC has examination, supervisory and enforcement authority over
all savings associations.
As insurer, the FDIC imposes deposit insurance premiums and is authorized
to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging
in any activity the FDIC determines by regulation or order to pose a serious
risk to the SAIF or the BIF. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified
as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of
Tier 1, or core capital, to risk-weighted assets ("Tier 1 risk-based capital")
of at least 6% and a risk-based capital ratio of at least 10%) and considered
healthy pay the lowest premium while institutions that are less than
adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less
than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern pay the highest premium. Risk classification
of all insured institutions is made by the FDIC for each semi-annual
assessment period.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than
the designated reserve ratio of 1.25% of SAIF insured deposits. In setting
these increased assessments, the FDIC must seek to restore the reserve ratio
to that designated reserve level, or such higher reserve ratio as established
by the FDIC. The FDIC may also impose special assessments on SAIF members to
repay amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
The premium schedule for BIF and SAIF insured institutions ranged from 0
to 27 basis points. However, SAIF insured institutions and BIF insured
institutions are required to pay a Financing Corporation assessment in order
to fund the interest on bonds issued to resolve thrift failures in the 1980s.
This amount is currently equal to about 1.88 points for each $100 in domestic
deposits for SAIF and BIF insured institutions. These assessments, which may
be revised based upon the level of BIF and SAIF deposits, will continue until
the bonds mature in 2017 through 2019.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or
the OTS. Management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Liquidity Requirements. Federal regulations require the Bank to maintain
sufficient liquidity to ensure its safe and sound operation. Liquid assets
include cash, cash equivalents consisting of short-term interest-earning
deposits, certain other time deposits, and other obligations generally having
remaining maturities of less than five years. Liquidity management is both a
daily and long-term responsibility of management. We adjust liquid assets
based upon management's assessment of (i) expected loan demand, (ii) expected
deposit flows, (iii) yields available on
23
interest-bearing deposits, and (iv) the objectives of its asset/liability
management program. The Bank has never been subject to monetary penalties for
failure to meet its liquidity requirements.
Prompt Corrective Action. The OTS is required to take certain
supervisory actions against undercapitalized savings associations, the
severity of which depends upon the institution's degree of
undercapitalization. Generally, an institution that has a ratio of total
capital to risk-weighted assets of less than 8%, a ratio of Tier I (core)
capital to risk-weighted assets of less than 4%, or a ratio of core capital to
total assets of less than 4% (3% or less for institutions with the highest
examination rating) is considered to be "undercapitalized." An institution
that has a total risk-based capital ratio less than 6%, a Tier I capital ratio
of less than 3% or a leverage ratio that is less than 3% is considered to be
"significantly undercapitalized" and an institution that has a tangible
capital to assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the OTS is required to
appoint a receiver or conservator for a savings institution that is
"critically undercapitalized."
At March 31, 2002, the Bank was categorized as "well capitalized" under
the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits ("Guidelines"). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that the
Bank fails to meet any standard prescribed by the Guidelines, the OTS may
require the Bank to submit to the OTS an acceptable plan to achieve compliance
with the standard. Management is aware of no conditions relating to these
safety and soundness standards which would require submission of a plan of
compliance.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. As an alternative, the savings
association may maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code ("Code"). Under either test,
such assets primarily consist of residential housing related loans and
investments. At March 31, 2002, the Bank met the test and its QTL percentage
was 81%.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and
is subject to national bank limits for payment of dividends. If such
association has not requalified or converted to a national bank within three
years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a
holding company, then within one year after the failure, the holding company
must register as a bank holding company and become subject to all restrictions
on bank holding companies. See "-- Savings and Loan Holding Company
Regulation."
Capital Requirements. Federally insured savings associations, such as
the Bank, are required to maintain a minimum level of regulatory capital. The
OTS has established capital standards, including a tangible capital
requirement, a leverage ratio (or core capital) requirement and a risk-based
capital requirement applicable to such savings associations.
24
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). At March 31, 2002, the Bank
had tangible capital of $25.5 million, or 6.8% of adjusted total assets, which
is approximately $19.8 million above the minimum requirement of 1.5% of
adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 4% of
adjusted total assets, depending on an institution's supervisory rating. Core
capital generally consists of tangible capital. At March 31, 2002, the Bank
had core capital equal to $25.6 million, or 6.8% of adjusted total assets,
which is $10.6 million above the minimum leverage ratio requirement of 4% as
in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists
of core capital, as defined above, and supplementary capital. Supplementary
capital consists of certain permanent and maturing capital instruments that do
not qualify as core capital and general valuation loan and lease loss
allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary
capital may be used to satisfy the risk-based requirement only to the extent
of core capital.
In determining the amount of risk-weighted assets, all assets, including
certain off-balance sheet items, are multiplied by a risk weight, ranging from
0% to 100%, based on the risk inherent in the type of asset. For example, the
OTS has assigned a risk weight of 50% for prudently underwritten permanent
one- to- four family first lien mortgage loans not more than 90 days
delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by FNMA or
FHLMC.
On March 31, 2002, the Bank had total risk-based capital of approximately
$28.3 million, including $25.6 million in core capital and $2.7 million in
qualifying supplementary capital, and risk-weighted assets of $230.3 million,
or total capital of 12.3% of risk-weighted assets. This amount was $9.9
million above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to
meet their capital requirements. The OTS is generally required to take action
to restrict the activities of an "undercapitalized association" (generally
defined to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized
associations.
The OTS is also generally authorized to reclassify an association into a
lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an
unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Company or the Bank may have a substantial adverse effect on their operations
and profitability.
Limitations on Capital Distributions. The OTS imposes various
restrictions on savings associations with respect to their ability to make
distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account.
Generally, savings institutions, such as the Bank, that before and after
the proposed distribution remain well-capitalized, may make capital
distributions during any calendar year equal to the greater of 100% of net
income for the year-to-date plus retained net income for the two preceding
years. However, an institution deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
The Bank may pay dividends in accordance with this general authority.
25
Savings institutions proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
institutions that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain
OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
See "-- Capital Requirements."
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the national bank limit on loans to one borrower. A
savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At March
31, 2002, the Bank's limit on loans to one borrower was $4.3 million. At
March 31, 2002, the Bank's largest single loan to one borrower was $4.0
million, which was performing according to its original terms.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide
the information each agency may, by regulation, require. Savings associations
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the
Bank include the Company and any company which is under common control with
the Bank. In addition, a savings association may not lend to any affiliate
engaged in activities not permissible for a bank holding company or acquire
the securities of most affiliates. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions
on loans to such persons and their related interests. Among other things,
such loans must be made on terms substantially the same as for loans to
unaffiliated individuals.
Community Reinvestment Act. Under the federal Community Reinvestment Act
("CRA"), all federally-insured financial institutions have a continuing and
affirmative obligation consistent with safe and sound operations to help meet
all the credit needs of their delineated communities. The CRA does not
establish specific lending requirements or programs nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to meet all the credit needs of its delineated
community. The CRA requires the federal banking agencies, in connection with
regulatory examinations, to assess an institution's record of meeting the
credit needs of its delineated community and to take such record into account
in evaluating regulatory applications to establish a new branch office that
will accept deposits, relocate an existing office, or merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally
regulated financial institution, among others. The CRA requires public
disclosure of an institution's CRA rating. The Bank received an "outstanding"
rating as a result of its latest evaluation.
26
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured institution. Formal enforcement action may range from the issuance
of a capital directive or cease and desist order to removal of officers or
directors, receivership, conservatorship or termination of deposit
insurance. Civil penalties cover a wide range of violations and can amount to
$25,000 per day, or $1.1 million per day in especially egregious cases. Under
the FDIA, the FDIC has the authority to recommend to the Director of the OTS
that enforcement action be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority
to take such action under certain circumstances. Federal law also establishes
criminal penalties for certain violations.
Savings and Loan Holding Company Regulation
- -------------------------------------------
The Company is a unitary savings and loan holding company subject to
regulatory oversight of the OTS. Accordingly, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over
the Company and its non-savings association subsidiaries which also permits
the OTS to restrict or prohibit activities that are determined to present a
serious risk to the subsidiary savings association.
New Legislation
- ---------------
Gramm-Leach-Bliley Financial Services Modernization Act. On November 12,
1999, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 was
signed into law. The purpose of this legislation was to modernize the
financial services industry by establishing a comprehensive framework to
permit affiliations among commercial banks, insurance companies, securities
firms and other financial service providers. Generally, the Act:
- repealed the historical restrictions and eliminated many federal and
state law barriers to affiliations among banks, securities firms,
insurance companies and other financial service providers;
- provided a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding
companies;
- broadened the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies and their financial
subsidiaries;
- provided an enhanced framework for protecting the privacy of
consumer information;
- adopted a number of provisions related to the capitalization,
membership, corporate governance and other measures designed to
modernize the FHLB system;
- modified the laws governing the implementation of the CRA; and
- addressed a variety of other legal and regulatory issues affecting
day-to-day operations and long-term activities of financial
institutions.
The USA Patriot Act. In response to the events of September 11th,
President George W. Bush signed into law the Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001, or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act
gives the federal government new powers to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers, increased
information sharing, and broadened anti-money laundering requirements. By way
of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes
measures intended to encourage information sharing among bank
27
regulatory agencies and law enforcement bodies. Further, certain provisions of
Title III impose affirmative obligations on a broad range of financial
institutions, including banks, thrifts, brokers, dealers, credit unions, money
transfer agents and parties registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
- Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i)
internal policies, procedures, and controls, (ii) specific
designation of an anti-money laundering compliance officer, (iii)
ongoing employee training programs, and (iv) an independent audit
function to test the anti-money laundering program.
- Section 326 of the Act authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue
regulations by October 26, 2002 that provide for minimum standards
with respect to customer identification at the time new accounts are
opened.
- Section 312 of the Act requires financial institutions that
establish, maintain, administer, or manage private banking accounts
or correspondent accounts in the United States for non-United States
persons or their representatives (including foreign individuals
visiting the United States) to establish appropriate, specific, and,
where necessary, enhanced due diligence policies, procedures, and
controls designed to detect and report money laundering.
- Effective December 25, 2001, financial institutions are prohibited
from establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that
do not have a physical presence in any country), and will be subject
to certain recordkeeping obligations with respect to correspondent
accounts of foreign banks.
- Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
During the first quarter of 2002 the Federal Crimes Enforcement Network
(FinCEN), a bureau of the Department of Treasury, issued proposed and interim
regulations to implement the provisions of Sections 312 and 352 of the USA
Patriot Act. To date, it has not been possible to predict the impact the USA
PATRIOT ACT and its implementing regulations may have on the Company and the
Bank.
Acquisitions. Federal law and OTS regulations issued thereunder
generally prohibit a savings and loan holding company, without prior OTS
approval, from acquiring more than 5% of the voting stock of any other savings
association or savings and loan holding company or controlling the assets
thereof. They also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or controls more
than 25% of the voting shares of such holding company, from acquiring control
of any savings association not a subsidiary of such savings and loan holding
company, unless the acquisition is approved by the OTS.
Activities. As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions. If the Company acquires
control of another savings association as a separate subsidiary other than in
a supervisory acquisition, it would become a multiple savings and loan holding
company and the activities of the Company and any of its subsidiaries (other
than the Bank or any other SAIF insured savings association) would generally
become subject to additional restrictions. There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company. Federal law
provides that, among other things, no multiple savings and loan holding
company or subsidiary thereof which is not an insured association shall
commence or continue for more than two years after becoming a multiple savings
and loan association holding company or subsidiary thereof, any business
activity other than: (i) furnishing or performing management
28
services for a subsidiary insured institution, (ii) conducting an insurance
agency or escrow business, (iii) holding, managing, or liquidating assets
owned by or acquired from a subsidiary insured institution, (iv) holding or
managing properties used or occupied by a subsidiary insured institution, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by regulation as of March 5, 1987 to be engaged in by
multiple holding companies or (vii) those activities authorized by the Federal
Reserve Board as permissible for bank holding companies, unless the OTS by
regulation, prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above also must be approved by
the OTS prior to being engaged in by a multiple savings and loan holding
company.
Qualified Thrift Lender Test. If the Bank fails the QTL test, within one
year the Company must register as, and will become subject to, the significant
activity restrictions applicable to bank holding companies. See "-- Federal
Regulation of Savings Associations -- Qualified Thrift Lender Test" for
information regarding the Bank's QTL test.
TAXATION
Federal Taxation
- ----------------
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income. The Bank's deductions with
respect to "qualifying real property loans," which are generally loans secured
by certain interest in real property, were computed using an amount based on
the Bank's actual loss experience, or a percentage equal to 8% of the Bank's
taxable income, computed with certain modifications and reduced by the amount
of any permitted additions to the non-qualifying reserve. Due to the Bank's
loss experience, the Bank generally recognized a bad debt deduction equal to
8% of taxable income.
The thrift bad debt rules were revised by Congress in 1996. The new
rules eliminated the 8% of taxable income method for deducting additions to
the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also required that all institutions recapture
all or a portion of their bad debt reserves added since the base year (last
taxable year beginning before January 1, 1988). The Bank has no post-1987
reserves subject to recapture. For taxable years beginning after December 31,
1995, the Bank's bad debt deduction will be determined under the experience
method using a formula based on actual bad debt experience over a period of
years. The unrecaptured base year reserves will not be subject to recapture
as long as the institution continues to carry on the business of banking. In
addition, the balance of the pre-1988 bad debt reserves continue to be subject
to provisions of present law referred to below that require recapture in the
case of certain excess distributions to shareholders.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Company, such distributions will be considered to result
in distributions from the balance of its bad debt reserve as of December 31,
1987 (or a lesser amount if the Bank's loan portfolio decreased since December
31, 1987) and then from the supplemental reserve for losses on loans ("Excess
Distributions"), and an amount based on the Excess Distributions will be
included in the Bank's taxable income. Nondividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock and distributions in partial or
complete liquidation. However, dividends paid out of the Bank's current or
accumulated earnings and profits, as calculated for federal income tax
purposes, will not be considered to result in a distribution from the Bank's
bad debt reserve. The amount of additional taxable income created from an
Excess Distribution is an amount that, when reduced
29
by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, after the Conversion, the Bank makes a "nondividend
distribution," then approximately one and one-half times the Excess
Distribution would be includable in gross income for federal income tax
purposes, assuming a 34% corporate income tax rate (exclusive of state and
local taxes). See "Regulation" for limits on the payment of dividends by the
Bank. The Bank does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Bank, whether or
not an Alternative Minimum Tax is paid.
Dividends-Received Deduction. The Company may exclude from its income
100% of dividends received from the Bank as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
Audits. The Company, the Bank and its consolidated subsidiary have been
audited or their books closed without audit by the IRS with respect to
consolidated federal income tax returns through March 31, 1994. See Note 10
of Notes to Consolidated Financial Statements contained in the Annual Report
for additional information regarding income taxes.
State Taxation
- --------------
South Carolina has adopted the Code as it relates to savings banks,
effective for taxable years beginning after December 31, 1986. The Bank is
subject to South Carolina income tax at the rate of 6%. The Bank has not been
audited by the State of South Carolina during the past five years.
The Corporation's income tax returns have not been audited by federal or
state authorities within the last five years. For additional information
regarding income taxes, see Note 10 of the Notes to Consolidated Financial
Statements contained in the Annual Report.
ITEM 2. PROPERTIES
----------
At March 31, 2002, Security Federal owned the buildings and land for its
main office, five of its branch offices, including the operations center,
leased the land and owned the improvements thereon for one of its offices,
and leased the remaining five offices. The property related to the offices
owned by Security Federal had a depreciated cost (including land) of
approximately $2.2 million at March 31, 2002. At March 31, 2002, the
aggregate net book value of leasehold improvements (excluding furniture and
equipment) associated with leased premises was $1.2 million. See Note 5 of
Notes to Consolidated Financial Statements contained in the Annual Report.
30
The following table sets forth the net book value of the offices owned
(including land) and leasehold improvements on properties leased by Security
Federal at March 31, 2002.
Date
Lease Facility Gross
Owned or Expiration Opened/ Square Net Book
Location Leased Date Acquired Footage Value
- ---------------- -------- ---------- -------- ------- --------
Main Office:
1705 Whiskey Road S. Owned N/A 1980 10,000 $402,000
Aiken, South Carolina
Full Service Branch
Offices
149 E. Baruch Street Owned N/A 1984 2,258 173,000
Denmark, South Carolina
100 Laurens Street, N.W. Leased 2013 1959 4,500 13,000
Aiken, South Carolina
313 East Martintowne Road Owned(1) N/A 1973 4,356 95,000
North Augusta,
South Carolina
1665 Richland Avenue, W. Owned N/A 1984 1,942 216,000
Aiken, South Carolina
Montgomery & Canal
Streets Leased 2007 1993(2) 3,576 215,000
Masonic Shopping Center
Graniteville,
South Carolina
2812 Augusta Road Owned N/A 1993(2) 2,509 163,000
Langley, South Carolina
Highway 125 and Highways
1 and 78 Leased 2003 1993(2) 2,287 123,000
Midland Valley Shopping
Center
Clearwater, South Carolina
118 Main Street North Owned N/A 1993(2) 3,600 238,000
Wagener, South Carolina
Wal-Mart Superstore Leased 2001 1996 517 130,000
2035 Whiskey Road
Aiken, South Carolina
1185 Sunset Boulevard
West Columbia,
South Carolina Leased 2015 2000 10,000 740,000
Operations Center:
871 East Pine Log Road Owned N/A 1988 10,000 901,000
Aiken, South Carolina
(footnotes on following page)
31
- ---------------
(1) Security Federal has a lease on the land for this office which expires in
2003, but has options through 2063.
(2) Represents acquisition date.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company is involved as plaintiff or defendant in various legal
actions arising in the course of its business. It is the opinion of
management, after consultation with counsel, that the resolution of these
legal actions will not have a material adverse effect on the Company's
financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended March 31, 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
-----------------------------------------------------------------
MATTERS
-------
The information contained in the section captioned "Shareholders
Information -- Price Range of Common Stock" and "-- Dividends" in the Annual
Report is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The information contained in the section captioned "Selected Consolidated
Financial and Other Data" in the Annual Report is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset and Liability Management" in the Annual Report is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Independent Auditors' Report*
Consolidated Balance Sheets, March 31, 2002 and 2001*
Consolidated Statements of Income For the Years Ended March 31, 2002,
2001 and 2000*
Consolidated Statements of Changes in Shareholders' Equity For the Years
Ended March 31, 2002, 2001 and 2000*
Consolidated Statements of Cash Flows For the Years Ended March 31, 2002,
2001 and 2000*
Notes to Consolidated Financial Statements*
Quarterly Financial Data (unaudited)*
* Contained in the Annual Report filed as an exhibit hereto and
incorporated herein by reference.
32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information contained under the section captioned "Election of
Directors" in the Proxy Statement is incorporated herein by reference. The
information contained under the section captioned "Compliance With Section
16(a) of the Exchange Act" in the Proxy Statement is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information contained in the section captioned "Executive Officers"
in the Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information contained in the section captioned "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information contained in the section captioned "Certain Transactions"
in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) 1. Financial Statements.
---------------------
For a list of the financial statements filed as part of this report
see Part II - Item 8.
2. Financial Statement Schedules.
------------------------------
All schedules have been omitted as the required information is
either inapplicable or contained in the Consolidated Financial
Statements or related Notes contained in the Annual Report filed as
an exhibit hereto.
3. Exhibits:
3.1 Articles of Incorporation, as amended*
3.2 Bylaws**
4 Instruments defining the rights of security holders,
including indentures***
10 Executive Compensation Plans and Arrangements:
Salary Continuation Agreements****
Amendment One to Salary Continuation Agreements*****
1999 Stock Option Plan**
1987 Stock Option Plan****
Incentive Compensation Plan****
13 Annual Report to Stockholders
21 Subsidiaries of Registrant
23 Consent of Elliott Davis, LLC
(footnotes on following page)
33
- -------------
* Filed on June 26, 1998, as an exhibit to the Company's Proxy Statement
and incorporated herein by reference.
** Filed on March 2, 2000, as an exhibit to the Company's Registration
Statement on Form S-8 and incorporated herein by reference.
*** Filed on August 12, 1987, as an exhibit to the Company's Registration
Statement on Form 8-A and incorporated herein by reference.
**** Filed on June 28, 1993, as an exhibit to the Company's Annual Report
on Form 10-KSB and incorporated herein by reference.
***** 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.
(b) Reports on Form 8-K.
- -------------------------
During the three months ended March 31, 2002, the Company filed the
following Current Report on Form 8-K:
On January 9, 2002, the Company filed a Form 8-K for a press release
announcing the election of J. Chris Verenes and Thomas C. Clark as
directors of the Company, the Bank and the Bank's subsidiaries.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: June 25, 2002 By: /s/ Timothy W. Simmons
----------------------------
Timothy W. Simmons
President, Chief Executive Officer
and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Timothy W. Simmons June 25, 2002
-----------------------------------------------
Timothy W. Simmons
President, Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/ Roy G. Lindburg June 25, 2002
-----------------------------------------------
Roy G. Lindburg
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
By: /s/ T. Clifton Weeks June 25, 2002
-----------------------------------------------
T. Clifton Weeks
Chairman of the Board and Director
By: /s/ Gasper L. Toole III June 25, 2002
-----------------------------------------------
Gasper L. Toole III
Director
By: /s/ Harry O. Weeks Jr. June 25, 2002
-----------------------------------------------
Harry O. Weeks Jr.
Director
By: /s/ Robert E. Alexander June 25, 2002
-----------------------------------------------
Robert E. Alexander
Director
By: /s/ Thomas L. Moore June 25, 2002
-----------------------------------------------
Thomas L. Moore
Director
By: /s/ William Clyburn June 25, 2002
-----------------------------------------------
William Clyburn
Director
By: /s/ Thomas C. Clark June 25, 2002
-----------------------------------------------
Thomas C. Clark
Director
By: /s/ J. Chris Verenes June 25, 2002
-----------------------------------------------
J. Chris Verenes
Director
INDEX TO EXHIBITS
Exhibit Number
- --------------
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Elliott Davis, LLC
Exhibit 13
Annual Report to Stockholders
TABLE OF CONTENTS
Letter to Shareholders ............................................ 1
Financial Highlights............................................... 2
Selected Consolidated Financial and Other Data .................... 3
Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 4
Report of Elliott Davis, LLC, Independent Auditors ............... 17
Consolidated Balance Sheets ....................................... 18
Consolidated Statements of Income ................................. 19
Consolidated Statements of Shareholders' Equity ................... 20
Consolidated Statements of Cash Flows ............................. 21
Notes to Consolidated Financial Statements ........................ 23
Shareholders Information .......................................... 42
Security Federal Bank Board of Directors and Management Team ...... 44
Fellow Shareholders:
We are pleased to report another consecutive year of record earnings. Net
income for our most recent fiscal year ending March 31, 2002 increased 18% to
$2.5 million compared to $2.1 million, or $1.50 per share compared to $1.27
per share, for the fiscal year ending March 31, 2001. Total assets reached a
record high of over $376 million and total loans reached a record high of over
$234 million. Our asset growth during the year was primarily funded by
deposits which increased $51.6 million or 20% to over $309 million.
In view of our record earnings, your Board of Directors approved a dividend of
$.02 per share which was paid on June 14, 2002 to shareholders of record as of
May 31, 2002. This represented the 46th consecutive quarterly dividend paid
since the Bank's conversion to a stock form of ownership in 1987.
During the year, we formed three new subsidiaries of the Bank, Security
Federal Insurance, Inc., Security Federal Investments, Inc., and
Security Federal Trust, Inc. These companies were formed to complement the
deposit and loan services offered by the Bank and help us achieve our
long-term goal of offering a complete menu of financial services. Security
Federal Insurance, Inc. offers homeowners, auto, business, life,
long-term care, and other various insurance products. Security Federal
Investments, Inc. offers complete brokerage services, which include
stocks, bonds, mutual funds and other investment vehicles. Security
Federal Trust, Inc. offers full service trust services including financial
planning. These three companies provide needed services to our customers and
fee income to our Company.
The past year also noted the 80th anniversary of the formation of Security
Federal Bank. We are blessed not only to have our Company prosper, but more
importantly to be associated with so many good people who include our
shareholders, our customers, and our dedicated employees. Thank you for your
continued support.
Sincerely, Sincerely,
/s/T. Clifton Weeks /s/Timothy W. Simmons
T. Clifton Weeks Timothy W. Simmons
Chairman President & Chief Executive
Officer
1
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
FINANCIAL HIGHLIGHTS
Years Ended March 31,
------------------------------
2002 2001
-------------- --------------
Net Income $ 2,509,586 $ 2,127,434
Earnings Per Share - Basic 1.50 1.27
Book Value Per Share 15.20 14.07
Total Interest Income 24,632,275 24,152,829
Total Interest Expense 12,211,657 13,871,311
Net Interest Income Before Provision For
Loan Losses 12,420,618 10,281,518
Provision For Loan Losses 1,525,000 925,000
Net Income After Provision For Loan Losses 10,895,618 9,356,518
Net Interest Margin 3.73% 3.38%
Total Loans Originated 179,646,000 115,586,000
Adjustable Rate Loans As A Percentage Of
Total Gross Loans 50.3% 55.3%
NET INCOME (In Thousands) EARNINGS PER SHARE - BASIC
1998 $1,713 1998 $1.02
1999 1,806 1999 1.07
2000 2,021 2000 1.20
2001 2,127 2001 1.27
2002 2,510 2002 1.50
RETURN ON EQUITY TOTAL ASSETS (In Millions)
1998 9.96% 1998 $216
1999 9.56% 1999 255
2000 10.41% 2000 305
2001 9.98% 2001 331
2002 9.97% 2002 376
BOOK VALUE PER SHARE ALLOWANCE FOR LOAN LOSSES(1)
1998 10.73 1998 1.09%
1999 11.62 1999 1.12%
2000 11.78 2000 1.09%
2001 14.07 2001 1.19%
2002 15.20 2002 1.55%
(1) ALLOWANCE FOR LOSSES AS A PERCENTAGE OF TOTAL LOANS.
2
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Selected Consolidated Financial and Other Data
At Or For The Year Ended March 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------------
Balance Sheet Data (Dollars In Thousands, Except Per Share Data)
- --------------------------
Total Assets $376,320 $330,642 $304,802 $254,718 $215,512
Cash And Cash Equivalents 11,528 12,616 7,417 6,951 4,659
Investment And Mortgage- 118,898 74,405 91,531 85,569 62,813
Backed Securities
Loans Receivable-Net (1) 234,319 230,997 193,001 151,986 137,724
Deposits 309,038 257,410 228,823 216,533 181,786
Advances From Federal Home
Loan Bank 33,108 42,704 50,611 14,600 12,126
Total Shareholders' Equity 25,401 23,500 19,759 19,560 18,076
Income Data
- --------------------------
Total Interest Income 24,632 24,153 19,805 17,312 16,618
Total Interest Expense 12,211 13,871 10,378 8,638 8,001
------- ------- ------- ------- -------
Net Interest Income 12,421 10,282 9,427 8,674 8,617
Provision For Loan Losses 1,525 925 750 600 780
------- ------- ------- ------- -------
Net Interest Income After
Provision For Loan Losses 10,896 9,357 8,677 8,074 7,837
Other Income 3,465 2,739 2,296 2,641 2,004
General And Administrative
Expense 10,337 8,851 7,845 7,962 7,220
Income Taxes 1,514 1,118 1,107 947 908
------- ------- ------- ------- -------
Net Income $ 2,510 2,127 $ 2,021 $ 1,806 $ 1,713
======= ======= ======= ======= =======
Per Common Share Data
- --------------------------
Net Income Per Common Share
(Basic) $ 1.50 1.27 $ 1.20 $ 1.07 $ 1.02
======= ======= ======= ======= =======
Cash Dividends Declared $ 0.08 0.08 $ 0.08 $ 0.07 $ 0.06
======= ======= ======= ======= =======
Other Data
- --------------------------
Interest Rate Spread Information:
Average During Period 3.42% 3.00% 3.19% 3.53% 4.00%
End Of Period 3.48% 3.11% 2.90% 3.15% 3.91%
Net Interest Margin (Net Interest
Income/Average Earning Assets) 3.73% 3.38% 3.54% 3.96% 4.33%
Average Interest-Earning Assets
To Average Interest-
Bearing Liabilities 108.80% 108.39% 109.11% 110.85% 108.27%
Equity To Total Assets 6.75% 7.11% 6.48% 7.68% 8.39%
Non-Performing Assets To
Total Assets (2) .40% .11% .40% .52% 1.02%
Return On Assets (Ratio Of Net
Income To Average Total Assets) .71% .66% .72% .77% .80%
Return On Equity (Ratio Of Net
Income To Average Equity) 9.97% 9.98% 10.41% 9.56% 9.96%
Equity To Assets Ratio (Ratio
Of Average Equity To Average
Total Assets) 7.14% 6.62% 6.93% 8.08% 8.05%
Dividend Pay-Out Ratio On
Common Shares 5.33% 6.30% 6.67% 6.54% 5.87%
Number Of Full-Service Offices 11 11 10 10 10
(1) INCLUDES LOANS HELD FOR SALE
(2) NON-PERFORMING ASSETS CONSIST OF NON-ACCRUAL LOANS AND REPOSSESSED ASSETS.
3
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The following discussion is presented to provide the reader with an
understanding of the financial condition and results of operations of Security
Federal Corporation and its subsidiaries. The investment and other activities
of the parent company, Security Federal Corporation ("the Company"), have had
no significant impact on the results of operations for the periods presented
in the financial statements. The information presented in the following
discussion of financial results is indicative of the activities of Security
Federal Bank ("the Bank"), a wholly owned subsidiary of the Company. The Bank
is a federally chartered thrift that was founded in 1922. The Bank also has
three wholly owned subsidiaries that were formed in the fiscal year ended
March 31, 2002.
The principal business of the Bank is accepting deposits from the general
public and originating consumer and commercial business loans as well as
mortgage loans that enable borrowers to purchase or refinance one-to-four
family residential real estate. The Bank also originates construction loans on
single-family residences; multi-family dwellings and projects; commercial real
estate; and loans for the acquisition, development and construction of
residential subdivisions and commercial projects.
The Bank's net income is dependent on its interest rate spread which is the
difference between the average yield earned on its loan and investment
portfolios and the average rate paid on its deposits and borrowings. The
Bank's interest spread is impacted by interest rates, deposit flows, and loan
demands. Levels of non-interest income and operating expense are also
significant factors in earnings.
Forward-Looking Statements
This document, including information included or incorporated by reference,
contents, and future filings by the Company on Form 10-K, Form 10Q, and Form
8-K, and future oral and written statements by the Company and its management
may contain forward-looking statements about Security Federal Corporation and
its subsidiaries which we believe are within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
include, without limitation, statements with respect to anticipated future
operating and financial performance; growth opportunities; interest rates;
acquisition and divestiture opportunities; and synergies, efficiencies,
cost-savings, and funding advantages expected to be realized from prior
acquisitions. Words such as "may," "could," "should," "would," "believe,"
"anticipate," "estimate," "expect," "intend," "plan," and similar expressions
are intended to identify these forward-looking statements. Forward-looking
statements by the Company and its management are based on beliefs, plans,
objectives, goals, expectations, anticipations, estimates, and intentions of
Management and are not guarantees of future performance. Factors which could
affect results include interest rate trends, the general economic climate in
the Company's market area and the nation as a whole, the ability of the
Company to control costs and expenses, deposit flows, demand for mortgages and
other loans, real estate values and vacancy rates, competition, pricing, loan
delinquency rates and changes in federal regulation. These factors should be
considered in evaluating "forward-looking statements," and undue reliance
should not be placed on any such statements. The Company disclaims any
obligation to update or revise any forward-looking statements based on the
occurrence of future events, the receipt of new information, or otherwise. The
important factors we discuss below and elsewhere in this document, identified
in our filings with the Securities and Exchange Commission ("SEC"), and
presented by our Management from time to time could cause actual results to
differ materially from those indicated by the forward-looking statements made
in this document.
Asset and Liability Management
The Bank's program of asset and liability management seeks to limit the Bank's
vulnerability to material and prolonged increases or decreases in interest
rates, or "interest rate risk." The principal determinant of the exposure of
the Bank's earnings to interest rate risk is the timing difference ("gap")
between the repricing or maturity of the Bank's interest-earning assets and
the repricing or maturity of its interest-bearing liabilities. If the
maturities of the Bank's assets and liabilities were perfectly matched and the
interest rates borne by its assets and liabilities were equally flexible and
moved concurrently (neither of which is the case), the impact on net interest
income of any material and prolonged changes in interest rates would be
minimal.
4
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Asset and Liability Management, Continued
The Bank's asset and liability policies are directed toward the objectives of
increasing the interest rate sensitivity of the Bank's assets by shortening
their maturities or periods to reprice while reducing the interest rate
sensitivity of the Bank's interest-bearing liabilities by extending their
maturities. The success of Management's strategy is evidenced by the
composition of the loan portfolio that includes $125.4 million of adjustable
rate consumer loans, commercial loans, and mortgage loans or approximately
50.3% of total gross loans at March 31, 2002. At March 31, 2002, the negative
mismatch of interest-earning assets repricing or maturing within one year with
interest- bearing liabilities repricing or maturing within one year was $93.4
million or 24.8% of total assets compared to $107.2 million or 32.4% at March
31, 2001. The decrease in the negative gap was due to an increase in loans
repricing in the less than one year category.
During the past year, the Bank originated approximately $41.7 million in
adjustable rate residential real estate loans, which are generally held for
investment and not sold. Also, as part of the Bank's asset liability program,
the Bank originated a total of $77.4 million in consumer and commercial loans,
which are usually short term in nature. During fiscal 2002, 94.9% of total
loan originations were comprised of consumer, commercial, and adjustable rate
mortgage loans compared to 93.4% of total originations in fiscal 2001. The
Bank's portfolio of consumer and commercial loans was $147.2 million at March
31, 2002, $120.8 million at March 31, 2001, and $103.8 million at March 31,
2000. Consumer and commercial loans combined were 59.0% of total loans at
March 31, 2002; 49.3% at March 31, 2001; and 51.5% at March 31, 2000.
The Bank originated $9.1 million, $6.3 million, and $6.2 million in fixed rate
residential loans, most of which were residential lot loans with terms of two
to five years, in fiscal 2002, 2001, and 2000, respectively. At March 31,
2002, these fixed rate residential loans, including construction loans with
terms of one year or less, amounted to $35.0 million or 14.0% of the total
loan portfolio compared to $34.1 million or 13.9% at the end of the previous
fiscal year. The Bank sells virtually all its 15 year and 30 year fixed rate
mortgage loans at origination. In fiscal 2001, the Bank decided to no longer
service loans for Freddie Mac or other investors, because of the fixed cost of
servicing those loans, while the income stream generated by that portfolio was
shrinking due to prepayments. Thus, during fiscal 2002, the Bank sold its new
fixed rate residential loan originations exclusively on a service-released
basis. The Bank sold $631,000 in fixed rate residential loans to secondary
market agencies on a service-retained basis in fiscal 2000 and $5.6 million in
fiscal 1999. Fixed rate residential loans passed directly on to institutional
investors including Freddie Mac, on a service-released basis, totaled $84.5
million in fiscal 2002, $29.5 million in fiscal 2001, and $16.0 million in
fiscal 2000.
Certificates of deposit of $100,000 or more "Jumbo Certificates" are normally
considered to be interest rate sensitive because of their relatively short
maturities. Many financial institutions have used Jumbo Certificates to manage
interest rate sensitivity and liquidity. The Bank has not relied on Jumbo
Certificates for liquidity or asset liability management. As of March 31,
2002, the Bank had $45.5 million outstanding in Jumbo Certificates compared to
$35.7 million at March 31, 2001. The Bank was more aggressive on bidding or
municipalities' and individual's Jumbo Certificates this past year as
Management saw opportunities to arbitrage successfully with these funds. The
Bank has no brokered deposits.
The following table sets forth the maturity schedule of certificates of
deposit with balances of $100,000 or greater at March 31, 2002.
Within 3 Months $ 18,932,000
After 3, Within 6 Months 11,211,000
After 6, Within 12 Months 9,895,000
After 12 Months 5,447,000
------------
$ 45,485,000
============
A negative gap position is expected to have an adverse effect on net interest
income during periods of rising interest rates. A negative one-year gap
position occurs when the dollar amount of rate sensitive liabilities maturing
or repricing within one year exceeds the dollar amount of rate sensitive
assets maturing or repricing during that same period. As a result, during
periods of rising interest rates, the interest paid on interest-bearing
liabilities will increase faster than interest received from earning assets,
thus reducing net interest income. The reverse is true in periods of declining
interest rates resulting in an expected increase in net interest income.
5
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Asset and Liability Management, Continued
The table on the following page sets forth the Bank's interest-bearing
liabilities and interest-earning assets being repriced or maturing within one
year. The table on page 7 presents the Bank's entire interest-bearing
liabilities and interest-earning assets into repricing or maturity time
periods. Both tables present adjustable rate loans in the periods they are
scheduled to reprice, not mature. Both tables also assume investments reprice
at the earlier of maturity; the likely call date, if any, based on current
interest rates; or the next scheduled interest rate change, if any. NOW
accounts, money market accounts, and regular savings accounts are assumed to
reprice in the less than three-months category.
The following table sets forth the Bank's interest-bearing liabilities and
interest-earning assets repricing or maturing within one year.
At March 31
------------------------
2002 2001
----------- -----------
(Dollars in Thousands)
Loans (1) $ 138,923 $ 100,482
Mortgage-Backed Securities:
Held To Maturity 328 638
Available For Sale 24,937 17,184
Investment Securities:
Held To Maturity 163 266
Available For Sale 17,635 21,355
Other Interest-Earning Assets 5,205 5,586
----------- -----------
Total Interest Rate Sensitive Assets
Repricing Within 1 Year $ 187,191 $ 145,511
----------- -----------
Deposits 269,438 239,711
FHLB Advances And Other Borrowed Money 11,169 12,969
----------- -----------
Total Interest Rate Sensitive Liabilities
Repricing Within 1 Year $ 280,607 $ 252,680
----------- -----------
Gap $ (93,416) $ (107,169)
=========== ===========
Interest Rate Sensitive Assets/Interest
Rate Sensitive Liabilities 66.71% 57.59%
Gap As A Percent Of Total Assets (24.8)% (32.4)%
(1) LOANS ARE NET OF UNDISBURSED FUNDS AND LOANS IN PROCESS.
6
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Asset and Liability Management, Continued
The following table sets forth the interest sensitivity of the Bank's assets and liabilities at March 31,
2002, on the basis of the factors and assumptions set forth in the table on the previous page.
Remaining Time Before Asset/Liability Matures Or Can Be Repriced
--------------------------------------------------------------------------
< Three 3 -12 1 - 3 3 - 5 5 - 10 10 - 20 > 20
Months Months Years Years Years Years Years Total
-------- -------- ------- ------- -------- -------- ------- --------
(Dollars in Thousands)
Interest-Earnings Assets
- -------------------------
Loans (1) $ 78,115 $ 60,808 $67,145 $21,670 $ 6,798 $ 3,455 $ 201 $238,192
Mortgage-Backed Securities:
Held To Maturity, At Cost 107 221 529 173 343 - - 1,373
Available For Sale, At Fair
Value 9,147 15,790 16,044 8,681 4,981 1,285 77 56,005
Investment Securities: (2)
Held To Maturity, At Cost 163 - - - - - - 163
Available For Sale, At Fair
Value 6,024 11,611 36,721 7,000 - - - 61,356
FHLB Stock, At Cost - - 2,669 - - - - 2,669
Other Interest-Earning Assets 5,205 - - - - - - 5,205
-------- -------- ------- ------- -------- -------- ------- --------
Total Financial Assets $ 98,761 $ 88,430 $123,108 $ 37,524 $12,122 $ 4,740 $ 278 $364,963
======== ======== ======== ======== ======== ======== ======= ========
Interest-Bearing Liabilities
- -----------------------------
Deposits:
Certificate Accounts $ 47,391 $ 79,583 $ 17,657 $ 3,318 $ - $ - $ - $147,949
NOW Accounts 53,282 - - - - - - 53,282
Money Market Accounts 74,075 - - - - - - 74,075
Passbook Accounts 15,107 - - - - - - 15,107
Borrowings 6,169 5,000 10,108 18,000 - - - 39,277
-------- -------- ------- ------- -------- -------- -------- --------
Total Interest-Bearing
Liabilities $196,024 $ 84,583 $27,765 $ 21,318 $ - $ - $ - $329,690
======== ======== ======== ======== ======== ======== ======= ========
Current Period Gap $(97,263) $ 3,847 $95,343 $ 16,206 $ 12,122 $ 4,740 $ 278 $ 35,273
Cumulative Gap $(97,263) $(93,416) $ 1,927 $ 18,133 $ 30,255 $34,995 $35,273 $ 35,273
Cumulative Gap As A
Percent Of Total Assets (25.8)% (24.8)% 0.5% 4.8% 8.0% 9.3% 9.4% 9.4%
(1) LOANS ARE NET OF UNDISBURSED FUNDS AND LOANS IN PROCESS.
(2) CALLABLE SECURITIES ARE SHOWN AT THEIR LIKELY CALL DATES BASED ON MANAGEMENT'S ESTIMATES AT MARCH 31,
2002.
In evaluating the Bank's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing tables must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates. Additionally, the interest rates
of certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates. Loan repayment rates and withdrawals of deposits
will likely differ substantially from the assumed rates previously set forth
in the event of significant changes in interest rates due to the option of
borrowers to prepay their loans and the ability of depositors to withdraw
funds prior to maturity. Further, certain assets, such as adjustable rate
mortgages, have features that restrict changes in interest rates on a
short-term basis as well as over the life of the asset.
7
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition
Total assets at March 31, 2002 were $376.3 million, an increase of $45.7
million or 13.8% from March 31, 2001. This increase was the result of a slight
increase in net loans receivable and a significant increase in total
investment securities.
Total net loans receivable were $234.3 million at March 31, 2002; an increase
of $3.3 million or 1.4% from the prior year. Residential real estate loans
decreased $21.7 million to $100.1 million at March 31, 2002 due primarily to
an increase in prepayments and payoffs caused by adjustable rate customers
refinancing to fixed rate loans. Fixed rate residential real estate loans are
not retained in the Bank's portfolio, but are sold immediately on the
secondary market. Security Federal sells virtually all its long-term fixed
rate mortgages, while retaining its adjustable rate mortgages originated.
Consumer loans increased $3.6 million while commercial business and commercial
real estate loans increased to $97.4 million at fiscal year end from $74.5
million at March 31, 2001; an increase of $22.9 million or 30.7%. Loans held
for sale decreased $80,000 at March 31, 2002 from the previous fiscal year
end.
Repossessed assets decreased $32,000 to $98,000 at March 31, 2002 from
$130,000 at fiscal year end 2001. Repossessed assets at March 31, 2002
consisted of vehicles and land.
Non-accrual loans totaled $1.4 million at March 31, 2002 compared to $183,000
a year earlier. Non-accrual loans averaged $1.0 during the fiscal year. The
Bank classifies all loans as non-accrual when they become 90 days or more
delinquent. The Bank had four loans totaling $622,000 at March 31, 2002 that
were troubled debt restructurings compared to 6 loans of $587,000 at March 31,
2001. None of the trouble debt restructurings at March 31, 2002 were more than
30 days delinquent. One $16,000 unsecured commercial loan was sixty days
delinquent. The four troubled debt restructurings consisted of a $60,000
consumer loan secured by a residential dwelling, a $16,000 commercial loan
secured by a second mortgage on a residence, a $57,000 commercial loan secured
by two rental properties, and a $489,000 commercial loan secured by commercial
real estate. All troubled debt restructurings are also considered impaired.
At March 31,2002, the Bank held $897,000 in impaired loans compared to
$789,000 at March 31, 2001.
The Bank reviews its loan portfolio and loan loss allowance on a monthly
basis. Future additions to the Bank's allowance for loan losses are dependent
on, among other things, the performance of the Bank's loan portfolio, the
economy, changes in real estate values, and interest rates. There can be no
assurance that additions to the allowance will not be required in future
periods. Management continually monitors its loan portfolio for the impact of
local economic changes. The ratio of allowance for loan losses to total loans
was 1.55% at March 31, 2002 compared to 1.19% at March 31, 2001.
Deposits at the Bank increased $51.6 million or 20.1% to $309.0 million at
March 31, 2002 from $257.4 million at March 31, 2001. The Bank had tremendous
success in attracting money market accounts with aggressive pricing. The
addition of a new branch in West Columbia also helped deposit growth. Advances
from the Federal Home Loan Bank "FHLB" decreased to $33.1 million at March 31,
2002; down from $42.7 million a year earlier, a decrease of $9.6 million. The
Bank was able to pay off advances due to the magnitude of growth in deposits.
Other borrowed money, which consists of retail repurchase agreements,
increased $2.8 million to a total of $6.2 million during the year compared to
$3.4 million at March 31, 2001.
Total shareholders' equity was $25.4 million at March 31, 2002; an increase of
$1.9 million or 8.1% compared to $23.5 million a year earlier. The increase
was attributable to net income of $2.5 million and a decrease in the indirect
guarantee of the ESOP debt of $57,000, offset partially by a decrease in
accumulated other comprehensive gain of $531,000 and $135,000 in dividends
paid.
8
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
The following table presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
higher or lower outstanding balances and the changes due to the volatility of
interest rates. For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes attributable to: 1)
changes in rate (changes in rate multiplied by old volume); 2) changes in
volume (changes in volume multiplied by old rate); and 3) net change (the sum
of the prior columns). For purposes of this table, changes attributable to
both rate and volume, which cannot be segregated, have been allocated
proportionately to the change due to volume and the change due to rate.
Fiscal Year 2002 Compared To 2001 Fiscal Year 2001 Compared To 2000
--------------------------------- ---------------------------------
Volume Rate Net Volume Rate Net
--------- --------- --------- --------- --------- ----------
(In Thousands)
Interest-Earning Assets:
Loans: (1)
Real Estate Loans $ 114 (155) (41) $ 2,005 426 2,431
Other Loans 1,819 (835) 984 1,555 330 1,885
--------- --------- --------- --------- --------- ----------
Total Loans 1,933 (990) 943 3,560 756 4,316
Mortgage-Backed Securities (2) 950 (450) 500 (78) 292 214
Investments (2) (592) (359) (951) (228) 23 (205)
Other Interest-Earning Assets 51 (64) (13) 3 20 23
--------- --------- --------- --------- --------- ----------
Total Interest-Earning Assets $ 2,342 (1,863) 479 $ 3,257 1,091 4,348
========= ========= ========= ========= ========= ==========
Interest-Bearing Liabilities:
Deposits:
Certificate Accounts $ 1,589 (1,160) 429 $ 687 922 1,609
NOW Accounts 52 (110) (58) 14 (50) (36)
Money Market Accounts 427 (733) (306) (232) 112 (120)
Passbook Accounts 20 (48) (28) (7) 0 (7)
--------- --------- --------- --------- --------- ----------
Total Deposits 2,088 (2,051) 37 462 984 1,446
Borrowings (1,280) (416) (1,696) 1,907 140 2,047
--------- --------- --------- --------- --------- ----------
Total Interest-Bearing Liabilities 808 (2,467) (1,659) 2,369 1,124 3,493
--------- --------- --------- --------- --------- ----------
Effect On Net Income $ 1,534 604 2,138 $ 888 (33) 855
========= ========= ========= ========= ========= ==========
(1) INTEREST ON NON-ACCRUAL LOANS IS NOT INCLUDED IN INCOME, ALTHOUGH THEIR LOAN BALANCES ARE INCLUDED IN
AVERAGE LOANS OUTSTANDING.
(2) SECURITIES AVAILABLE FOR SALE ARE COMPUTED USING THEIR HISTORICAL COST.
9
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations, Continued
The following table presents the total dollar amount of interest income from
average interest-earning assets for the periods indicated and the resultant
yields as well as the interest expense on average interest-bearing liabilities
expressed both in dollars and rates. No tax equivalent adjustments were made.
Averages For Fiscal Years Ended March 31,
----------------------------------------------------------------------------
Yield/ 2002 2001 2000
Rate At ----------------------- ------------------------ -----------------------
March 31 Average Yield/ Average Yield/ Average Yield/
2002 Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- ------- -------- ------ ------- -------- ----- ------- -------- -----
(Dollars in Thousands)
Interest-Earning
Assets:
Mortgage Loans 7.07% $105,676 7,833 7.41% $104,171 $ 7,874 7.56% $ 77,275 $5,443 7.04%
Other Loans 7.60% 130,359 11,630 8.92% 110,477 10,646 9.64% 94,241 8,761 9.30%
------ -------- ------- ---- -------- ------- ---- -------- ------ ----
Total Loans(1) 7.39% 236,035 19,463 8.25% 214,648 18,520 8.63% 171,516 14,204 8.28%
Mortgage-Back
Securities(2) 5.71% 50,045 2,753 5.50% 33,707 2,253 6.68% 35,009 2,039 5.82%
Investments (2) 4.65% 43,924 2,337 5.32% 54,487 3,288 6.03% 58,296 3,493 5.99%
Other Interest-
Earning Assets 1.64% 2,598 79 3.04% 1,427 92 6.43% 1,376 69 5.01%
------ -------- ------- ---- ------- ------- ---- -------- ------- ----
Total Interest-
Earning Assets 6.55% $332,602 24,632 7.41% $304,269 $24,153 7.94% 266,197 $19,805 7.44%
====== ======== ======= ==== ======== ======= ==== ======== ======= ====
Interest-Bearing
Liabilities:
Certificate
Accounts 3.59% $147,263 7,393 5.02% $117,555 $ 6,964 5.92% 104,978 $ 5,355 5.10%
NOW Accounts 0.78% 47,691 324 0.68% 41,408 382 0.92% 40,081 418 1.04%
Money Market
Accts. 2.73% 57,804 1,983 3.43% 47,682 2,289 4.80% 52,589 2,409 4.58%
Passbook Accounts 1.75% 13,418 283 2.11% 12,584 311 2.47% 12,890 318 2.47%
----- -------- ------- ----- -------- ------- ---- -------- ------- -----
Total Interest-
Bearing Accounts 2.76% 266,176 9,983 3.75% 219,229 9,946 4.54% 210,538 8,500 4.04%
Other Borrowings 1.73% 4,187 115 2.75% 2,924 167 5.71% 1,534 74 4.82%
FHLB Advances 6.09% 35,351 2,114 5.98% 58,555 3,758 6.42% 31,909 1,804 5.65%
Total Interest-
Bearing
Liabilities 3.07% $305,714 12,212 3.99% $280,708 $13,871 4.94% 243,981 $10,378 4.25%
===== ======== ======= ==== ======== ======= ==== ======== ======= ====
Net Interest Income $12,420 $10,282 $ 9,427
======= ======= =======
Interest Rate Spread 3.48% 3.42% 3.00% 3.19%
===== ==== ==== ====
Net Yield On
Earning Assets 3.73% 3.38% 3.54%
==== ==== ====
(1) INTEREST ON NON-ACCRUAL LOANS IS NOT INCLUDED IN INCOME, ALTHOUGH THEIR LOAN BALANCES ARE INCLUDED IN
AVERAGE LOANS OUTSTANDING.
(2) SECURITIES AVAILABLE FOR SALE ARE COMPUTED USING THEIR HISTORICAL COST.
10
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of the Years Ended March 31, 2002 and 2001
General
The Company earned record net income of $2.5 million for the year ended March
31, 2002, an increase of $382,000 or 18.0% over net income of $2.1 million for
the year ended March 31, 2001. This marked the fifth consecutive year of
record earnings. The primary reason for the increased earnings was an increase
in net interest income and other income offset in part by increases in the
provision for loan losses and general and administrative expenses.
Net Interest Income
Net interest income increased $2.1 million to $12.4 million in fiscal 2002
compared to $10.3 million in fiscal 2001 due to a 35 basis point increase in
the net yield on interest-earning assets. The Bank also increased its interest
earning assets, fueled by its growth in deposit accounts.
Interest income on loans increased $943,000 as the average portfolio balance
increased $21.4 million during the year ending March 31, 2002, despite the
average yield declining 38 basis points. Interest income on investment
securities, mortgage-backed securities, and other investments decreased
$464,000 as the yield on total investments decreased 94 basis points during
the year. The average balance of the investment portfolio increased $6.9
million during fiscal 2002.
Interest expense on deposits increased $37,000 during the year ended March 31,
2002 compared to the year ended March 31, 2001. Average interest bearing
deposits increased $46.9 million while the average cost of those deposits
decreased 79 basis points during the year. Interest expense on FHLB advances
and other borrowings decreased $1.7 million during fiscal 2002 due to the
average amount of borrowings decreasing $21.9 million. The average cost of
borrowings decreased 74 basis points comparing fiscal 2002 to fiscal 2001.
Provision for Loan Losses
The Company's provision for loan losses increased $600,000 to $1.5 million
during the year ended March 31, 2002. The amount of the provision is
determined by Management's on-going monthly analysis of the loan portfolio.
Non-accrual loans, which are loans delinquent 90 days or more, were $1.4
million at March 31, 2002 compared to $183,000 at March 31, 2001. Net
charge-offs were $620,000 in fiscal 2002 compared to $262,000 in fiscal 2001.
The ratio of the allowance for loan losses to total loans at March 31, 2001
was 1.55% compared to 1.19% at March 31, 2001. Management felt it prudent to
increase the provision due to the predicted general slowing of the national
economy, the cyclical nature of economic business cycles, the growing
percentage of commercial loans in the portfolio compared to residential
mortgage loans, and the entrance into a new loan market for the Bank the prior
year. Management believes the allowance for loan losses is adequate based on
Management's estimates of the losses inherent in the loan portfolio, although
there can be no guarantee as to these estimates. In addition, bank regulatory
agencies may require additions to the allowance for loan losses based on their
judgments and estimates as part of their examination process.
Other Income
Other income increased $725,000 or 26.5% from $2.7 million during fiscal 2001
to $3.5 million during fiscal 2002. Gain on sale of loans increased $1.0
million to $1.5 million during fiscal 2002 compared to $496,000 during fiscal
2001 due to a $55.0 million increase in originations of loans held for sale
and a concerted effort to better manage the Bank's secondary market sales. The
origination trend changed due to the decrease in mortgage rates during the
year. Loan servicing fees decreased $105,000. The Bank sold its remaining
mortgage loan servicing in January 2001 for a profit on sale of servicing if
approximately $400,000. Service fees on deposit accounts increased $103,000
due to the growth in demand deposit accounts. Income from real estate
operations decreased $47,000 as the Company sold its remaining lots held for
development in March 2001. Other miscellaneous income encompassing credit life
insurance, annuity, and investment brokerage commissions, and other
miscellaneous income increased $117,000 or 27.3% during fiscal 2002.
11
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
General and Administrative Expenses
General and administrative expenses increased $1.5 million or 16.8% to $10.3
million during the year ended March 31, 2002 compared to $8.9 million during
the same period one year earlier. Salaries and employee benefits increased
$1.0 million or 21.0% due to operating the Bank's West Columbia branch office
a full year compared to four months the prior year, the start up of the three
new subsidiaries, and normal annual salary adjustments. Occupancy expense
increased $128,000 or 18.9% also due to the new branch office. Advertising
expense decreased $25,000 during fiscal 2002. Depreciation and maintenance of
equipment expense increased $79,000 or 7.7% as the Bank added on-line banking
and bill payment software and software and hardware purchased during fiscal
2001, which was depreciated for a full year. Other miscellaneous expenses
encompassing repossessed assets expense, legal, professional, and consulting
expenses, stationery and office supplies, and other sundry expenses increased
$295,000 or 18.0% during fiscal 2002 due primarily to slight increases in most
of the above mentioned expenses and the opening of the new branch office.
Income Taxes
Income taxes increased $397,000 during the year ended March 31, 2002 compared
to the year ended March 31, 2001 due to an increase in taxable income. The
effective tax rate was 37.6% for fiscal 2002 and 34.4% for fiscal 2001.
12
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Comparison of the Years Ended March 31, 2001 and 2000
General
The Company earned record net income of $2.1 million for the year ended March
31, 2001, an increase of $106,000 or 5.3% over earnings of $2.0 million for
the year ended March 31, 2000. This marked the fourth consecutive year of
record earnings. The primary reason for the increased earnings was an increase
in net interest income and other income offset in part by increases in the
provision for loan losses and general and administrative expenses.
Net Interest Income
Net interest income increased $854,000 to $10.3 million in fiscal 2001
compared to $9.4 million in fiscal 2000 despite a 16 basis point decline in
the net yield on interest-earning assets. The increase in income was
accomplished by increasing the average of total loans by $43.1 million in
fiscal 2001. The Bank has also been successful in attracting demand, money
market, and certificate of deposit accounts.
Interest income on loans increased $4.3 million as residential real estate
loans and commercial loans both increased during the year. The yield of the
loan portfolio during fiscal 2001 increased 35 basis points. Interest income
on investment securities, mortgage-backed securities, and other securities
increased $32,000 during fiscal 2001. The yield during the year increased 37
basis points as lower yielding investments matured and adjustable rate
mortgage-backed securities rolled into higher rates, but the average balance
of the investment portfolio decreased $5.1 million.
Interest expense on deposits increased $1.4 million during the year ended
March 31, 2001 compared to the year ended March 31, 2000. Average interest
bearing deposits increased $8.7 million and the average cost of those deposits
increased fifty basis points during the year due to increases in market
interest rates during the first 9 months of the year. Interest expense on FHLB
advances and other borrowings increased $2.0 during fiscal 2001 due to the
average amount of borrowings increasing $28.0 million. The average cost of
borrowings increased 76 basis points comparing fiscal 2001 to fiscal 2000.
Provision for Loan Losses
The Company's provision for loan losses increased $175,000 to $925,000 during
the year ended March 31, 2001. The amount of the provision is determined by
Management's on-going monthly analysis of the loan portfolio. Non-accrual
loans, which are loans delinquent 90 days or more, were $183,000 at March 31,
2001 compared to $890,000 at March 31, 2000. Net charge-offs were $262,000 in
fiscal 2001 compared to $344,000 in fiscal 2000. The ratio of the allowance
for loan losses to total loans at March 31, 2001 was 1.19% compared to 1.09%
at March 31, 2000. Management felt it prudent to increase the provision due to
the predicted general slowing of the national economy, the cyclical nature of
economic business cycles, and the entrance into a new loan market for the
Bank. Management believes the allowance for loan losses is adequate based on
Management's estimates of the losses inherent in the loan portfolio, although
there can be no guarantee as to these estimates. In addition, bank regulatory
agencies may require additions to the allowance for loan losses based on their
judgments and estimates as part of their examination process.
Other Income
Other income increased $444,000 or 19.3% from $2.3 million during fiscal 2000
to $2.7 million during fiscal 2001. Gain on sale of loans increased $239,000
to $496,000 during fiscal 2001 compared to $257,000 during fiscal 2000 due to
a $13.3 million or 80.2% increase in originations of loans held for sale and a
concerted effort to better manage the Bank's secondary market sales. The
origination trend changed due to the decrease in mortgage rates during the
year. Loan servicing fees increased $12,000. The Bank sold its remaining
portfolio of loans serviced for others in January 2001 for a profit on sale of
approximately $400,000. Service fees on deposit accounts decreased $42,000 due
to the interest credit rate used by commercial accounts to offset service fees
increasing the first nine months of the year. Income from real estate
operations decreased $24,000 as the Company sold its remaining lots held for
development in March 2001. Other miscellaneous income decreased $106,000 or
24.1% during fiscal 2001 due primarily to a decrease in the commissions earned
on annuity and investment products.
13
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
General and Administrative Expenses
General and administrative expenses increased $1.0 million or 12.8% to $8.9
million during the year ended March 31, 2001 compared to $7.9 million during
the same period one year earlier. Salaries and employee benefits increased
$602,000 or 14.4% due to the opening of the West Columbia branch office in
December 2000 and normal annual salary adjustments. Occupancy expense
increased $165,000 or 32.1% also due to the new branch office. Advertising
expense increased $35,000 during fiscal 2001 due to the "Loan on Us" campaign.
Depreciation and maintenance of equipment expense increased $126,000 or 14.1%
as the Bank added on-line banking and bill payment software and software and
hardware purchased for the year 2000 was depreciated for a full year. Other
miscellaneous expenses encompassing repossessed assets expense, legal,
professional, and consulting expenses, stationery and office supplies, and
other sundry expenses increased $111,000 or 7.2% during fiscal 2001 due
primarily to slight increases in most of the above mentioned expenses and the
opening of a new branch office.
Income Taxes
Income taxes increased $11,000 during the year ended March 31, 2001 compared
to the year ended March 31, 2000 due to an increase in taxable income. The
effective tax rate was 34.4% for fiscal 2001 and 35.4% for fiscal 2000.
14
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Regulatory Capital
The following table reconciles the Bank's shareholders' equity to its various
regulatory capital positions:
March 31,
-----------------------------
2002 2001
-------------- --------------
(In Thousands)
Shareholders' Equity (1) (2) $ 25,646 $ 23,136
Reduction For Goodwill And Other Intangibles 185 650
-------------- --------------
Tangible Capital 25,461 22,486
-------------- --------------
Qualifying Core Deposit Intangibles 185 470
Core Capital 25,646 22,956
-------------- --------------
Supplemental Capital 2,879 2,582
Less Assets Required To Be Deducted 237 227
-------------- --------------
Total Risk-Based Capital $ 28,288 $ 25,311
============== ==============
(1) FOR 2002 AND 2001, INCLUDES UNREALIZED LOSSES OF $183,000 AND EXCLUDES
UNREALIZED GAINS OF $348,000, RESPECTIVELY ON AVAILABLE FOR SALE
SECURITIES.
(2) FOR 2002 AND 2001, EXCLUDES EQUITY OF SECURITY FEDERAL CORPORATION, THE
PARENT.
The following table compares the Bank's capital levels relative to regulatory
requirements at March 31, 2002:
Amount Percent Actual Actual Excess Excess
Required Required Amount Percent Amount Percent
-------- -------- ------ -------- ------ -------
(Dollars in Thousands)
Tangible Capital $ 7,533 2.0% $25,461 6.8% $17,928 4.8%
Tier 1 Leverage (Core)Capital 15,072 4.0% 22,646 6.8% 10,574 2.8%
Tier 1 Risk-Based (Core)
Capital 9,212 4.0% 25,646 11.1% 16,434 7.1%
Total Risk-Based Capital 18,424 8.0% 28,288 12.3% 9,864 4.3%
Liquidity and Capital Resources
Liquidity refers to the ability of the Bank to generate sufficient cash flows
to fund current loan demand, repay maturing borrowings, fund maturing deposit
withdrawals, and meet operating expenses. The Bank's primary sources of funds
include loan repayments, loan sales, increased deposits, advances from the
FHLB, and cash flow generated from operations. The need for funds varies among
periods depending on funding needs as well as the rate of amortization and
prepayment on loans. The use of FHLB advances varies depending on their
relative costs.
The principal use of the Bank's funds is the origination of mortgages and
other loans and the purchase of investments and mortgage-backed securities.
Loan originations were $128.2 million in fiscal 2002 compared to $95.2 million
in fiscal 2001 and $102.5 million in fiscal 2000. Purchases of investments and
mortgage-backed securities were $104.0 million in fiscal 2002 compared to $9.5
million in fiscal 2001 and $30.4 million in fiscal 2000.
Outstanding loan commitments for which the Bank has not obtained prior
commitments to purchase from other institutional investors amounted to
$272,000 at March 31, 2002 compared to $422,000 at March 31, 2001. Those
commitments were for adjustable rate mortgage loans in which the commitment
generally expires in 45 days. In addition, unused lines of credit on home
equity loans, credit cards, and other loans amounted to $33.0 million at March
31, 2002. Home equity loans are made on a floating rate basis with final
maturities of 10 to 15 years. Credit cards are generally made on a floating
rate basis, and are renewed annually or every other year. Management does not
anticipate that the percentage of funds drawn on unused lines of credit will
increase substantially over amounts currently utilized. Funding of undisbursed
loans-in-process of $11.3 million at March 31, 2002 and commitments to
originate loans and future advances on lines of credit are expected to be
provided from loan amortizations and prepayments, deposit inflows, and
short-term borrowing capacity.
15
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources, Continued
The Bank is required under applicable Federal regulations to maintain a
liquidity ratio at specified levels that are subject to change. Currently, a
minimum of 4.0% of the combined total of deposits and certain borrowings must
be maintained in the form of cash or eligible investments. At March 31, 2002,
the Bank's liquidity ratio was approximately 29%. Management believes that
liquidity during fiscal 2002 can be met through the Bank's deposit base, which
increased $51.6 million during fiscal 2002, and from maturing investments.
Also, the Bank has another $58.4 million in unused borrowing capacity at FHLB.
See "Consolidated Statements of Cash Flows" in the consolidated financial
statements.
Recently Issued Accounting Standards
In July 2001, The SEC issued Staff Accounting Bulletin ("SAB") No. 102 -
Selected Loan Loss Allowance Methodology and Documentation Issues. This staff
accounting bulletin clearly defines the required development, documentation,
and application of a systematic methodology for determining allowances for
loan and lease losses in accordance with generally accepted accounting
principles. The company believes that it is in compliance with SAB 102.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141 - Business
Combinations. This SFAS addresses accounting and reporting for all business
combinations and defines the purchase method as the only acceptable method.
This statement is effective for all business combinations initiated after June
30, 2001.
In June 2001, the FASB issued SFAS No. 142 - Goodwill and Other Intangible
Assets. This SFAS addresses how goodwill and other intangible assets should be
accounted for at their acquisition (except for those acquired in a business
combination) and after they have been initially recognized in the financial
statements. The statement is effective for all fiscal years beginning after
December 15, 2001. The Company believes the effect of this SFAS will not have
a material impact on the financial position of the Company.
In August 2001, The FASB issued SFAS No. 144 - Accounting for the Impairment
or Disposal of Long-Lived Assets. This Statement addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. This Statement supersedes SFAS No. 121 -
Accounting for the Impairment of Long-Lived assets and for Long-Lived Assets
to Be Disposed Of. However, this Statement retains the fundamental provisions
of Statement 121 for (a) recognition and measurement of the impairment of
long-lived assets to be held and used and (b) measurement of long-lived assets
to be disposed of by sale. SFAS No. 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years. The statement is not expected to have a material
impact on the consolidated financial statements of the Company.
Additional accounting standards that have been issued or proposed by the FASB
that do not require adoption until a future date are not expected to have a
material impact on the consolidated financial statements upon adoption.
Impact of Inflation and Changing Prices
The consolidated financial statements, related notes, and other financial
information presented herein have been prepared in accordance with Generally
Accepted Accounting Principles ("GAAP") that require the measurement of
financial position and operating results in terms of historical dollars
without considering changes in relative purchasing power over time due to
inflation. Unlike most industrial companies, substantially all of the assets
and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
16
Elliott Davis, LLC
Advisors-CPAs-Consultants
870 S. Pleasantburg Drive
P.O. Box 6286
Greenville, SC 29606-6286
Elliott Davis
- ------------------------------------------------------------------------------
Phone 864.242.3370
Fax 864.232.7161
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Security Federal Corporation and Subsidiaries
Aiken, South Carolina
We have audited the accompanying consolidated balance sheets of
Security Federal Corporation and Subsidiaries as of March 31, 2002 and 2001,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended March 31, 2002.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Security Federal Corporation and Subsidiaries as of March 31, 2002 and 2001
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended March 31, 2002, in conformity with
accounting standards generally accepted in the United States of America.
/s/Elliott Davis, LLC
Elliott Davis, LLC
Greenville, South Carolina
May 2, 2002
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31,
----------------------------
2002 2001
------------- --------------
ASSETS:
Cash And Cash Equivalents $ 11,528,411 $ 12,616,129
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized Cost of
$117,657,245 and $71,574,673 at March 31,
2002 and 2001, Respectively) 117,361,736 72,111,240
Held To Maturity: (Fair Value of $1,571,667
and $2,334,809 at March 31, 2002 and 2001,
Respectively) 1,536,656 2,293,922
------------ ------------
Total Investment And Mortgage-Backed Securities 118,898,392 74,405,162
------------ ------------
Loans Receivable, Net:
Held For Sale 2,165,918 2,245,951
Held For Investment: (Net of Allowance of
$3,689,079 and $2,784,117 at March 31, 2002
and 2001, Respectively) 232,152,950 228,751,063
------------ ------------
Total Loans Receivable, Net 234,318,868 230,997,014
------------ ------------
Accrued Interest Receivable:
Loans 1,249,273 1,348,178
Mortgage-Backed Securities 283,775 179,977
Investments 650,034 572,074
------------ ------------
Total Accrued Interest Receivable 2,183,082 2,100,229
------------ ------------
Premises And Equipment, Net 4,859,140 5,262,957
Federal Home Loan Bank Stock, At Cost 2,669,300 3,431,000
Repossessed Assets Acquired In Settlement Of
Loans 98,157 130,157
Other Assets 1,764,980 1,698,995
------------ ------------
Total Assets $376,320,330 $330,641,643
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposit Accounts $309,037,602 $257,410,417
Advances From Federal Home Loan Bank 33,108,000 42,704,000
Other Borrowings 6,169,411 3,409,362
Advance Payments By Borrowers For Taxes And
Insurance 247,149 382,478
Other Liabilities 2,357,605 3,235,022
------------ ------------
Total Liabilities 350,919,767 307,141,279
------------ ------------
Shareholders' Equity:
Serial Preferred Stock, $.01 Par Value;
Authorized 200,000 Shares; Issued And
Outstanding, None - -
Common Stock, $.01 Par Value; Authorized
5,000,000 Shares, Issued And Outstanding
Shares, 1,671,459 at March 31, 2002 And
1,669,901 at March 31, 2001 16,842 16,842
Additional Paid-In Capital 3,985,312 3,985,312
Indirect Guarantee Of Employee Stock
Ownership Trust Debt (358,297) (415,000)
Accumulated Other Comprehensive Income (Loss) (183,335) 348,015
Retained Earnings, Substantially Restricted 21,940,041 19,565,195
------------ ------------
Total Shareholders' Equity 25,400,563 23,500,364
------------ ------------
Total Liabilities And Shareholders' Equity $376,320,330 $330,641,643
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended March 31,
-----------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Interest Income:
Loans $ 19,462,998 $ 18,519,958 $ 14,204,384
Mortgage-Backed Securities 2,752,563 2,253,322 2,038,716
Investment Securities 2,337,395 3,287,767 3,493,565
Other 79,319 91,782 68,696
------------- ------------- -------------
Total Interest Income 24,632,275 24,152,829 19,805,361
------------- ------------- -------------
Interest Expense:
NOW And Money Market
Accounts 2,307,002 2,671,159 2,827,007
Passbook Accounts 282,646 310,941 318,378
Certificate Accounts 7,392,855 6,964,464 5,355,057
Advances And Other
Borrowed Money 2,229,154 3,924,747 1,877,812
------------- ------------- -------------
Total Interest Expense 12,211,657 13,871,311 10,378,254
------------- ------------- -------------
Net Interest Income 12,420,618 10,281,518 9,427,107
Provision For Loan Losses 1,525,000 925,000 750,000
------------- ------------- -------------
Net Interest Income
After Provision For
Loan Losses 10,895,618 9,356,518 8,677,107
------------- ------------- -------------
Other Income:
Gain On Sale Of Investment
Securities 29,817 - 3,896
Gain On Sale Of Loans 1,522,535 496,132 257,044
Gain On Sale Of Loan
Servicing - 400,000 -
Loan Servicing Fees 198,124 302,885 291,193
Service Fees On Deposit
Accounts 1,166,958 1,064,030 1,106,007
Income From Real Estate
Operations - 46,741 71,117
Other 547,305 429,941 566,742
------------- ------------- -------------
Total Other Income 3,464,739 2,739,729 2,295,999
------------- ------------- -------------
General And Administrative
Expenses:
Compensation And Employee
Benefits 5,805,020 4,798,804 4,196,630
Occupancy 807,430 679,303 514,232
Advertising 175,256 200,668 165,567
Depreciation And Maintenance
Of Equipment 1,100,237 1,021,274 895,498
Amortization Of Intangibles 465,240 465,240 465,240
FDIC Insurance Premiums 48,442 45,949 78,743
Other 1,934,847 1,640,022 1,529,306
------------- ------------- ------------
Total General And
Administrative Expenses 10,336,472 8,851,260 7,845,216
------------- ------------- ------------
Income Before Income Taxes 4,023,885 3,244,987 3,127,890
Provision For Income Taxes 1,514,299 1,117,553 1,106,677
------------- ------------- -------------
Net Income $ 2,509,586 $ 2,127,434 $ 2,021,213
============= ============= =============
Net Income Per Common Share
(Basic) $ 1.50 $ 1.27 $ 1.20
============= ============= =============
Net Income Per Common Share
(Diluted) $ 1.47 $ 1.25 $ 1.19
============= ============= =============
Cash Dividend Per Share On
Common Stock $ .08 $ .08 $ .08
============= ============= =============
Weighted Average Shares
Outstanding (Basic) 1,671,139 1,672,694 1,680,644
============= ============= =============
Weighted Average Shares
Outstanding (Diluted) 1,706,912 1,703,776 1,694,198
============= ============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years Ended March 31, 2002, 2001 and 2000
- ------------------------------------------------------------------------------------------------------------
Additional Indirect Accumulated Other
Common Paid -In Guarantee Comprehensive Retained
Stock Capital of ESOP Loss Loss Earnings Total
--------- ---------- ------------ -------------- ---------- ----------
Balance At March 31,
1999 $ 8,421 $ 3,993,733 $ - $ (127,738) $ 15,686,026 $ 19,560,442
Net Income - - - - 2,021,213 2,021,213
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Losses On Securities
Available For Sale - - - (1,498,841) - (1,498,841)
Reclassification
Adjustment For
Gains Included In
Net Income (2,571) (2,571)
------------
Comprehensive Income - - - - - 519,801
Increase in Indirect
Guarantee of ESOP
Debt - - (186,803) - - (186,803)
Cash Dividends - - - - (134,739) (134,739)
------- ----------- ---------- ------------ ------------ ------------
Balance At March 31,
2000 $ 8,421 $ 3,993,733 $ (186,803) $ (1,629,150) $ 17,572,500 $ 19,758,701
======= =========== ========== ============ ============ ============
- ------------------------------------------------------------------------------------------------------------
Additional Indirect Accumulated Other
Common Paid -In Guarantee Comprehensive Retained
Stock Capital of ESOP Loss Loss Earnings Total
--------- ---------- ------------ -------------- ---------- ----------
Balance At March 31,
2000 $ 8,421 $ 3,993,733 $ (186,803) $ (1,629,150) $ 17,572,500 $ 19,758,701
Net Income - - - - 2,127,434 2,127,434
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Gains On Securities
Available For Sale - - - 1,977,165 - 1,977,165
------------
Comprehensive Income - - - - - 4,104,599
2-For-1 Stock Split 8,421 (8,421) - - - -
Increase in Indirect
Guarantee of ESOP Debt - - (228,197) - - (228,197)
Cash Dividends - - - - (134,739) (134,739)
------- ----------- ---------- ------------ ------------ ------------
Balance At March 31,
2001 $16,842 $ 3,985,312 $ (415,000) $ 348,015 $ 19,565,195 $ 23,500,364
======= =========== ========== ============ ============ ============
- ------------------------------------------------------------------------------------------------------------
Additional Indirect Accumulated Other
Common Paid -In Guarantee Comprehensive Retained
Stock Capital of ESOP Loss Loss Earnings Total
--------- ---------- ------------ -------------- ---------- ----------
Balance At March 31,
2001 $16,842 $ 3,985,312 $ (415,000) $ 348,015 $ 19,565,195 $ 23,500,364
Net Income - - - - 2,509,586 2,509,586
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Losses On Securities
Available For Sale - - - (511,671) - (511,671)
Reclassification
Adjustment For Gains
Included In Net Income - - - (19,679) - (19,679)
------------
Comprehensive Income - - - - - 1,978,236
Decrease in Indirect
Guarantee of ESOP Debt - - 56,703 - - 56,703
Cash Dividends - - - - (134,740) (134,740)
------- ----------- ----------- ------------ ------------ ------------
Balance At March 31,
2002 $16,842 $ 3,985,312 $ (358,297) $ (183,335) $ 21,940,041 $ 25,400,563
======= =========== =========== ============ ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended March 31,
-------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income $ 2,509,586 $ 2,127,434 $ 2,021,213
Adjustments To Reconcile
Net Income To Net
Cash Provided By
Operating Activities:
Depreciation 959,341 893,682 783,805
Amortization Of
Intangibles 465,240 465,240 465,240
Discount Accretion
And Premium
Amortization 178,126 25,750 144,460
Provisions For Losses
On Loans And Real
Estate 1,525,000 875,000 750,000
Gain On Sales Of Loans (1,522,535) (496,132) (257,044)
Gain On Sales Of
Investment Securities (29,817) - (3,896)
Gain On Sale Of Real
Estate 13,681 (88,134) (60,834)
Amortization Of Deferred
Fees On Loans (223,581) (148,692) (3,859)
Loss On Disposition Of
Premises And Equipment (330) 6,008 6,538
Proceeds From Sale Of
Loans Held For Sale 86,027,850 29,042,592 17,184,431
Origination Of Loans
For Sale (84,455,282) (29,496,735) (16,618,763)
(Increase) Decrease In
Accrued Interest
Receivable:
Loans 98,905 (384,959) (306,066)
Mortgage-Backed
Securities (103,798) 24,026 (57,264)
Investments (77,960) 189,354 42,268
(Decrease) Increase In
Advance Payments
By Borrowers (135,329) 8,818 99,593
Other, Net (1,098,686) (206,547) (301,338)
-------------- -------------- --------------
Net Cash Provided By
Operating Activities 4,130,411 2,836,705 3,888,484
-------------- -------------- --------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase Of Mortgage-
Backed Securities
Available For Sale (40,134,586) (7,496,845) (17,409,175)
Principal Repayments On
Mortgage-Backed
Securities Available
For Sale 17,931,424 6,627,764 6,580,795
Principal Repayments On
Mortgage-Backed
Securities Held To
Maturity 740,244 416,356 750,408
Purchase Of Investment
Securities Available
For Sale (63,835,317) (1,975,000) (13,006,730)
Maturities Of Investment
Securities Available
For Sale 34,642,931 22,689,718 11,985,716
Maturities Of Investment
Securities Held To
Maturity 102,351 - 71,115
Proceeds From Sales Of
Investment Securities
Available For Sale 2,003,738 - 2,503,985
Proceeds From Sale of
Mortgage-Backed
Securities Available
For Sale 3,075,600 - -
Purchase Of FHLB Stock - (825,400) (1,734,200)
Redemption Of FHLB Stock 761,700 - 373,600
Increase In Loans
Receivable (5,075,962) (38,154,684) (42,357,135)
Investment In Real Estate
Held For Development - (463,361) (689,318)
Proceeds From Sale Of
Real Estate Held For
Development - 1,095,900 776,668
Proceeds From Sale Of
Repossessed Assets 468,475 582,019 99,265
Purchase And Improvement
Of Premises And
Equipment (555,194) (1,877,954) (888,372)
Proceeds From Sale Of
Premises and Equipment - - 12,110
-------------- -------------- --------------
Net Cash Used By Investing
Activities (49,874,596) (19,381,487) (52,931,268)
-------------- -------------- --------------
(Continued)
21
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the Years Ended March 31,
-------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Increase In Deposit
Accounts 51,627,185 28,587,086 12,290,648
Proceeds From FHLB
Advances 75,075,000 98,273,305 143,350,000
Repayment Of FHLB
Advances (84,671,000) (106,180,305) (107,339,000)
Proceeds From Other
Borrowings, Net 2,760,049 1,198,862 1,341,230
Dividends To Shareholders (134,740) (134,739) (134,739)
-------------- -------------- --------------
Net Cash Provided By
Financing Activities 44,656,494 21,744,209 49,508,139
-------------- -------------- --------------
Net Increase (Decrease)
In Cash And Cash
Equivalents (1,087,718) 5,199,427 465,355
Cash And Cash Equivalents
At Beginning Of Year 12,616,129 7,416,702 6,951,347
-------------- -------------- --------------
Cash And Cash Equivalents
At End Of Year $ 11,528,411 $ 12,616,129 $ 7,416,702
============== ============== ==============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash Paid During The Period
For:
Interest $ 12,780,647 $ 13,596,058 $ 10,592,614
============== ============== ==============
Income Taxes $ 1,994,513 $ 1,503,183 $ 1,216,350
============== ============== ==============
Supplemental Schedule Of
Non Cash Transactions:
Additions To Repossessed
Assets $ 402,656 $ 332,203 $ 287,405
============== ============== ==============
(Increase) Decrease In
Unrealized Net Loss On
Securities Available
For Sale, Net Of Taxes $ (531,350) $ 1,977,165 $ (1,501,412)
============== ============== ==============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies
-------------------------------
The following is a description of the more significant accounting and
reporting policies used in the preparation and presentation of the
accompanying consolidated financial statements. All significant intercompany
transactions have been eliminated in consolidation.
(a) Basis of Consolidation and Nature of Operations
-----------------------------------------------
The accompanying consolidated financial statements include the
accounts of Security Federal Corporation (the "Company") and its
wholly owned subsidiary, Security Federal Bank (the "Bank") and the
Bank's wholly owned subsidiaries, Security Federal Insurance
("SFINS"), Security Federal Investments ("SFINV"), Security Federal
Trust ("SFT"), and Security Financial Services Corporation ("SFSC").
The Bank is primarily engaged in the business of accepting savings
and demand deposits and originating mortgage loans and other loans
to individuals and small businesses for various personal and
commercial purposes. SFINS, SFINV, and SFT were formed during fiscal
2002 and began operating during the December 2001 quarter. SFINS is
an insurance agency offering business, health, home and life
insurance. SFINV engages primarily in investment brokerage
services. SFT offers trust, financial planning and financial
management services. SFSC is currently inactive. Also included in
the consolidation is a real estate partnership, Willow Woods. Willow
Woods sold its remaining property in fiscal 2001 and the partnership
was liquidated.
(b) Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks, interest-bearing balances in other
banks, and federal funds sold. Cash equivalents have maturities
of three months or less.
(c) Investment and Mortgage-Backed Securities
-----------------------------------------
Investment securities, including mortgage-backed securities, are
classified in one of three categories: held to maturity, available
for sale, or trading. Management determines the appropriate
classification of debt securities at the time of purchase.
Investment securities are classified as held to maturity when the
Company has the positive intent and ability to hold the securities
to maturity. These securities are recorded at cost and adjusted for
amortization of premiums and accretion of discounts over the
estimated life of the security using a method that approximates
a level yield. Prepayment assumptions on mortgage-backed securities
are anticipated.
Management classifies investment securities that are not considered
to be held to maturity as available for sale. These type investments
are stated at fair value with unrealized gains and losses, net of
tax, reported in a separate component of shareholders' equity
("accumulated other comprehensive income (loss)"). Gains and losses
from sales of investment and mortgage-backed securities available
for sale are determined using the specific identification method.
The Company has no trading securities.
The Bank maintained liquid assets in excess of the amount required
by regulations. The required amount is 4% of the average daily
balances of deposits and certain borrowings. Liquid assets consist
primarily of cash, time deposits, and certain investment securities.
23
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(d) Allowance for Loan Losses
-------------------------
The Company provides for loan losses using the allowance method.
Accordingly, all loan losses are charged to the related allowance
and all recoveries are credited to the allowance for loan losses.
Additions to the allowance for loan losses are provided by charges
to operations based on various factors which, in Management's
judgment, deserve current recognition in estimating possible
losses. Such factors considered by Management include the fair
value of the underlying collateral; stated guarantees by the
borrower, if applicable; the borrower's ability to repay from other
economic resources; growth and composition of the loan portfolios;
the relationship of the allowance for loan losses to outstanding
loans; loss experience; delinquency trends; and general economic
conditions. Management evaluates the carrying value of the loans
periodically and the allowance is adjusted accordingly. While
Management uses the best information available to make evaluations,
future adjustment to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making
these evaluations. Allowances for loan losses are subject to
periodic evaluations by various regulatory authorities and may be
subject to adjustments based upon the information that is available
at the time of their examinations.
The Company values impaired loans at the loan's fair value if it is
probable that the Company will be unable to collect all amounts due
according to the terms of the loan agreement at the present value of
expected cash flows; the market price of the loan, if available; or
the value of the underlying collateral. Expected cash flows are
required to be discounted at the loan's effective interest rate.
When the ultimate collectibility of an impaired loan's principal is
in doubt, wholly or partially, all cash receipts are applied to
principal. When this doubt does not exist, cash receipts are applied
under the contractual terms of the loan agreement first to interest
then to principal. Once the recorded principal balance has been
reduced to zero, future cash receipts are applied to interest income
to the extent that any interest has been foregone. Further cash
receipts are recorded as recoveries of any amounts previously
charged off.
(e) Loans Held for Sale
-------------------
Loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the
aggregate. Net unrealized losses are provided for in a valuation
allowance by charges to operations.
(f) Repossessed Assets Acquired in Settlement of Loans
--------------------------------------------------
Repossessed Assets represents real estate and other assets acquired
through foreclosure or repossession and is initially recorded at the
lower of cost (principal balance of the former mortgage loan less
any specific valuation allowances) or estimated fair value less
costs to sell. Subsequent improvements are capitalized. Costs of
holding real estate, such as property taxes, insurance, general
maintenance and interest expense, are expensed as a period cost.
Fair values are reviewed regularly and allowances for possible
losses are established when the carrying value of the asset owned
exceeds the fair value less estimated costs to sell. Fair values are
generally determined by reference to an outside appraisal.
(g) Premises and Equipment
----------------------
Premises and equipment are carried at cost, net of accumulated
depreciation. Depreciation of premises and equipment is amortized on
a straight-line method over the estimated useful life of the related
asset. Estimated lives are 7-30 years for buildings and improvements
and generally 5-10 years for furniture, fixtures and equipment.
(h) Income Taxes
------------
Deferred tax expense or benefit is recognized for the net change
during the year in the deferred tax liability or asset. That amount
together with income taxes currently payable is the total amount of
income tax expense or benefit for the year. Deferred taxes are
provided for in differences in financial reporting bases for assets
and liabilities compared with their tax bases. Basically, a current
tax liability or asset is established for taxes presently payable or
refundable and a deferred tax liability or asset is established for
future tax items. A valuation allowance, if applicable, is
established for deferred tax assets that may not be realized. Tax
bad debt reserves in excess of the base year amount (established as
taxable years ending March 31, 1988 or later) would create a
deferred tax liability. Deferred income taxes are provided for in
differences between the provision for loan losses for financial
statement purposes and those allowed for income tax purposes.
24
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(i) Loan Fees and Costs Associated with Originating Loans
-----------------------------------------------------
Loan fees received, net of direct incremental costs of originating
loans, are deferred and amortized over the contractual life of the
related loan. The net fees are recognized as yield adjustments by
applying the interest method. Prepayments are not anticipated.
(j) Intangible Assets
-----------------
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line basis
over the expected periods to be benefited. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through projected undiscounted future results. The amount
of goodwill impairment, if any, is measured based on projected
discounted future results using a discount rate reflecting the
Company's average cost of funds.
Deposit based premiums, representing the cost of acquiring deposits
from other financial institutions, are included in the balance sheet
as "Other Assets" and are being amortized by charges to operations
over the expected periods to be benefited. The effective
amortization period for intangible assets is approximately 10 years.
The balance of intangible assets was $185,000 and $650,000 at March
31, 2002 and March 31, 2001, respectively.
(k) Interest Income
---------------
Interest on loans is accrued and credited to income monthly based on
the principal balance outstanding and the contractual rate on the
loan. The Company places loans on non-accrual status when they
become greater than 90 days delinquent or when, in the opinion of
Management, full collection of principal or interest is unlikely.
The Company provides an allowance for uncollectible accrued interest
on loans that are 90 days delinquent for all interest accrued prior
to the loan being placed on non-accrual status. The loans are
returned to an accrual status when full collection of principal and
interest appears likely.
(l) Fair Value of Financial Instruments
-----------------------------------
The Company discloses the fair value of on- and off-balance sheet
financial instruments when it is practicable to do so. Fair values
are based on quoted market prices, where available; on estimates of
present value; or on other valuation techniques. These estimates are
made at a specific point in time, are subjective in nature, and
involve uncertainties and significant judgment. In addition, the
Company does not disclose the fair value of non-financial
instruments. Accordingly, the aggregate fair values presented do not
represent the underlying fair value of the Company.
Fair value approximates carrying value for the following financial
instruments due to the short-term nature of the instrument: cash and
cash equivalents.
Securities are valued using quoted fair market prices.
Fair value for the Company's off-balance sheet financial instruments
is based on the discounted present value of the estimated future
cash flows.
Fair value for variable rate loans that reprice frequently, loans
held for sale, and for loans that mature in less than three months
is based on the carrying value. Fair value for fixed rate mortgage
loans, personal loans, and other loans (primarily commercial)
maturing after three months is based on the discounted present value
of the estimated future cash flows. Discount rates used in these
computations approximate the rates currently offered for similar
loans of comparable terms and credit quality.
Fair value for demand deposit accounts and interest-bearing accounts
with no fixed maturity date is equal to the carrying value.
Certificates of deposit accounts and securities sold under
repurchase agreements maturing within one year are valued at their
carrying value. The fair value of certificates of deposit accounts
and securities sold under repurchase agreements after one year are
estimated by discounting cash flows from expected maturities using
current interest rates on similar instruments. Fair value for
long-term FHLB advances is based on discounted cash flows using the
Company's current incremental borrowing rate. Discount rates used in
these computations approximate rates currently offered for similar
borrowings of comparable terms and credit quality.
25
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(m) Earnings Per Share
------------------
Net income per share is computed by dividing consolidated net income
by the weighted average number of common shares outstanding during
the period. The treasury stock method is used to compute the
dilutive effect of stock options in the diluted weighted average
number of common shares. All per share data has been restated to
reflect the 2-for-1 stock split issued during the year ended March
31, 2001.
For the Year Ended
March 31, 2002 March 31, 2001
------------------------------- ------------------------------
Per share Per share
Income Shares amounts Income Shares amounts
---------- --------- --------- --------- --------- --------
Basic EPS $2,509,586 1,671,139 $ 1.50 $2,127,434 1,672,694 $ 1.27
Dilutive
effect of:
Stock
Options - 22,712 (0.02) - 19,576 (0.01)
ESOP - 13,061 (0.01) - 11,506 (0.01)
----------- --------- ------ ----------- --------- ------
Diluted EPS $ 2,509,586 1,706,912 $ 1.47 $ 2,127,434 1,703,776 $ 1.25
(n) Use of Estimates
----------------
The preparation of financial statements in conformity with
Generally Accepted Accounting Principles ("GAAP") requires
Management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial
statements and the reported amounts of income and expenses during
the reporting periods. Actual results could differ from those
estimates.
(o) Recently Issued Accounting Standards
------------------------------------
In July 2001, The SEC issued Staff Accounting Bulletin ("SAB") No.
102 - Selected Loan Loss Allowance Methodology and Documentation
Issues. This staff accounting bulletin clearly defines the required
development, documentation, and application of a systematic
methodology for determining allowances for loan and lease losses in
accordance with generally accepted accounting principles. The
company believes that it is in compliance with SAB 102.
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statements of Financial Accounting Standards ("SFAS") No. 141
- Business Combinations. This SFAS addresses accounting and
reporting for all business combinations and defines the purchase
method as the only acceptable method. This statement is effective
for all business combinations initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142 - Goodwill and Other
Intangible Assets. This SFAS addresses how goodwill and other
intangible assets should be accounted for at their acquisition
(except for those acquired in a business combination) and after they
have been initially recognized in the financial statements. The
statement is effective for all fiscal years beginning after December
15, 2001. The Company believes the effect of this SFAS will not have
a material impact on the financial position of the Company.
In August 2001, The FASB issued SFAS No. 144 - Accounting for the
Impairment or Disposal of Long-Lived Assets. This Statement
addresses financial accounting and reporting for the impairment of
long-lived assets and for long-lived assets to be disposed of. This
Statement supersedes SFAS No. 121 - Accounting for the Impairment of
Long-Lived assets and for Long-Lived Assets to Be Disposed Of.
However, this Statement retains the fundamental provisions of
Statement 121 for (a) recognition and measurement of the impairment
of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal
years. The statement is not expected to have a material impact on
the consolidated financial statements of the Company.
Other accounting standards that have been issued or proposed by FASB
that do not require adoption until a future date are not expected to
have a material impact on the consolidated financial statements upon
adoption.
26
(p) Risks and Uncertainties
-----------------------
In the normal course of its business the Company encounters two
significant types of risk: economic and regulatory. There are three
main components of economic risk: interest rate risk, credit risk,
and market risk. The Company is subject to interest rate risk to the
degree that its interest-bearing liabilities mature or reprice at
different speeds, or on different bases, than its interest-earning
assets. Credit risk is the risk of default on the Company's loan
portfolio that results from borrowers' inability or unwillingness to
make contractually required payments. Market risk reflects changes
in the value of collateral underlying loans receivable, the
valuation of real estate held by the Company, and the valuation of
loans held for sale and mortgage-backed securities available for
sale. The Company is subject to the regulations of various
government agencies. These regulations can and do change
significantly from period to period. The Company also undergoes
periodic examinations by the regulatory agencies, which may subject
it to further changes with respect to asset valuations, amounts of
required loss allowances, and operating restrictions, resulting form
the regulators' judgements based on information available to them at
the time of their examination.
(q) Reclassifications
-----------------
Certain amounts in prior years' consolidated financial statements
have been reclassified to conform to current year classifications.
27
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(2) Investment and Mortgage-Backed Securities, Available for Sale
-------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and
fair values of investment and mortgage-backed securities available for
sale are as follows:
March 31, 2002
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair value
------------- ---------- ----------- -------------
FHLB Securities $ 51,434,653 $ 182,122 $ 787,932 $ 50,828,843
Federal Farm Credit
Securities 8,536,297 39,795 50,392 8,525,700
FHLMC Bonds 2,012,874 17,493 28,607 2,001,760
Mortgage-Backed
Securities 55,673,421 594,414 262,402 56,005,433
------------- ---------- ----------- -------------
$ 117,657,245 $ 833,824 $ 1,129,333 $ 117,361,736
============= ========== =========== =============
March 31, 2001
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair value
------------- ---------- ----------- -------------
GNMA Bond $ 1,975,022 $ - $ - $ 1,975,022
FHLB Securities 26,102,565 167,703 17,345 26,252,923
Federal Farm Credit
Securities 4,971,771 50,839 - 5,022,610
FHLMC Bonds 2,052,253 - 13,368 2,038,885
Mortgage-Backed
Securities 36,473,062 380,794 32,056 36,821,800
------------- ---------- ----------- -------------
$ 71,574,673 $ 599,336 $ 62,769 $ 72,111,240
============= ========== =========== =============
The amortized cost and fair value of investment and mortgage-backed
securities available for sale at March 31, 2002 are shown below by
contractual maturity. Expected maturities will differ from contractual
maturities because borrowers have the right to prepay obligations with or
without call or prepayment penalties.
Amortized Cost Fair value
--------------- --------------
Less Than 1 Year $ 1,500,000 $ 1,531,570
1 - 5 Years 38,265,716 37,975,327
More Than 5 Years 22,218,108 21,849,406
Mortgage-Backed Securities 55,673,421 56,005,433
--------------- --------------
$ 117,657,245 $ 117,361,736
=============== ==============
At March 31, 2002, investment and mortgage-backed securities available
for sale of $20,700,000 were pledged as collateral for certain deposit
accounts.
The Bank received approximately $5,079,000 and $2,504,000 proceeds from
sales of available for sale securities with approximately $29,800 and
$3,900 recorded in gross gains and no gross losses in the years ending
March 31, 2002 and 2000, respectively. The Bank sold no securities in the
year ending March 31, 2001.
28
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) Investment and Mortgage-Backed Securities, Held to Maturity
-----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and
fair values of investment and mortgage-backed securities held to
maturity are as follows:
March 31, 2002
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair value
------------- ---------- ----------- -------------
FNMA Securities $ 163,356 $ 2,771 $ - $ 166,127
Mortgage-Backed
Securities 1,373,300 32,240 - 1,405,540
------------- ---------- ----------- -------------
$ 1,536,656 $ 35,011 $ - $ 1,571,667
============= ========== =========== =============
March 31, 2001
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair value
------------- ---------- ----------- -------------
FNMA Securities $ 265,707 $ 1,733 $ - $ 267,440
Mortgage-Backed
Securities 2,028,215 39,154 - 2,067,369
------------- ---------- ----------- -------------
$ 2,293,922 $ 40,887 $ - $ 2,334,809
============= ========== =========== =============
The amortized cost and fair value of investment and mortgage-backed
securities held to maturity at March 31, 2002, by contractual maturity,
are shown below. Expected maturities will differ from contractual
maturities due to call features on certain investments.
Amortized Cost Fair value
--------------- --------------
Less Than 1 Year $ - $ -
1 - 5 Years - -
More Than 5 Years 163,356 166,127
Mortgage-Backed Securities 1,373,300 1,405,540
--------------- --------------
$ 1,536,656 $ 1,571,667
=============== ==============
At March 31, 2002, investment and mortgage-backed securities held to
maturity of $1,300,000 were pledged as collateral for certain deposit
accounts.
29
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(4) Loans Receivable, Net
---------------------
Loans receivable, net, at March 31 consisted of the following:
2002 2001
------------- -------------
Residential Real Estate Loans $ 100,065,942 $ 121,736,566
Consumer Loans 49,851,549 46,277,098
Commercial Business And Real
Estate Loans 97,396,184 74,520,017
Loans Held For Sale 2,165,918 2,245,951
------------- -------------
249,479,593 244,779,632
------------- -------------
Less:
Allowance For Loan Losses 3,689,079 2,784,117
Loans In Process 11,287,518 10,738,528
Deferred Loan Fees 184,128 259,973
------------- -------------
15,160,725 13,782,618
------------- -------------
Total Loans Receivable, Net $ 234,318,868 $ 230,997,014
============= =============
Changes in the allowance for loan losses for the years ended March 31 are
summarized as follows:
2002 2001 2000
-------------- -------------- --------------
Balance At Beginning Of
Year $ 2,784,117 $ 2,120,767 $ 1,715,068
Provision For Loan Losses 1,525,000 925,000 750,000
Charge Offs (817,680) (329,825) (383,466)
Recoveries 197,642 68,175 39,165
-------------- -------------- --------------
Total Allowance For Loan
Losses $ 3,689,079 $ 2,784,117 $ 2,120,767
============== ============== ==============
The following table sets forth the amount of the Company's non-accrual
loans and the status of the related interest income at March 31.
2002 2001
------------- -------------
Non-Accrual Loans $ 1,390,000 $ 183,000
============= =============
Interest Income That
Would Have Been
Recognized Under
Original Terms $ 58,000 $ 13,000
============= =============
Loans serviced for others at March 31, 2002, 2001 and 2000, were
approximately $671,000, $48.3 million, and $54.1 million, respectively.
On January 31, 2001, the Company sold the mortgage loan servicing for
others to another bank. The gain on sale of servicing was $400,000. The
Company sub-serviced for the buyer of the servicing, until the transfer
date of April 15, 2001.
At March 31, 2002 and 2001, impaired loans amounted to $897,000 and
$789,000, respectively. Losses on impaired loans are accounted for in the
allowance for loan loss. For the years ended March 31, 2002 and 2001, the
average recorded investment in impaired loans was $786,000 and $740,000
respectively.
The Bank blanket pledges its portfolio of single family mortgage loans to
secure FHLB advances.
30
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(5) Premises and Equipment, Net
---------------------------
Premises and equipment, net, at March 31 are summarized as follows:
2002 2001
------------ -----------
Land $ 496,163 496,163
Buildings And Improvements 5,180,492 5,170,080
Furniture And Equipment 5,033,765 4,642,542
------------ -----------
10,710,420 10,308,785
Less Accumulated Depreciation (5,851,280) (5,045,828)
------------ -----------
Total Premises And Equipment, Net $ 4,859,140 5,262,957
============ ===========
Depreciation expense for the years ended March 31, 2002, 2001, and 2000
was approximately $959,000, $894,000, and $784,000, respectively.
The Bank has entered into non-cancelable operating leases related to
buildings and land. At March 31, 2002, future minimum payments under
non-cancelable operating leases with initial or remaining terms of one
year or more are as follows (by fiscal year):
2003 $ 188,157
2004 179,157
2005 178,343
2006 174,117
2007 152,987
Thereafter 1,139,519
-----------
$ 2,012,280
===========
Total rental expense amounted to $190,000, $150,000, and $69,000 for the
years ended March 31, 2002, 2001 and 2000, respectively. Five lease
agreements with monthly expenses of $2,385, $2,113, $493, $407 and $700
have renewal options of 10, 10, 60, 5, and 20 years, respectively.
(6) FHLB Stock
----------
By law, every federally insured savings institution is required to invest
in FHLB stock. No ready market exists for this stock and it has no quoted
fair value. However, because redemption of this stock has historically
been at par, it is carried at cost.
The Bank, as a member of the FHLB of Atlanta, is required to acquire and
hold shares of capital stock in the FHLB of Atlanta in an amount equal to
the greater of: 1) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year; or, 2) 1/20th of its advances
(borrowings) from the FHLB of Atlanta. The Bank is in compliance with
this requirement with an investment in FHLB of Atlanta stock of
$2,669,300 as of March 31, 2002.
31
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To consolidated Financial Statements
(7) Real Estate Operations
----------------------
The Company participated in a real estate joint venture near Aiken;
Willow Woods. The Company owned 50% of the Willow Woods partnership as a
joint venture. The joint venture has been consolidated into the Company's
financial statements since the Company had voting control in the
partnership. In the latter part of fiscal 2001, the Company liquidated
the remaining assets of the Willow Woods partnership and therefore the
Company had no investment in real estate held for development and sale
at March 31, 2002 and 2001. Income from real estate operations at March
31 is as follows:
2002 2001 2000
-------------- -------------- --------------
Real Estate Held For
Development And Sale:
Sales $ - $ 1,095,900 $ 776,668
Cost Of Sales - 1,049,159 705,551
----------- ----------- -----------
Gross Profit - 46,741 71,117
Recovery Of Previously
Recognized Loss - (50,000) -
Other Expenses, Net - 72,099 90,994
----------- ----------- -----------
Net Income (Loss) $ - $ 24,642 $ (19,877)
=========== =========== ===========
32
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(8) Deposits
--------
Deposits outstanding by type of account are summarized as follows:
At March 31, 2002 At March 31, 2001
--------------------------------------- ----------------------------------------
Weighted Interest Rate Weighted Interest Rate
Rate Range Amount Rate Range
------------ -------- ------------- ----------- -------- --------------
Checking Accounts $ 71,906,781 0.58% 0.00-2.47% $ 61,453,344 0.86% 0.00-4.89%
Money Market Accts. 74,074,781 2.73% 1.74-2.96% 49,855,497 4.66% 2.20-5.13%
Passbook Accounts 15,106,897 1.75% 0.00-2.50% 12,911,410 2.44% 0.00-2.50%
------------ ---- --------- ------------ ---- ---------
Total 161,088,510 1.68% 0.00-2.96% 124,220,251 2.55% 0.00-5.13%
------------ ---- --------- ------------ ---- ---------
Certificate
Accounts:
0.00 - 4.99% 127,067,831 10,021,153
5.00 - 6.99% 19,982,399 112,040,419
7.00 - 8.99% 898,862 11,128,594
------------ ------------
Total 147,949,092 3.59% 0.00-7.26% 133,190,166 6.15% 4.17-7.26%
------------ ---- --------- ------------ ---- ---------
Total Deposits $309,037,602 2.60% 0.00-7.26% $257,410,417 4.41% 0.00-7.26%
============ ==== ========= ============ ==== =========
The aggregate amount of short-term certificates of deposit with a minimum
denomination of $100,000 was $45,485,000 and $35,720,000 at March 31,
2002 and 2001, respectively. The amounts and scheduled maturities of
certificates of deposit at March 31 are as follows:
March 31,
----------------------------
2002 2001
------------- ------------
Within 1 Year $ 125,974,703 $ 115,491,473
After 1 Year, Within 2 15,454,043 15,122,512
After 2 Years, Within 3 2,202,571 1,931,789
After 3 Years, Within 4 817,484 254,103
After 4 Years, Within 5 3,500,291 390,289
Thereafter - -
------------- -------------
$ 147,949,092 $ 133,190,166
============= =============
(9) Advances From Federal Home Loan Bank (FHLB)
------------------------------------------
Advances from the FHLB at March 31 are summarized by year of maturity and
weighted average interest rate below:
2002 2001
---------------------------- ----------------------------
Year Ending
March 31 Amount Weighted Rate Amount Weighted Rate
------------- -------------- ------------- --------------
2002 $ - - $ 9,560,000 5.63%
2003 5,000,000 6.40% 5,000,000 6.40%
2004 - - - -
2005 10,108,000 6.15% 10,144,000 6.16%
2006 18,000,000 5.98% 18,000,000 5.98%
Thereafter - - - -
----------- ---- ----------- ----
$33,108,000 6.09% $42,704,000 5.99%
=========== ==== =========== ====
These advances are secured by a blanket collateral agreement with the
FHLB pledging the Bank's portfolio of residential first mortgage loans.
Advances are subject to prepayment penalties.
At March 31, 2002, the Bank had $58.4 million in an unused line of credit
at the FHLB.
33
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(10) Income Taxes
------------
Income tax expense is comprised of the following:
For the Years Ended March 31,
----------------------------------------------
2002 2001 2000
-------------- -------------- ---------------
Current:
Federal $ 1,799,303 $ 1,323,058 $ 1,409,595
State 200,700 46,000 -
------------ ----------- -------------
Total Current Tax Expense 2,000,003 1,369,058 1,409,595
------------ ----------- -------------
Deferred:
Federal (348,904) (251,505) (302,918)
State (136,800) - -
------------ ----------- -------------
Total Deferred Tax Expense (485,704) (251,505) (302,918)
------------ ----------- -------------
Total Income Tax Expense $ 1,514,299 $ 1,117,553 $ 1,106,677
============ =========== =============
The Company's income taxes differ from those computed at the statutory
Federal income tax rate, as follows:
For the Years Ended March 31,
----------------------------------------------
2002 2001 2000
-------------- -------------- ---------------
Tax At Statutory Income
Tax Rate $ 1,368,121 $ 1,103,296 $ 1,063,483
State Tax And Other 146,178 14,257 43,194
------------ ------------ -------------
Total Income Tax Expense $ 1,514,299 $ 1,117,553 $ 1,106,677
============ ============ =============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
presented below.
At March 31,
2002 2001
Deferred Tax Assets:
Provision For Loan Losses $ 1,475,632 $ 885,628
Goodwill Tax Basis Over Financial
Statement Basis 680,221 433,198
Net Fees Deferred For Financial
Reporting 168,042 52,771
Unrealized Loss On Securities Available
For Sale 112,174 -
Other 23,254 25,479
----------- -----------
Total Gross Deferred Tax Assets 2,459,323 1,397,076
----------- -----------
Deferred Tax Liabilities:
Unrealized Gain On Securities Available
For Sale - 212,933
FHLB Stock Basis Over Tax Basis 133,367 113,362
Depreciation 91,968 112,032
Other 464,428 -
Total Gross Deferred Tax Liability 689,763 438,327
----------- -----------
Net Deferred Tax Asset $ 1,769,560 $ 958,749
=========== ===========
The balance of the change in the net deferred tax asset results from the
current period deferred tax expense of $485,704. The net deferred tax
asset is included in other assets in the accompanying consolidated
balance sheets.
No valuation allowance for deferred tax assets was required at March 31,
2002 and 2001. The realization of net deferred tax assets may be based on
utilization of carrybacks to prior taxable periods, anticipation of
future taxable income in certain periods, and the utilization of tax
planning strategies. Management has determined that the net deferred tax
asset can be supported based upon these criteria.
34
SECURITY FEDERAL CORPORATION SUBSIDIARIES
Notes To Consolidated Financial Statements
(10) Income Taxes, Continued
-----------------------
Retained earnings at March 31, 2002 include tax bad debt reserves of
approximately $2.2 million for which no provision for federal income tax
has been made. If in the future these amounts are used for any purpose
other than to absorb bad debt losses including dividends, stock
redemptions, or distributions in liquidation or the Company ceases to
be qualified as a bank, then these amounts may be subject to federal
income tax at the then prevailing corporate tax rate.
(11) Regulatory Matters
------------------
The Bank is subject to various regulatory capital requirements that are
administered by Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and discretionary actions by
regulators that could have a material adverse effect on the Company.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also
subject to qualitative judgements by regulators with regard to
components, risk weightings, and other factors.
As of March 31, 2002 and 2001, the Bank was categorized as "well
capitalized" under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Bank had to maintain total
risk-based capital, Tier 1 risk-based capital, and Tier 1 leverage ratios
at 10%, 6%, and 5%, respectively. There are no conditions or events that
Management believes have changed the Bank's classification.
The Bank's regulatory capital amounts and ratios are as follows as of the dates indicated:
To Be Well Capitalized
Under Prompt
Corrective Action
Actual For Capital Adequacy Provisions
------------------- -------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- -------- -------- -------- ---------- --------
(Dollars in Thousands)
March 31, 2002
Tier 1 Risk-Based Core
Capital (To Risk Weighted
Assets) $ 25,646 11.1% $ 9,212 4.0% $ 13,818 6.0%
Total Risk-Based Capital
(To Risk Weighted Assets) $ 28,288 12.3% $ 18,424 8.0% $ 23,030 10.0%
Tier 1 Leverage (Core)
Capital (To Adjusted
Tangible Assets) $ 25,646 6.8% $ 15,072 4.0% $ 18,841 5.0%
Tangible Capital
(To Tangible Assets) $ 25,461 6.8% $ 7,533 2.0% $ 18,831 5.0%
March 31, 2001
Tier 1 Risk-Based Core
Capital (To Risk Weighted
Assets) $ 22,956 11.1% $ 8,267 4.0% $ 12,400 6.0%
Total Risk-Based Capital
(To Risk Weighted Assets) $ 25,311 12.2% $ 16,533 8.0% $ 20,667 10.0%
Tier 1 Leverage (Core)
Capital (To Adjusted
Tangible Assets) $ 22,956 6.9% $ 13,219 4.0% $ 16,523 5.0%
Tangible Capital
(To Tangible Assets) $ 22,486 6.8% $ 6,600 2.0% $ 16,500 5.0%
The payment of dividends by the Company depends primarily on the ability
of the Bank to pay dividends to the Company. The payment of dividends by
the Bank to the Company is subject to substantial restrictions and would
require prior notice to the Office of Thrift Supervision "OTS".
35
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(12) Employee Benefit Plans
----------------------
The Company is participating in a multiple employer defined contribution
employee benefit plan covering substantially all employees with one or
more years of service. The Company matches a portion of the employees'
contributions and has a discretionary profit sharing provision. The total
employer contributions were $207,000, $143,000, and $130,000 for the
years ended March 31, 2002, 2001 and 2000, respectively.
The Company has an Employee Stock Ownership Plan ("ESOP") for the
exclusive benefit of employee participants. The discretionary
contributions for the years ended March 31, 2002, 2001 and 2000 were
$109,000, $67,000, and $57,000, respectively. The ESOP from time to time
borrows funds from financial institutions to purchase the Company's
stock. The balance of the loan was $358,000 and $415,000 at March 31,
2002 and 2001, respectively. The Company carries the debt as a liability
and a reduction in equity, although the Company neither endorses nor
guarantees the loan. The loan is repaid by Company contributions to the
trustee, who in turn makes the loan payment to the financial institution.
Certain officers of the Company participate in an incentive stock option
plan. Options are granted at exercise prices not less than the fair value
of the Company's common stock on the date of the grant. The following is
a summary of the activity under the Company's incentive stock option plan
for the years ended March 31, 2002, 2001, and 2000.
2002 2001 2000
------------------------ ------------------------ -------------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------------------ ------------------------ -------------------------
Balance, Beginning of Year 82,556 $ 22.86 81,556 $ 22.71 11,556 $ 8.00
Options granted 2,000 30.00 4,000 27.50 70,000 25.14
Options exercised - - - - - -
Options forfeited 3,000 25.00 3,000 25.00 - -
------ ------ ------
Balance, March 31 81,556 $ 22.96 82,556 $ 22.86 81,556 $ 22.71
====== ====== ======
At March 31, 2002, the Company had the following options outstanding:
Outstanding Earliest Date
Grant Date Options Option Price Exercisable Expiration Date
---------- ----------- ------------ ------------- ---------------
1/07/97 11,556 $ 8.00 1/1/02 to 12/31/02 to
1/1/06 12/31/06
10/19/99 60,000 $25.00 10/1/04 to 9/30/05 to
10/01/08 9/30/09
10/19/99 4,000 $27.50 10/01/03 9/30/04
4/18/00 2,000 $27.50 4/1/05 to 3/31/06 to
4/1/09 3/31/10
11/21/00 2,000 $27.50 12/1/05 to 11/30/06 to
12/1/09 11/30/10
4/17/01 2,000 $30.00 5/1/06 to 4/30/07
5/1/10 4/30/11
The above options vest over ten years with the first vesting earned after
five years and 20% vesting earned evenly in years six through ten except
for the 4,000 shares granted on 10/19/99 which fully vest on 10/1/03. All
options which vest must be exercised within one year of vesting.
36
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(12) Employee Benefit Plans, Continued
---------------------------------
There were 10,000 options available for granting at March 31, 2002.
The incentive stock option plan adopted by the Company includes a
provision for tandem stock appreciation rights ("SARs"). Upon vesting,
these stock appreciation rights are exercisable in lieu of the stock
options granted to the employee. Upon exercise, the employee chooses the
option or SAR feature, and the tandem instrument is cancelled. The
Company accounts for incentive stock options and tandem SARs under
Accounting Principles Board ("APB") Option No. 25, "Accounting for Stock
Issued to Employees". APB No. 25 states that compensation cost for a
combination plan permitting an employee to elect one part should be
measured according to the terms that an employee is mostly likely to
elect based on the facts available each period. Due to the personal
income tax implications of SARs under the Internal Revenue Code,
employees have historically elected to exercise options rather than the
SARs. Accordingly, the Company has elected to measure compensation cost
for stock options as required by APB No. 25, rather than for the SARs.
The Company has elected the disclosure-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation
cost has been recognized for the stock option plan. Had compensation cost
for the Company's stock option plan been determined based on the fair
value at the grant date consistent with the provisions of SFAS No. 123,
the Company's net income and earnings per share amounts as of March 31
would have been reduced to the pro forma amounts indicated below.
2002 2001 2000
----------- ---------- -----------
Net Income, As Reported $ 2,509,586 $ 2,127,434 $ 2,021,213
Net Income, Pro Forma $ 2,397,678 $ 2,070,652 $ 2,005,458
Net Income Per Common Share
(Basic), As Reported $ 1.50 $ 1.27 $ 1.20
Net Income Per Common Share
(Basic), Pro Forma $ 1.44 $ 1.24 $ 1.19
Net Income Per Common Share
(Diluted), As Reported $ 1.47 $ 1.25 $ 1.19
Net Income Per Common Share
(Diluted), Pro Forma $ 1.41 $ 1.22 $ 1.18
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions for grants: Dividend yield of $.08 per share for
options granted during the years ended 2002 and 2001 and $.055 for shares
granted during the year ended 1997, expected volatility of 30% for
options granted in 2002, 2001 and 2000 and 20% for options granted in
1997, risk-free interest rate of 5.9%, and expected lives of 6-10 years.
(13) Commitments
-----------
In conjunction with its lending activities, the Bank enters into various
commitments to extend credit and issue letters of credit. Loan
commitments (unfunded loans and unused lines of credit) and letters of
credit are issued to accommodate the financing needs of the Bank's
customers. Loan commitments are agreements by the Bank to lend at a
future date, so long as there are no violations of any conditions
established in the agreement. Letters of credit commit the Bank to make
payments on behalf of customers when certain specified events occur.
Financial instruments where the contract amount represents the Bank's
credit risk include commitments under pre-approved but unused lines of
credit of $30.9 million and $25.4 million and letters of credit of
$318,000 and $132,000 at March 31, 2002 and 2001, respectively.
These loan and letter of credit commitments are subject to the same
credit policies and reviews as loans on the balance sheet. Collateral,
both the amount and nature, is obtained based upon Management's
assessment of the credit risk. Since many of the extensions of credit
are expected to expire without being drawn, the total commitment amounts
do not necessarily represent future cash requirements. In addition to
these loan commitments noted above, the Bank had unused credit card loan
commitments of $2.1 million and $2.0 million at March 31, 2002 and 2001,
respectively. Outstanding commitments on mortgage loans not yet closed
amounted to $272,000 at March 31, 2002. Such commitments, which are
funded subject to certain limitations, extend over varying periods of
time with the majority being funded within 90 days. At March 31, 2002,
the Bank had outstanding commitments to sell approximately $2.2 million
of loans.
37
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(14) Related Party Transactions
--------------------------
At March 31, 2002, the total aggregate indebtedness to the Bank by
executive officers and directors of the Bank and Company, whose
individual indebtedness exceeded $60,000 at any time over the period
since April 1, 2000, was $597,000. There were $25,000 in additional loans
to executive officers and directors whose individual indebtedness
exceeded $60,000 during fiscal 2002. Repayments on these loans totaled
approximately $136,000. Loans to all employees, officers, and directors
of the Company, in the aggregate constituted approximately 11.80% of the
total shareholders' equity of the Company at March 31, 2002.
The Company rents office space from a company in which a director and an
officer of the Company and the Bank have an ownership interest. The Bank
incurred expenses of $29,000, $28,000, and $27,000 for rent for the years
ended March 31, 2002, 2001 and 2000, respectively. Management is of the
opinion that the transactions with respect to office rent are made on
terms that are comparable to those which would be made with unaffiliated
persons.
(15) Security Federal Corporation Condensed Financial Statements (Parent
-------------------------------------------------------------------
Company Only)
------------
The following is condensed financial information of Security Federal
Corporation (Parent Company only). The primary asset is its investment in
the Bank subsidiary and the principal source of income for the Company is
equity in undistributed earnings from the Bank.
Condensed Balance Sheet Data
At March 31,
------------------------------
2002 2001
------------ -------------
Assets:
Cash $ 285,396 $ 421,979
Investment In Security Federal Bank 25,463,436 23,484,072
Income Tax Receivable From Bank 32,071 31,356
------------ ------------
Total Assets $ 25,780,903 $ 23,937,407
============ ============
Liability And Shareholders' Equity:
Accounts Payable $ 22,043 $ 22,043
Indirect Guarantee of ESOP Debt 358,297 415,000
Shareholders' Equity 25,400,563 23,500,364
------------ ------------
Total Liabilities And Shareholders'
Equity $ 25,780,903 $ 23,937,407
============ ============
Condensed Statements of Income Data
For the Years Ended March 31,
-------------------------------------
2002 2001 2000
---------- ----------- -----------
Income:
Equity In Earnings Of Security
Federal Bank $ 2,510,729 $ 2,092,433 $ 2,036,062
Equity In (Loss) Earnings Of Real
Estate Partnership - (12,678) 12,380
Miscellaneous Income 406 30,382 21,599
----------- ----------- -----------
2,511,135 2,110,137 2,070,041
Expenses:
Recovery Of Previously Recognized
Loss - (50,000) -
Other Expenses 1,549 32,703 48,828
----------- ----------- -----------
1,549 (17,297) 48,828
----------- ----------- -----------
Net Income $ 2,509,586 $ 2,127,434 $ 2,021,213
=========== =========== ===========
38
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(15) Security Federal Corporation Condensed Financial Statements (Parent
-------------------------------------------------------------------
Company Only), Continued
------------------------
Condensed Statements of Cash Flow Data
For the Years Ended March 31,
-------------------------------------
2002 2001 2000
----------- ----------- -----------
Operating Activities:
Net Income $ 2,509,586 $ 2,127,434 $ 2,021,213
Adjustments To Reconcile Net
Income To Net Cash Provided By
(Used In) Operating Activities:
Equity In Earnings Of Security
Federal Bank (2,510,729) (2,092,433) (2,036,062)
Equity In Earnings (Loss) Of
Real Estate Partnership - 12,678 (12,380)
Recovery of Previously
Recognized Loss - (50,000) -
(Increase) Decrease In Income
Taxes Receivable And Other
Assets (700) 202,704 25,899
Increase (Decrease) In
Accounts Payable 8,409 8,399
----------- ----------- -----------
Net Cash Provided By (Used In)
Operating Activities (1,843) 208,792 7,069
----------- ----------- -----------
Investing Activities:
Return Of Capital From Real
Estate Partnerships - 196,526 40,000
----------- ----------- -----------
Net Cash Provided By Investing
Activities - 196,526 40,000
----------- ----------- -----------
Financing Activities:
Dividends Paid (134,740) (134,739) (134,739)
----------- ----------- -----------
Net Increase (Decrease) In Cash (136,583) 270,579 (87,670)
Cash At Beginning Of Year 421,979 151,400 239,070
----------- ----------- -----------
Cash At End Of Year $ 285,396 $ 421,979 $ 151,400
=========== =========== ===========
(16) Carrying Amounts and Fair Value of Financial Instruments
--------------------------------------------------------
The carrying amounts and fair value of financial instruments are
summarized below:
At March 31,
---------------------------------------------
2002 2001
---------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In Thousands)
Financial Assets:
Cash And Cash Equivalents $ 11,528 11,528 $ 12,616 12,616
Investment And Mortgage-
Back Securities $118,898 118,933 $ 74,405 74,446
Loans Receivable, Net $234,319 236,591 $230,997 232,165
Federal Home Loan Bank
Stock $ 2,669 2,669 $ 3,431 3,431
Financial Liabilities:
Deposits:
Checking, Savings, and
Money Market Accounts $161,089 161,089 $124,220 124,220
Certificate Accounts $147,949 148,637 $133,190 134,702
Advances From Federal
Home Loan Bank $ 33,108 34,675 $ 42,704 43,316
Other Borrowed Money $ 6,169 6,169 $ 3,409 3,409
39
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(16) Carrying Amounts and Fair Value of Financial Instruments, Continued
-------------------------------------------------------------------
At March 31, 2002, the Bank had $33.3 million of off-balance sheet
financial commitments. These commitments are to originate loans and
unused consumer lines of credit and credit card lines. Since these
obligations are based on current market rates, if funded, the original
principal is considered to be a reasonable estimate of fair value.
Fair value estimates are made at a specific point in time, based on
relevant market data and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale the Bank's entire holdings of a particular
financial instrument. Because no active market exists for a significant
portion of the Bank's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current
economic conditions, current interest rates and prepayment trends, risk
characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in any of these assumptions used in calculating fair
value would also significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Bank has
significant assets and liabilities that are not considered financial
assets or liabilities including deposit franchise values, loan servicing
portfolios, deferred tax liabilities, and premises and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in any of these estimates. The
values used are provided from the Office of Thrift Supervison's interest
rate risk model.
The Company has used management's best estimate of fair value on the
above assumptions. Thus, the fair values presented may not be the amounts
which could be realized in an immediate sale or settlement of the
instrument. In addition, any income taxes or other expenses which would
be incurred in an actual sale or settlement are not taken into
consideration in the fair value presented.
(17) Quarterly Financial Data (Unaudited)
-----------------------------------
Unaudited condensed financial data by quarter for fiscal year 2002 and 2001 is as follows (amounts,
except per share data, in thousands):
Quarter ended
-----------------------------------------------------------------
2001-2002 June 30, 2001 Sept. 30, 2001 Dec. 31, 2001 Mar. 31, 2002
------------- -------------- ------------- -------------
Interest Income $ 6,185 $ 6,339 $ 6,196 $ 5,912
Interest Expense 3,407 3,349 2,923 2,533
------------ ------------ ------------ ------------
Net Interest Income 2,778 2,990 3,273 3,379
Provision for Loan Losses 175 250 500 600
------------ ------------ ------------ ------------
Net Interest Income after
Provision for Loan Losses 2,603 2,740 2,773 2,779
Noninterest Income 822 718 1,054 871
Noninterest Expense 2,569 2,551 2,709 2,507
------------ ------------ ------------ ------------
Income before Income Tax 856 907 1,118 1,143
Provision for Income taxes 319 338 426 431
------------ ------------ ------------ ------------
Net Income $ 537 $ 569 $ 692 $ 712
============ ============ ============ ============
Basic Net Income per Common Share $ 0.32 $ 0.34 $ 0.41 $ 0.43
============ ============ ============ ============
Diluted Net Income per Common
Share $ 0.32 $ 0.33 $ 0.40 $ 0.42
============ ============ ============ ============
Basic Weighted Average Shares
Outstanding 1,670,175 1,671,459 1,671,459 1,671,459
============ ============ ============ ============
Diluted Weighted Average Shares
Outstanding 1,703,675 1,707,680 1,708,146 1,708,146
============ ============ ============ ============
40
(17) Quarterly Financial Data (Unaudited), Continued
-----------------------------------------------
Quarter ended
-----------------------------------------------------------------
2000-2001 June 30, 2000 Sept. 30, 2000 Dec. 31, 2000 Mar. 31, 2001
------------- -------------- ------------- -------------
Interest Income $ 5,632 $ 5,971 $ 6,283 $ 6,267
Interest Expense 3,132 3,434 3,729 3,577
------------- ------------- ------------ ------------
Net Interest Income 2,500 2,537 2,554 2,690
Provision for Loan Losses 175 150 150 450
------------- ------------- ------------ ------------
Net Interest Income after
Provision for Loan Losses 2,325 2,387 2,404 2,240
Noninterest Income 589 599 591 960
Noninterest Expense 2,105 2,164 2,202 2,380
------------- ------------- ------------ ------------
Income before Income Tax 809 822 793 820
Provision for Income taxes 300 303 285 229
------------- ------------- ------------ ------------
Net Income $ 509 $ 519 $ 508 $ 591
============= ============= ============ ============
Basic Net Income per Common Share $ 0.30 $ 0.31 $ 0.30 $ 0.36
============= ============= ============ ============
Diluted Net Income per $ 0.30 $ 0.30 $ 0.30 $ 0.35
============= ============= ============ ============
Basic Weighted Average Shares
Outstanding 1,676,494 1,673,718 1,670,434 1,669,901
============= ============= ============ ============
Diluted Weighted Average Shares
Outstanding 1,693,672 1,697,072 1,702,206 1,702,206
============= ============= ============ ============
41
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
SHAREHOLDERS INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held at 2:00 p.m., Tuesday, July
16, 2002 at the University of South Carolina - Aiken, Business and Educational
Building, Room 116, 471 University Parkway, Aiken, SC.
STOCK LISTING
The Company's stock is traded over the counter and trades infrequently.
PRICE RANGE OF COMMON STOCK
The table below shows the range of high and low bid prices as reported by the
Salomon Smith Barney, located in Aiken, SC. These prices represent actual
transactions and do not include retail markups, markdowns or commissions. The
Salomon Smith Barney Company creates a market for the stock.
Quarter Ending High Low
-------------- ------------ ------------
06-30-00 $ 30.00 $ 22.50
09-30-00 $ 27.56 $ 27.50
12-31-00 $ 27.56 $ 27.50
03-31-01 $ 30.00 $ 28.00
06-30-01 $ 30.00 $ 30.00
09-30-01 $ 33.50 $ 31.50
12-31-01 $ 33.00 $ 31.50
03-31-02 $ 32.50 $ 32.50
As of March 31, 2002, the Company had approximately 286 shareholders and
1,671,459 outstanding shares of common stock.
DIVIDENDS
The first quarterly dividend on the stock was paid to shareholders on March
15, 1991. Dividends will be paid upon the determination of the Board of
Directors that such payment is consistent with the long-term interest of the
Company. The factors affecting this determination include the Company's
current and projected earnings, operating results, financial condition,
regulatory restrictions, future growth plans and other relevant factors. The
Company declared and paid dividends of $0.02 per share for each of the four
quarters of the fiscal years ended March 31, 2002 and 2001. There was a
2-for-1 stock split in the fiscal year ended March 31, 2001.
The ability of the Company to pay dividends depends primarily on the ability
of the Bank to pay dividends to the Company. The Bank may not declare or pay a
cash dividend on its stock or repurchase shares of its stock if the offset
thereof would be to cause its regulatory capital to be reduced below the
amount required for the liquidation account or to meet applicable regulatory
capital requirements. Pursuant to the OTS regulations, Tier 1 Associations
(associations that before and after the proposed distribution meet or exceed
their fully phased-in capital requirements) may make capital distributions
during any calendar year equal to 100% of net income for the year-to-date plus
50% of the amount by which the association's total capital exceeds its fully
phased-in capital requirement as measured at the beginning of the capital
year. However, a Tier 1 Association deemed to be in need of more than normal
supervision by the OTS may be downgraded to a Tier 2 or Tier 3 Association as
a result of such a determination. The Bank is also required to give the OTS 30
days notice prior to the declaration of a dividend. Unlike the Bank, there is
no regulatory restriction on the payment of dividends by the Company. However,
it is subject to the requirements of South Carolina. South Carolina generally
prohibits the Company from paying dividends if, after giving effect to a
proposed dividend, 1) the Company would be unable to pay its debts as they
become due in the normal course of business, or 2) the Company's total assets
would be less than its total liabilities plus the sum that would be needed to
satisfy the preferential rights upon dissolution of shareholders whose
preferential rights are superior to those receiving the dividend. The ability
of the Company to pay dividends depends primarily on the ability of the Bank
to pay dividends to the Company.
42
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
SHAREHOLDERS INFORMATION
ANNUAL AND OTHER REPORTS
The Company is required to file an annual report on Form 10-K for its fiscal
year ended March 31, 2002 with the Securities and Exchange Commission. Copies
of Form 10-K, Security Federal Corporation's annual report, and the Company's
quarterly reports may be obtained from any of the following companies listed
below. Additionally, shareholder and/or general inquiries may be addressed to
Mrs. Ruth Vance of Security Federal Corporation.
GENERAL INQUIRIES: TRANSFER AGENT: SPECIAL COUNSEL: INDEPENDENT AUDITORS:
- ------------------ --------------- ---------------- ---------------------
Mrs. Ruth Vance Security Federal Breyer & Associates, PC Elliott Davis , LLC
Security Federal Corporation Suite 785 211 York Street, N.W.
Corporation 1705 Whiskey Road, S 8180 Greensboro Drive P.O. Box 930
1705 Whiskey Road, S P.O. Box 810 McLean, VA 22102 Aiken, SC 29802-0930
P.O. Box 810 Aiken, SC 29802-0810
Aiken, SC 29802-0810
Phone: 803-641-3000
43
BOARD OF DIRECTORS*
- ------------------------------------------------------------------------------------------------------------
T. Clifton Weeks Sen. Thomas L. Moore Harry O. Weeks, Jr. Directors Emeriti:
Chairman President Business Development Walter E. Brooker, Sr.
Security Federal Corp. Boiler Efficiency, Inc. Executive President, Brooker's Inc.
Aiken, SC Clearwater, SC Hutson-Etherredge Denmark, SC
Companies
Aiken, SC
Dr. Robert E. Alexander Timothy W. Simmons Thomas Clark Robert E. Johnson
Chancellor Emeritus President/CEO President Corporate Secretary
Univ. of SC at Aiken Security Federal Corp. Security Federal Bank Attorney-At-Law (Retired)
Aiken, SC Aiken, SC Aiken, SC Aiken, SC
William Clyburn G. L. Toole, III Chris Verenes
Advisor for Community Attorney-At-Law Director of Planning &
Alliances Aiken, SC Administration
WSRC Washington Group
Aiken, SC International
Aiken, SC
DENMARK ADVISORY BOARD**
- ------------------------------------------------------------------------------------------------------------
Walter E. Booker, Sr. David Crum Jim Harrison Claude E. McCain Rev. Isaiah Odom
President Attorney-At-Law Owner President Owner
Brooker's Inc. Crum, Crum and Crum Jim Harrison Art H.C. McCain Odom's Auto Sure
Denmark, SC Denmark, SC Gallery Insurance Agency Auto Parts
Denmark, SC Denmark, SC Denmark, SC
NORTH AUGUSTA ADVISORY BOARD**
- ------------------------------------------------------------------------------------------------------------
Richard Borden Rev. G.L. Brightharp Helen Butler Sen. Thomas L. Moore John Potter
Owner Owner Retired Banker President Director of Finance
Borden Pest Control G. L. Brighthard & North Augusta, SC Boiler Efficiency, City of North
North Augusta, SC Sons Mortuary Inc. Augusta
North Augusta, SC Clearwater, SC North Augusta, SC
WAGENER ADVISORY BOARD**
- ------------------------------------------------------------------------------------------------------------
M. Judson Busbee Chad. Ingram Mary Lybrand Richard H Sumpter
Owner Vice President Retired Banker Retired Educator
Busbee Hardware New World Wagener, SC Wagener, SC
Wagener, SC Enterprises
Wagener, SC
MIDLAND VALLEY ADVISORY BOARD**
- ------------------------------------------------------------------------------------------------------------
Charles Hilton Rev. Nathaniel Gloria Bush-Johnson Sen. Thomas L. Moore Rev. Dennis Phillips
General Manager Irvin, Sr. Consultant President Pastor
Breezy Hill Water Pastor Aiken, SC Boiler Efficiency, Inc.Christian Heritage
& Sewer Old Storm Church Clearwater, SC Church
Garniteville, SC Baptist Chruch Graniteville, SC
Clearwater, SC
Glenda K. Napier Carlton Shealy
Co-Owner Owner
Napier Funeral C. Shealy Realty
Home Builders &
Graniteville, SC Developers
North Augusta, SC
WEST COLUMBIA ADVISORY BOARD**
- ------------------------------------------------------------------------------------------------------------
Eleanor Powell Clark Dr. G. Tripp Jones L. Ed Kirkland Donald T. Martin L. Todd Sease
Owner/Operator Physician Owner/Agent Controller, CPA Partner
B & E Enterprises Inc. SC Oncology L. Ed Kirkland & Nexen, Pruet, Jacobs Jumper, Carter,
dba McDonald's Associates Co., LLC & Pollard, LLP Sease, Architects,
Columbia, SC West Columbia, SC Columbia, SC Columbia, SC PA
West Columbia, SC
Jan Hook-Stamps
Owner
Southern Anesthesis
& Surgical Co.
West Columbia, SC
* Serves as Members of the Board for: Security Federal Corporation, Security Federal Bank, and
Security Financial Services Corporation
** Serves as Members of the Board for: Security Federal Bank
44
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
SECURITY FEDERAL BANK MANAGEMENT TEAM:
- ------------------------------------------------------------------------------
T. Clifton Weeks Chairman of Security Federal Corporation
-----------
Timothy W. Simmons Chairman and Chief Executive Officer
-----------
G.L. Toole, III Vice President
-----------
Robert E. Johnson Corporate Secretary
-----------
Thomas Clark President
-----------
Roy G. Lindburg Treasurer and Chief Financial Officer
-----------
Floyd Blackmon Senior Vice President and Chief Operations
Officer
-----------
Frank Thomas Senior Vice President - Business
Development/Commercial Loans
-----------
Stephen P. Nivens Regional President - West Columbia
-----------
Sandy Bartlett Vice President - Human Resources
-----------
Kathryn Carr Vice President - Special Assets
-----------
Carol McCleskey Vice President and Branch Coordinator
-----------
Harley Henkes Internal Auditor and Compliance/Security
Officer
-----------
Gabriele Dukes Vice President - Financial Counseling
-----------
Rodney Ingle Vice President - Business
Development/Commercial Loans
-----------
Joseph Taylor Vice President - Operations Officer
-----------
Sherry Stone Vice President - Investment Consultant
-----------
Scott Raines Vice President- Senior Trust Consultant
-----------
Greg Warfield Vice President - Mortgage Loan Originator
-----------
Deborah Vermillion Vice President - Mortgage Loan Production
-----------
Ruth Vance Assistant Secretary and Assistant Vice
President
-----------
Margaret Hurt Assistant Treasurer - Accounting
-----------
Laura Conway Assistant Vice President - Operations
-----------
Patricia Moseley Assistant Vice President - Loan and Credit Card
Servicing
-----------
Ann Johnson Assistant Vice President - Purchasing and
Equipment Maintenance
-----------
Etta Petroff Assistant Vice President - Secondary Marketing
-----------
Lee Hutto Assistant Vice President - Business
Development/Commercial Loans
-----------
Todd Lucas Assistant Vice President - Business
Development/Commercial Loans
-----------
Elsie Dicks Assistant Vice President - Call Center Manager
-----------
Cathy Fields Assistant Vice President - Construction Loan
Administration
-----------
SECURITY FEDERAL BANK BRANCHES:
- ------------------------------------------------------------------------------
Whiskey Road Dana Hall, Assistant Vice President/Manager
-----------
North Augusta Sam Cox, Assistant Vice President/Manager
-----------
Denmark Cynthia Towne, Assistant Vice President/Manager
-----------
Laurens Street Vicky Moseley, Assistant Vice President/Manager
-----------
Richland Avenue Kevin Price, Assistant Vice President/Manager
-----------
Wal-Mart Amanda Clifford, Manager
-----------
Graniteville Kathy Williamson, Assistant Vice
President/Manager
-----------
Langley Pat Guglieri, Assistant Vice President/Manager
-----------
Clearwater Gail Dotson, Assistant Vice President/Manager
-----------
Wagener Sharon Swift, Assistant Vice President/Manager
-----------
West Columbia Mary Clark, Assistant Vice President/Manager
-----------
45
Exhibit 21
Subsidiaries of the Registrant
State Percent-
of Incor- tage of
Parent Subsidiary poration Ownership
- ------ ---------- -------- ---------
Security Federal Corporation Security Federal Bank United States 100%
Security Federal Bank Security Federal
Insurance South Carolina 100%
Security Federal
Investments South Carolina 100%
Security Federal Trust South Carolina 100%
Security Financial
Services Corporation South Carolina 100%
Exhibit 23
Consent of Elliott Davis, LLC
Elliott Davis, LLC
Advisors-CPAs-Consultants
870 S. Pleasantburg Drive
P.O. Box 6286
Elliott Davis Greenville, SC 29606-6286
- ------------------------------------------------------------------------------
Phone 864.242.3370
Fax 864.232.7161
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Security Federal Corporation
We consent to incorporation by reference in the Registration Statement
No. 3380008 on Form S-8 of our report dated May 2, 2002, relating to the
consolidated balance sheet of Security Federal Corporation and subsidiaries as
of March 31, 2002 and the related consolidated statements of income,
shareholders' equity and cash flows for the year then ended, which report
appears in the March 31, 2002 annual report on Form 10-K.
/s/Elliott Davis, LLC
Greenville, South Carolina
June 25, 2002