UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
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, 2008 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 0-16120
SECURITY FEDERAL CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
South Carolina 57-08580504
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
238 Richland Avenue West, Aiken, South Carolina 29801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 641-3000
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Securities registered pursuant to Section 12(b)
of the Act: None
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Securities registered pursuant to Section 12(g)
of the Act: Common Stock, par value
$0.01 per share
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(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. YES NO X
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Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES NO X
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer or a smaller reporting company.
See definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer X
---- ---- ----
Smaller reporting company
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Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
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As of June 12, 2008, there were issued and outstanding 2,531,906 shares
of the registrant's Common Stock, which are traded on the over-the-counter
market through the OTC "Electronic Bulletin Board" under the symbol "SFDL."
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the bid and asked price of
such stock as of September 30, 2007, was $44.3 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, 2008. (Parts I and II)
2. Portions of the Registrant's Proxy Statement for the 2008 Annual
Meeting of Stockholders. (Part III)
PART I
Item 1. Business
Security Federal Corporation
----------------------------
Security Federal Corporation (the "Company") was incorporated under the
laws of the State of Delaware in July 1987 for the purpose of becoming the
savings and loan holding company for Security Federal Bank ("Security
Federal" or the "Bank") upon the Bank's conversion from mutual to the stock
form (the "Conversion"). Effective August 17, 1998, the Company changed its
state of incorporation from Delaware to South Carolina.
As a South Carolina corporation, the Company is authorized to engage in
any activity permitted by South Carolina General Corporation Law. The Company
is a unitary savings and loan holding company. Through the unitary holding
company structure, it is possible to expand the size and scope of the
financial services offered beyond those currently offered by the Bank. The
holding company structure also provides the Company with greater flexibility
than the Bank would have to diversify its business activities, through
existing or newly formed subsidiaries, or through acquisitions or mergers of
stock thrift institutions as well as other companies. There are no current
arrangements, understandings or agreements regarding any such acquisition.
Future activities of the Company, other than the continuing operations of
Security Federal, will be funded through dividends from Security Federal and
through borrowings from third parties. See "Regulation Savings and Loan
Holding Company Regulation" and "Taxation." Activities of the Company may also
be funded through sales of additional securities or income generated by other
activities of the Company. At this time, there are no plans regarding sales
of additional securities or other activities.
At March 31, 2008, the Company had assets of approximately $840.0
million, deposits of approximately $590.9 million and shareholders' equity of
approximately $47.5 million.
The executive office of the Company is located at 238 Richland Avenue
West, Aiken, South Carolina 29801, and its telephone number is (803) 641-3000.
Security Federal Bank
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General. Security Federal is a federally chartered stock savings bank
headquartered in Aiken, South Carolina. Security Federal, with 11 branch
offices in Aiken and Lexington Counties, was originally chartered under the
name Aiken Building and Loan Association on March 27, 1922. It received its
federal charter and changed its name to Security Federal Savings and Loan
Association of Aiken on March 7, 1962, and later changed its name to Security
Federal Savings Bank of South Carolina, on November 11, 1986. Effective April
8, 1996, the Bank changed its name to Security Federal Bank. The Bank
converted from the mutual to the stock form of organization on October 30,
1987.
In October 1993, Security Federal increased its branch network to nine
offices with the completion of its acquisition of four former NationsBank of
South Carolina, N.A. branches located in Aiken County. In February 1996,
Security Federal opened a new branch office in the Aiken Wal-Mart Superstore.
The Bank opened a branch in West Columbia, Lexington County, South Carolina,
in December 2000, which provided the Bank with the opportunity to expand its
market area. In August 2003, the Bank opened a new branch in Lexington, South
Carolina. During February 2004, the Bank completed the sale of its Denmark,
South Carolina branch office to South Carolina Bank and Trust, N.A. of
Orangeburg, South Carolina. In January 2006, the Bank closed its branch in
the Aiken Wal-Mart Superstore and replaced it with a free standing branch on
an out parcel in the Aiken Exchange Shopping Center. In December 2007, the
Bank opened a new full service branch office in Evans, Georgia, and a new full
service branch office in Columbia, South Carolina.
The principal business of Security Federal is accepting deposits from the
general public and originating mortgage loans to enable borrowers to purchase
or refinance one- to four-family residential real estate. The Bank also makes
multi-family residential and commercial real estate loans, consumer loans,
commercial loans, as well as construction loans on single family residences,
multi-family dwellings and commercial real estate, and loans for the
acquisition, development and construction of residential subdivisions and
commercial projects. Additional financial
2
services are provided by three of the Bank's wholly owned subsidiaries,
Security Federal Insurance, Inc., Security Federal Investments, Inc. and
Security Federal Trust, Inc.
Security Federal's income is derived primarily from interest and fees
earned in connection with its lending activities, and its principal expenses
are interest paid on savings deposits and borrowings and operating expenses.
Selected Consolidated Financial Information
-------------------------------------------
This information is incorporated by reference to page 7 of the 2008
Annual Report to Stockholders ("Annual Report").
Yields Earned and Rates Paid
----------------------------
This information is incorporated by reference to page 15 of the Annual
Report.
Rate/Volume Analysis
--------------------
This information is incorporated by reference to page 14 of the Annual
Report.
Lending Activities
------------------
General. The primary source of revenue for the Bank is interest and fee
income from lending activities. One of the principal lending activities of
the Bank is making conventional first mortgage real estate loans to enable
borrowers to purchase or refinance one- to four-family residential real
property. The Bank also makes multi-family residential and commercial real
estate and consumer and commercial loans. The Bank continues to emphasize the
origination of adjustable rate residential mortgage loans, subject to market
conditions, for retention in its portfolio. In addition, the Bank originates
construction loans on single family residences, multi-family dwellings and
commercial real estate, and loans for the acquisition, development and
construction of residential subdivisions and commercial projects.
Residential adjustable rate mortgage loans ("ARMs") constituted
approximately 22.9% of the Bank's total outstanding loan portfolio at March
31, 2008.
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.
3
Loan Portfolio Composition. The following table sets forth information concerning the composition of
the Bank's loan portfolio in dollar amounts and in percentages by type of loan, and presents a
reconciliation of total loans receivable before net items.
At March 31,
---------------------------------------------------------------------------------------
2008 2007 2006 2005 2004
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
TYPE OF LOAN:
-------------
Fixed rate loans
----------------
Residential real
estate............ $ 12,036 2.3% $ 11,620 2.6% $11,594 3.0% $31,336 9.3% $43,911 15.8%
Commercial business
and commercial
real estate....... 154,558 28.9 126,987 28.2 99,446 25.4 77,202 22.8 62,799 22.6
Consumer........... 37,026 6.9 37,123 8.2 32,342 8.3 27,047 8.0 26,508 9.5
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total fixed rate
loans........... 203,620 38.1 175,730 39.0 143,382 36.7 135,585 40.1 133,218 47.9
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Adjustable rate loans
---------------------
Residential real
estate............ 122,123 22.9 115,422 25.6 111,753 28.6 93,564 27.7 67,516 24.3
Commercial business
and commercial real
estate............ 178,829 33.4 132,221 29.4 109,768 28.0 85,015 25.2 58,313 20.9
Consumer........... 29,806 5.6 26,687 5.9 26,271 6.7 23,797 7.0 19,133 6.9
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total adjustable
rate loans...... 330,758 61.9 274,330 61.0 247,792 63.3 202,376 59.9 144,962 52.1
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans...... 534,378 100.0% 450,060 100.0% 391,174 100.0% 337,961 100.0% 278,180 100.0%
====== ====== ====== ====== ======
Less
----
Loans in process... 8,064 6,443 9,185 14,627 12,356
Deferred fees and
discounts......... 315 281 175 161 165
Allowance for loan
losses............ 8,067 7,297 6,705 6,284 5,764
-------- -------- -------- -------- --------
Total loans
receivable....... $517,932 $436,039 $375,109 $316,889 $259,895
======== ======== ======== ======== ========
The total amount of loans due after March 31, 2009, which have predetermined or fixed interest rates is
$141.7 million, while the total amount of loans due after that date which have floating or adjustable
interest rates is $166.3 million.
The following table sets forth information concerning the composition of the Bank's loan portfolio in
dollar amounts and in percentages by type of loan, and presents a reconciliation of total loans receivable
before net items.
At March 31,
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2008 2007 2006 2005 2004
--------------- --------------- --------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
TYPE OF LOAN:
-------------
Real Estate Loans:
Residential real
estate.......... $116,184 21.7% $109,532 24.3% $99,561 25.4% $105,516 31.2% $95,863 34.5%
Residential
construction.... 17,975 3.4 17,510 3.9 23,786 6.1 19,384 5.8 15,564 5.6
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate
loans.......... 134,159 25.1 127,042 28.2 123,347 31.5 124,900 37.0 111,427 40.1
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial business
and commercial real
estate........... 333,387 62.4 259,208 57.6 209,214 53.5 162,217 48.0 121,112 43.5
Consumer loans:
Deposit account.. 1,569 0.3 1,647 0.4 1,180 0.3 1,145 0.3 1,383 0.5
Home equity
lines........... 22,693 4.2 20,086 4.4 20,059 5.1 16,918 5.0 13,694 4.9
Consumer first
and second
mortgages....... 19,076 3.6 22,868 5.1 22,144 5.7 22,327 6.6 15,080 5.4
Premium finance.. 778 0.1 892 0.2 -- - -- - -- --
Other............ 22,716 4.3 18,317 4.1 15,230 3.9 10,454 3.1 15,484 5.6
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer
loans.......... 66,832 12.5 63,810 14.2 58,613 15.0 50,844 15.0 45,641 16.4
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans..... 534,378 100.0% 450,060 100.0% 391,174 100.0% 337,961 100.0% 278,180 100.0%
====== ====== ====== ====== ======
Less:
Loans in process.. 8,064 6,443 9,185 14,627 12,356
Deferred fees and
discounts........ 315 281 175 161 165
Allowance for loan
losses........... 8,067 7,297 6,705 6,284 5,764
-------- -------- -------- -------- --------
Total loans
receivable...... $517,932 $436,039 $375,109 $316,889 $259,895
======== ======== ======== ======== ========
5
The following schedule illustrates the maturities of Security Federal's
loan portfolio at March 31, 2008. 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, 2008
------------------------------------------------
Commercial
Business and
Residential Commercial
Real Estate Consumer Real Estate Total
------------ ------------ ----------- --------
(In Thousands)
Six months or less (1)....... $ 7,459 $ 7,832 $ 96,190 $111,481
Over six months to one year.. 4,825 2,669 53,187 60,681
Over one year to three years. 687 9,230 85,170 95,087
Three to five years.......... 416 11,479 63,753 75,648
Over five to ten years....... 2,993 9,764 20,273 33,030
Over ten years............... 109,714 25,858 14,814 150,386
------------ ----------- ---------- --------
Total (2)................... $ 126,094 $ 66,832 $ 333,387 $526,313
============ =========== ========== ========
___________
(1) Includes demand loans, loans having no stated maturity, overdraft loans
and equity line of credit loans.
(2) Loan amounts are net of undisbursed funds for loans in process of $8.1
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,
--------------------------------------------
2008 2007 2006 2005 2004
------- ------- ------- ------ -------
(In Thousands)
Originated:
Adjustable rate - residential
real estate.................... $ 47,432 $40,380 $ 45,259 $43,578 $ 47,263
Fixed rate - residential real
estate (1)..................... 39,268 30,542 28,946 41,746 73,291
Consumer........................ 31,663 34,748 33,621 29,290 26,829
Commercial business and
commercial real estate......... 311,839 283,749 198,360 134,439 91,562
-------- -------- -------- -------- --------
Total consumer/commercial
business real estate.......... 343,502 318,497 231,981 163,729 118,391
-------- -------- -------- -------- --------
Total loans originated...... $430,202 $389,419 $306,186 $249,053 $238,945
======== ======== ======== ======== ========
Purchased....................... $ 15,618 $ 10,200 $ 5,060 $ 6,536 $ 3,500
Acquired in acquisition of
Collier Jennings Financial
Corporation.................... -- 708 - - --
Less:
Sold:
Fixed rate -
residential real estate....... $ 38,502 $ 30,333 $ 29,903 $25,957 $63,497
Fixed rate -
commercial real estate........ 4,695 8,106 - -- --
Adjustable rate -
commercial real estate........ 4,000 3,240 2,300 - --
Principal repayments............ 315,108 299,763 225,830 169,851 157,979
Increase (decrease) in other
items, net..................... 1,622 (2,044) (5,007) 2,787 4,230
Net increase.................... $ 81,893 $ 60,929 $ 58,220 $56,994 $16,739
___________
(1) Includes newly originated fixed rate loans held for sale and construction/
permanent loans converted to fixed rate loans and sold.
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
6
creation of the loan. The Bank's loan origination fees are generally 1% on
conventional residential mortgages, and 0.25% to 1% on 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,
2008 was $1.3 million.
Loan origination and commitment fees are volatile sources of income.
These fees vary with the volume and type of loans and commitments made and
purchased and with competitive conditions in mortgage markets, which in turn
are governed by the demand for and availability of money.
The following table shows deferred mortgage 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,
------------------------------------
2008 2007 2006
--------- -------- --------
(Dollars in Thousands)
Net deferred mortgage loan
origination fees earned during
the period (1)........................ $ 103 $ 173 $ 170
Mortgage loan origination fees earned
as a percentage of total portfolio
mortgage loans originated during
the period............................ 0.2% 0.4% 0.4%
Net deferred mortgage loan origination
fees in loan portfolio at end of
period................................ $ 115 $ 114 $ 175
___________
(1) Includes amounts amortized to interest income as yield adjustments; does
not include fees earned on loans sold.
The Bank also receives other fees and charges related to existing loans,
conversion fees, assumption fees, late
charges and other fees collected in connection with a change in borrower or
other loan modifications.
Security Federal currently sells substantially all conforming fixed rate
loans with terms of 15 years or greater in the secondary mortgage market.
These loans are sold in order to provide a source of funds and as one of the
strategies available to close the gap between the maturities of the Bank's
interest-earning assets and interest-bearing liabilities. Currently, most
fixed rate, long-term mortgage loans are being originated based on Federal
National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage
Corporation ("Freddie Mac") underwriting standards.
Secondary market sales have been made primarily to Freddie Mac, or other
banks or investors. Freddie Mac is a quasi-governmental agency that purchases
residential mortgage loans from federally insured financial institutions and
certain other lenders. All loans sold to Freddie Mac are without recourse to
Security Federal and generally all other loans sold to other investors are
without recourse. For the past few years, substantially all loans have been
sold on a service released basis.
In fiscal 2008, Security Federal sold $38.5 million in fixed rate
residential loans on a service released basis on the secondary market. Loans
closed but not yet settled with Freddie Mac or other investors, are carried in
the Bank's "loans held for sale" portfolio. At March 31, 2008, the Bank had
$2.3 million of loans held for sale. These loans are fixed rate residential
loans that have been originated in the Bank's name and have closed. Virtually
all of these loans have commitments to be purchased by investors and the
majority of these loans were locked in by price with the investors on the same
day or shortly thereafter that the loan was locked in with the Bank's
customers. Therefore, these loans present very little market risk for the
Bank. The Bank usually delivers to and receives funding from the investor
within 30 days. Security Federal originates all of its loans held for sale on
a "best efforts" basis. Best efforts means that the Bank suffers no penalty
if it is unable to deliver a loan to a potential investor.
The Bank also originates and holds adjustable and fixed rate construction
loans. The construction loans are for one year terms. At March 31, 2008, the
Bank held $18.0 million, or 3.4% of the total loan portfolio, in construction
7
loans to individuals in its residential portfolio. At March 31, 2008, the
Bank also held approximately $6.4 million in longer term fixed rate
residential mortgage loans. These loans, which were 1.2% of the entire loan
portfolio at March 31, 2008, had converted from ARM loans to fixed rate loans
during the previous 60 months, and had remaining maturities of 10 to 29 years.
The Bank no longer originates ARM loans with conversion features nor has any
loans in its portfolio with conversion features.
Loan Solicitation and Processing. The Bank actively solicits mortgage
loan applications from existing customers, real estate agents, builders, real
estate developers and others. The Bank also receives mortgage loan
applications as a result of customer referrals and from walk-in customers.
Detailed loan applications are obtained to determine the borrower's
creditworthiness and ability to repay. The more significant items on loan
applications are verified through the use of credit reports, financial
statements and confirmations. After analysis of the loan application and
property or collateral involved, including an appraisal of the property
(residential appraisals are obtained through independent fee appraisers), the
lending decision is made in accordance with the underwriting guidelines of the
Bank. These guidelines are generally consistent with Freddie Mac and Fannie
Mae guidelines for residential real estate loans. With respect to commercial
real estate loans, the Bank also reviews the capital adequacy of the business,
the income potential of the property, the ability of the borrower to repay the
loan and honor its other obligations, and general economic and industry
conditions.
Upon receipt of a loan application and all required related information
from a prospective borrower, the loan application is submitted for approval or
rejection. The residential mortgage loan underwriters approve loans which
meet Freddie Mac and Fannie Mae underwriting requirements, not to exceed
$417,000 per loan, Federal Housing Administration ("FHA") loans not to exceed
$200,161 and Veterans' Administration ("VA") loans not to exceed $417,000. The
Chairman of the Company, the Chief Executive Officer of the Bank, or the
President of the Bank individually have the authority to approve loans of
$300,000 or less, except as set forth above for conforming conventionally
underwritten, single family mortgage loans, which are approved by the
underwriters. The two Executive Vice Presidents/Lending and the Senior Vice
President/Mortgage Lending have the authority to approve loans up to $250,000.
Loans in excess of $300,000 up to $500,000 require the approval of any two of
the Chairman of the Company, the Chief Executive Officer of the Bank, the
President of the Bank and the Senior Vice President/Mortgage Lending or either
of the two Executive Vice Presidents/Lending. Commercial, consumer and all
non-conforming real estate loans in excess of $350,000 up to $500,000 require
approval of any two of the Chairman of the Company, the Chief Executive
Officer of the Bank, or the President of the Bank, and any loan in an amount
in excess of $500,000 must be approved by the Bank's Executive Committee,
which operates as the Bank's Loan Committee. The loan approval limits shown
are the aggregate of all loans to any one borrower or entity, not including
loans that are the borrower's primary residence, and are conventionally
underwritten.
The general policy of Security Federal is to issue loan commitments to
qualified borrowers for a specified time period. These commitments are
generally for a period of 45 days or less. With management approval,
commitments may be extended for a longer period. As of March 31, 2008,
Security Federal had $585,000 of residential mortgage loan commitments for
portfolio loans issued (excluding undisbursed portions of construction loans
in process). Security Federal had outstanding commitments available on retail
lines of credit (including home equity and other consumer loans) totaling
$30.5 million as of March 31, 2008. See Note 16 of the Notes to Consolidated
Financial Statements contained in the Annual Report.
Permanent Residential Mortgage Lending. Permanent residential real estate
mortgage loans constituted approximately 21.7% of the Bank's total outstanding
loan portfolio at March 31, 2008.
Security Federal offers a variety of ARMs which offer adjustable rates of
interest, payments, loan balances or terms to maturity which vary according to
specified indices. The Bank's ARMs generally have a loan term of 15 to 30
years with initial rate adjustments every one, three, five or seven years
during the term of the loan. After the initial rate adjustment, the loan rate
then adjusts annually. Most of the Bank's ARMs contain a 200 basis point
limit as to the maximum amount of change in the interest rate at any
adjustment period and a 500 or 600 basis point limit over the life of the
loan. The Bank generally originates ARMs to hold in its portfolio. These
loans are generally made consistent with Freddie Mac and Fannie Mae
guidelines. At March 31, 2008, residential ARMs totaled $122.1 million, or
22.9%
8
of the Bank's loan portfolio. For the year ended March 31, 2008, the Bank
originated $86.7 million in residential real estate loans, 54.7% of which had
adjustable rates of interest.
There are unquantifiable risks resulting from possible increased costs to
the borrower as a result of periodic repricing. Despite the benefits of ARMs
to the Bank's asset/liability management program, these loans also pose
potential additional risks, primarily because as interest rates rise, the
underlying payment by the borrower rises, increasing the potential for
default. At the same time, marketability of the underlying property may be
adversely affected by higher interest rates.
When making a one- to four-family residential mortgage loan, the Bank
evaluates both the borrower's creditworthiness and his or her general ability
to make principal and interest payments, and the value of the property that
will secure the loan. The Bank generally makes loans on one- to four-family
residential properties in amounts of 95% or less of the appraised value
thereof. Where loans are made in amounts which exceed 80% of the appraised
value of the underlying real estate, the Bank's general policy is to require
private mortgage insurance on the portion of the loan in excess of 80% of the
appraised value. In general, the Bank restricts its residential lending to
South Carolina and the nearby Augusta, Georgia market.
The Bank also provides construction financing for single family dwellings
to owner-occupants. Construction loans are generally made for periods of six
months to one year with either adjustable or fixed rates. At March 31, 2008,
residential construction loans on one- to four-family dwellings to
owner-occupants totaled $18.0 million, or 3.4%, of the Bank's loan portfolio.
On loans of this type, the Bank seeks to evaluate the financial condition and
prior performance of the builder, as well as the 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. On construction loans
offered to individuals (non-builders), the Bank offers a
construction/permanent loan. The construction portion of the loan has an
adjustable rate (typically prime) or a fixed rate (typically prime plus
0.25%) during the construction period. After construction, the loan then
automatically converts to an ARM loan. The borrower also has the option,
after the construction period only, to convert the loan to a fixed rate loan
which the Bank then sells on the secondary market immediately on a service
released basis.
Commercial Business and Commercial Real Estate Loans. The commercial
business and commercial real estate loans originated by the Bank are primarily
secured by business properties, churches, income property developments,
undeveloped land, business equipment, furniture and fixtures, inventory and
receivables. At March 31, 2008, the Bank had approximately $333.4 million, or
62.4%, of the Bank's total loan portfolio, in commercial business and
commercial real estate loans. Approximately $183.4 million, or 55.0% of these
loans were secured primarily by real estate at March 31, 2008. Included in
these loans is approximately $31.1 million in loans for the construction of
single family dwellings to builders with a term of typically one year. Not
included in these loans are approximately $45.9 million in acquisition and
development loans with terms of typically two to three years. Loans secured
by commercial real estate are typically written for terms of 10 to 20 years.
Commercial loans not secured by real estate are typically based on terms of
three to 60 months. Fixed rate loans typically balloon at the end of three to
seven years. Adjustable rate loans are usually tied to the prime interest
rate or LIBOR as quoted in the Wall Street Journal, and adjust daily, monthly
or annually. Some adjustable rate loans have interest rate caps, although
most of these loans have a five year balloon.
Commercial business and commercial real estate lending entails significant
additional credit risk when compared to residential lending. Commercial loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The payment experience of these loans is typically dependent upon
the successful operation of the business or real estate project. These risks
can be significantly affected by supply and demand conditions in the market
for office and retail space, condominiums and apartments, and by adverse
conditions in the local economy. Although commercial loans generally involve
more risk than residential loans, they also typically provide a greater yield
and are more sensitive to changes in interest rates.
The Bank's underwriting standards 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. Typically, the Bank requires the principal or owners
of a business to guarantee all loans made to their business by the Bank.
Although the
9
creditworthiness of the business and its principals is of primary
consideration, the underwriting process also includes a comparison of the
value of the security, if any, in relation to the proposed loan amount.
Properties securing commercial loans originated by the Bank are generally
appraised at the time of the loan by appraisers designated by the Bank.
Although the Bank is permitted to invest in loans up to 100% of the appraised
value of a property on a commercial loan, the Bank currently seeks to invest
in loans with a loan to value ratio of 75% to 85%.
At March 31, 2008, the Bank did not have any commercial business or
commercial real estate loans to one borrower in excess of $7.0 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 $8.9 million as calculated at March 31, 2008.
Consumer Loans. The Bank originates consumer loans for any personal,
family or household purpose, including the financing of home improvements,
loans to individuals for residential lots for a future home, automobiles,
boats, mobile homes, recreational vehicles and education. The Bank also makes
consumer first and second mortgage loans secured by residences. These loans
typically do not qualify for sale in the secondary market, but are generally
not considered sub-prime lending. In addition, the Bank has expanded its home
equity lending program. Home equity loans are secured by mortgage lines on
the borrower's principal or second residence. At March 31, 2008, the Bank had
$22.7 million of home equity lines of credit outstanding and $23.8 million of
additional commitments of home equity lines of credit. The Bank also makes
secured and unsecured lines of credit available. Although consumer loans
involve a higher level of risk than one- to four-family residential mortgage
loans, they generally provide higher yields and have shorter terms to maturity
than one- to four-family residential mortgage loans. At March 31, 2008, the
Bank had total consumer loans of $66.8 million, or 12.5% of the Bank's loan
portfolio.
The Bank's underwriting standards for consumer loans include a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income is determined
by verification of gross monthly income from primary employment, and from any
verifiable secondary income. Although creditworthiness of the applicant is of
primary consideration, the underwriting process also includes a comparison of
the value of the security, if any, in relation to the proposed loan amount.
The Bank also has a credit card program. As of March 31, 2008, the Bank
had issued 1,511 Visa credit cards with total approved credit lines of $5.5
million, of which $1.8 million was outstanding.
Loan Delinquencies and Defaults
-------------------------------
General. The Bank's collection procedures provide that when a real estate
loan is approximately 20 days past due, the borrower is contacted by mail and
payment is requested. If the delinquency continues, subsequent efforts are
made to contact the delinquent borrower and establish a program to bring the
loan current. In certain instances, the Bank may modify the loan or grant a
limited moratorium on loan payments to enable the borrower to reorganize his
financial affairs. If the loan continues in a delinquent status for 60 days
or more, the Bank generally initiates foreclosure proceedings after the
customer has been notified by certified mail. At March 31, 2008, the Bank had
property acquired as the result of foreclosures and other property repossessed
classified as repossessed assets valued at $767,000.
10
Delinquent Loans. The following table sets forth information concerning
delinquent loans at March 31, 2008. The amounts presented represent the total
remaining principal balances of the delinquent loans (before specific reserves
for losses), rather than the actual payment amounts which are overdue.
Real Estate Non-Real Estate
-------------------------------- ---------------------------------
Commercial
Residential Commercial Consumer Business
--------------- -------------- -------------- ----------------
Number Amount Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------ ------ -------
(Dollars in Thousands, number of loans are actual)
Loans delinquent for:
30 - 59 days............ 13 $1,520 22 $5,322 34 $1,025 18 $ 6,519
60 - 89 days............ 1 94 2 1,031 8 54 3 8
90 days and over........ 5 609 11 1,168 10 416 8 3,826
------ ------ ------ ------ ------ ------ ------ -------
Total delinquent loans.. 19 $2,223 35 $7,521 52 $1,495 29 $10,353
====== ====== ====== ====== ====== ====== ====== =======
Classified Assets. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered to be of
lesser quality as "substandard," "doubtful" or "loss" assets. The regulations
require savings associations to classify their own assets and to establish
prudent general allowances for loan losses for assets classified "substandard"
or "doubtful." For the portion of assets classified as "loss," an institution
is required to either establish specific allowances of 100% of the amount
classified or charge off such amount. In addition, the Office of Thrift
Supervision ("OTS") may require the establishment of a general allowance for
losses based on assets classified as "substandard" and "doubtful" or based on
the general quality of the asset portfolio of an association. See "Regulation
Federal Regulation of Savings Institutions."Assets which do not currently
expose the savings association to sufficient risk to warrant classification in
one of the aforementioned categories but possess potential weaknesses are
designated "special mention" by management.
At March 31, 2008, approximately $16.0 million of the Bank's loans were
classified "substandard" compared to $10.8 million at March 31, 2007. In
fiscal 2005, the Bank began applying stricter standards in securitizing its
loan portfolio for classification purposes in conjunction with the formation
of a Credit Administration Department. At March 31, 2008, $1.6 million were
classified as "special mention" compared to $2.3 million at March 31, 2007.
The Bank had no loans classified as "doubtful" or "loss" at March 31, 2008.
As of March 31, 2008, there were loans totaling $187,000 which were troubled
debt restructurings within the meaning of Statement of Financial Accounting
Standard ("SFAS") No. 15. The Bank's policy is to classify all troubled debt
restructurings as substandard. The Bank's classification of assets is
consistent with OTS regulatory classifications.
Non-performing Assets. Loans are placed on non-accrual status when the
collection of principal and/or interest becomes doubtful. In addition, all
loans are placed on non-accrual status when the loan becomes 90 days or more
contractually delinquent. All consumer loans more than 90 days delinquent are
charged against the consumer loan allowance for loan losses unless there is
adequate collateral which is in the process of being repossessed or foreclosed
on. At March 31, 2008, the Bank did not have any troubled debt restructurings
which involve forgiving a portion of interest or principal on any loans or
making loans at a rate materially less than market rate. Other loans of
concern are those loans (not delinquent more than 60 days) that management has
determined need to be closely monitored as the potential exists for increased
risk on these loans in the future. Nonperforming loans are reviewed monthly
on a loan by loan basis. Charge-offs, whether partial or in full, associated
with these loans will vary based on estimates of recovery for each loan.
11
The following table sets forth the amounts and categories of risk
elements in the Bank's loan portfolio.
At March 31,
----------------------------------------------
2008 2007 2006 2005 2004
------ ------ ------ ------ ------
(Dollars in Thousands)
Loans Delinquent 60 to
89 Days:
Residential............... $ 94 $ 621 $ 182 $ 73 $ 72
Consumer.................. 54 97 5 13 73
Commercial business and
real estate.............. 1,039 1,031 420 13 88
------ ------ ------ ------- ------
Total..................... $1,187 $1,749 $ 607 $ 99 $ 233
====== ====== ====== ======= ======
Total as a percentage of
total assets............. 0.14% 0.24% 0.09% 0.02% 0.04%
Non-Accruing Loans Delinquent
90 Days or More:
Residential............... $ 609 $ 353 $ 412 $ 569 $ 559
Consumer.................. 416 142 133 140 243
Commercial business and
real estate.............. 4,994 560 646 1,721 1,242
------ ------ ------ ------- ------
Total................... $6,019 $1,055 $1,191 $ 2,430 $2,044
====== ====== ====== ======= ======
Total as a percentage
of total assets........ 0.72% 0.14% 0.18% 0.42% 0.39%
Troubled debt
restructurings............. $ 187 $ 204 $ 418 $ 434 $ 646(1)
Repossessed assets.......... $ 767 $ 25 $ 91 $ 53 $ 51
Allowance for loan losses... $8,067 $7,297 $6,705 $ 6,284 $5,764
___________
(1) $201,000 of troubled debt restructurings are included in non-accruing
loans.
For the fiscal year ended March 31, 2008, 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 $238,000 compared to $107,000 for the year ended March
31, 2007.
At March 31, 2008, non-accruing loans totaled $6.0 million, compared to
$1.1 million and $1.2 million at March 31, 2007 and 2006, respectively.
Included in non-accruing loans at March 31, 2008 were five residential real
estate loans totaling $609,000, 19 commercial loans totaling $5.0 million and
10 consumer loans totaling $416,000. Of the 10 consumer loans on non-accrual
status at fiscal year end, no loan exceeded $180,000. Of the 19 commercial
loans on non-accrual status at fiscal year end, no loan exceeded $1.4 million.
The Bank had five loans totaling $187,000 at fiscal year end which were
troubled debt restructurings compared to five loans of $204,000 at March 31,
2007. The five troubled debt restructurings were three consumer loans
totaling $170,000 secured by residential dwellings, a $9,000 consumer loan
secured by a second mortgage on a residence, and a $8,000 unsecured commercial
loan. The $9,000 consumer loan was 60 days delinquent at March 31, 2008. The
remaining four loans were current at March 31, 2008.
At March 31, 2008, repossessed assets had an outstanding carrying value
of $767,000 and consisted of four single family dwellings, two residential
lots, and a tractor.
Provision for Losses on Loans and Repossessed Assets. Security Federal
recognizes that it will experience credit losses 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
12
characteristics of the loan portfolio, (2) current economic conditions on a
local as well as a statewide basis, (3) actual losses experienced historically
and (4) the level of reserves for possible losses in the future.
Additionally, the Bank maintains a reserve for uncollected interest on loans
90 days or more past due.
At March 31, 2008, total reserves relating to loans were $8.1 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 $400.2 million, or 74.9% of the Bank's total loan portfolio at March 31,
2008, and it is anticipated there will be a continued emphasis on this type of
credit. Although commercial and consumer loans carry a higher level of credit
risk than conventional residential mortgage loans, the level of reserves
reflects management's continuing evaluation of this risk based on upon the
Bank's past loss experience. At fiscal year end, the Bank's ratio of loans
delinquent more than 60 days to total assets was 0.86%. These delinquent
loans are considered to be well secured and are in the process of collection.
Management uses four methods or calculations to estimate the adequacy of the
reserve using the factors mentioned above. The reserve is management's best
estimate for the reserve. There can be no guarantee that the estimate is
adequate or accurate. Management believes that reserves for loan losses are
at a level adequate to provide for inherent loan losses. Although management
believes that it has considered all relevant factors in its estimation of
future losses, future adjustments to reserves may be necessary if conditions
change substantially from the assumptions used in making the original
estimations. Regulators will from time to time evaluate the allowance for
loan losses which is subject to adjustment based upon the information
available to the regulators at the time of their examinations.
Management believes the Bank has no undue concentration of loans in any
one particular industry. At March 31, 2008, the Bank had no allowance for
losses on real estate owned.
The following table sets forth an analysis of the Bank's allowance for
loan losses.
At March 31,
-------------------------------------------------
2008 2007 2006 2005 2004
-------- -------- -------- -------- --------
(Dollars in Thousands)
Balance at beginning
of year.................. $ 7,297 $ 6,705 $ 6,284 $ 5,764 $ 4,911
Allowance acquired in
acquisition.............. - 22 - -- --
Provision charged to
operations............... 895 600 660 780 1,200
Charge-offs:
Residential real estate.. 15 9 25 29 38
Commercial business and
commercial real estate.. 146 16 159 257 164
Consumer................. 89 108 117 157 467
------- ------- ------- ------ ------
Total charge-offs....... 250 133 301 443 669
------- ------- ------- ------ ------
Recoveries:
Residential real estate.. 1 - 4 - --
Commercial business and
commercial real estate.. 83 23 33 112 16
Consumer................. 41 80 25 71 306
------- ------- ------- ------ ------
Total recoveries........ 125 103 62 183 322
------- ------- ------- ------ ------
Balance at end of year.... $8,067 $7,297 $6,705 $6,284 $5,764
======= ======= ======= ====== ======
Ratio of net charge-offs
during the year to average
loans outstanding during
the year . . . . . . . . . . 0.03% 0.01% 0.07% 0.09% 0.14%
======= ======= ======= ====== ======
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,
----------------------------------------------------------------------------------
2008 2007 2006 2005 2004
-------------- ------------- ------------- ------------- -------------
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Residential............ $ 665 25.2% $ 619 28.2% $ 568 31.5% $ 531 37.0% $ 500 40.1%
Consumer............... 3,712 12.5 3,339 14.2 3,068 15.0 2,876 15.0 2,632 16.4
Commercial business
and commercial real
estate................ 3,690 62.3 3,339 57.6 3,069 53.5 2,877 48.0 2,632 43.5
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total................. $8,067 100.0% $7,297 100.0% $6,705 100.0% $6,284 100.0% $5,764 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Service Corporation
-------------------
As a federally chartered savings bank, Security Federal is permitted by
OTS regulations to invest up to 3% of its assets in the stock of service
corporations, provided that any investment in excess of 2% of its assets must
be primarily for community, inner-city or community development purposes. At
March 31, 2008, Security Federal's net investment in its service corporations
(including loans to service corporations) totaled $3.6 million. In addition
to investments in service corporations, federal institutions are permitted to
invest an unlimited amount in operating subsidiaries engaged solely in
activities which a federal savings bank may engage in directly.
Security Federal Insurance, Inc. ("SFINS"), Security Federal Investments,
Inc. ("SFINV") and Security Federal Trust, Inc. ("SFT"). SFINS, SFINV and
SFT, wholly owned subsidiaries of the Bank, were formed during fiscal 2002 and
began operating during the December 2001 quarter. SFINS is an insurance
agency offering auto, business, health, home and life insurance, and premium
finance. SFINV offers mutual funds, annuities and discount brokerage
services. SFT offers a full range of trust and financial planning services.
The operations of SFINS, SFINV and SFT are included in the Company's
Consolidated Financial Statements.
Collier Jennings Financial Corporation. Collier Jennings Financial
Corporation is a subsidiary of SFINS, a subsidiary of the Bank, which is
described above. The Company acquired the insurance and premium finance
businesses of Collier Jennings Financial Corporation and its subsidiaries,
Collier-Jennings, Inc., The Auto Insurance Store, Inc., and Collier-Jennings
Premium Pay Plans, Inc. (the "Collier-Jennings Companies"), effective as of
June 30, 2006.
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.
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. Furthermore, 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."
14
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 Institutions Federal Home Loan Bank System." Liquidity may increase
or decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans.
Historically, the Bank has maintained its liquid assets above the minimum
requirements imposed by OTS regulations and at a level believed adequate to
meet requirements of normal daily activities, repayment of maturing debt and
potential deposit outflows. Management regularly reviews and updates cash
flow projections to assure that adequate liquidity is provided.
The following table sets forth the composition of the Company's portfolio
of securities and other investments, not including mortgage-backed securities.
At March 31,
----------------------------
2008 2007 2006
-------- ------- --------
(In Thousands)
Interest bearing deposit at FHLB............. $ 1,846 $ 1,795 $ 3,715
------- -------- --------
Total...................................... $ 1,846 $ 1,795 $ 3,715
======= ======== ========
Investment Securities:
Available for Sale:
FHLB securities............................ $32,517 $38,373 $ 24,005
Federal Farm Credit Bank securities........ 15,173 9,214 2,941
Fannie Mae bonds........................... 3,006 2,930 979
Freddie Mac bonds.......................... - 64 230
Equity Securities.......................... 89 104 103
------- -------- --------
Total securities available for sale....... 50,785 50,685 28,258
------- -------- --------
Held to Maturity:
FHLB securities............................ 18,000 55,995 66,002
Federal Farm Credit Bank securities........ 2,000 7,989 8,986
Equity Securities.......................... 155 155 --
------- -------- --------
Total securities held to maturity......... 20,155 64,139 74,988
------- -------- --------
Total securities (1)......................... 70,940 114,824 103,246
FHLB stock................................... 9,497 8,209 7,150
------- -------- --------
Total securities and FHLB stock (1).......... $80,437 $123,033 $110,396
======= ======== ========
___________
(1) Does not include mortgage-backed securities.
At March 31, 2008, 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.
FHLB securities, Federal Farm Credit Bank securities, Fannie Mae bonds and
Freddie Mac bonds are all securities that are issued by government sponsored
enterprises (GSEs). GSE securities are not backed by the full faith and
credit of the United States government.
15
The following table sets forth the maturities or repricing of investment
securities and FHLB stock at March 31, 2008, and the weighted average yields
of such securities and FHLB stock (calculated on the basis of the cost and
effective yields weighted for the scheduled maturity of each security).
Callable securities are shown at their likely call dates based on current
interest rates. The table was prepared using amortized cost.
Maturing or Repricing
-------------------------------------------------------------
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
------------- ------------- ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
U.S. Government
sponsored
enterprises... $28,595 5.15% $22,144 5.16% $ -- --% $ -- --%
FHLB stock (1). 9,497 6.00 - -- -- -- -- --
Other equity
securities.... 103 0.20 - - - - - --
------- ----- ------- ------ ------ ----- ------ -----
Total (2).... $38,195 5.35% $22,144 5.16% $ -- --% $ -- --%
======= ===== ======= ====== ====== ===== ====== =====
___________
(1) FHLB stock has no stated maturity date.
(2) Excludes mortgage-backed securities and equity securities totaling
$190.5 million with a yield of 5.05%.
For information regarding the market value of the Bank's securities
portfolios, see Notes 3 and 4 of the Notes to Consolidated Financial
Statements contained in the Annual Report.
Mortgage-backed Securities. Security Federal has a portfolio of
mortgage-backed securities which it holds in both an available for sale and a
held to maturity portfolio. Mortgage-backed securities can serve as
collateral for borrowings and, through repayments, as a source of liquidity.
Under the Bank's risk-based capital requirement, mortgage-backed securities
have a risk weight of 20% (or 0% in the case of Government National Mortgage
Association ("Ginnie Mae") securities) in contrast to the 50% risk weight
carried by residential loans. See "Regulation."
The following table sets forth the composition of the mortgage-backed
securities available for sale portfolio at fair value at the dates indicated.
At March 31,
----------------------------
2008 2007 2006
-------- -------- --------
(In Thousands)
Available for Sale:
Freddie Mac........................ $ 34,250 $ 18,591 $ 21,196
Fannie Mae......................... 84,965 67,675 74,498
Ginnie Mae......................... 74,159 48,815 39,493
-------- -------- --------
Total............................. $193,374 $135,081 $135,187
======== ======== ========
At March 31, 2008, 2007 and 2006, the Company did not have any
mortgage-backed securities held to maturity.
At March 31, 2008, 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.
Freddie Mac and Fannie Mae mortgage-backed securities are GSE issued
securities. GSE securities are not backed by the full faith and credit of the
United States government. Ginnie Mae mortgage-backed securities are backed by
the full faith and credit of the United States government.
For information regarding the market values of Security Federal's
mortgage-backed securities portfolio, see Notes 3 and 4 of the Notes to
Consolidated Financial Statements contained in the Annual Report.
16
The following table sets forth the final maturities or initial repricings, whichever occurs first, and
the weighted average yields of the mortgage-backed securities at March 31, 2008. Not considered in the
preparation of the table below is the effect of scheduled payments or anticipated prepayments. The table is
prepared using amortized cost.
At
The Earliest of Maturing or Repricing March 31, 2008
-------------------------------------------------------------------- ---------------
Less Than 1 to 5 5 to 10 Over Balance
1 Year Years Years Ten Years Outstanding
-------------- -------------- -------------- -------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Fannie Mae...... $ 2,415 3.84% $ 6,249 4.07% $ 3,474 4.61% $21,727 5.15% $ 33,865 4.80%
Freddie Mac..... 20,237 5.04 26,356 4.75 18,407 4.54 18,818 5.33 83,818 4.90
Ginnie Mae...... 22,846 5.25 10,410 5.30 435 5.97 39,080 5.39 72,771 5.34
------- ----- ------- ----- ------- ----- ------- ----- -------- -----
Total........... $45,498 5.08% $43,015 4.78% $22,316 4.58% $79,625 5.31% $190,454 5.05%
======= ===== ======= ===== ======= ===== ======= ===== ======== =====
Sources of Funds
----------------
Deposit accounts have traditionally been a principal source of the Bank's
funds for use in lending and for other general business purposes. In addition
to deposits, the Bank derives funds from loan repayments, cash flows generated
from operations (including interest credited to deposit accounts), FHLB of
Atlanta advances, the sale of securities under agreements to repurchase, and
loan sales. Scheduled loan payments are a relatively stable source of funds
while deposit inflows and outflows and the related cost of such funds have
varied widely. FHLB of Atlanta advances and the sale of securities under
agreements to repurchase may be used on a short-term basis to compensate for
seasonal reductions in deposits or deposit inflows at less than projected
levels and may be used on a longer term basis in support of expanded lending
activities. The availability of funds from loan sales is influenced by
general interest rates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the Annual Report.
Deposits. The Bank attracts both short-term and long-term deposits from
the general public by offering a wide assortment of account types and rates.
In recent years, market conditions have required the Bank to rely increasingly
on short-term accounts and other deposit alternatives that are more responsive
to market interest rates than the savings accounts and regulated fixed
interest rate, fixed-term certificates that were the Bank's primary source of
deposits before 1978. The Bank offers regular savings accounts, checking
accounts, various money market accounts, fixed interest rate certificates with
varying maturities, negotiated rate $100,000 or above jumbo certificates of
deposit ("Jumbo CDs") and individual retirement accounts.
At March 31, 2008, the Bank had no brokered deposits. In addition, the
Bank believes that, based on its experience over the past several years, its
savings and transaction accounts are stable sources of deposits.
17
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,
------------------------------------------------------
2008 2007 2006
---------------- ---------------- ----------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Interest Rate Range
-------------------
for 2008:
---------
Savings accounts
0% - 1.00%........... $15,966 2.7% $ 17,459 3.3% $ 17,795 3.7%
NOW and other
transaction
accounts 0% - 1.98%.. 100,586 17.0 105,515 20.1 105,348 22.0
Money market funds
1.09% - 3.01%........ 143,225 24.3 145,492 27.8 151,494 31.6
-------- ------ -------- ------ -------- ------
Total non-
certificates........ $259,777 44.0% $268,466 51.2% $274,637 57.3%
======== ====== ======== ====== ======== ======
Certificates:
-------------
0.00-1.99%............ $ - --% $ - --% $ 60 --%
2.00-2.99%............ 14,047 2.4 2,972 0.6 26,836 5.6
3.00-3.99%............ 59,527 10.1 36,045 6.9 72,832 15.2
4.00-4.99%............ 68,149 11.5 35,617 6.8 94,241 19.7
5.00-5.99%............ 189,350 32.0 180,638 34.5 10,623 2.2
-------- ------ -------- ------ -------- ------
Total certificates... 331,073 56.0 255,272 48.8 204,592 42.7
-------- ------ -------- ------ -------- ------
Total deposits....... $590,850 100.0% $523,738 100.0% $479,229 100.0%
======== ====== ======== ====== ======== ======
The Bank relies to a limited extent upon locally obtained Jumbo CDs to
maintain its deposit levels. At March 31, 2008, Jumbo CDs constituted 21.1%
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,
----------------------------------
2008 2007 2006
--------- --------- ---------
(Dollars in Thousands)
Opening balance..................... $ 523,738 $ 479,229 $ 430,287
Net deposits........................ 67,112 44,509 48,942
Ending balance...................... 590,850 523,738 479,229
--------- --------- ---------
Net increase........................ $ 67,112 $ 44,509 $ 48,942
========= ========= =========
Percent increase.................... $12.8% 9.3% 11.4%
========= ========= =========
18
The following table shows rate and maturity information for the Bank's
certificates of deposit as of March 31, 2008.
2.00- 3.00- 4.00- 5.00-
2.99% 3.99% 4.99% 5.99% Total
----- ----- ----- ----- -----
Certificate accounts maturing (In Thousands)
in quarter ending:
June 30, 2008.............. $ 5,495 $ 7,629 $10,183 $ 52,582 $ 75,889
September 30, 2008......... 3,137 7,896 11,748 82,749 105,530
December 31, 2008.......... 35 31,975 33,903 47,696 113,609
March 31, 2009............. 3,623 7,114 7,013 828 18,578
June 30, 2009.............. 567 2,124 153 426 3,270
September 30, 2009......... 142 658 219 400 1,419
December 31, 2009.......... - 722 276 562 1,560
March 31, 2010............. 1,021 526 266 - 1,813
June 30, 2010.............. - 108 419 - 527
September 30, 2010......... - 224 209 261 694
December 31, 2010.......... - 5 246 100 351
Thereafter................. 27 546 3,514 3,746 7,833
------- ------- ------- -------- --------
Total..................... $14,047 $59,527 $68,149 $189,350 $331,073
======= ======= ======= ======== ========
The following table indicates the amount of the Bank's deposits of
$100,000 or more by time remaining until maturity at March 31, 2008.
Certificates Savings, NOW and
of Deposit Money Market Accounts
---------- ---------------------
Maturity Period (In Thousands)
---------------
Three months or less.............. $ 35,114 $ 122,043
Over three through six months..... 44,386 --
Over six through twelve months.... 62,808 --
Over twelve months................ 7,220 --
---------- ----------
Total............................ $ 149,528 $ 122,043
========= ==========
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 10
of the Notes to Consolidated Financial Statements contained in the Annual
Report for information regarding the maturities and rate structure of the
Bank's FHLB advances. Federal law contains certain collateral requirements
for FHLB advances. See "Regulation Federal Regulation of Savings
Institutions Federal Home Loan Bank System."
At March 31, 2008, the Company had $5.2 million in junior subordinated
debentures. Half of the debentures have a fixed rate of 6.88%, which balloons
in September 2011. The other half of the debentures have a fixed rate that
floats quarterly at 170 basis points over the three-month LIBOR rate, or 4.50%
at March 31, 2008. The blended rate was 5.69% at March 31, 2008. The
debentures are callable by the Company in September 2011, and quarterly
thereafter, with a final maturity date of December 15, 2036. See Note 11 of
the Notes to Consolidated Financial Statements contained in the Annual Report
for more information.
19
The following table sets forth the maximum month-end balance and average
balance of FHLB advances, other borrowings and junior subordinated debentures
for the periods indicated.
Years Ended March 31,
--------------------------------
2008 2007 2006
-------- -------- ---------
(In Thousands)
Maximum Balance:
FHLB advances...................... $ 179,142 $ 159,376 $ 132,513
Other borrowings................... 13,635 8,088 7,290
Junior subordinated debentures..... 5,155 5,155 --
Average Balance:
FHLB advances...................... $ 170,606 $ 145,299 $ 121,526
Other borrowings................... 10,171 7,080 6,201
Junior subordinated debentures..... 5,155 2,721 --
At March 31, 2008, the Bank had $9.8 million in retail repurchase
agreements with an average rate of 3.01%. These repurchase agreements are
included in "Other Borrowings" in the consolidated financial statements and
the table above.
The following table sets forth information as to the Bank's borrowings and
the weighted average interest rates thereon at the dates indicated.
At March 31,
--------------------------------
2008 2007 2006
-------- -------- ---------
(Dollars in Thousands)
Balance:
FHLB advances..................... $178,234 $153,049 $131,363
Other borrowings.................. 12,784 8,088 7,290
Junior subordinated debentures.... 5,155 5,155 --
Weighted Average Interest Rate at
Fiscal Year End:
FHLB advances..................... 4.18% 4.36% 3.74%
Other borrowings.................. 3.62 4.41 4.43
Junior subordinated debentures.... 5.69 6.97 --
During Fiscal Year:
FHLB advances..................... 4.46% 4.23% 3.55%
Other borrowings.................. 3.29 4.49 3.38
Junior subordinated debentures.... 7.03 7.05 --
Competition
-----------
The Bank serves the counties of Aiken and Lexington, South Carolina
through its 13 full service branch offices located in Aiken, North Augusta,
Graniteville, Langley, Clearwater, Wagener, Lexington and West Columbia, South
Carolina, and a branch office in Columbia County, Evans, Georgia, which opened
in December 2007.
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
20
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.
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.
Personnel
---------
At March 31, 2008, the Bank employed 195 full-time and 22 part-time
employees. The Bank employees are not represented by any collective
bargaining agreement. Management of the Bank considers its relations with its
employees to be good.
Executive Officers of the Registrant. The following table sets forth
information regarding the executive officers of the Company and the Bank.
Age at Position
March 31, -------------------------------------------
Name 2008 Company Bank
------------- ------------ -------------------- ---------------------
Timothy W. Simmons 62 President and Chief Chairman of the Board
Executive Officer and Chief Executive
Officer
T. Clifton Weeks 81 Chairman of the Board
Roy G. Lindburg 47 Chief Financial Chief Financial
Officer Officer
J. Chris Verenes 52 President
Biographical Information. The following is a description of the principal
occupation and employment of the executive officers of the Corporation and the
Bank during at least the past five years:
Timothy W. Simmons has been President of the Company since 1987 and Chief
Executive Officer since June 1994. Mr. Simmons was elected President and
Chief Operating Officer of the Bank in January 1987 and served in these
capacities from March 1987 to December 2001. In May 1988, Mr. Simmons became
Chief Executive Officer of the Bank and in January 2002, he was elected
Chairman of the Bank's Board of Directors.
T. Clifton Weeks has been Chairman of the Board of the Company since July
1987 and was Chief Executive Officer of the Company from July 1987 until June
1994. Mr. Weeks served as Chairman of the Board of the Bank from January 1987
until January 2002 and was Chief Executive Officer of the Bank from 1987 until
May 1988. Prior thereto, he served as President and Managing Officer of the
Bank beginning in 1958.
Roy G. Lindburg has been Chief Financial Officer of the Company and the
Bank since January 1995. He was named Executive Vice President in 2005.
J. Chris Verenes was elected President of the Bank effective January 26,
2004. Prior to that, he held a variety of management positions with
Washington Group International, an engineering and construction company that
manages and operates major government sites throughout the United States for
the Department of Energy. He was Director of Planning and Administration from
2001 to January 2004, Chief of Staff during 2001, Director of Strategic
Programs for the business unit from 2000 to 2001 and Deputy Manager of
Business from 1996 to 2000. Prior to his employment by Washington Group
International, Mr. Verenes served as Controller for Riegel Textile
Corporation, as Director of Control Data and Business and Technology Center,
and as Executive Director of the South Carolina Democratic Party.
21
REGULATION
The following is a brief description of certain laws and regulations which
are applicable to the Company and the Bank. The description of these laws and
regulations, as well as descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to the applicable laws and regulations.
Legislation is introduced from time to time in the United States Congress
that may affect our operations. In addition, the regulations governing us may
be amended from time to time by the OTS. Any such legislation or regulatory
changes in the future could adversely affect us. We cannot predict whether
any such changes may occur.
General
-------
The Bank, as a federally-chartered savings institution, is subject to
extensive regulation, examination and supervision by the OTS, as its primary
federal regulator, and the FDIC, as its deposits insurer. The Bank is a
member of the FHLB System and its deposit accounts are insured up to
applicable limits by the Deposit Insurance Fund administered by the FDIC. 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 and,
under certain circumstances, the FDIC to evaluate the Bank's safety and
soundness and compliance with various regulatory requirements. This
regulatory structure is intended primarily for the protection of the insurance
fund and depositors. 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 and the Bank and their operations. The Company, as a savings and loan
holding company, is required to file certain reports with, are subject to
examination by, and otherwise must comply with the rules and regulations of
the OTS. The Company is also subject to the rules and regulations of the SEC
under the federal securities laws. See "-- Savings and Loan Holding Company
Regulations."
Federal Regulation of Savings Institutions
------------------------------------------
Office of Thrift Supervision. The OTS has extensive authority over the
operations of savings institutions. As part of this authority, the Bank is
required to file periodic reports with the OTS and is subject to periodic
examinations by the OTS and the FDIC. The OTS also has extensive enforcement
authority over all savings institutions and their holding companies, including
the Bank and the Company. This enforcement authority includes, among other
things, the ability to assess civil money penalties, issue cease-and-desist or
removal orders and initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the
OTS. Except under certain circumstances, public disclosure of final
enforcement actions by the OTS is required.
In addition, the investment, lending and branching authority of the Bank
also are prescribed by federal laws, which prohibit the Bank from engaging in
any activities not permitted by these laws. For example, no savings
institution may invest in non-investment grade corporate debt securities. In
addition, the permissible level of investment by federal institutions in loans
secured by non-residential real property may not exceed 400% of total capital,
except with approval of the OTS. Federal savings institutions are also
generally authorized to branch nationwide. The Bank is in compliance with the
noted restrictions.
All savings institutions are required to pay assessments to the OTS to
fund the agency's operations. The general assessments, paid on a semi-annual
basis, are determined based on the savings institution's total assets,
including consolidated subsidiaries. The Bank's OTS assessment for the fiscal
year ended March 31, 2008 was $164,000.
The Bank's general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus).
At March 31, 2008, the Bank's lending limit under
22
this restriction was $8.9 million and, at that date, the Bank's largest single
loan to one borrower was $7.0 million, which was performing according to its
original terms.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution that fails to comply with these
standards must submit a compliance plan.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs that administer the home financing
credit function of savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of
the FHLB System. It makes loans or advances to members in accordance with
policies and procedures, established by the Board of Directors of the FHLB,
which are subject to the oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient
collateral as determined by the FHLB. In addition, all long-term advances are
required to provide funds for residential home financing. At March 31, 2008,
the Bank had $178.2 million of outstanding advances from the FHLB of Atlanta
under an available credit facility of $252.0 million, which is limited to
available collateral. See Business Sources of Funds Borrowings.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Atlanta. At March 31, 2008, the Bank had $9.5 million in FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past two fiscal
years these dividends have averaged 5.91% and were 6.00% for the fiscal year
ended March 31, 2008.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low- and
moderately-priced housing programs through direct loans or interest subsidies
on advances targeted for community investment and low- and moderate-income
housing projects. These contributions have affected adversely the level of
FHLB dividends paid and could continue to do so in the future. These
contributions could also have an adverse effect on the value of FHLB stock in
the future. A reduction in value of the Bank's FHLB stock may result in a
corresponding reduction in the Bank's capital.
Federal Deposit Insurance Corporation. The Bank's deposits are insured up
to applicable limits by the Deposit Insurance Fund of the FDIC. The Deposit
Insurance Fund is the successor to the Bank Insurance Fund and the Savings
Association Insurance Fund, which were merged effective March 31, 2006. 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 insurance fund. 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.
As authorized by the Federal Deposit Insurance Reform Act of 2005, which
was enacted in 2006 ("Reform Act"), the FDIC amended its risk-based assessment
system. Under the revised system, insured institutions are assigned to one of
four risk categories based on supervisory evaluations, regulatory capital
levels and certain other factors. An institution's assessment rate depends
upon the category to which it is assigned. Risk category I, which contains
the least risky depository institutions, is expected to include more than 90%
of all institutions. Unlike the other categories, Risk Category I contains
further risk differentiation based on the FDIC's analysis of financial ratios,
examination component ratings and other information. Assessment rates are
determined by the FDIC and currently range from five to seven basis points for
the healthiest institutions (Risk Category I) to 43 basis points of assessable
deposits for the riskiest (Risk Category IV). The FDIC may adjust rates
uniformly from one quarter to the next, except that no single adjustment can
exceed three basis points. No institution may pay a dividend if in default of
the FDIC assessment.
The Reform Act also provided for a one-time credit for eligible
institutions based on their assessment base as of December 31, 1996. Subject
to certain limitations with respect to institutions that are exhibiting
weaknesses, credits can be used to offset assessments until exhausted. The
Bank's one-time credit was $235,000, which offset the Bank's assessment that
was paid during the year ended March 31, 2008. The Reform Act also provided
for the possibility that
23
the FDIC may pay dividends to insured institutions once the Deposit Insurance
Fund reserve ratio equals or exceeds 1.35% of estimated insured deposits.
In addition to the assessment for deposit insurance, the Financing
Corporation ("FICO") is authorized to impose and collect, with the approval of
the FDIC, assessments for anticipated payments, issuance costs and custodial
fees on bonds issued by the FICO in the 1980s to recapitalize the Federal
Savings and Loan Insurance Corporations. The bonds issued by the FICO are due
to mature in 2017 through 2019. For the quarter ended March 31, 2008, the
annualized FICO assessment was equal to seven basis points for each $100 in
domestic deposits maintained at an institution.
The Reform Act provided the FDIC with authority to adjust the Deposit
Insurance Fund ratio to insured deposits within a range of 1.15% and 1.50%, in
contrast to the prior statutorily fixed ratio of 1.25%. The ratio, which is
viewed by the FDIC as the level that the fund should achieve, was established
by the agency at 1.25% for 2008.
The FDIC has authority to increase insurance assessments. A significant
increase in insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Bank. There can be no
prediction as to what insurance assessment rates will be in the future.
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 is not aware of any practice, condition or violation
that might lead to termination of the Bank's deposit insurance.
Capital Requirements. The OTS's capital regulations require federal
savings institutions to meet three minimum capital standards: a 1.5% tangible
capital to total assets ratio, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS examination rating system) and an
8% risk-based capital ratio. In addition, the prompt corrective action
standards discussed below also establish, in effect, a minimum 2% tangible
capital standard, a 4% leverage ratio (3% for institutions receiving the
highest rating on the CAMELS system) and, together with the risk-based capital
standard itself, a 4% Tier I risk-based capital standard. The OTS regulations
also require that, in meeting the tangible, leverage and risk-based capital
standards, institutions must generally deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank.
The risk-based capital standard requires federal savings institutions to
maintain Tier I (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, recourse obligations, residual
interests and direct credit substitutes, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the
risks believed inherent in the type of asset. Core (Tier I) capital is
defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships.
The components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets and up to
45% of unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The OTS also has authority to establish individual minimum capital
requirements in appropriate cases upon a determination that an institution's
capital level is or may become inadequate in light of the particular
circumstances. At March 31, 2008, the Bank met each of these capital
requirements. For additional information, see Note 13 of the Notes to
Consolidated Financial Statements included in the Annual Report.
Prompt Corrective Action. The OTS is required to take certain supervisory
actions against undercapitalized savings institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, an
institution that has a ratio of total capital to risk-weighted assets of less
than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than
4%, or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
"undercapitalized." An institution that has a total risk-based
24
capital ratio less than 6%, a Tier I capital ratio of less than 3% or a
leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and an institution that has a tangible capital to assets
ratio equal to or less than 2% is deemed to be "critically undercapitalized."
Subject to a narrow exception, the OTS is required to appoint a receiver or
conservator for a savings institution that is "critically undercapitalized."
OTS regulations also require that a capital restoration plan be filed with the
OTS within 45 days of the date a savings institution receives notice that it
is "undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to an undercapitalized institution, including, but not
limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. "Significantly undercapitalized" and
"critically undercapitalized" institutions are subject to more extensive
mandatory regulatory actions. The OTS also could take any one of a number of
discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
At March 31, 2008, the Bank was categorized as "well capitalized" under
the prompt corrective action
regulations of the OTS.
Qualified Thrift Lender Test. All savings institutions, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
institution to have at least 65% of its total assets, as defined by
regulation, in qualified thrift investments on a monthly average for nine out
of every 12 months on a rolling basis. As an alternative, the savings
institution may maintain 60% of its assets in those assets specified in
Section 7701(a)(19) of the Internal Revenue Code. Under either test, such
assets primarily consist of residential housing related loans and investments.
A savings institution that fails to meet the QTL is subject to certain
operating restrictions and may be required to convert to a national bank
charter. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered "qualified thrift
investments." As of March 31, 2008, the Bank maintained 98.5% of its portfolio
assets in qualified thrift investments and, therefore, met the qualified
thrift lender test.
Limitations on Capital Distributions. OTS regulations impose various
restrictions on savings institutions with respect to their ability to make
distributions of capital, which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the capital
account. Generally, savings institutions, such as the Bank, that before and
after the proposed distribution are well-capitalized, may make capital
distributions during any calendar year equal to up to 100% of net income for
the year-to-date plus retained net income for the two preceding years.
However, an institution deemed to be in need of more than normal supervision
by the OTS may have its dividend authority restricted by the OTS. The Bank
may pay dividends to the Company in accordance with this general authority.
Savings institutions proposing to make any capital distribution need not
submit written notice to the OTS prior to such distribution unless they are a
subsidiary of a holding company or would not remain well-capitalized following
the distribution. Savings institutions that do not, or would not meet their
current minimum capital requirements following a proposed capital distribution
or propose to exceed these net income limitations, must obtain OTS approval
prior to making such distribution. The OTS may object to the distribution
during that 30-day period based on safety and soundness concerns. See "
Capital Requirements."
Activities of Savings Institutions and their Subsidiaries. When a savings
institution establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that it controls, the savings institution must
notify the FDIC and the OTS 30 days in advance and provide the information
each agency may, by regulation, require. Savings institutions also must
conduct the activities of subsidiaries in accordance with existing regulations
and orders.
The OTS may determine that the continuation by a savings institution of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the institution or is
inconsistent with sound banking practices or with the purposes of the Federal
Deposit Insurance Act. Based upon that determination, the FDIC or the OTS has
the authority to order the savings institution to divest itself of control of
the subsidiary. The FDIC also may determine by regulation or order that any
specific activity poses a serious threat to the Deposit Insurance Fund. If
so, it may require that no member of the Deposit Insurance Fund engage in that
activity directly.
25
Transactions with Affiliates. The Bank's authority to engage in
transactions with "affiliates" is limited by OTS regulations and by Sections
23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve
Board's Regulation W. The term "affiliates" for these purposes generally
means any company that controls or is under common control with an
institution. The Company and its non-savings institution subsidiaries are
affiliates of the Bank. In general, transactions with affiliates must be on
terms that are as favorable to the institution as comparable transactions with
non-affiliates. In addition, certain types of transactions are restricted to
an aggregate percentage of the institution's capital. Collateral in specified
amounts must usually be provided by affiliates in order to receive loans from
an institution. In addition, savings institutions are prohibited from lending
to any affiliate that is engaged in activities that are not permissible for
bank holding companies and no savings institution may purchase the securities
of any affiliate other than a subsidiary.
The Sarbanes-Oxley Act of 2002 generally prohibits a company from making
loans to its executive officers and directors. However, there is a specific
exception for loans by a depository institution to its executive officers and
directors in compliance with federal banking laws. Under such laws, the
Bank's authority to extend credit to executive officers, directors and 10%
stockholders ("insiders"), as well as entities such persons control, is
limited. The law restricts both the individual and aggregate amount of loans
the Bank may make to insiders based, in part, on the Bank's capital position
and requires certain Board approval procedures to be followed. Such loans
must be made on terms substantially the same as those offered to unaffiliated
individuals and not involve more than the normal risk of repayment. There is
an exception for loans made pursuant to a benefit or compensation program that
is widely available to all employees of the institution and does not give
preference to insiders over other employees. There are additional
restrictions applicable to loans to executive officers.
Community Reinvestment Act. Under the Community Reinvestment Act, every
FDIC-insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods. The
Community Reinvestment Act does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the Community
Reinvestment Act. The Community Reinvestment Act requires the OTS, in
connection with its examination of the Bank, to assess the institution's
record of meeting the credit needs of its community and to take such record
into account in its evaluation of certain applications, such as a merger or
the establishment of a branch, by the Bank. An unsatisfactory rating may be
used as the basis for the denial of an application by the OTS. Due to the
heightened attention being given to the Community Reinvestment Act in the past
few years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was examined for Community
Reinvestment Act compliance and received a rating of satisfactory in its
latest examination.
Affiliate Transactions. The Company and the Bank are separate and
distinct legal entities. Various legal limitations restrict the Bank from
lending or otherwise supplying funds to the Company, generally limiting any
single transaction to 10% of the Bank's capital and surplus and limiting all
such transactions to 20% of the Bank's capital and surplus. These
transactions also must be on terms and conditions consistent with safe and
sound banking practices that are substantially the same as those prevailing at
the time for transactions with unaffiliated companies.
Federally insured savings institutions are subject, with certain
exceptions, to certain restrictions on extensions of credit to their parent
holding companies or other affiliates, on investments in the stock or other
securities of affiliates and on the taking of such stock or securities as
collateral from any borrower. In addition, these institutions are prohibited
from engaging in certain tie-in arrangements in connection with any extension
of credit or the providing of any property or service.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring action against all
"institution-affiliated parties," including shareholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1.1 million
per day in especially egregious cases. The
26
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.
Standards for Safety and Soundness. As required by statute, the federal
banking agencies have adopted Interagency Guidelines prescribing Standards for
Safety and Soundness. 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 a savings institution fails to meet any standard
prescribed by the guidelines, it may require the institution to submit an
acceptable plan to achieve compliance with the standard.
Environmental Issues Associated with Real Estate Lending. The
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), a federal statute, generally imposes strict liability on all prior
and present "owners and operators" of sites containing hazardous waste.
However, Congress asked to protect secured creditors by providing that the
term "owner and operator" excludes a person whose ownership is limited to
protecting its security interest in the site. Since the enactment of the
CERCLA, this "secured creditor exemption" has been the subject of judicial
interpretations which have left open the possibility that lenders could be
liable for cleanup costs on contaminated property that they hold as collateral
for a loan.
To the extent that legal uncertainty exists in this area, all creditors,
including the Bank, that have made loans secured by properties with potential
hazardous waste contamination (such as petroleum contamination) could be
subject to liability for cleanup costs, which costs often substantially exceed
the value of the collateral property.
Privacy Standards. The Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 ("GLBA"), modernized the financial services industry
by establishing a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms and other financial
service providers. The Bank is subject to OTS regulations implementing the
privacy protection provisions of the GLBA. These regulations require the Bank
to disclose its privacy policy, including identifying with whom it shares
"non-public personal information," to customers at the time of establishing
the customer relationship and annually thereafter.
Anti-Money Laundering and Customer Identification. Congress enacted the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act") in
response to the terrorist events of September 11, 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. In
March 2006, Congress re-enacted certain expiring provisions of the USA Patriot
Act.
Savings and Loan Holding Company Regulation
-------------------------------------------
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight of the OTS. Accordingly, the Company is
required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
present a serious risk to the Bank.
Mergers and Acquisitions. The Company must obtain approval from the OTS
before acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company or acquiring such an
institution or holding company by merger, consolidation or purchase of its
assets. In evaluating an application for the Company to acquire control of a
savings institution, the OTS would consider the financial and managerial
resources and future prospects of the Company and the target institution, the
effect of the acquisition on the risk to the insurance fund, the convenience
and the needs of the community and competitive factors.
Activities Restrictions. The Company and its non-savings institution
subsidiaries are subject to statutory and regulatory restrictions on their
business activities specified by federal regulations, which include performing
services
27
and holding properties used by a savings institution subsidiary, activities
authorized for savings and loan holding companies as of March 5, 1987, and
non-banking activities permissible for bank holding companies pursuant to the
Bank Holding Company Act of 1956 or authorized for financial holding companies
pursuant to the GLBA.
If the Bank fails the QTL test, the Company must, within one year of that
failure, register as, and will become subject to, the restrictions applicable
to bank holding companies. See " Federal Regulation of Savings Institutions
Qualified Thrift Lender Test."
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley Act") was signed into law in response to public concerns
regarding corporate accountability in connection with several accounting
scandals. The stated goals of the Sarbanes-Oxley Act are to increase
corporate responsibility, to provide for enhanced penalties for accounting and
auditing improprieties at publicly traded companies and to protect investors
by improving the accuracy and reliability of corporate disclosures pursuant to
the securities laws. The Sarbanes-Oxley Act generally applies to all
companies, both U.S. and non-U.S., that file or are required to file periodic
reports with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934, including the Company.
The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules, and required the SEC and
securities exchanges to adopt extensive additional disclosure, corporate
governance and related rules. The Sarbanes-Oxley Act represents significant
federal involvement in matters traditionally left to state regulatory systems,
such as the regulation of the accounting profession, and to state corporate
law, such as the relationship between a board of directors and management and
between a board of directors and its committees.
TAXATION
Federal Taxation
----------------
General. The Company and the Bank report their income on a fiscal year
basis using the accrual method of accounting and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company.
Bad Debt Reserve. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrift") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have
been deducted in arriving at their taxable income. 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 has been 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 Bank continues to carry on the business of banking. In addition, the
balance of the pre-1988 bad debt reserves continue to be subject to provisions
of present law referred to below that require recapture in the case of certain
excess distributions to shareholders.
Distributions. To the extent that the Bank makes "nondividend
distributions" to the Company, these distributions will be considered to
result in distributions from the balance of its bad debt reserve as of
December 31, 1987 (or a lesser amount if the Bank's loan portfolio decreased
since December 31, 1987) and then from the supplemental
28
reserve for losses on loans ("Excess Distributions"), and an amount based on
the Excess Distributions will be included in the Bank's taxable income.
Nondividend distributions include distributions in excess of the Bank's
current and accumulated earnings and profits, distributions in redemption of
stock and distributions in partial or complete liquidation. However,
dividends paid out of the Bank's current or accumulated earnings and profits,
as calculated for federal income tax purposes, will not be considered to
result in a distribution from the Bank's bad debt reserve. The amount of
additional taxable income created from an Excess Distribution is an amount
that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if, after the Conversion, the Bank makes a
"nondividend distribution," then approximately one and one-half times the
Excess Distribution would be includable in gross income for federal income tax
purposes, assuming a 34% corporate income tax rate (exclusive of state and
local taxes). See "Regulation Federal Regulation of Savings Institutions
Limitations on Capital Distributions" for limits on the payment of dividends
by the Bank. The Bank does not intend to pay dividends that would result in a
recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Bank's adjusted
current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Bank, whether or
not an Alternative Minimum Tax is paid.
Dividends-Received Deduction. The Company may exclude from its income
100% of dividends received from the Bank as a member of the same affiliated
group of corporations. The corporate dividends-received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank owns more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
deducted.
Audits. The Company, the Bank and its consolidated subsidiaries have been
audited or their books closed without audit by the IRS with respect to
consolidated federal income tax returns through March 31, 1999. See Note 12
of the Notes to Consolidated Financial Statements contained in the Annual
Report for additional information regarding income taxes.
State Taxation
--------------
South Carolina has adopted the Internal Revenue Code as it relates to
savings banks, effective for taxable years beginning after December 31, 1986.
The Bank is subject to South Carolina income tax at the rate of 6%. The Bank
has not been audited by the State of South Carolina during the past five
years.
The Company's income tax returns have not been audited by federal or state
authorities within the last five years. For additional information regarding
income taxes, see Note 12 of the Notes to Consolidated Financial Statements
contained in the Annual Report.
Item 1A. Risk Factors.
-----------------------
An investment in our common stock involves various risks which are
particular to Security Federal Corporation, our industry, and our market area.
Before making an investment decision, you should carefully consider the risks
and uncertainties described below, together with all of the other information
included in this report. In addition to the risks and uncertainties described
below, other risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially and adversely affect our
business, financial condition and results of operations. The value or market
price of our common stock could decline due to any of these identified or
other risks, and you could lose all or part of your investment.
29
An economic downturn, especially one affecting Aiken, Richland and Lexington
Counties in South Carolina and Columbia County in Georgia and surrounding
areas, could reduce our customer base, our level of deposits, demand for our
financial products, and increase our delinquency rates on loans.
Unlike larger national or other regional banks that are more
geographically diversified, we provide banking and financial services to
customers located primarily in three counties of South Carolina and one county
in Georgia. Our success depends on the growth in population, income levels,
deposits, and housing starts in our primary market area. If the communities
in our market area do not continue to expand, our business may not succeed.
A local economic downturn could adversely affect the real estate markets in
the communities in our market area, which would increase our loan losses on
residential and commercial real estate. In that case, our allowance for loan
losses may not be adequate, which would negatively impact our earnings.
Further, a significant decline in general economic conditions, caused by
inflation, recession, acts of terrorism, outbreak of hostilities or other
international or domestic occurrences, unemployment, changes in securities
markets or other factors could impact these state and local markets and, in
turn, also have a material adverse effect on our financial condition and
results of operations.
Our loan portfolio in Lexington, Richland and Columbia Counties and
surrounding area is relatively unseasoned. We also plan to build a branch
office in Ballentine, South Carolina, which is another new lending area. We
could experience higher than normal loan losses in newer loan markets.
Although we have hired experienced lending officers in Lexington, Richland
and Columbia Counties, these market areas are relatively new to us. Many of
our loans in these markets are acquisition and development loans and loans to
builders for speculative housing, which have a higher degree of risk than
single family permanent mortgage loans. Although we have not had increased
delinquencies in these markets, we have not experienced an economic cycle of
declining real estate values in these counties. We also plan to open a branch
in Ballentine, South Carolina, which will be a new market area for us. We
plan on hiring experienced lenders, although this may be difficult because
competition for experienced commercial lenders is fierce. Because these
market areas are new to us, we may experience increased loan losses that would
require additional reserves and which would negatively impact our earnings.
Fluctuations in interest rates could reduce our profitability and affect the
value of our assets.
Our profitability depends substantially upon our net interest income. Net
interest income is the difference between the interest earned on loans and
investments and interest paid on deposits and borrowings. Market interest
rates for loans and deposits are highly sensitive to competition for these
products. We expect that we will periodically experience imbalances in the
interest rate sensitivities of our assets and liabilities and the
relationships of various interest rates to each other. Over any period of
time, our interest-earning assets may be more sensitive to changes in market
interest rates than our interest-bearing liabilities, or vice versa. In
addition, the individual market interest rates underlying our loan and deposit
products may not change to the same degree over a given time period. In any
event, if market interest rates should move contrary to our position, our
earnings may be negatively affected. In addition, loan volume and quality and
deposit volume and mix can be affected by market interest rates. Changes in
levels of market interest rates could materially adversely affect our net
interest spread, asset quality, origination volume and overall profitability.
During the fiscal year ended March 31, 2008 interest rates dropped quickly
and significantly. Since September 18, 2007, the U.S. Federal Reserve
decreased its target for federal funds rate seven times, from 5.25% to 2.00%
for a total decrease of 325 basis points. Sudden significant decreases in
these short-term market interest rates negatively impact margins as our assets
tend to reprice faster than our liabilities in the short-term. However,
sudden and significant increases in short-term market rates can also adversely
affect our net interest margins and the value of our assets. We principally
manage interest rate risk by managing our volume and mix of our earning assets
and funding liabilities. In a changing interest rate environment, we may not
be able to manage this risk effectively. If we are unable to manage interest
rate risk effectively, our business, financial condition and results of
operations could be materially harmed.
An inadequate allowance for loan losses would reduce our earnings.
We are exposed to the risk that our borrowers will be unable to repay
their loans according to their terms and that any collateral securing the
payment of their loans will not be sufficient to assure full repayment.
Credit losses are
30
inherent in the lending business and could have a material adverse effect on
our operating results. Volatility and deterioration in the economy may also
increase our risk for credit losses. We evaluate the collectibility of our
loan portfolio and provide an allowance for loan losses that we believe is
adequate based upon such factors as:
* cash flow of the borrower and/or the project being financed;
* in the case of a collateralized loan, the changes and uncertainties
as to the future value of the collateral;
* the credit history of a particular borrower;
* changes in economic and industry conditions; and
* the duration of the loan.
If our evaluation is incorrect and borrower defaults cause losses
exceeding our allowance for loan losses, our earnings could be materially and
adversely affected. We cannot assure you that our allowance will be adequate
to cover loan losses inherent in our portfolio. We may experience losses in
our loan portfolio or perceive adverse trends that require us to significantly
increase our allowance for loan losses in the future, which would also reduce
our earnings. In addition, Security Federal Bank's regulators, as an integral
part of their examination process, may require us to make additional
provisions for loan losses.
Our funding sources may prove insufficient to replace deposits and support our
future growth.
We rely on customer deposits and advances from the FHLB of Atlanta and
other borrowings to fund our operations. Although we have historically been
able to replace maturing deposits and advances if desired, no assurance can be
given that we would be able to replace such funds in the future if our
financial condition or the financial condition of the FHLB or market
conditions were to change. Our financial flexibility will be severely
constrained if we are unable to maintain our access to funding or if adequate
financing is not available to accommodate future growth at acceptable interest
rates. Finally, if we are required to rely more heavily on more expensive
funding sources to support future growth, our revenues may not increase
proportionately to cover our costs. In this case, our profitability would be
adversely affected.
Competition with other financial institutions could adversely affect our
profitability.
The banking and financial services industry is very competitive. Legal
and regulatory developments have made it easier for new and sometimes
unregulated competitors to compete with us. Consolidation among financial
service providers has resulted in fewer very large national and regional
banking and financial institutions holding a large accumulation of assets.
These institutions generally have significantly greater resources, a wider
geographic presence or greater accessibility. Our competitors may be able to
offer more services, more favorable pricing or greater customer convenience
than we do. In addition, our competition has grown from new banks and other
financial services providers that target our existing or potential customers.
As consolidation continues among large banks, we expect additional
institutions to try to exploit our market.
Technological developments have allowed competitors, including some
non-depository institutions, to compete more effectively in local markets and
have expanded the range of financial products, services and capital available
to our target customers. If we are unable to implement, maintain and use such
technologies effectively, we may not be able to offer products or achieve
cost-efficiencies necessary to compete in our industry. In addition, some of
these competitors have fewer regulatory constraints and lower cost structures.
We are exposed to a failure or breach of our technology.
As a financial services company, we are heavily dependent on our core
processing system and computer networks to conduct our business. Although we
have policies and procedures designed to prevent or limit the effect of
31
the failure, interruption or security breach of our information systems, there
can be no assurance that any such failures, interruptions or security breaches
will not occur or, if they do occur, that they will be adequately addressed.
The occurrence of any failures, interruptions or security breaches of our
information systems could damage our reputation, result in a loss of customer
business, subject us to additional regulatory scrutiny, or expose us to civil
litigation and possible financial liability, any of which could have a
material adverse effect on our financial condition and results of operations.
Although we do our own core bank processing in-house, we rely on
third-party service providers for much of our communications, information,
operating and financial control systems technology. If any of our third-party
service providers experience financial, operational or technological
difficulties, or if there is any other disruption in our relationships with
them, we may be required to locate alternative sources of such services, and
we cannot assure that we could negotiate terms that are as favorable to us, or
could obtain services with similar functionality, as found in our existing
systems, without the need to expend substantial resources, if at all. Any of
these circumstances could have an adverse effect on our business.
Our ability to pay dividends is limited and we may be unable to pay future
dividends. This could lead to appreciation of our common stock price as the
sole return on an investor's investment.
Security Federal Corporation is a separate and distinct legal entity from
its subsidiaries. We receive substantially all of our revenue from dividends
from Security Federal Bank. These dividends are the principal source of funds
to pay dividends on our common stock and interest and principal on our debt.
Various federal and/or state laws and regulations limit the amount of
dividends that Security Federal Bank may pay us. Also, our right to
participate in a distribution of assets upon a subsidiary's liquidation or
reorganization is subject to the prior claims of the subsidiary's creditors.
In the event Security Federal Bank is unable to pay dividends to us, we may
not be able to service our debt, pay obligations or pay dividends on our
common stock. The inability to receive dividends from Security Federal Bank
could have a material adverse effect on our business, financial condition and
results of operations. Thus, no assurances can be made that we will continue
to increase or even pay our quarterly dividend.
We may need to raise capital to support our growth. We may not be able to
raise capital at the time we need it.
In order to sustain the high rate of growth we have experienced during the
past few years, we may need to raise additional capital in the near future.
Although there are various ways to raise capital, those methods may not be
available at the time we need to raise additional capital. In the event we
are unable to raise the capital we need, our growth, and future earnings,
would be curtailed.
The integration of the Collier Jennings Companies may be difficult, which
could have a negative impact on earnings.
We recently acquired the Collier Jennings Companies, a local insurance
agency. The integration of the Collier-Jennings Companies may be difficult
and may cause us not to realize expected revenue increases, cost savings,
increases in geographic or product presence, and/or other projected benefits
from the acquisition. The process of integrating operations could cause an
interruption of, or loss of momentum in, the activities of our business. The
diversion of management's attention and any delays or difficulties encountered
in connection with the acquisition could have an adverse effect on our
business and results of operations following the acquisition or otherwise
adversely affect our ability to achieve the anticipated benefits of the
acquisition.
We are subject to extensive regulation from numerous governmental agencies,
which could restrict our activities and impose financial requirements or
limitations on the conduct of our business.
We are subject to extensive federal and state regulation and supervision,
primarily through Security Federal Bank. Banking regulations are primarily
intended to protect depositors' funds, the federal deposit insurance fund and
the banking system as a whole, not shareholders. These regulations affect our
lending practices, capital structure, investment practices, dividend policy
and growth, among other things. Congress and federal regulatory agencies
continually review banking laws, regulations and policies for possible
changes. Changes to statutes, regulations or regulatory policies, including
changes in interpretation or implementation of statutes, regulations or
policies, could affect
32
us in substantial and unpredictable ways. Such changes could subject us to
additional costs, limit the types of financial services and products we may
offer and/or increase the ability of non-banks to offer competing financial
services and products, among other things. Failure to comply with laws,
regulations or policies could result in sanctions by regulatory agencies,
civil money penalties and/or reputation damage, which could have a material
adverse effect on our business, financial condition and results of operations.
While we have policies and procedures designed to prevent any such violations,
there can be no assurance that such violations will not occur.
We are dependent on key individuals, and the loss of one or more of these key
individuals could limit our growth and adversely affect earnings.
Timothy W. Simmons, our Chief Executive Officer, is a very experienced
banker and has long-standing ties to our community. The loss of Mr. Simmons,
or other key personnel, could have a negative impact on earnings. The
competition for seasoned, experienced, banking personnel is highly competitive
in South Carolina and Georgia. The cost of attaining and retaining these
individuals could increase in the future, which would negatively impact our
operations. Our success depends on our ability to continue to attract, manage
and retain other qualified personnel as we grow. We cannot assure you that we
will continue to attract or retain such personnel.
Changes in accounting standards may affect our performance.
Our accounting policies and methods are fundamental to how we record and
report our financial condition and results of operations. From time to time
there are changes in the financial accounting and reporting standards that
govern the preparation of our financial statements. These changes can be
difficult to predict and can materially impact how we report and record our
financial condition and results of operations. In some cases, we could be
required to apply a new or revised standard retroactively, resulting in
restating prior period financial statements.
Our recent results may not be indicative of future results, and may not be an
adequate measure of the risk of investing in our stock.
We may not be able to sustain our historical growth rate or our recent
growth rates in loans and deposits. If we are unable to sustain our growth,
this would negatively affect our earnings and the value of our common stock.
33
Item 2. Properties
----------
During the third quarter ended December 31, 2007, Security Federal opened
a new full service branch office in Evans, Georgia, and a new full service
branch office in Columbia, South Carolina. At March 31, 2008, Security Federal
owned the buildings and land for nine of its branch offices and the operations
center, leased the land and owned the improvements thereon for two of its
offices, and leased the remaining four offices, including its main office.
The Company also leased three offices for Security Federal Insurance/Collier
Jennings. The property related to the offices owned by Security Federal had a
depreciated cost (including land) of approximately $12.7 million at March 31,
2008. At March 31, 2008, the aggregate net book value of leasehold
improvements (excluding furniture and equipment) associated with leased
premises was $2.7 million. In addition to the properties related to current
Company offices, Security Federal owned five other properties at March 31,
2008. Three lots owned for future branch sites include one in Aiken County,
South Carolina and two in Richland County, South Carolina, which had a
combined book value of $2.2 million at March 31, 2008. Another lot in Aiken
County, to be used for a possible new Operations Center, had a book value of
$236,000. The other property consisting of land and a building, located
adjacent to the 1705 Whiskey Road office, is currently leased and had a book
value of approximately $200,000 at March 31, 2008. See Note 6 of the Notes to
Consolidated Financial Statements contained in the Annual Report.
The following table sets forth the net book value of the offices owned
(including land) and leasehold improvements on properties leased by Security
Federal at March 31, 2008.
Lease Date
Expir- Facility Gross
Owned or ation Opened/ Square Net Book
Location Leased Date Acquired Footage Value
---------------------------- ------ ----- -------- ------- ---------
Main Office:
238 Richland Avenue, W. Leased 2016 2006 3,840 $812,000
Aiken, South Carolina
Full Service Branch Offices
100 Laurens Street, N.W. Leased 2016 1959 3,840 816,000
Aiken, South Carolina
1705 Whiskey Road S. Owned N/A 1980 10,000 1,328,000
Aiken, South Carolina
313 East Martintown Road Owned N/A 1973 4,356 869,000
North Augusta, South Carolina
1665 Richland Avenue, W. Owned N/A 1984 1,942 245,000
Aiken, South Carolina
Montgomery & Canal Streets Leased 2007 1993 (1) 3,576 216,000
Masonic Shopping Center
Graniteville, South Carolina
2812 Augusta Road Owned N/A 1993 (1) 2,509 86,000
Langley, South Carolina
(table continued on the following page)
34
Lease Date
Expir- Facility Gross
Owned or ation Opened/ Square Net Book
Location Leased Date Acquired Footage Value
---------------------------- ------ ----- -------- ------- ---------
4568 Jefferson Davis Highway Owned N/A 2008 2,287 $1,529,000
Clearwater, South Carolina
118 Main Street North Owned N/A 1993 (1) 3,600 177,000
Wagener, South Carolina
1185 Sunset Boulevard Leased 2015 2000 10,000 532,000
West Columbia, South Carolina
2587 Whiskey Road Owned N/A 2006 4,000 1,516,000
Aiken, South Carolina
5446 Sunset Boulevard Owned(2) N/A 2003 9,200 1,441,000
Lexington, South Carolina
1900 Assembly Street Owned(3) N/A 2007 6,000 484,000
Columbia, South Carolina
7004 Evans Town Center Owned N/A 2007 18,000 4,282,000
Evans, Georgia
Operations Center:
871 East Pine Log Road Owned N/A 1988 10,000 724,000
Aiken, South Carolina
Insurance Investments & Trust Leased 2016 2006 1,948 333,000
Offices
234 Richland Avenue, West
Aiken, South Carolina
Insurance Office & Insurance Leased 2011 2006 4,600 30,000
Operations Center
517-521 Belvedere Clearwater Road
North Augusta, South Carolina
Insurance Office Leased 2008 2006 1,500 --
1557 F. Gordon Highway
Augusta, Georgia
_________
(1) Represents acquisition date.
(2) Security Federal has a lease on the land for this office which expires
in 2018, but has options through 2063.
(3) Security Federal has a lease on the land for this office which expires
in 2027, but has options through 2047.
35
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, 2008.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
------------------------------------------------------------------
The information contained in the section captioned "Shareholders
Information - Price Range of Common Stock" and "- Dividends" in the Annual
Report is incorporated herein by reference.
Stock Repurchases. The following table sets forth the Company's
repurchases of its outstanding common stock during the fourth quarter of the
year ended March 31, 2008.
Total Number
of Shares Maximum
Purchased as Number
Total Part of of Shares that
Number of Average Publicly May Yet Be
Shares Price Paid Announced Purchased
Period Purchased per Share Plans Under the Plans
---------------- ----------- ------------ ------------ -----------------
January 1 -
January 31..... 707 $ 23.19 707 14,154
February 1 -
February 29.... 700 23.08 700 13,454
March 1 -
March 31....... 4,289 23.08 4,289 9,165
---------- ------------ ------------ ---------------
Total........... 5,696 $ 23.09 5,696 9,165
========== ============ ============ ===============
These stock repurchases are being conducted pursuant to a repurchase
program announced by the Company in May 2004, for the purchase of up to 5% of
its outstanding shares, or approximately 126,000 shares, subject to market
conditions.
Equity Compensation Plan Information. The equity compensation plan
information presented under subparagraph (d) in Part III, Item 12 of this
report is incorporated herein by reference.
36
Performance Graph. The following graph compares the cumulative total
shareholder return on the Company's Common Stock with the cumulative total
return on the NASDAQ Composite Index and a peer group of the SNL All Thrift
Index. Total return assumes the reinvestment of all dividends and that the
value of Common Stock and each index was $100 on March 31, 2003.
[PERFORMANCE GRAPH APPEARS HERE]
Period Ending
------------------------------------------------------------
Index 03/31/03 03/31/04 03/31/05 03/31/06 03/31/07 03/31/08
---------------- ---------- -------- -------- -------- -------- --------
Security Federal
Corporation $100.00 104.33 114.86 121.94 125.72 118.22
NASDAQ Composite 100.00 148.69 149.07 174.46 180.56 169.93
SNL Thrift Index 100.00 148.54 146.01 164.47 173.90 105.98
37
Item 6. Selected Financial Data
-----------------------
The information contained in the section captioned "Selected Consolidated
Financial and Other Data" in the Annual Report is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Market risk is the risk of loss from adverse changes in market prices and
rates. Our market risk arises principally from interest rate risk inherent in
our lending, investing, deposit and borrowings activities. Management
actively monitors and manages its interest rate risk exposure. In addition to
other risks that we manage in the normal course of business, such as credit
quality and liquidity, management considers interest rate risk to be a
significant market risk that could have a potentially have a material effect
on our financial condition and result of operations. The information
contained in the section captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operations Asset and Liability
Management" in the Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Report of Independent and Registered Accounting Firm*
Consolidated Balance Sheets, March 31, 2008 and 2007*
Consolidated Statements of Income For the Years Ended March 31, 2008,
2007 and 2006*
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income For the Years Ended March 31, 2008, 2007 and
2006*
Consolidated Statements of Cash Flows For the Years Ended March 31,
2008, 2007 and 2006*
Notes to Consolidated Financial Statements*
Quarterly Financial Data (unaudited)*
* Contained in the Annual Report filed as an exhibit hereto and
incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
---------------------------------------------------------------
None.
Item 9A(T). Controls and Procedures
-----------------------
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of
the Company's disclosure controls and procedures (as defined in Section
13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) was carried out
under the supervision and with the participation of the Company's Chief
Executive Officer, Chief Financial Officer and several other members of the
Company's senior management as of the end of the period covered by this
report. The Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures as currently
in effect are effective in ensuring that the information required to be
disclosed by the Company in the reports it files or submits under the Act is
(i) accumulated and communicated to the Company's management (including the
Chief Executive Officer and Chief Financial Officer) in a timely manner, and
(ii) recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
(b) Report of Management on Internal Control over Financial Reporting:
-----------------------------------------------------------------
The management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting. The internal
control process has been designed under our supervision to provide reasonable
assurance
38
regarding the reliability of financial reporting and the preparation of the
Company's financial statements for external reporting purposes in accordance
with accounting principles generally accepted in the United States of America.
Management conducted an assessment of the effectiveness of the Company's
internal control over financial reporting as of March 31, 20008, utilizing the
framework established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on this assessment, management has determined that the Company's internal
control over financial reporting as of March 31, 2008 is effective.
Our internal control over financial reporting includes policies and
procedures that pertain to the maintenance of records that accurately and
fairly reflect, in reasonable detail, transactions and dispositions of assets;
and provide reasonable assurances that: (1) transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States; (2) receipts
and expenditures are being made only in accordance with authorizations of
management and the directors of the Company; and (3) unauthorized acquisition,
use, or disposition of the Company's assets that could have a material effect
on the Company's financial statements are prevented or timely detected.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
This annual report does not include an attestation report of the Company's
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only management's report in this annual report.
There have been no changes in the Company's internal control over
financial reporting during the quarter ended March 31, 2008 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
/s/Timothy W. Simmons /s/Roy G. Lindburg
------------------------------------- ----------------------------------
Timothy W. Simmons Roy G. Lindburg
President and Chief Executive Officer Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting
Officer)
(c) Changes in Internal Controls: In the year ended March 31, 2008, the
Company did not make any significant changes in, nor take any corrective
actions regarding, its internal controls or other factors that could
significantly affect these controls.
Item 9B. Other Information
-----------------
There was no information to be disclosed by the Company in a report on
Form 8-K during the fourth quarter of fiscal 2008 that was not so disclosed.
39
PART III
Item 10. Directors, Executive Officers and Corporate Governance
------------------------------------------------------
The information contained under the section captioned " Proposal 1
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
For information regarding the executive officers of the Company and the
Bank, see the information contained herein under the section captioned "Item
1. Business - Personnel - Executive Officers of the Registrant."
Audit Committee Financial Expert. The Audit Committee of the Company is
composed of Directors Moore (Chairperson) and Clyburn. Each member of the
Audit Committee is "independent" as defined in the Nasdaq Stock Market listing
standards. The Board of Directors has determined there is no "audit committee
financial expert" as defined by the SEC. The Board believes that the current
members of the Audit Committee are qualified to serve based on their
collective experience and background. Each member of the Audit Committee is
independent as that term is used in Rule 10A-3 of the Exchange Act.
Code of Ethics. The Board of Directors has adopted a Code of Ethics for
the Company's officers (including its senior financial officers), directors
and employees. The Code is applicable to the Company's principal executive
officer and senior financial officers, and requires individuals to maintain
the highest standards of professional conduct. The Company has posted its
Code of Ethics on its website www.securityfederalbank.com.
Compliance with Section 16(a) of the Exchange Act. The information
contained under the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance" is included in the Company's Proxy Statement and is
incorporated herein by reference.
Item 11. Executive Compensation
----------------------
The information contained in the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners.
The information contained in the section captioned "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is
incorporated herein by reference.
(b) Security Ownership of 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.
(c) Changes In Control
The Company is not aware of any arrangements, including any pledge by any
person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the Company.
40
(d) Equity Compensation Plan Information
The following table sets forth certain information with respect to
securities to be issued under the Company's equity compensation plans as of
March 31, 2008.
(c)
Number of
securities
remaining
(a) available for
Number of future issuance
securities (b) under equity
to be issued Weighted-average compensation
upon exercise of exercise price plans (excluding
outstanding of outstanding securities
options, warrants options, warrants reflected in
Plan category and rights and rights column (a))
-------------------- ----------------- ----------------- ------------------
Equity compensation
plans approved
by security holders:
1999 Stock Option
Plan.............. 74,100 $21.31 78,892
2002 Stock Option
Plan.............. 23,000 21.39 12,375
2006 Stock Option
Plan.............. 14,000 23.03 36,000
Equity compensation
plans not approved by
security holders: N/A N/A N/A
----------------- ----------------- ------------------
Total........ 11,100 $21.55 127,267
================= ================= ==================
Item 13. Certain Relationships and Related Transactions, and Director
Independence
------------------------------------------------------------
Related Transactions. The information contained in the section captioned
"Meetings and Committees of the Board of Directors and Corporate Governance
Matters - Corporate Governance - Related Party Transactions" in the Proxy
Statement is incorporated herein by reference.
Director Independence. The information contained in the section captioned
"Meetings and Committees of the Board of Directors and Corporate Governance
Matters - Corporate Governance - Director Independence" in the Proxy Statement
is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
--------------------------------------
The information contained under the section captioned "Auditor " is
included in the Company's Proxy Statement and is incorporated herein by
reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
------------------------------------------
(a) 1. Financial Statements.
---------------------
For a list of the financial statements filed as part of this
report see Part II - Item 8.
41
2. Financial Statement Schedules.
------------------------------
All schedules have been omitted as the required information is either
inapplicable or contained in the Consolidated Financial Statements or
related Notes contained in the Annual Report filed as an exhibit hereto.
3. Exhibits:
---------
3.1 Articles of Incorporation, as amended (1)
3.2 Bylaws (2)
4 Instruments defining the rights of security holders, including
indentures (3)
10.1 1993 Salary Continuation Agreements (4)
10.2 Amendment One to 1993 Salary Continuation Agreements (5)
10.3 Form of 2006 Salary Continuation Agreement (6)
10.4 1987 Stock Option Plan (4)
10.5 1999 Stock Option Plan (7)
10.6 2002 Stock Option Plan (8)
10.7 2006 Stock Option Plan (9)
10.8 Form of incentive stock option agreement and non-qualified stock
option agreement pursuant to the 2006 Stock Option Plan (9)
10.9 2004 Employee Stock Purchase Plan (10)
10.10 Incentive Compensation Plan (4)
13 Annual Report to Stockholders
14 Code of Ethics (11)
21 Subsidiaries of Registrant
23 Consent of Elliott Davis, LLC
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
__________
(1) Filed on June 26, 1998, as an exhibit to the Company's Proxy
Statement and incorporated herein by reference.
(2) Filed on May 5, 2008, as an exhibit to the Company's Current
Report on Form 8-K and incorporated herein by reference.
(3) Filed on August 12, 1987, as an exhibit to the Company's
Registration Statement on Form 8-A and incorporated herein by
reference.
(4) Filed on June 28, 1993, as an exhibit to the Company's Annual
Report on Form 10-KSB and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the quarter ended September 30, 1993 and incorporated
herein by reference.
(6) Filed on May 24, 2006 as an exhibit to the Company's Current
Report on Form 8-K dated May 18, 2006 and incorporated herein by
reference.
(7) Filed on March 2, 2000, as an exhibit to the Company's
Registration Statement on Form S-8 (Registration Statement No.
333-31500) and incorporated herein by reference.
(8) Filed on January 3, 2003, as an exhibit to the Company's
Registration Statement on Form S-8 (Registration Statement No.
333-102337) and incorporated herein by reference.
(9) Filed on August 22, 2006, as an exhibit to the Company's
Registration Statement on Form S-8 (Registration Statement No.
333-136813) and incorporated herein by reference.
(10) Filed on June 18, 2004, as an exhibit to the Company's Proxy
Statement and incorporated herein by reference.
(11) Filed on June 29, 2006, as an exhibit to the Company's Annual
Report on Form 10-K and incorporated herein by reference.
42
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 27, 2008 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 27, 2008
-------------------------------------
Timothy W. Simmons
President, Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/Roy G. Lindburg June 27, 2008
-------------------------------------
Roy G. Lindburg
Chief Financial Officer and Director
(Principal Financial and Accounting Officer)
By: /s/T.Clifton Weeks June 27, 2008
-------------------------------------
T. Clifton Weeks
Chairman of the Board and Director
By: , 2008
------------------------------------- -------
J. Chris Verenes
President of the Bank and Director of
the Company and the Bank
By: /s/Gasper L. Toole III June 27, 2008
-------------------------------------
Gasper L. Toole III
Director
By: /s/Robert E. Alexander June 27, 2008
-------------------------------------
Robert E. Alexander
Director
By: , 2008
------------------------------------- -------
Thomas L. Moore
Director
By: , 2008
------------------------------------- -------
William Clyburn
Director
By: /s/Frank M. Thomas, Jr. June 27, 2008
-------------------------------------
Frank M. Thomas, Jr.
Director
43
INDEX TO EXHIBITS
Exhibit Number
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Elliott Davis, LLC
31.1 Certification of Chief Executive Officer of Security Federal
Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of Chief Financial Officer of Security Federal
Corporation Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Certification of Chief Executive Officer and Chief Financial
Officer of Security Federal Corporation Pursuant to Section 906
of the Sarbanes-Oxley Act
Exhibit 13
Annual Report to Stockholders
2008
Security Federal Corporation
March 31st, 2008
LETTER TO SHAREHOLDERS
Fellow Shareholders:
In keeping with our conservative but steady growth strategy, Security Federal
Corporation, holding company of Security Federal Bank, is pleased to announce
an increase in earnings for the year ending March 31, 2008. The Company
reported net income of $4.3 million or $1.66 per share (basic) for the year
ending March 31, 2008, a 3.7% increase from net income of $4.1 million or
$1.59 per share (basic) for the year ending March 31, 2007. The increase in
net income is a result of a $1.9 million increase in net interest income and a
$629,000 increase in non-interest income offset partially by a $2.2 million
increase in general and administrative expenses for the year ending March 31,
2008 when compared to the year ending March 31, 2007.
Total assets at March 31, 2008 were $840.0 million compared to $738.1 million
at March 31, 2007, an increase of 13.8% for the year. Net loans receivable
increased $81.9 million or 18.8% to $517.9 million at March 31, 2008 from
$436.0 million at March 31, 2007. Total deposits were $590.9 million at March
31, 2008 compared to $523.7 million at March 31, 2007, an increase of 12.8%.
Federal Home Loan Bank advances, subordinated debentures and other borrowings
increased $29.9 million or 18% to $196.2 million at March 31, 2008 from $166.3
million at March 31, 2007.
We are pleased to announce that a quarterly dividend of $.08 per share will be
paid on or about June 15, 2008 to shareholders of records as of May 31, 2008.
This is a 14% increase in the quarterly dividend and is the seventieth
consecutive quarterly dividend to shareholders since the Bank's conversion in
October of 1987 from a mutual to a stock form of ownership. The dividend was
declared as a result of the Bank's continued profitability.
Security Federal Bank has 13 full service branches located in Aiken,
Clearwater, Graniteville, Langley, Lexington, North Augusta, Wagener, Columbia
and West Columbia, South Carolina and Evans, Georgia. Additional financial
services are offered through the Bank's three wholly owned subsidiaries,
Security Federal Insurance Inc., Security Federal Investments Inc., and
Security Federal Trust Inc.
Sincerely,
/s/T. Clifton Weeks /s/Timothy W. Simmons
T. Clifton Weeks Timothy W. Simmons
Chairman President & Chief Executive Officer
CONTENTS:
2 Letter to Shareholders
3 The More Things Change
4-6 Financial Highlights
7 Selected Consolidated Financial & Other Data
8 Management's Discussion and Analysis of Financial Condition & Results of
Operations
23 Report of Elliott Davis, LLC, Independent Auditors
24 Consolidated Balance Sheets
25 Consolidated Statements of Income
26 Consolidated Statements of Shareholders' Equity Comprehensive Income
27 Consolidated Statements of Cash Flows
29 Notes to Consolidated Financial Statements
55 Shareholders Information
56 Security Federal Bank Board of Directors
57 Bank Advisory Boards
58 Management Team & Branch Locations
59 Security Federal Insurance
- 2
THE MORE THINGS CHANGE
J. Chris Verenes, President, Security Federal Bank
Security Federal Bank was established in 1922 in Aiken, SC. Since that time,
there have been 15 recessions, one depression and one World War. Security
Federal weathered those challenges by sticking to the fundamentals -staying
close to the customer, conservative lending practices, measured growth, and a
long-term focus.
The last year has presented a new set of challenges for financial institutions
marked by subprime loans and the credit crises. The federal government has
responded to this by dramatically reducing interest rates in a short period of
time. Security Federal could have exploited the mortgage boom in the short
run by making subprime loans, but decided to stick to the fundamentals. That
sound decision was based on our focus on the long run and our tradition of
staying away from products that look "too good to be true". While this pumped
up the earnings of many institutions for a while, our focus was on steady
growth and investing for the future. This strategy has served us well.
Nevertheless, we have been indirectly impacted in the short run.
Our fundamentals -loan growth, deposits, non-interest income -are projected to
show healthy increases for the new fiscal year while our credit quality
remains strong. However, the Federal Reserve's precipitous drop in interest
rates has acted to immediately drive down the interest income we receive on
many of our loans, while deposits....our source of funding, tend to re-price
at a more gradual pace. This has resulted in a narrowing of our net interest
margin. This unusual situation began to impact our earnings during the last
quarter of the fiscal year, and should prove to be a challenge until later in
the year when rates are predicted to stabilize and our deposits begin to re-
price to reflect the current interest rate environment.
This challenge will subside in due time and institutions will go to great
lengths to insure that they are protected from the failures of the past. The
one thing that we have learned during the 86 years since our founding is that
a new cycle of challenges will naturally occur after the memory of this crisis
fades. After 15 recessions, one depression, one World War and a liquidity
crisi, our focus will continue to be on the fundamentals.
-3
FINANCIAL HIGHLIGHTS
Years Ended March 31st
2008 2007
Net Income 4,280,000 4,127,000
Earnings Per Share - Basic 1.66 1.59
Book Value Per Share 18.76 16.36
Total Interest Income 49,632,000 42,098,000
Total Interest Expense 29,544,000 23,933,000
Net Interest Income Before
Provision For Loan Losses 20,088,000 18,165,000
Provision For Loan Losses 895,000 600,000
Net Interest Income After
Provision For Loan Losses 19,193,000 17,565,000
Net Interest Margin 2.69% 2.76%
Total Loans Originated 422,085,000 379,593,000
Adjustable Rate Loans As A Percentage
of Total Gross Loans 61.9% 61.0%
www.securityfederalbank.com
-4
Financial Highlights
------------------------------------------------------------------------------
2008 2007 2006 2005 2004
------ ------ ------ ------ ------
Net Income (In Thousands) $4,280 $4,127 $3,813 $3,505 $4,263*
*Includes the sale of the Denmark branch.
2008 2007 2006 2005 2004
------ ------ ------ ------ ------
Total Assets (In Millions) $ 840 $ 738 $ 659 $ 586 $ 528
2008 2007 2006 2005 2004
------ ------ ------ ------ ------
Return on Equity 9.54% 10.24% 10.27% 10.28% 13.67%
Allowance for Loan Losses (1) 2008 2007 2006 2005 2004
------ ------ ------ ------ ------
1.53% 1.65% 1.76% 1.94% 2.17%
(1) Allowance for losses as a percentage of total loans.
www.securityfederalbank.com
5
Financial Highlights
------------------------------------------------------------------------------
2008 2007 2006 2005 2004
------ ------ ------ ------ ------
Book Value Per Share $18.76 $16.36 $14.82 $13.92 $13.30
2008 2007 2006 2005 2004
------ ------ ------ ------ ------
Earnings Per Share - Basic $1.66 $1.59 $1.51 $1.39 $1.70
Security Federal Corporation Stock Prices (at March 31st of each year)
2008 2007 2006 2005 2004 2003 2002 2001
------ ------ ------ ------ ------ ------ ------ ------
23.00 24.75 24.25 23.00 21.00 20.26 21.67 20.00
2000 1999 1998 1997 1996 1995 1994
------ ------ ------ ------ ------ ------ ------
18.00 15.00 7.33 5.17 4.54 3.65 3.37
1993 1992 1991 1990 1989
------ ------ ------ ------ -------
2.75 2.54 2.46 2.40 1.83
www.securityfederalbank.com
6
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Selected Consolidated Financial and Other Data
At Or For The Year Ended March 31,
------------------------------------------------
2008 2007 2006 2005 2004
-------- -------- -------- -------- --------
Balance Sheet Data (Dollars In Thousands, Except Per Share Data)
-----------------------------
Total Assets $840,030 $738,110 $658,678 $585,978 $528,005
Cash And Cash Equivalents 10,539 13,438 14,351 7,916 6,749
Investment And Mortgage-
Backed Securities 264,312 249,905 238,433 241,076 245,715
Total Loans Receivable,
Net (1) 517,932 436,038 375,109 316,889 259,895
Deposits 590,850 523,738 479,229 430,287 389,593
Advances From Federal Home
Loan Bank 178,234 153,049 131,363 112,038 96,336
Total Shareholders' Equity 47,496 42,693 37,602 35,111 33,472
Income Data
-----------------------------
Total Interest Income 49,632 42,098 32,617 25,770 23,011
Total Interest Expense 29,544 23,933 15,969 11,525 9,606
-------- -------- -------- -------- --------
Net Interest Income 20,088 18,165 16,648 14,245 13,405
Provision For Loan Losses 895 600 660 780 1,200
-------- -------- -------- -------- --------
Net Interest Income After
Provision For Loan Losses 19,193 17,565 15,988 13,465 12,205
Non-Interest Income(2) 4,489 3,861 2,630 2,524 5,235
General And Administrative
Expense 17,322 15,157 13,027 10,773 10,725
Income Taxes 2,080 2,142 1,778 1,711 2,452
-------- -------- -------- -------- --------
Net Income $ 4,280 $ 4,127 $ 3,813 $ 3,505 $ 4,263
======== ======== ======== ======== ========
Per Common Share Data
-----------------------------
Net Income Per Common Share
(Basic) $ 1.66 $ 1.59 $ 1.51 $ 1.39 $ 1.70
======== ======== ======== ======== ========
Cash Dividends Declared $ 0.28 $ 0.24 $ 0.16 $ 0.11 $ 0.08
======== ======== ======== ======== ========
Other Data
-----------------------------
Interest Rate Spread Information:
Average During Period 2.44% 2.47% 2.52% 2.44% 2.66%
End Of Period 2.14% 2.51% 2.59% 2.45% 2.59%
Net Interest Margin (Net
Interest Income/Average
Earning Assets) 2.69% 2.76% 2.79% 2.64% 2.84%
Average Interest-Earning Assets
To Average Interest-Bearing
Liabilities 106.30% 108.00% 110.25% 109.07% 109.05%
Equity To Total Assets 5.65% 5.78% 5.71% 5.99% 6.34%
Non-Performing Assets To Total
Assets (3) 0.81% 0.15% 0.20% 0.42% 0.40%
Return On Assets (Ratio Of Net
Income To Average Total
Assets) 0.54% 0.59% 0.62% 0.63% 0.87%
Return On Equity (Ratio Of Net
Income To Average Equity) 9.54% 10.24% 10.27% 10.28% 13.67%
Equity To Assets Ratio (Ratio
Of Average Equity To Average
Total Assets) 5.66% 5.78% 6.03% 6.09% 6.36%
Dividend Pay-Out Ratio On
Common Shares 16.90% 15.11% 10.67% 7.96% 4.75%
Number Of Full-Service Offices 13 11 11 11 11
(1) INCLUDES LOANS HELD FOR SALE.
(2) FOR 2004, INCLUDES APPROXIMATELY $1.5 MILLION IN GAIN ON SALE OF BRANCH
(3) NON-PERFORMING ASSETS CONSIST OF NON-ACCRUAL LOANS AND REPOSSESSED
ASSETS.
7
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
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 stock savings bank that was founded in 1922. The
Bank also has four wholly owned subsidiaries, Security Federal Insurance Inc.
("SFINS"), Security Federal Investments Inc. ("SFINV"), Security Federal Trust
Inc. ("SFT"), and Security Federal Financial Services Corporation ("SFSC").
SFINS, SFINV, and SFT were formed in the fiscal year ended March 31, 2002 and
began operating during the December 2001 quarter. SFINS has a wholly owned
subsidiary, Collier Jennings Financial Corporation ("Collier Jennings"), which
has three wholly owned subsidiaries Security Federal Auto Insurance, The Auto
Insurance Store Inc., and Security Federal Premium Pay Plans Inc. SFSC was
formed in 1975 and is currently inactive. In addition to the Bank, Security
Federal Corporation has another wholly owned subsidiary, Security Federal
Statutory Trust (the "Trust"), which issued and sold fixed and floating rate
capital securities of the Trust. However, under current accounting guidance,
the Trust is not consolidated in the Company's financial statements. Unless
the context indicates otherwise, references to the Company shall include the
Bank and its subsidiaries.
The principal business of the Bank is accepting deposits from the general
public and originating consumer and commercial business loans as well as
mortgage loans that enable borrowers to purchase or refinance one to four
family residential real estate. The Bank also originates construction loans
on single-family residences, multi-family dwellings and projects, and
commercial real estate, as well as loans for the acquisition, development and
construction of residential subdivisions and commercial projects.
The Bank's net income is dependent on its interest rate spread which is the
difference between the average yield earned on its loan and investment
portfolios and the average rate paid on its deposits and borrowings. The
Bank's interest spread is influenced by interest rates, deposit flows, and
loan demands. Levels of non-interest income and operating expense are also
significant factors in earnings.
Forward-Looking Statements
This document, including information included or incorporated by reference,
contents, and future filings by the Company on Form 10-K, Form 10-Q, and Form
8-K, and future oral and written statements by the Company and its management
may contain forward-looking statements about the Company and its subsidiaries
which we believe are within the meaning of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements include, without
limitation: statements with respect to anticipated future operating and
financial performance; growth opportunities; interest rates; acquisition and
divestiture opportunities; and synergies, efficiencies, and cost-savings.
Words such as "may," "could," "should," "would," "believe," "anticipate,"
"estimate," "expect," "intend," "plan," and similar expressions are intended
to identify these forward-looking statements. Forward-looking statements by
the Company and its management are based on beliefs, plans, objectives, goals,
expectations, anticipations, estimates, and intentions of management and are
not guarantees of future performance. Factors which could affect results
include interest rate trends, the general economic climate in the Company's
market area and the nation as a whole, the ability of the Company to control
costs and expenses, deposit flows, demand for mortgages and other loans, real
estate values and vacancy rates, competition, pricing, loan delinquency rates
and changes in federal regulation. These factors should be considered in
evaluating "forward-looking statements," and undue reliance should not be
placed on any such statements. The Company disclaims any obligation to update
or revise any forward-looking statements based on the occurrence of future
events, the receipt of new information, or otherwise. The important factors
we discuss below and elsewhere in this document, identified in the Company's
filings with the Securities and Exchange Commission ("SEC"), and presented by
our management from time to time could cause actual results to differ
materially from those indicated by the forward-looking statements made in this
document.
Critical Accounting Policies
The Company has adopted various accounting policies which govern the
application of accounting principles generally accepted in the United States
in the preparation of the Company's financial statements. The significant
accounting policies of the Company are described in Note 1 of the Notes to the
Consolidated Financial Statements.
8
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Critical Accounting Policies, Continued
Certain accounting policies involve significant judgments and assumptions by
management, which have a material impact on the carrying value of certain
assets and liabilities; management considers these accounting policies to be
critical accounting policies. The judgments and assumptions used by
management are based on historical experience and other factors, which are
believed to be reasonable under the circumstances. Because of the nature of
the judgments and assumptions made by management, actual results could differ
from these judgments and estimates that could have a material impact on the
carrying values of assets and liabilities and the results of operations of the
Company.
Of these significant accounting policies, the Company considers its policies
regarding the allowance for loan losses to be its most critical accounting
policy because of the significant degree of management judgment involved in
determining the amount of allowance for loan losses. The Company has
developed policies and procedures for assessing the adequacy of the allowance
for loan losses, recognizing that this process requires a number of
assumptions and estimates with respect to its loan portfolio. The Company's
assessments may be impacted in future periods by changes in economic
conditions, the impact of regulatory examinations, and the discovery of
information with respect to borrowers, which is not known to management at the
time of the issuance of the consolidated financial statements. For a further
discussion of the Company's estimation process and methodology related to the
allowance for loan losses, see the discussion under the section entitled
"Comparison of the Years Ended March 31, 2008 and 2007- Financial Condition"
and "-Provision for Loan Losses" and "Comparison of the Years Ended March 31,
2007 and 2006- Financial Condition" and "- Provision for Loan Losses" included
herein.
Asset and Liability Management
The Bank's program of asset and liability management seeks to limit the Bank's
vulnerability to material and prolonged increases or decreases in interest
rates, or "interest rate risk." The principal determinant of the exposure of
the Bank's earnings to interest rate risk is the timing difference ("gap")
between the repricing or maturity of the Bank's interest-earning assets and
the repricing or maturity of its interest-bearing liabilities. If the
maturities of the Bank's assets and liabilities were perfectly matched and the
interest rates borne by its assets and liabilities were equally flexible and
moved concurrently (neither of which is the case), the impact on net interest
income of any material and prolonged changes in interest rates would be
minimal.
A positive gap position generally has an adverse effect on net interest income
during periods of falling interest rates. A positive one-year gap position
occurs when the dollar amount of rate sensitive assets maturing or repricing
within one year exceeds the dollar amount of rate sensitive liabilities
maturing or repricing during that same one-year period. In a period of
falling interest rates, the interest received on interest-earning assets will
increase slower than the interest paid on interest-bearing liabilities,
causing a decrease in net interest income. During periods of rising interest
rates, the interest received on interest-earning assets will increase faster
than interest paid on interest-bearing liabilities, thus increasing net
interest income.
A negative gap position generally has an adverse effect on net interest income
during periods of rising interest rates. A negative one-year gap position
occurs when the dollar amount of rate sensitive liabilities maturing or
repricing within one year exceeds the dollar amount of rate sensitive assets
maturing or repricing during that same period. As a result, during periods of
rising interest rates, the interest paid on interest-bearing liabilities will
increase faster than interest received from interest-earning assets, thus
reducing net interest income. The reverse is true in periods of declining
interest rates, as discussed above, which generally results in an increase in
net interest income.
The Bank's Board of Directors reviews the Interest Rate Exposure Report
generated for the Bank by the Office of Thrift Supervision. This report
measures the interest rate sensitivity of the Bank's net portfolio value
("NPV") on a quarterly basis under different interest rate scenarios. The
Bank's sensitivity measure is well within the Bank's policy on changes in NPV.
The Bank's asset and liability policies are directed toward maximizing
long-term profitability while managing acceptable interest rate risk within
the Bank's policies.
At March 31, 2008, the negative mismatch of interest-earning assets repricing
or maturing within one year with interest-bearing liabilities repricing or
maturing within one year was $12.2 million or (1.5)% of total assets compared
to a positive mismatch of $1.7 million or 0.2% at March 31, 2007. For more
information on the Bank's repricing position at March 31, 2008, see the tables
on pages 11 and 12.
9
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Asset and Liability Management, Continued
During the past year, the Bank originated, for investment purposes,
approximately $47.4 million in adjustable rate residential real estate loans
("ARM's"), which are held for investment and not sold. The Bank's loan
portfolio included $330.8 million of adjustable rate consumer loans,
commercial loans, and mortgage loans or, approximately 61.9% of total gross
loans at March 31, 2008. During fiscal 2008, the Bank originated $343.5
million in consumer and commercial loans, which are usually short term in
nature. The Bank's portfolio of consumer and commercial loans was $400.2
million at March 31, 2008, $323.0 million at March 31, 2007, and $267.8
million at March 31, 2006. Consumer and commercial loans combined were 74.9%
of total loans at March 31, 2008, 71.8% of total loans at March 31, 2007, and
68.5% at March 31, 2006.
At March 31, 2008, the Bank held approximately $6.4 million in longer term
fixed rate residential mortgage loans. These loans, which amounted to 1.2% of
the total loan portfolio, had converted from ARM loans to fixed rate loans
during the previous 60 months. These fixed rate loans have remaining
maturities ranging from 10 to 28 years. As of March 31, 2008, the Bank no
longer has any ARM loans that have conversion features to fixed rate loans.
On new originations, the Bank sells virtually all of its 15 and 30 year fixed
rate mortgage loans at origination. Fixed rate residential loans sold to
Freddie Mac and other institutional investors, on a service-released basis,
totaled $38.9 million in fiscal 2008, $30.3 million in fiscal 2007, and $29.9
million in fiscal 2006. The Bank sells all its fixed rate mortgage loans on a
service-release basis.
Certificates of deposit of $100,000 or more, referred to as "Jumbo
Certificates," are normally considered to be interest rate sensitive because
of their relatively short maturities. Many financial institutions have used
Jumbo Certificates to manage interest rate sensitivity and liquidity. The
Bank has not relied on Jumbo Certificates for liquidity or asset liability
management. At March 31, 2008, the Bank had $149.5 million outstanding in
Jumbo Certificates compared to $110.6 million at March 31, 2007. The Bank has
no brokered deposits. The majority of the Bank's deposits originate from the
Bank's immediate market area.
The following table sets forth the maturity schedule of certificates of
deposit with balances of $100,000 or greater at March 31, 2008:
At March 31, 2008
-----------------
(In Thousands)
Within 3 Months $ 35,114
After 3, Within 6 Months 44,386
After 6, Within 12 Months 62,808
After 12 Months 7,220
--------
$149,528
========
10
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Asset and Liability Management, Continued
The following table sets forth the Bank's interest-bearing liabilities and
interest-earning assets repricing or maturing within one year. The table on
the following page presents the Bank's entire interest-bearing liabilities and
interest-earning assets into repricing or maturity time periods. Both tables
present adjustable rate loans in the periods they are scheduled to reprice and
fixed rate loans are shown in the time frame of corresponding principal
amortization schedules. Adjustable and fixed rate loans are also adjusted for
the Company's estimates of pre-payments. Mortgage-backed securities are shown
at repricing dates, but also include prepayment estimates. 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 are assumed to have a decay rate of 20% the
first year, money market accounts to have a decay rate of 65% the first year,
and statement savings accounts to have a decay rate of 20% the first year.
The balance, for all three products, is deemed to reprice in the one to three
year category. Callable fixed rate Federal Home Loan Bank ("FHLB") advances
are included in borrowings, and are deemed to mature at the expected call date
or maturity, based on the stated interest rate of the advance and current
market rates. Junior subordinated debentures are shown at their repricing
date or call date.
At March 31
-------------------
2008 2007
-------- --------
(Dollars In Thousands)
Loans (1) $348,908 $279,508
Mortgage-Backed Securities:
Available For Sale 70,019 81,072
Investment Securities:
Held To Maturity 16,000 27,000
Available For Sale 29,400 16,707
Other Interest-Earning Assets And FHLB Stock 11,343 10,004
-------- --------
Total Interest Rate Sensitive Assets
Repricing Within 1 Year $475,670 $414,291
-------- --------
Deposits 422,198 346,914
FHLB Advances And Other Borrowed Money 65,662 65,665
-------- --------
Total Interest Rate Sensitive Liabilities
Repricing Within 1 Year $487,860 $412,579
-------- --------
Gap $(12,190) $ 1,712
======== ========
Interest Rate Sensitive Assets/Interest
Rate Sensitive Liabilities 97.50% 100.04%
Gap As A Percent Of Total Assets (1.5)% 0.2%
(1) LOANS ARE NET OF UNDISBURSED FUNDS AND LOANS IN PROCESS.
11
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Asset and Liability Management, Continued
The following table sets forth the interest sensitivity of the Bank's assets and liabilities at March 31,
2008, on the basis of the factors and assumptions set forth in the table on the previous page.
< Three 3 - 12 1 - 3 3 - 5 5 - 10 > 10
Months Months Years Years Years Years Total
-------- --------- -------- -------- -------- --------- --------
(Dollars In Thousands)
Interest-Earnings Assets
------------------------
Loans (1) $256,013 $ 92,895 $ 94,744 $ 60,639 $ 17,396 $ 4,626 $526,313
Mortgage-Backed Securities:
Available For Sale, At Fair
Value 24,611 45,408 52,191 50,039 18,643 2,481 193,373
Investment Securities: (2)
Held To Maturity, At Cost 6,000 10,000 3,000 1,155 - - 20,155
Available For Sale, At Fair
Value 11,046 18,354 19,163 2,222 - - 50,785
FHLB Stock, At Cost - 9,497 - - - - 9,497
Other Interest-Earning Assets 1,846 - - - - - 1,846
-------- --------- -------- -------- -------- ------- --------
Total Financial Assets $299,516 $ 176,154 $169,098 $114,055 $ 36,039 $ 7,107 $801,969
======== ========= ======== ======== ======== ======= ========
Interest-Bearing Liabilities
----------------------------
Deposits:
Certificate Accounts $ 75,886 $ 237,716 $ 11,122 $ 6,349 $ - $ - $331,073
NOW Accounts 6,153 6,153 49,228 - - - 61,534
Money Market Accounts 46,548 46,548 50,129 - - - 143,225
Statement Savings Account 1,597 1,597 12,773 - - - 15,967
Borrowings (2) 50,662 15,000 25,000 37,277 68,234 - 196,173
-------- --------- -------- -------- -------- ------- --------
Total Interest-Bearing
Liabilities $180,846 $ 307,014 $148,252 $ 43,626 $ 68,234 $ - $747,972
======== ========= ======== ======== ======== ======= ========
Current Period Gap $118,670 $(130,860) $ 20,846 $ 70,429 $(32,195) $ 7,107 $ 53,997
Cumulative Gap $118,670 $ (12,190) $ 8,656 $ 79,085 $ 46,890 $53,997 $ 53,997
Cumulative Gap As A Percent
Of Total Assets 14.1% (1.5)% 1.0% 9.4% 5.6% 6.4% 6.4%
(1) LOANS ARE NET OF UNDISBURSED FUNDS AND LOANS IN PROCESS.
(2) CALLABLE SECURITIES AND ADVANCES ARE SHOWN AT THEIR LIKELY CALL DATES BASED ON MANAGEMENT'S ESTIMATES
AT MARCH 31, 2008.
In evaluating the Bank's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing tables must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates. Additionally, the interest rates
of certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates. Loan repayment rates and withdrawals of deposits
will likely differ substantially from the assumed rates previously set forth
in the event of significant changes in interest rates due to the option of
borrowers to prepay their loans and the ability of depositors to withdraw
funds prior to maturity. Further, certain assets, such as ARMs, have features
that restrict changes in interest rates on a short-term basis as well as over
the life of the asset.
12
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Financial Condition
Total assets at March 31, 2008 were $840.0 million, an increase of $101.9
million or 13.8% from $738.1 million at March 31, 2007. This increase was
primarily the result of an increase in net loans receivable.
Total net loans receivable were $517.9 million at March 31, 2008, an increase
of $81.9 million or 18.8% from $436.0 million at March 31, 2007. Residential
real estate loans held for investment increased $6.4 million or 5.1% to $131.9
million at March 31, 2008. Typically, long term, newly originated fixed rate
mortgage loans are not retained in the portfolio but are sold immediately.
ARMs are typically retained in the portfolio. At March 31, 2008, the Bank
held 91.0% of its residential mortgage loans in ARMs, while it had 9.0% in
fixed rate mortgages. Consumer loans increased $3.0 million or 4.7% while
commercial business and commercial real estate loans increased $74.2 million
or 28.6% to $333.4 million at fiscal year end March 31, 2008 from $259.2
million at March 31, 2007. A large portion of the increased activity in
commercial lending during fiscal 2008 took place in the Midlands area of South
Carolina including Columbia, Lexington, and West Columbia and in Evans,
Georgia. A significant portion of these loans are acquisition and development
loans. Loans held for sale, which was $2.3 million at March 31, 2008,
increased $766,000 from the previous fiscal year end. Total investments and
mortgage-backed securities increased $14.4 million or 5.8% to $264.3 million
at March 31, 2008. Cash and cash equivalents were $10.5 million at March 31,
2008 compared to $13.4 million at March 31, 2007. Premises and equipment
increased $5.6 million or 35.5% to $21.5 million in fiscal 2008 as the Bank
completed the construction of its Evans, Georgia branch building and
construction of a new branch building in Clearwater, South Carolina to replace
a previously leased location. The Company also completed leasehold
improvements to a branch location in Columbia, South Carolina and renovations
of its Whiskey Road Aiken branch building. The cash value of Bank Owned Life
Insurance ("BOLI") was $8.3 million at March 31, 2008 compared to $5.8 million
at March 31, 2007. The $2.5 million increase was attributable to accumulated
BOLI earnings of $327,000 and an additional BOLI purchase of $2.2 million
during the fiscal year ended March 31, 2008. BOLI, which earns tax-free
yields, is utilized to partially offset the cost of the Company's employee
benefits programs and provide key person insurance on certain officers of the
Company.
Repossessed assets acquired in settlement of loans increased $742,000 to
$767,000 at March 31, 2008 from $25,000 at March 31, 2007. At March 31, 2008,
the balance consisted of the following six properties: two lots within one
subdivision of Aiken, South Carolina, one lot within a subdivision of
Columbia, South Carolina and three single-family residences.
The balance of loans in troubled debt restructurings decreased during the
period. The Bank had five loans that were troubled debt restructurings
totaling $187,000 at March 31, 2008 compared to five loans totaling $204,000
at March 31, 2007. The five troubled debt restructurings consisted of three
consumer loans secured by first mortgages on residential dwellings totaling
$170,000, a $9,000 consumer loan secured by a second mortgage on a residential
dwelling, and a $8,000 unsecured commercial loan. The $9,000 consumer loan
was delinquent at March 31, 2008 while the other four loans were current in
payments. All troubled debt restructurings are reviewed for impairment. At
March 31, 2008, the Bank held $4.5 million in impaired loans compared to $1.5
million at March 31, 2007.
Non-accrual loans totaled $6.0 million at March 31, 2008 compared to $1.1
million a year earlier and consisted of five residential real estate loans
which comprised 10.1% of the balance, 11 commercial real estate loans which
comprised 19.4% of the balance, 10 consumer loans which comprised 6.9% of the
balance and eight commercial non-real estate loans which comprised 63.6% of
the total balance. Non-accrual loans averaged $2.9 million in fiscal 2008
compared to $1.3 million during fiscal 2007. The increase in non-accrual
loans is the result of a general decline in economic conditions and borrower
cash flow during fiscal 2008. Despite the increase in non-accrual loans, these
loans continue to represent less than 1% of the Company's total assets at
March 31, 2008.
The Bank reviews its loan portfolio and allowance for loan losses on a monthly
basis. Future additions to the Bank's allowance for loan losses are dependent
on, among other things, the performance of the Bank's loan portfolio, the
economy, changes in real estate values, and interest rates. There can be no
assurance that additions to the allowance will not be required in future
periods. Management continually monitors its loan portfolio for the impact of
local economic changes. The ratio of allowance for loan losses to total loans
was 1.53% at March 31, 2008 compared to 1.65% at March 31, 2007. The Bank
continues to practice conservative lending and past due loans are monitored
closely.
In July 2006, the Company acquired Collier Jennings Financial Corporation, an
insurance agency specializing in consumer automobile insurance and premium
financing. The resulting goodwill and other intangibles were $1.2 million
and $443,000 at March 31, 2008, respectively. Collier Jennings is now a
subsidiary of Security Federal Insurance Inc.
13
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Financial Condition, Continued
Deposits at the Bank increased $67.1 million or 12.8% to $590.9 million at
March 31, 2008 from $523.7 million at March 31, 2007. During fiscal 2008, the
Bank was very successful in attracting certificate of deposit accounts with
aggressive pricing and advertising. Advances from the FHLB increased to
$178.2 million at March 31, 2008 from $153.0 million a year earlier, an
increase of $25.2 million or 16.5%. Other borrowed money, which consists of
retail repurchase agreements and a line of credit with another financial
institution, increased $4.7 million or 58.1% to $12.8 million at March 31,
2008 from $8.1 million at March 31, 2007. The Company issued its first trust
preferred security issuance in September 2006. Gross proceeds of the issuance
were $5.2 million and are classified as junior subordinated debentures on the
consolidated balance sheet.
Total shareholders' equity was $47.5 million at March 31, 2008, an increase of
$4.8 million or 11.3% from $42.7 million a year earlier. The increase was
attributable to net income of $4.3 million, proceeds from the exercise of
stock options of $105,000, proceeds from employee stock purchase plan
purchases of $97,000, stock compensation expense of $21,000, and a net
increase in other comprehensive income of $3.1 million, offset partially by
the purchase of $2.1 million of treasury stock, and $723,000 in dividends
paid.
Results of Operations
The following table presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table also distinguishes between the
changes related to higher or lower outstanding balances and the changes due to
the volatility of interest rates. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to: (1) changes in rate (changes in rate multiplied by prior year
volume); (2) changes in volume (changes in volume multiplied by prior year
rate); and (3) net change (the sum of the prior columns). For purposes of
this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change attributable to
volume and the change attributable to rate.
Fiscal Year 2008 Fiscal Year 2007
Compared To 2007 Compared To 2006
------------------------ ------------------------
Volume Rate Net Net Rate Net
------ ------ ------ ------ ------ ------
(In Thousands)
Interest-Earning Assets:
Loans: (1)
Real Estate Loans $ 316 $ 156 $ 472 $ 385 $ 558 $ 943
Other Loans 5,406 (425) 4,981 4,534 2,294 6,828
------ ------ ------ ------ ------ ------
Total Loans 5,722 (269) 5,453 4,919 2,852 7,771
Mortgage-Backed
Securities (2) 454 586 1,040 (629) 947 318
Investments (2) 242 813 1,055 635 745 1,380
Other Interest-Earning
Assets 14 (28) (14) (9) 21 12
------ ------ ------ ------ ------ ------
Total Interest-Earning
Assets $6,432 $1,102 $7,534 $4,916 $4,565 $9,481
====== ====== ====== ====== ====== ======
Interest-Bearing
Liabilities:
Deposits:
Certificate Accounts $3,243 $1,028 $4,271 $2,092 $2,499 $4,591
NOW Accounts (36) 39 3 (5) 119 114
Money Market Accounts (119) (187) (306) (303) 1,437 1,134
Savings Accounts (7) 0 (7) (9) 0 (9)
------ ------ ------ ------ ------ ------
Total Deposits 3,081 880 3,961 1,775 4,055 5,830
Borrowings 1,362 288 1,650 1,158 976 2,134
------ ------ ------ ------ ------ ------
Total Interest-Bearing
Liabilities 4,443 1,168 5,611 2,933 5,031 7,964
------ ------ ------ ------ ------ ------
Effect On Net Income $1,989 $ (66) $1,923 $1,983 $ (466) $1,517
====== ====== ====== ====== ====== ======
(1) INTEREST ON NON-ACCRUAL LOANS IS NOT INCLUDED IN INCOME, ALTHOUGH THEIR
LOAN BALANCES ARE INCLUDED IN AVERAGE LOANS OUTSTANDING.
(2) SECURITIES AVAILABLE FOR SALE ARE COMPUTED USING THEIR HISTORICAL COST.
14
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
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/ 2008 2007 2006
Rate At ------------------------- ------------------------ ------------------------
March 31, Average Yield/ Average Yield/ Average Yield/
2008 Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- ------- -------- ------ ------- -------- ------ ------- -------- ------
(Dollars In Thousands)
Interest-Earning
Assets:
Mortgage Loans 6.24% $123,893 $ 7,757 6.26% $118,793 $ 7,285 6.13% $112,223 $ 6,342 5.65%
Other Loans 6.75% 356,994 28,877 8.09% 289,925 23,896 8.24% 232,793 17,068 7.33%
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total Loans (1) 6.63% 480,887 36,634 7.62% 408,718 31,181 7.63% 345,016 23,410 6.79%
Mortgage-Backed
Securities (2) 5.05% 144,041 6,813 4.73% 133,923 5,773 4.31% 150,107 5,455 3.63%
Investments (2) 3.94% 120,544 6,125 5.08% 115,253 5,070 4.40% 99,473 3,690 3.71%
Other Interest-
Earning Assets 2.40% 1,619 60 3.71% 1,412 74 5.23% 1,775 62 3.49%
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total Interest-
Earning Assets 5.97% $747,091 $49,632 6.64% $659,306 $42,098 6.39% $596,371 $32,617 5.47%
==== ======== ======= ==== ======== ======= ==== ======== ======= =====
Interest-Bearing
Liabilities:
Certificate
Accounts 4.75% $295,424 $14,768 5.00% $229,120 $10,497 4.58% $175,703 $ 5,906 3.36%
NOW Accounts 0.73% 61,534 814 1.32% 62,578 811 1.30% 63,000 697 1.11%
Money Market
Accounts 2.84% 143,695 5,492 3.82% 146,781 5,798 3.95% 156,508 4,664 2.98%
Savings Accounts 0.97% 16,195 159 0.98% 16,895 166 0.98% 17,969 175 0.98
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total Interest-
Bearing Accounts 3.70% 516,848 21,233 4.11% 455,374 17,272 3.79% 413,180 11,442 2.77%
Other Borrowings 3.62% 10,171 334 3.29% 7,080 318 4.49% 6,201 210 3.38%
Jr. Subordinated
Debt 5.69% 5,155 362 7.03% 2,721 192 7.05% - - -
FHLB Advances 4.18% 170,606 7,615 4.46% 145,299 6,151 4.23% 121,526 4,317 3.55%
---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total Interest-
Bearing
Liabilities 3.83% $702,780 $29,544 4.20% $610,474 $23,933 3.92% $540,907 $15,969 2.95%
==== ======== ======= ==== ======== ======= ==== ======== ======= =====
Net Interest Income $20,088 $18,165 $16,648
======= ======= =======
Interest Rate Spread 2.14% 2.44% 2.47% 2.52%
==== ==== ==== ====
Net Yield On Earning
Assets 2.69% 2.76% 2.79%
==== ==== ====
(1) INTEREST ON NON-ACCRUAL LOANS IS NOT INCLUDED IN INCOME, ALTHOUGH THEIR LOAN BALANCES ARE INCLUDED IN
AVERAGE LOANS OUTSTANDING.
(2) SECURITIES AVAILABLE FOR SALE ARE COMPUTED USING THEIR HISTORICAL COST.
15
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Comparison of the Years Ended March 31, 2008 and 2007
General
The Company's earnings were $4.3 million for the year ended March 31, 2008,
compared to $4.1 million for the year ended March 31, 2007. The $153,000 or
3.7% increase in earnings was attributable primarily to an increase in net
interest income and non-interest income offset partially by an increase in
general and administrative expenses.
Net Interest Income
Net interest income increased $1.9 million or 10.6% to $20.1 million in fiscal
2008 from $18.2 million in fiscal 2007. The increase was attributable to an
increase of $87.8 million in average interest-earning assets to $747.1 million
and an increase in the yield earned on these assets offset by an increase of
$92.3 million in average interest-bearing liabilities to $702.8 million and an
increase in the average cost of these liabilities during fiscal 2008.
Interest income on loans increased $5.5 million to $36.6 million during the
year ended March 31, 2008 from $31.2 million during fiscal 2007. The increase
was attributable to an increase in average total loans outstanding of $72.2
million offset by a 1 basis point decrease in the yield earned on the Bank's
loans during fiscal 2008. Interest income on investment securities,
mortgage-backed securities, and other investments increased $2.1 million as a
result of an increase in the aggregate average balance in the overall
investment portfolio, including mortgage-backed securities, investments, and
other interest-earning assets of $15.6 million and an increase in the yield of
42 basis points.
Interest expense on deposits increased $4.0 million or 22.9% to $21.2 million
during the year ended March 31, 2008. Average interest bearing deposits
increased $61.5 million while the average cost of those deposits increased 32
basis points during the year. Interest expense on FHLB advances and other
borrowings increased $1.5 million or 22.9% to $7.9 million during fiscal 2008.
The increase was a result of an increase in average FHLB advances and other
borrowings outstanding during the year of $28.4 million while the average
costs of those borrowings increased 15 basis points to 4.40% in fiscal 2008
compared to 4.25% in fiscal 2007. Interest expense on junior subordinated
debentures was $362,000 for fiscal 2008 compared to $192,000 during fiscal
2007. The average outstanding balance on these debentures increased $2.4
million while the average cost decreased 2 basis points to 7.03% in fiscal
2008 compared to 7.05% in fiscal 2007.
The Bank's interest rate spread decreased three basis points to 2.44% during
fiscal 2008. The Federal Reserve's recent interest rate decreases resulted in
lower yields on adjustable rate assets while intense competition in the
marketplace continued to increase interest rates paid on deposit accounts. In
addition, the Bank's liabilities tend to re-price at a more gradual rate than
its assets. The Bank anticipates these recent rate reductions will cause asset
yields to decline in fiscal 2009 as well.
Provision for Loan Losses
The Company's provision for loan losses increased $295,000 to $895,000 during
the year ended March 31, 2008 from $600,000 in fiscal 2007. The increase in
the provision for loan losses was the result of $81.9 million in loan growth
in conjunction with a general decline in economic conditions and an increase
in non-performing assets within the Company's portfolio.
The amount of the provision is determined by management's on-going monthly
analysis of the loan portfolio. Management uses multiple methods to measure
the estimate of the adequacy of the allowance for loan losses. These methods
incorporate percentage of classified loans, five-year averages of historical
loan losses in each loan category and current economic trends, and the
assignment of percentage targets of reserves in each loan category. The
Company considers subjective factors such as changes in local and national
economic conditions, industry trends, the composition and volume of the loan
portfolio, credit concentrations, lending policies, and the experience and
ability of the staff and Board of Directors.
Non-accrual loans, which are loans delinquent 90 days or more, were $6.0
million at March 31, 2008 compared to $1.1 million at March 31, 2007. Despite
the increase in non-accrual loans, these loans continue to comprise less than
1% of the Company's total assets at March 31, 2008. Non-performing assets,
which include non-accrual loans and repossessed assets, increased to 0.8% of
total assets at March 31, 2008 from 0.2% at March 31, 2007. Net charge-offs
were $125,000 or 0.02% of gross loans in fiscal 2008 compared to $30,000 or
0.01% of gross loans in fiscal 2007.
16
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Provision for Loan Losses, Continued
The sub prime lending and credit crisis caused national economic conditions to
deteriorate in fiscal 2008. As a result, real estate demand, real estate
market values and borrower cash flow declined significantly during the year
creating industry wide asset quality problems. Although the Company does not
have a sub prime lending program, it was indirectly impacted by these events
and the general condition of the economy. Non-performing assets within the
Company's portfolio increased $5.7 million to $6.8 million at March 31, 2008
from $1.1 million at March 31, 2007 and net charge-offs were $125,000 in
fiscal 2008 compared to $30,000 in fiscal 2007. The Company continues to
monitor national trends along with trends within its own portfolio in an
effort to be better equipped to identify and resolve problem loans in the
future.
Management believes the allowance for loan losses is adequate based on its
best estimates of the losses inherent in the loan portfolio, although there
can be no guarantee as to these estimates. In addition, bank regulatory
agencies may require additions to the allowance for loan losses based on their
judgments and estimates as part of their examination process. Because the
allowance for loan losses is an estimate, there can be no guarantee that
actual loan losses would not exceed the allowance for loan losses or that
additional increases in the allowance for loan losses will not be required in
the future.
Non-Interest Income
Non-interest income increased $629,000 from $3.9 million during fiscal 2007 to
$4.5 million during fiscal 2008. Gain on sale of loans increased $152,000 to
$613,000 during fiscal 2008 compared to $461,000 during fiscal 2007 as a
result of an increase in the origination and sale of fixed rate residential
mortgage loans. Service fees on deposit accounts decreased $7,000 or 0.6% to
$1.2 million during fiscal 2008 as a result of an increase in the average
balance of deposit accounts. Income from insurance agency commissions was
$665,000 during fiscal 2008 compared to $650,000 during fiscal 2007. Other
agency income from Collier Jennings increased $31,000 to $98,000 during fiscal
2008 from $68,000 during fiscal 2007. Trust income decreased $40,000 or 8.2%
to $443,000 during fiscal 2008 as a result of a decrease in the market value
of the underlying trust accounts offset slightly by an increase in the number
of trust accounts. Income from BOLI increased $85,000 or 34.9% to $327,000
during fiscal year 2008 as a result of an additional purchase of life
insurance. Other miscellaneous income including annuity and investment
brokerage commissions, Bank credit life insurance on loans, and other
miscellaneous income increased $124,000 or 17.2% to $842,000 during fiscal
2008 primarily as a result of an increase in fee income and specifically check
card fee income and wire transfer fee income. The Bank's three financial
subsidiaries, SFINS, SFINV, and SFT began operating in the third quarter of
the fiscal year ended March 31, 2002. SFINS is an insurance agency handling
property and casualty insurance and life and health insurance. In 2008 SFINS
incurred a $266,000 loss partially as a result of the continued integration of
Collier Jennings. In addition, changes in South Carolina insurance laws
enacted during fiscal 2008 negatively impacted revenue in conjunction with a
decrease in the commissions percentages earned from the insurance companies
resulting from current market conditions and increased competition. SFINV
markets mutual funds, discount brokerage, and annuities. SFT is a
full-service trust company. SFINV and SFT had losses of $18,000 and $77,000,
respectively, in fiscal 2008.
General and Administrative Expenses
General and administrative expenses increased $2.2 million or 14.3% to $17.3
million during the year ended March 31, 2008 compared to $15.2 million during
the same period one year earlier. The largest increase was compensation and
employee benefits which increased $900,000 or 9.6% to $10.3 million as a
result of the hiring of additional staff to expand into new market areas in
addition to normal annual salary adjustments. Occupancy expense increased
$373,000 or 26.4% to $1.8 million as a result of the depreciation of branch
renovations and construction and maintaining additional locations.
Advertising expense increased $82,000 or 27.7% from $297,000 to $380,000 as a
result of advertising consumer loans and certificates of deposit during the
year. Depreciation and maintenance of equipment expense increased $42,000 or
3.2% to $1.4 million. FDIC insurance premiums increased $3,000 to $62,000 for
fiscal 2008 from $58,000 in fiscal 2007. Other miscellaneous expenses, which
encompasses repossessed assets expense, legal, professional, and consulting
expenses, stationery and office supplies, and other expenses increased
$743,000 or 28.3% during fiscal 2008. This increase is attributable to general
growth including maintaining additional employees and locations.
Income Taxes
The provision for income taxes decreased $62,000 or 2.9% to $2.1 million
during the year ended March 31, 2008 compared to the year ended March 31,
2007. The effective tax rate was 34.2% for fiscal 2008 and 34.2% for fiscal
2007.
17
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Comparison of the Years Ended March 31, 2007 and 2006
General
The Company's earnings were $4.1 million for the year ended March 31, 2007,
compared to $3.8 million for the year ended March 31, 2006. The $314,000 or
8.2% increase in earnings was attributable primarily to an increase in net
interest income and non-interest income offset partially by an increase in
general and administrative expenses.
Net Interest Income
Net interest income increased $1.5 million or 9.1% to $18.2 million in fiscal
2007 from $16.7 million in fiscal 2006. The increase was attributable to an
increase of $62.9 million to $659.3 million in average interest-earning assets
during fiscal 2007. The Bank's interest rate spread decreased five basis
points to 2.47% during fiscal 2007. The yield of average interest-earning
assets increased 92 basis points to 6.39%, while the cost of average
interest-bearing liabilities increased 97 basis points to 3.92%. Interest
income on loans increased $7.8 million to $31.2 million during the year ended
March 31, 2007 from $23.4 million during fiscal 2006. The increase was
attributable to an increase in average total loans outstanding of $63.7
million and an 84 basis point increase in the yield earned on the Bank's loans
during fiscal 2007. Interest income on investment securities, mortgage-backed
securities, and other investments increased $1.7 million as a result of an
increase in yield of 70 basis points in the overall investment portfolio. The
aggregate average balance in the overall investment portfolio, including
mortgage-backed securities, investments, and other interest-earning assets,
decreased $767,000 during fiscal 2007 compared to fiscal 2006 to help fund the
growth in loans.
Interest expense on deposits increased $5.8 million or 51.0% to $17.3 million
during the year ended March 31, 2007. Average interest-bearing deposits
increased $42.2 million while the average cost of those deposits increased 102
basis points during the year. Interest expense on FHLB advances and other
borrowings increased $1.9 million or 42.9% to $6.5 million during fiscal 2007.
The increase was a result of an increase in average FHLB advances and other
borrowings outstanding during the year of $24.6 million while the average
costs of those borrowings increased 71 basis points to 4.25% in fiscal 2007
compared to 3.54% in fiscal 2006. Interest expense on junior subordinated
debentures was $192,000 during fiscal 2007, with a weighted average cost of
7.05%. The Company issued its first junior subordinated debentures in
September 2006. Net proceeds of the issuance were $5.0 million.
Provision for Loan Losses
The Company's provision for loan losses decreased $60,000 to $600,000 during
the year ended March 31, 2007 from $660,000 in fiscal 2006. The amount of the
provision is determined by management's on-going monthly analysis of the loan
portfolio. Management uses three methods to measure the estimate of the
adequacy of the allowance for loan losses. These methods incorporate
percentage of classified loans, five-year averages of historical loan losses
in each loan category and current economic trends, and the assignment of
percentage targets of reserves in each loan category. Management has used all
three methods for the past seven fiscal years.
Non-accrual loans, which are loans delinquent 90 days or more, were $1.1
million at March 31, 2007 compared to $1.2 million at March 31, 2006. Net
charge-offs were $30,000 in fiscal 2007 compared to $239,000 in fiscal 2006.
The ratio of the allowance for loan losses to total loans at March 31, 2007
was 1.65% compared to 1.76% at March 31, 2006. Management believes the
allowance for loan losses is adequate based on its best estimates of the
losses inherent in the loan portfolio, although there can be no guarantee as
to these estimates. In addition, bank regulatory agencies may require
additions to the allowance for loan losses based on their judgments and
estimates as part of their examination process. Because the allowance for
loan losses is an estimate, there can be no guarantee that actual loan losses
would not exceed the allowance for loan losses or that additional increases in
the allowance for loan losses will not be required in the future.
18
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Non-Interest Income
Non-interest income increased $1.2 million from $2.6 million during fiscal
2006 to $3.9 million during fiscal 2007. Gain on sale of loans was $461,000
in fiscal 2007 compared to $467,000 during fiscal 2006. Service fees on
deposit accounts increased $107,000 or 9.5% to $1.2 million during fiscal 2007
as a result of an increase in the number of demand accounts. Income from
insurance agency commissions increased $608,000 to $650,000 as a result of the
acquisition of Collier Jennings at the beginning of the September 2006
quarter. Other agency income from Collier Jennings was $68,000 during fiscal
2007. Trust income increased $119,000 or 32.7% to $482,000 during fiscal 2007
due to an increase in trust account balances. Income from BOLI was $243,000
during fiscal year 2007. The Company did not own any BOLI until March 31,
2006. Other miscellaneous income including annuity and investment brokerage
commissions, Bank credit life insurance on loans, and other miscellaneous
income increased $142,000 or 24.7% to $718,000 during fiscal 2007 primarily as
a result of an increase in the gain on sale of repossessed assets and
increased annuity and investment brokerage commissions. The Bank's three
financial subsidiaries, SFINS, SFINV, and SFT began operating in the third
quarter of the fiscal year ended March 31, 2002. SFINS is an insurance agency
handling property and casualty insurance and life and health insurance and
became profitable during the fiscal year ended March 31, 2004. In fiscal
2006, SFINS incurred a slight loss as a result of an increase in staff. In
fiscal 2007 SFINS incurred an $83,000 loss as a result of infrastructure being
put in place for the assimilation of Collier Jennings. SFINV markets mutual
funds, discount brokerage, and annuities. SFT is a full-service trust
company. SFINV and SFT had losses of $33,000 and $35,000, respectively, in
fiscal 2007.
General and Administrative Expenses
General and administrative expenses increased $2.1 million or 16.4% to $15.2
million during the year ended March 31, 2007 compared to the same period one
year earlier primarily as a result of the Collier Jennings insurance agency
acquisition, which added approximately $1.1 million in general and
administrative expenses. Without that acquisition, general and administrative
expenses increased $1.0 million or 7.7%. Compensation and employee benefits
increased $1.8 million or 23.8% to $9.4 million as a result of the Collier
Jennings acquisition, the hiring of additional business development officers
and auditing staff, and normal annual salary adjustments. Excluding the
acquisition, compensation and employee benefits expense increased $1.2 million
or 16.4%. Occupancy expense increased $147,000 or 11.6% to $1.4 million as a
result of the depreciation of branch renovations and the leasing of additional
office space. Advertising expense increased $125,000 or 72.5% from $172,000
to $297,000 as a result of advertising consumer loans and certificates of
deposit during the year. Depreciation and maintenance of equipment expense
increased $216,000 or 19.7% to $1.3 million. FDIC insurance premiums were
$58,000 in both fiscal 2007 and 2006. Other miscellaneous expenses, which
encompasses repossessed assets expense, legal, professional, and consulting
expenses, stationery and office supplies, and other expenses decreased
$231,000 or 8.1% during fiscal 2007.
Income Taxes
The provision for income taxes increased $364,000 or 20.5% to $2.1 million
during the year ended March 31, 2007 as a result of an increase in taxable
income compared to $1.8 million during the year ended March 31, 2006. The
effective tax rate was 34.2% for fiscal 2007 and 31.8% for fiscal 2006.
19
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Regulatory Capital
The following table reconciles the Bank's shareholders' equity to its various
regulatory capital positions:
March 31,
2008 2007
------- -------
(In Thousands)
Bank's Shareholders' Equity (1) $53,872 $47,318
Reduction For Goodwill And Other Intangibles 1,640 1,730
------- -------
Tangible Capital 52,232 45,588
------- -------
Core Capital 52,232 45,588
------- -------
Supplemental Capital 6,951 6,016
Less Assets Required To Be Deducted - 22
------- -------
Total Risk-Based Capital $59,183 $51,582
======= =======
(1) FOR FISCAL 2008 AND 2007, EXCLUDES UNREALIZED GAIN (LOSS) OF $1,640
THOUSAND AND ($748) THOUSAND, RESPECTIVELY ON AVAILABLE FOR SALE
SECURITIES.
The following table compares the Bank's capital levels relative to regulatory
requirements at March 31, 2008:
Amount Percent Actual Actual Excess Excess
Required Required Amount Percent Amount Percent
-------- -------- ------ ------- ------ -------
(Dollars In Thousands)
Tangible Capital $16,688 2.0% $52,232 6.3% $35,544 4.3%
Tier 1 Leverage (Core)
Capital 33,377 4.0% 52,232 6.3% 18,855 2.3%
Tier 1 Risk-Based (Core)
Capital 22,250 4.0% 52,232 9.4% 29,982 5.4%
Total Risk-Based Capital 44,485 8.0% 59,183 10.6% 14,698 2.6%
20
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Liquidity and Capital Resources
Liquidity refers to the ability of the Bank to generate sufficient cash flows
to fund current loan demand, repay maturing borrowings, fund maturing deposit
withdrawals, and meet operating expenses. The Bank's primary sources of funds
include loan repayments, loan sales, increased deposits, advances from the
FHLB, and cash flow generated from operations. The need for funds varies
among periods depending on funding needs as well as the rate of amortization
and prepayment on loans. The use of FHLB advances varies depending on loan
demand, deposit inflows, and the use of investment leverage strategies to
increase net interest income.
The principal use of the Bank's funds is the origination of mortgages and
other loans and the purchase of investments and mortgage-backed securities.
Loan originations on loans held for investment were $390.9 million in fiscal
2008 compared to $358.9 million in fiscal 2007 and $277.2 million in fiscal
2006. The bulk of the increase in originations in fiscal 2008, 2007, and 2006
was primarily the result of an increase in commercial loan originations, which
increased $28.1 million, $85.4 million, and $63.9 million, respectively.
Purchases of investments and mortgage-backed securities were $142.8 million in
fiscal 2008 compared to $63.4 million in fiscal 2007 and $59.4 million in
fiscal 2006. Another use of the Bank's funds is the building and renovation
of branch offices. The Bank plans to consider expanding its branch network in
Aiken, Richland and Lexington County, South Carolina and metro Augusta,
Georgia and surrounding areas during the next few years.
Unused lines of credit on home equity loans, credit cards, and commercial
loans amounted to $70.6 million at March 31, 2008. Home equity loans are made
on a floating rate basis with final maturities of 10 to 15 years. Credit
cards are generally made on a floating rate basis, and are renewed annually or
every other year. Management does not anticipate that the percentage of funds
drawn on unused lines of credit will increase substantially over amounts
currently utilized. In addition to the above commitments, the Bank has
undisbursed loans-in-process of $8.1 million at March 31, 2008, which will
disburse over an average of 90 days. These commitments to originate loans and
future advances of lines of credit are expected to be funded from loan
amortizations and prepayments, deposit inflows, maturing investments, and
short-term borrowing capacity.
The following table sets forth the length of time until maturity for unused
commitments to extend credit and standby letters of credit at March 31, 2008:
Greater After
Than One Three
Within Through Through One
One Three Twelve Within Year Or
(In Thousands) Month Months Months One Year Greater Total
------- -------- ------- -------- ------- ------
Unused Lines Of Credit $3,406 $4,898 $20,479 $28,783 $41,768 $70,551
Standby Letters Of
Credit 51 91 337 479 138 617
------ ------ ------- ------- ------- -------
Total $3,457 $4,989 $20,816 $29,262 $41,906 $71,168
====== ====== ======= ======= ======= =======
Management believes that future liquidity can be met through the Bank's
deposit base, which increased $67.1 million during fiscal 2008, and from
maturing investments. Also, the Bank has another $60.4 million in unused
borrowing capacity at FHLB at March 31, 2008 and $7.0 million borrowing
capacity on a line of credit with another institution.
Historically the Bank's cash flow from operating activities has been
relatively stable. The cash flows from investing activities varies with the
need to invest excess funds or utilize leverage strategies with the purchase
of mortgage-backed and investment securities. The cash flows from financing
activities vary with the need for FHLB advances. See "Consolidated Statements
of Cash Flows" in the Consolidated Financial Statements contained herein.
21
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and
Results of Operation
Contractual Obligations
In the normal course of business, the Company enters into contractual
obligations that meet various business needs. These contractual obligations
include time deposits to customers, borrowings from the FHLB of Atlanta, other
borrowings, junior subordinated debentures, and lease obligations for
facilities. See Notes 6, 9, 10, and 11 of the Notes to the Consolidated
Financial Statements included herein for additional information. The
following table summarizes the Company's long-term contractual obligations at
March 31, 2008:
One to Three
Less than Three to Five
One Year Years Years Thereafter Total
--------- ------- ------- ---------- -------
(In Thousands)
Time deposits $313,602 $11,122 $ 6,349 $ - $331,073
FHLB Advances 42,300 25,000 34,700 76,234 178,234
Other Borrowings 12,784 - - - 12,784
Jr. Sub. Debentures - - 5,155 - 5,155
Operating Lease
Obligations 439 861 801 2,700 4,801
-------- ------- ------- ------- --------
Total $369,125 $36,983 $47,005 $78,934 $532,047
======== ======= ======= ======= ========
Off-Balance Sheet Arrangements
In the normal course of business, the Company makes off-balance sheet
arrangements, including credit commitments to its customers to meet their
financial needs. These arrangements involve, to varying degrees, elements of
credit and interest rate risk not recognized in the consolidated statement of
financial condition. The Bank makes personal, commercial, and real estate
lines of credit available to customers and does issue standby letters of
credit.
Commitments to extend credit to customers are subject to the Bank's normal
credit policies and are essentially the same as those involved in extending
loans to customers. See Note 16 of the Notes to the Consolidated Financial
Statements included herein for additional information.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements, related notes, and other financial
information presented herein have been prepared in accordance with Generally
Accepted Accounting Principles ("GAAP") that require the measurement of
financial position and operating results in terms of historical dollars
without considering changes in relative purchasing power over time due to
inflation. Unlike most industrial companies, substantially all of the assets
and liabilities of a financial institution are monetary in nature. As a
result, interest rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Security Federal Corporation and Subsidiaries
Aiken, South Carolina
We have audited the accompanying consolidated balance sheets of Security
Federal Corporation and Subsidiaries as of March 31, 2008 and 2007, and the
related consolidated statements of income, shareholders' equity and
comprehensive income and cash flows for each of the years in the three year
period ended March 31, 2008. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Security Federal Corporation and Subsidiaries as of March 31, 2008 and
2007, and the consolidated results of their operations and their cash flows
for each of the years in the three year period ended March 31, 2008, in
conformity with accounting principles generally accepted in the United States
of America.
We were not engaged to examine management's assertion about the
effectiveness of Security Federal Corporation and Subsidiaries' internal
control over financial reporting as of March 31, 2008 and 2007 included in the
accompanying Management's Report on Internal Control over Financial Reporting
and, accordingly, we do not express an opinion thereon.
/s/Elliott Davis, LLC
Columbia, South Carolina
June 9, 2008
23
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31,
--------------------------
2008 2007
------------ ------------
ASSETS:
Cash And Cash Equivalents $ 10,539,054 $ 13,438,129
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized Cost of
$240,295,683 and $186,970,867 at March 31,
2008 and 2007, Respectively) 244,157,872 185,766,296
Held To Maturity: (Fair Value of $20,506,250
and $63,441,641 at March 31, 2008 and 2007,
Respectively) 20,154,618 64,138,589
------------ ------------
Total Investment And Mortgage-Backed Securities 264,312,490 249,904,885
------------ ------------
Loans Receivable, Net:
Held For Sale 2,295,721 1,529,748
Held For Investment: (Net of Allowance of
$8,066,762 and $7,296,791 at March 31, 2008
and 2007, Respectively) 515,635,984 434,508,612
------------ ------------
Total Loans Receivable, Net 517,931,705 436,038,360
------------ ------------
Accrued Interest Receivable:
Loans 1,952,866 1,459,193
Mortgage-Backed Securities 822,379 550,682
Investments 764,746 1,181,639
------------ ------------
Total Accrued Interest Receivable 3,539,991 3,191,514
------------ ------------
Premises And Equipment, Net 21,544,380 15,895,192
Federal Home Loan Bank Stock, At Cost 9,497,100 8,209,200
Repossessed Assets Acquired In Settlement Of Loans 767,096 24,909
Bank Owned Life Insurance 8,310,813 5,783,620
Intangible Assets, Net 442,500 532,500
Goodwill 1,197,954 1,197,954
Other Assets 1,947,403 3,893,928
------------ ------------
Total Assets $840,030,486 $738,110,191
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposit Accounts $590,850,208 $523,737,592
Advances From Federal Home Loan Bank 178,234,007 153,049,272
Other Borrowings 12,784,094 8,088,194
Junior Subordinated Debentures 5,155,000 5,155,000
Advance Payments By Borrowers For Taxes And
Insurance 620,467 486,101
Mandatorily Redeemable Financial Instruments 1,417,312 1,417,312
Other Liabilities 3,472,985 3,483,512
------------ ------------
Total Liabilities 792,534,073 695,416,983
------------ ------------
Commitments (Notes 6 and 16)
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,
2,649,027 And 2,532,192, Respectively, at
March 31, 2008 And 2,637,942 And 2,609,116,
Respectively, at March 31, 2007 25,925 25,814
Additional Paid-In Capital 5,072,086 4,850,029
Treasury Stock (At Cost 116,835 and 28,826 shares
at March 31, 2008 and 2007, respectively) (2,769,446) (651,220)
Accumulated Other Comprehensive Income (Loss) 2,395,537 (747,316)
Retained Earnings, Substantially Restricted 42,772,311 39,215,901
------------ ------------
Total Shareholders' Equity 47,496,413 42,693,208
------------ ------------
Total Liabilities And Shareholders' Equity $840,030,486 $738,110,191
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
24
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended March 31,
---------------------------------------
2008 2007 2006
----------- ----------- -----------
Interest Income:
Loans $36,634,595 $31,180,719 $23,410,189
Mortgage-Backed Securities 6,812,983 5,772,667 5,455,369
Investment Securities 6,124,662 5,070,355 3,689,641
Other 60,086 73,873 62,008
----------- ------------ -----------
Total Interest Income 49,632,326 42,097,614 32,617,207
----------- ------------ -----------
Interest Expense:
NOW And Money Market Accounts 6,306,433 6,609,207 5,360,351
Passbook Accounts 158,703 165,664 175,237
Certificate Accounts 14,768,301 10,497,490 5,906,157
FHLB Advances And Other Borrowed
Money 7,948,807 6,468,828 4,527,182
Junior Subordinated Debentures 362,281 191,811 -
----------- ------------ -----------
Total Interest Expense 29,544,525 23,933,000 15,968,927
----------- ------------ -----------
Net Interest Income 20,087,801 18,164,614 16,648,280
Provision For Loan Losses 895,000 600,000 660,000
----------- ------------ -----------
Net Interest Income After Provision
For Loan Losses 19,192,801 17,564,614 15,988,280
----------- ------------ -----------
Non-Interest Income:
Gain On Sale Of Investment
Securities 267,981 - 48,962
Gain On Sale Of Loans 613,493 460,750 467,481
Service Fees On Deposit Accounts 1,232,676 1,239,579 1,132,194
Commissions From Insurance Agency 664,844 649,548 41,803
Other Agency Income 98,499 67,613 -
Trust Income 442,625 482,376 363,413
Bank Owned Life Insurance Income 327,193 242,619 -
Other 841,762 718,046 575,715
----------- ------------ -----------
Total Non-Interest Income 4,489,073 3,860,531 2,629,568
----------- ------------ -----------
General And Administrative Expenses:
Compensation And Employee Benefits 10,284,937 9,384,640 7,579,695
Occupancy 1,783,729 1,411,006 1,263,839
Advertising 379,819 297,330 172,409
Depreciation And Maintenance Of
Equipment 1,351,289 1,309,696 1,094,149
FDIC Insurance Premiums 61,508 58,325 57,702
Amortization Of Intangibles 90,000 67,500 -
Other 3,371,248 2,628,612 2,859,587
----------- ------------ -----------
Total General And Administrative
Expenses 17,322,530 15,157,109 13,027,381
----------- ------------ -----------
Income Before Income Taxes 6,359,344 6,268,036 5,590,467
Provision For Income Taxes 2,079,745 2,141,483 1,777,616
----------- ------------ -----------
Net Income $ 4,279,599 $ 4,126,553 $ 3,812,851
=========== =========== ===========
Net Income Per Common Share (Basic) $ 1.66 $ 1.59 $ 1.51
=========== =========== ===========
Net Income Per Common Share
(Diluted) $ 1.65 $ 1.58 $ 1.48
=========== =========== ===========
Cash Dividend Per Share On Common
Stock $ 0.28 $ 0.24 $ 0.16
=========== =========== ===========
Weighted Average Shares Outstanding
(Basic) 2,583,568 2,594,525 2,532,999
=========== =========== ===========
Weighted Average Shares Outstanding
(Diluted) 2,586,703 2,608,552 2,575,061
=========== =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
25
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
For the Years Ended March 31, 2008, 2007 and 2006
Accumulated
Additional Indirect Other
Common Paid - In Treasury Guarantee Comprehensive Retained
Stock Capital Stock Of ESOP Debt Income (Loss) Earnings Total
------ ---------- ---------- ------------ ------------- ---------- -------
Balance At March 31,
2005 $25,438 $4,181,804 $(165,089) $(276,217) $ (961,504) $32,306,633 $35,111,065
Net Income - - - - - 3,812,851 3,812,851
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Losses On Securities
Available For Sale,
Net Of Taxes - - - - (1,094,649) - (1,094,649)
Reclassification
Adjustment For
Gains Included In
Net Income, Net of
Taxes (30,356) (30,356)
-----------
Comprehensive Income - - - - - - 2,687,846
Purchase Of Treasury
Stock At Cost,
3,235 Shares - - (73,567) - - - (73,567)
Exercise Of Stock
Options 144 222,306 - - - - 222,450
Decrease in Indirect
Guarantee Of ESOP
Debt - - - 60,714 - - 60,714
------- ---------- --------- --------- ----------- ----------- -----------
Cash Dividends - - - - - (406,749) (406,749)
------- ---------- --------- --------- ----------- ----------- -----------
Balance At March 31,
2006 $25,582 $4,404,110 $(238,656) $(215,503) $(2,086,509) $35,712,735 $37,601,759
======= ========== ========= ========= =========== =========== ===========
------------------------------------------------------------------------------------------------------------
Accumulated
Additional Indirect Other
Common Paid - In Treasury Guarantee Comprehensive Retained
Stock Capital Stock Of ESOP Debt Income (Loss) Earnings Total
------ ---------- ---------- ------------ ------------- ---------- -------
Balance At March 31,
2006 $25,582 $4,404,110 $(238,656) $(215,503) $(2,086,509) $35,712,735 $37,601,759
Net Income - - - - - 4,126,553 4,126,553
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Gains On Securities
Available For Sale,
Net Of Taxes - - - - 1,339,193 - 1,339,193
-----------
Comprehensive Income - - - - - - 5,465,746
Purchase Of Treasury
Stock At Cost, 17,514
Shares (412,564) - - - (412,564)
Exercise Of Stock
Options 232 438,233 - - - - 438,465
Decrease In Indirect
Guarantee Of ESOP
Debt - - - 215,503 - - 215,503
Stock Compensation
Expense 7,686 7,686
Cash Dividends - - - - - (623,387) (623,387)
------- ---------- --------- --------- ----------- ----------- -----------
Balance At March 31,
2007 $25,814 $4,850,029 $(651,220) $ - $ (747,316) $39,215,901 $42,693,208
======= ========== ========= ========= =========== =========== ===========
------------------------------------------------------------------------------------------------------------
Accumulated
Additional Indirect Other
Common Paid - In Treasury Guarantee Comprehensive Retained
Stock Capital Stock Of ESOP Debt Income (Loss) Earnings Total
------ ---------- ---------- ------------ ------------- ---------- -------
Balance At March 31,
2007 $25,814 $4,850,029 $ (651,220) $ $ (747,316) $39,215,901 $42,693,208
Net Income - - - - - 4,279,599 4,279,599
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Gains On
Securities Available
For Sale, Net Of
Taxes - - - - 3,309,388 - 3,309,388
Reclassification
Adjustment For Gains
Included In Net
Income, Net Of Taxes - - - - (166,535) - (166,535)
-----------
Comprehensive Income - - - - - - 7,422,452
Purchase Of Treasury
Stock At Cost,
88,009 Shares - - (2,118,226) - - - (2,118,226)
Exercise Of Stock
Options 63 104,958 - - - - 105,021
Employee Stock
Purchase Plan
Purchases 48 96,581 - - - - 96,629
Stock Compensation
Expense - 20,518 - - - - 20,518
Cash Dividends - - - - - (723,189) (723,189)
------- ---------- ----------- ------- ---------- ----------- -----------
Balance At March 31,
2008 $25,925 $5,072,086 $(2,769,446) $ - $2,395,537 $42,772,311 $47,496,413
======= ========== =========== ======= ========== =========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended March 31,
------------------------------------------
2008 2007 2006
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,279,599 $ 4,126,553 $ 3,812,851
Adjustments To Reconcile Net
Income To Net Cash Provided By
Operating Activities:
Depreciation Expense 1,098,711 1,011,963 965,226
Amortization Of Intangible Assets 90,000 67,500 -
Stock Option Compensation Expense 20,518 7,686 -
Discount Accretion And Premium
Amortization 236,743 405,777 927,981
Provisions For Losses On Loans 895,000 600,000 660,000
Gain On Sales Of Loans (613,493) (460,750) (467,481)
Gain On Sales Of Investment
Securities (267,981) - (48,962)
(Gain) Loss On Sale Of Real
Estate (14,685) (48,678) 21,416
Amortization Of Deferred Fees
On Loans (109,539) (283,252) (170,009)
Loss On Disposition Of Premises
And Equipment 10,906 165 32,344
Proceeds From Sale Of Loans
Held For Sale 39,115,662 30,793,793 30,370,085
Origination Of Loans Held
For Sale (39,268,142) (30,542,147) (28,945,486)
(Increase) Decrease In Accrued
Interest Receivable:
Loans (493,673) (363,179) (194,142)
Mortgage-Backed Securities (271,697) (42,250) 47,501
Investments 416,893 (236,019) (223,876)
(Decrease) Increase In Advance
Payments By Borrowers 134,366 (15,897) 84,588
Other, Net 10,762 88,888 295,799
------------- ------------- -------------
Net Cash Provided By Operating
Activities 5,269,950 5,110,153 7,167,835
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase Of Mortgage-Backed
Securities Available For Sale (93,232,730) (30,261,270) (31,386,556)
Principal Repayments On Mortgage-
Backed Securities Available For
Sale 39,514,170 34,829,410 49,386,450
Principal Repayments On Mortgage-
Backed Securities Held To
Maturity - - 10,407
Purchase Of Investment Securities
Available For Sale (49,522,853) (33,152,147) (28,031,364)
Maturities Of Investment Securities
Available For Sale 41,664,531 8,019,815 4,924,531
Maturities Of Investment Securities
Held To Maturity 44,000,000 11,000,000 1,000,000
Proceeds From Sale of Investment
Securities Available For Sale 8,268,604 - -
Proceeds From Sale of Mortgage-
Backed Securities Available For
Sale - - 3,797,360
Proceeds From Sale of Mortgage-
Backed Securities Held To
Maturity - - 249,650
Purchase Of FHLB Stock (10,486,300) (7,232,000) (6,897,300)
Redemption Of FHLB Stock 9,198,400 6,172,600 5,982,000
Increase In Loans Receivable (83,076,705) (61,061,837) (59,900,035)
Proceeds From Sale Of
Repossessed Assets 436,370 139,700 173,547
Purchase And Improvement Of
Premises And Equipment (6,759,305) (5,244,344) (4,746,502)
Proceeds From Sale of Premises
and Equipment 500 - -
Increase In Bank Owned Life
Insurance (2,527,193) (783,619) (5,000,001)
------------- ------------- -------------
Net Cash Used By Investing
Activities (102,522,511) (77,573,692) (70,437,813)
------------- ------------- -------------
(Continued)
27
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
For the Years Ended March 31,
------------------------------------------
2008 2007 2006
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase In Deposit Accounts 67,112,616 44,508,253 48,941,948
Proceeds From FHLB Advances 352,450,000 279,973,450 262,655,000
Repayment Of FHLB Advances (327,265,265) (258,287,178) (243,330,000)
Proceeds Of Other Borrowings, Net 4,695,900 798,421 1,695,616
Proceeds From Junior Subordinated
Debentures - 5,155,000 -
Proceeds From Employee Stock
Purchase Plan Purchases 96,629 - -
Proceeds From Exercise Of Stock
Options 105,021 438,465 222,450
Purchase Of Treasury Stock (2,118,226) (412,564) (73,567)
Dividends To Shareholders (723,189) (623,387) (406,749)
------------- ------------- -------------
Net Cash Provided By Financing
Activities 94,353,486 71,550,460 69,704,698
------------- ------------- -------------
Net Increase (Decrease) In Cash
And Cash Equivalents (2,899,075) (913,079) 6,434,720
Cash And Cash Equivalents At
Beginning Of Year 13,438,129 14,351,208 7,916,488
------------- ------------- -------------
Cash And Cash Equivalents At End
Of Year $ 10,539,054 $ 13,438,129 $ 14,351,208
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash Paid During The Period For:
Interest $ 29,481,506 $ 23,339,597 $ 15,679,123
============= ============= =============
Income Taxes $ 2,403,290 $ 1,869,292 $ 2,276,825
============= ============= =============
Supplemental Schedule Of Non Cash
Transactions:
Additions To Repossessed Assets $ 1,163,872 $ 24,909 $ 232,985
============= ============= =============
Decrease (Increase) In
Unrealized Net Loss On
Securities Available For Sale,
Net Of Taxes $ 3,142,853 $ 1,339,193 $ (1,125,005)
============= ============= =============
Issuance Of A Mandatorily
Redeemable Financial Instrument
Through The Issuance Of Common
Stock $ - $ 1,417,312 $ -
============= ============= =============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies
-------------------------------
The following is a description of the more significant accounting and
reporting policies used in the preparation and presentation of the
accompanying consolidated financial statements. All significant intercompany
transactions have been eliminated in consolidation.
(a) Basis of Consolidation and Nature of Operations
-----------------------------------------------
The accompanying consolidated financial statements include the
accounts of Security Federal Corporation (the "Company") and its
wholly owned subsidiary, Security Federal Bank (the "Bank") and the
Bank's wholly owned subsidiaries, Security Federal Insurance, Inc.
("SFINS"), Security Federal Investments, Inc. ("SFINV"), Security
Federal Trust Inc. ("SFT"), and Security Financial Services
Corporation ("SFSC"). Security Federal Corporation has a wholly owned
subsidiary, Security Federal Statutory Trust (the "Trust"), which
issued and sold fixed and floating rate capital securities of the
Trust. However, under current accounting guidance, the Trust is not
consolidated in the financial statements. 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 auto, business, health, home and life insurance. SFINS has a
wholly owned subsidiary, Collier Jennings Financial Corporation which
has as subsidiaries Collier Jennings Inc., The Auto Insurance Store
Inc., and Security Federal Premium Pay Plans Inc. SFINV engages
primarily in investment brokerage services. SFT offers trust,
financial planning and financial management services.
(b) Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks, interest-bearing balances in other
banks, and federal funds sold. Cash equivalents have original
maturities of three months or less.
(c) Investment and Mortgage-Backed Securities
-----------------------------------------
Investment securities, including mortgage-backed securities, are
classified in one of three categories: held to maturity, available for
sale, or trading. Management determines the appropriate
classification of debt securities at the time of purchase.
Investment securities are classified as held to maturity when the
Company has the positive intent and ability to hold the securities to
maturity. These securities are recorded at cost and adjusted for
amortization of premiums and accretion of discounts over the estimated
life of the security using a method that approximates a level yield.
Prepayment assumptions on mortgage-backed securities are anticipated.
Management classifies investment securities that are not considered to
be held to maturity as available for sale. These type of investments
are stated at fair value with unrealized gains and losses, net of tax,
reported in a separate component of shareholders' equity ("accumulated
other comprehensive income (loss)"). Gains and losses from sales of
investment and mortgage-backed securities available for sale are
determined using the specific identification method. The Company has
no trading securities.
(d) Loans Receivable Held for Investment
------------------------------------
Loans are stated at their unpaid principal balance. Interest income
is computed using the simple interest method and is recorded in the
period earned.
29
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(e) Allowance for Loan Losses
-------------------------
The Company provides for loan losses using the allowance method.
Accordingly, all loan losses are charged to the related allowance and
all recoveries are credited to the allowance for loan losses.
Additions to the allowance for loan losses are provided by charges to
operations based on various factors which, in management's judgment,
deserve current recognition in estimating possible losses. Such
factors considered by management include the fair value of the
underlying collateral, stated guarantees by the borrower, if
applicable, the borrower's ability to repay from other economic
resources, growth and composition of the loan portfolios, the
relationship of the allowance for loan losses to outstanding loans,
loss experience, delinquency trends, and general economic conditions.
Management evaluates the carrying value of the loans periodically and
the allowance is adjusted accordingly. While management uses the
best information available to make evaluations, future adjustments to
the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making these evaluations.
Allowances for loan losses are subject to periodic evaluations by
various regulatory authorities and may be subject to adjustments based
upon the information that is available at the time of their
examinations.
The Company values impaired loans at either the loan's fair value, or
the present value of expected future cash flows, if it is probable
that the Company will be unable to collect all amounts due according
to the terms of the loan agreement at the present value of expected
cash flows, the market price of the loan, if available, or the value
of the underlying collateral. Expected cash flows are required to be
discounted at the loan's effective interest rate. When the ultimate
collectibility of an impaired loan's principal is in doubt, wholly or
partially, all cash receipts are applied to principal. When this
doubt does not exist, cash receipts are applied under the contractual
terms of the loan agreement first to interest then to principal. Once
the recorded principal balance has been reduced to zero, future cash
receipts are applied to interest income to the extent that any
interest has been foregone. Further cash receipts are recorded as
recoveries of any amounts previously charged off.
(f) Loans Receivable Held for Sale
------------------------------
Loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate.
Net unrealized losses are provided for in a valuation allowance by
charges to operations.
(g) Repossessed Assets Acquired in Settlement of Loans
--------------------------------------------------
Repossessed assets represent real estate and other assets acquired
through foreclosure or repossession and are initially recorded at the
lower of cost (principal balance of the former mortgage loan less any
specific valuation allowances) or estimated fair value less costs to
sell. Subsequent improvements are capitalized. Costs of holding
real estate, such as property taxes, insurance, general maintenance
and interest expense, are expensed as a period cost. Fair values are
reviewed regularly and allowances for possible losses are established
when the carrying value of the asset owned exceeds the fair value less
estimated costs to sell. Fair values are generally determined by
reference to an outside appraisal.
(h) Premises and Equipment
----------------------
Premises and equipment are carried at cost, net of accumulated
depreciation. Depreciation of premises and equipment is amortized on
a straight-line method over the estimated useful life of the related
asset. Estimated lives are seven to 40 years for buildings and
improvements and generally three to 10 years for furniture, fixtures
and equipment. Maintenance and repairs are charged to current
expense. The cost of major renewals and improvements are capitalized.
(i) Intangible Assets and Goodwill
------------------------------
Intangible Assets consist of the customer list and employment
contracts resulting from the Company's acquisition of Collier Jennings
Financial Corporation in July 2006. The goodwill also is a result of
the excess of the cost over the fair value of net assets resulting
from the Collier Jennings acquisition.
Intangible assets are amortized over their estimated economic lives
using methods that reflect the pattern in which the economic benefits
are utilized. Goodwill is reviewed for impairment annually or
whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable.
30
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(j) Income Taxes
------------
Deferred tax expense or benefit is recognized for the net change
during the year in the deferred tax liability or asset. That amount
together with income taxes currently payable is the total amount of
income tax expense or benefit for the year. Deferred taxes are
provided for in differences in financial reporting bases for assets
and liabilities compared with their tax bases. Generally, a current
tax liability or asset is established for taxes presently payable or
refundable and a deferred tax liability or asset is established for
future tax items. A valuation allowance, if applicable, is
established for deferred tax assets that may not be realized. Tax bad
debt reserves in excess of the base year amount (established as
taxable years ending March 31, 1988 or later) would create a deferred
tax liability. Deferred income taxes are provided for in differences
between the provision for loan losses for financial statement purposes
and those allowed for income tax purposes.
(k) 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.
(l) Interest Income
---------------
Interest on loans is accrued and credited to income monthly based on
the principal balance outstanding and the contractual rate on the
loan. The Company places loans on non-accrual status when they become
greater than 90 days delinquent or when, in the opinion of management,
full collection of principal or interest is unlikely. The Company
provides an allowance for uncollectible accrued interest on loans that
are contractually 90 days delinquent for all interest accrued prior to
the loan being placed on non-accrual status. The loans are returned
to an accrual status when full collection of principal and interest
appears likely.
(m) Advertising Expense
-------------------
Advertising and public relations costs are generally expensed as
incurred. External costs relating to direct mailing costs are
expensed in the period in which the direct mailings are sent.
Advertising and public relations costs of $379,819, $297,330, and
$172,409 were included in the Company's results of operations for
2008, 2007, and 2006, respectively.
(n) 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 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 as a result of the short-term nature of the instrument:
cash and cash equivalents.
Securities are valued using quoted fair market prices.
Fair value for the Company's off-balance sheet financial instruments
is based on the discounted present value of the estimated future
cash flows.
Fair value for variable rate loans that reprice frequently, loans held
for sale, and loans that mature in less than three months is based on
the carrying value. Fair value for fixed rate mortgage loans,
personal loans, and other loans (primarily commercial) maturing after
three months is based on the discounted present value of the estimated
future cash flows. Discount rates used in these computations
approximate the rates currently offered for similar loans of
comparable terms and credit quality.
31
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
-------------------------------------------
(n) Fair Value of Financial Instruments, Continued
----------------------------------------------
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. Junior
subordinated debentures are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements.
(o) Stock-Based Compensation
------------------------
On April 1, 2006, the Company adopted the fair value recognition
provisions of Financial Accounting Standards Board ("FASB") Statement
on Financial Accounting Standards ("SFAS") No. 123 (R), Shared-Based
Payment ("SFAS 123R"), to account for compensation costs under its
stock option plans. The Company previously utilized the intrinsic
value method under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (as amended) ("APB 25").
Under the intrinsic value method prescribed by APB 25, no compensation
costs were recognized for the Company's stock options because the
option exercise price in its plans equals the market price on the date
of grant. Prior to April 1, 2006, the Company only disclosed the pro
forma effects on net income and earnings per share as if the fair
value recognition provisions of SFAS 123 (R) have been utilized.
In adopting SFAS 123 (R), Company elected to use the modified
prospective method to account for the transition from the intrinsic
value method to the fair value recognition method. Under the modified
prospective method, compensation cost is recognized from the adoption
date forward for all new stock options granted and for any outstanding
unvested awards as if the fair value method had been applied to those
awards as of the date of grant.
On March 30, 2006, the Board of Directors approved accelerating the
vesting of 98,800 unvested stock options. The accelerated vesting was
effective as of March 30, 2006. All of the other terms and conditions
applicable to the outstanding stock options remained unchanged.
The decision to accelerate vesting of these options will avoid
recognition of pre-tax compensation expense by the Company upon the
adoption of SFAS 123(R). In the Company's view, the future
compensation expense could outweigh the incentive and retention value
associated with the stock options. The future compensation expense,
net of income taxes, that was avoided, based upon the effective date
of April 1, 2006, was approximately $275,000. The Company believes
that the acceleration of vesting stock options meets the criteria for
variable accounting under FASB Interpretation No. 44. Based upon past
experience, the Company believes the grantees of these stock options
will remain as directors or employees of the Company.
32
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(p) 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.
For the Year Ended
------------------------------------------------------------
March 31, 2008 March 31, 2007
----------------------------- -----------------------------
Per Share Per Share
Income Shares Amounts Income Shares Amounts
------ ------ --------- ------ ------ ---------
Basic EPS $4,279,599 2,583,568 $ 1.66 $4,126,553 2,594,525 1.59
Dilutive effect
of:
Stock Options - 3,135 (0.01) - 14,027 (0.01)
ESOP - - - - - -
---------- --------- ------ ---------- --------- ------
Diluted EPS $4,279,599 2,586,703 $ 1.65 $4,126,553 2,608,552 $ 1.58
========== ========= ====== ========== ========= ======
For the Year Ended
March 31, 2006
-------------------------------
Per share
Income Shares Amounts
------ ------ ---------
Basic EPS $3,812,851 2,532,999 $ 1.51
Dilutive effect of:
Stock Options - 32,666 (0.02)
ESOP - 10,396 (0.01)
---------- --------- ------
Diluted EPS $3,812,851 2,576,061 $ 1.48
========== ========= ======
(q) Use of Estimates
----------------
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the dates of the financial
statements and the reported amounts of income and expenses during the
reporting periods. Actual results could differ from those estimates.
(r) Recently Issued Accounting Standards
------------------------------------
The following is a summary of recent authoritative pronouncements that
could affect accounting, reporting, and disclosure of financial
information by the Company:
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements.
This standard eliminates inconsistencies found in various prior
pronouncements but does not require any new fair value measurements.
SFAS 157 is effective for the Company on April 1, 2008 and will not
impact the Company's accounting measurements but it is expected to
result in additional disclosures.
33
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(r) Recently Issued Accounting Standards
------------------------------------
In December 2007, the FASB issued SFAS No. 141(R), "Business
Combinations," ("SFAS 141(R)") which replaces SFAS 141. SFAS 141(R)
establishes principles and requirements for how an acquirer in a
business combination recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed,
and any controlling interest; recognizes and measures goodwill
acquired in the business combination or a gain from a bargain
purchase; and determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial
effects of the business combination. FAS 141(R) is effective for
acquisitions by the Company taking place on or after January 1, 2009.
Early adoption is prohibited. Accordingly, the Company is required to
record and disclose business combinations following existing
accounting guidance until April 1, 2009. The Company will assess the
impact of SFAS 141(R) if and when a future acquisition occurs.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interests in Consolidated Financial Statements an amendment of ARB
No. 51" ("SFAS 160"). SFAS 160 establishes new accounting and
reporting standards for the noncontrolling interest in a subsidiary
and for the deconsolidation of a subsidiary. Before this statement,
limited guidance existed for reporting noncontrolling interests
(minority interest). As a result, diversity in practice exists. In
some cases minority interest is reported as a liability and in others
it is reported in the mezzanine section between liabilities and
equity. Specifically, SFAS 160 requires the recognition of a
noncontrolling interest (minority interest) as equity in the
consolidated financials statements and separate from the parent's
equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of
the income statement. SFAS 160 clarifies that changes in a parent's
ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its
controlling financial interest. In addition, this statement requires
that a parent recognize gain or loss in net income when a subsidiary
is deconsolidated. Such gain or loss will be measured using the fair
value of the noncontrolling equity investment on the deconsolidation
date. SFAS 160 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling
interests. SFAS 160 is effective for the Company on April 1, 2009.
Earlier adoption is prohibited. The Company is currently evaluating
the impact, if any, the adoption of SFAS 160 will have on its
consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities" ("SFAS 161"). SFAS 161
requires enhanced disclosures about an entity's derivative and hedging
activities and thereby improving the transparency of financial
reporting. It is intended to enhance the current disclosure framework
in SFAS 133 by requiring that objectives for using derivative
instruments be disclosed in terms of underlying risk and accounting
designation. This disclosure better conveys the purpose of derivative
use in terms of the risks that the entity is intending to manage. SFAS
161 is effective for the Company on April 1, 2009. This pronouncement
does not impact accounting measurements but will result in additional
disclosures if the Company is involved in material derivative and
hedging activities at that time.
In February 2008, the FASB issued FASB Staff Position ("FSP") No.
140-3, "Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions" ("FSP 140-3"). This FSP provides guidance on
accounting for a transfer of a financial asset and the transferor's
repurchase financing of the asset. This FSP presumes that an initial
transfer of a financial asset and a repurchase financing are
considered part of the same arrangement (linked transaction) under
SFAS No. 140. However, if certain criteria are met, the initial
transfer and repurchase financing are not evaluated as a linked
transaction and are evaluated separately under Statement 140. FSP
140-3 will be effective for financial statements issued for fiscal
years beginning after November 15, 2008, and interim periods within
those fiscal years and earlier application is not permitted.
Accordingly, this FSP is effective for the Company on April 1, 2009.
The Company is currently evaluating the impact, if any, the adoption
of FSP 140-3 will have on its financial position, results of
operations and cash flows.
In April 2008, the FASB issued FSP No. 142-3, "Determination of the
Useful Life of Intangible Assets" ("FSP 142-3"). This FSP amends the
factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, "Goodwill and Other Intangible
Assets".
34
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Significant Accounting Policies, Continued
------------------------------------------
(r) Recently Issued Accounting Standards, Continued
-----------------------------------------------
The intent of this FSP is to improve the consistency between the
useful life of a recognized intangible asset under SFAS No. 142 and
the period of expected cash flows used to measure the fair value of
the asset under SFAS No. 141(R), "Business Combinations," and other
U.S. generally accepted accounting principles. This FSP is effective
for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years and
early adoption is prohibited. Accordingly, this FSP is effective for
the Company on April 1, 2009. The Company does not believe the
adoption of FSP 142-3 will have a material impact on its financial
position, results of operations or cash flows.
Other accounting standards that have been issued or proposed by the
FASB or other standards-setting bodies that do not require adoption
until a future date are not expected to have a material impact on the
consolidated financial statements upon adoption.
(s) 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' judgments based
on information available to them at the time of their examination.
(t) Reclassifications
-----------------
Certain amounts in prior years' consolidated financial statements have
been reclassified to conform to current year classifications.
(2) Acquisition
-----------
On June 30, 2006, the Company completed the acquisition of the insurance and
premium finance businesses of Collier-Jennings Financial Corporation and it
subsidiaries Collier-Jennings, Inc., The Auto Insurance Store, Inc., and
Collier-Jennings Premium Pay Plans, Inc (the "Collier-Jennings Companies").
The purpose of the acquisition was to expand the Company's insurance services
and increase non-interest income. The shareholder of the Collier-Jennings
Companies received $180,000 in cash and 54,512 shares of the Company's common
stock valued at $26 per share for an approximate purchase price of $1,597,312.
The Company will release the shares to the former shareholder of the
Collier-Jennings Companies over a three-year period. The stock is mandatorily
redeemable by the shareholder of Collier-Jennings Companies at his option in
cumulative increments of 20% per year for a five-year period at the greater of
$26 per share or one and one-half times the book value of the Company's stock.
At March 31, 2008, the shareholder had not elected to redeem any of the
shares.
35
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(2) Acquisition, Continued
----------------------
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at June 30, 2006, the date of acquisition,
including subsequent adjustments to the allocation of the purchase price.
Cash And Cash Equivalents $ 43,192
Accounts Receivable 784,247
Premises And Equipment 41,696
Other Assets 56,289
Intangible Assets 600,000
Goodwill 1,197,954
----------
Total Assets Acquired 2,723,378
----------
Notes Payable 386,185
Other Liabilities 739,881
----------
Total Liabilities Assumed 1,126,066
----------
Net Assets Acquired $1,597,312
==========
(3) Investment and Mortgage-Backed Securities, Available for Sale
-------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities available for sale are as
follows:
March 31, 2008
-----------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair value
-------------- ---------- ---------- ------------
FHLB Securities $ 31,891,456 $ 625,583 $ - $32,517,039
Federal Farm Credit
Securities 14,849,646 323,594 - 15,173,240
FNMA Bonds 2,997,470 7,840 - 3,005,310
Mortgage-Backed
Securities 190,454,173 3,023,143 104,283 193,373,033
Equity Securities 102,938 - 13,688 89,250
------------ ---------- -------- ------------
$240,295,683 $3,980,160 $117,971 $244,157,872
============ ========== ======== ============
March 31, 2007
-----------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair value
-------------- ---------- ---------- ------------
FHLB Securities $ 38,487,381 $ 17,627 $ 131,886 $ 38,373,122
Federal Farm Credit
Securities 9,217,205 8,580 11,504 9,214,281
FNMA Bonds 2,942,530 - 12,141 2,930,389
FHLMC Bonds 64,071 - 94 63,977
Mortgage-Backed
Securities 136,156,742 276,292 1,352,007 135,081,027
Equity Securities 102,938 562 - 103,500
------------ -------- ---------- ------------
$186,970,867 $303,061 $1,507,632 $185,766,296
============ ======== ========== ============
36
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) Investment and Mortgage-Backed Securities, Available for Sale, Continued
------------------------------------------------------------------------
FHLB securities, Federal Farm Credit securities, FNMA bonds, FHLMC bonds, and
FNMA and FHLMC mortgage-backed securities are issued by government-sponsored
enterprises ("GSE's"). GSE's are not backed by the full faith and credit of
the United States government. Included in the tables above and below in
mortgage-backed securities are GNMA mortgage-backed securities, which are
backed by the full faith and credit of the United States government. At March
31, 2008, the Bank held an amortized cost and fair value of $72.8 million and
$74.2 million respectively in GNMA mortgage-backed securities included in
mortgage-backed securities listed above.
The amortized cost and fair value of investment and mortgage-backed securities
available for sale at March 31, 2008 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 One Year $ 1,000,000 $ 1,002,810
One - Five Years 10,327,525 10,489,287
Five - Ten Years 21,810,096 22,299,902
After Ten Years 16,703,889 16,992,840
Mortgage-Backed Securities 190,454,173 193,373,033
------------ ------------
$240,295,683 $244,157,872
============ ============
At March 31, 2008 and 2007, the amortized cost and fair value of investment
and mortgage-backed securities available for sale pledged as collateral for
certain deposit accounts, FHLB advances and other borrowings were $137.7
million and $140.1 million and $80.5 million and $79.5 million, respectively.
The Bank received approximately $8.2 million and $3.8 million, respectively in
proceeds from sales of available for sale securities during the years ended
March 31, 2008 and 2006 and recognized approximately $269,000 in gross gains
and $1,000 in gross losses for the year ended March 31, 2008 and $42,000 in
gross gains and $3,500 in gross losses for the year ended March 31, 2006.
There were no sales of available for sale securities in the year ended March
31, 2007.
The following table shows gross unrealized losses and fair value, aggregated
by investment category, and length of time that individual available for sale
securities have been in a continuous unrealized loss position, at March 31,
2008.
Less than 12 Months 12 Months or More Total
-------------------- ---------------------- ----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------- ---------- ------- ---------- ------- -----------
Mortgage-Backed
Securities $22,564,320 $82,522 $3,144,500 $21,761 $25,708,820 $104,283
Securities classified as available-for-sale are recorded at fair market value.
Approximately 20.9% of the unrealized losses, or four individual securities,
consisted of securities in a continuous loss position for 12 months or more.
The Company has the ability and intent to hold these securities until such
time as the value recovers or the securities mature. The Company believes,
based on industry analyst reports and credit ratings, that the deterioration
in value is attributable to changes in market interest rates and is not in the
credit quality of the issuer and therefore, these losses are not considered
other-than-temporary.
37
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(4) Investment and Mortgage-Backed Securities, Held to Maturity
-----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities held to maturity are as
follows:
March 31, 2008
---------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
-------------- ---------- ---------- -----------
FHLB Securities $17,999,618 $320,072 $ - $18,319,690
Federal Farm Credit
Securities 2,000,000 31,560 - 2,031,560
Equity Securities 155,000 - - 155,000
----------- -------- -------- -----------
$20,154,618 $351,632 $ - $20,506,250
=========== ======== ======== ===========
March 31, 2007
---------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
-------------- ---------- ---------- -----------
FHLB Securities $55,994,852 $21,560 $573,841 $55,442,571
Federal Farm Credit
Securities 7,988,737 - 144,667 7,844,070
Equity Securities 155,000 - - 155,000
----------- ------- -------- -----------
$64,138,589 $21,560 $718,508 $63,441,641
=========== ======= ======== ===========
FHLB securities and Federal Farm Credit securities are issued by GSE's. GSE's
are not backed by the full faith and credit of the United States government.
The amortized cost and fair value of investment and mortgage-backed securities
held to maturity at March 31, 2008, 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 One Year $ 5,000,000 $ 5,037,510
One - Five Years 4,000,000 4,116,240
Over Five - Ten Years 8,000,000 8,191,250
More Than Ten Years 3,154,618 3,161,250
----------- -----------
$20,154,618 $20,506,250
=========== ===========
At March 31, 2008 and 2007, the amortized cost and fair value of investment
and mortgage-backed securities held to maturity pledged as collateral for
certain deposit accounts, FHLB advances and other borrowings were $20.2
million and $20.5 million and $51.0 million and $50.4 million, respectively.
The Bank received approximately $250,000 in proceeds from the sale of three
held to maturity securities with approximately $10,324 recorded in gross gains
and no gross losses during the year ended March 31, 2006. All three
securities had paid down at least ninety percent therefore meeting the intent
of SFAS No. 115, "Accounting for Certain Investment in Debt and Equity
Securities". There were no sales of held to maturity securities during the
years ended March 31, 2007 and 2008.
The Company did not have any held to maturity securities in a loss position at
March 31, 2008. The Company's held-to-maturity portfolio is recorded at
amortized cost. The Company has the ability and intends to hold these
securities to maturity.
38
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(5) Loans Receivable, Net
---------------------
Loans receivable, net, at March 31 consisted of the following:
2008 2007
------------ ------------
Residential Real Estate Loans $131,863,466 $125,512,411
Consumer Loans 66,832,377 63,809,478
Commercial Business And Real Estate Loans 333,386,661 259,207,877
Loans Held For Sale 2,295,721 1,529,748
------------ ------------
534,378,225 450,059,514
------------ ------------
Less:
Allowance For Loan Losses 8,066,762 7,296,791
Loans In Process 8,064,728 6,443,372
Deferred Loan Fees 315,030 280,991
------------ ------------
16,446,520 14,021,154
------------ ------------
Total Loans Receivable, Net $517,931,705 $436,038,360
============ ============
Changes in the allowance for loan losses for the years ended March 31 are
summarized as follows:
2008 2007 2006
---------- ---------- ----------
Balance At Beginning Of Year $7,296,791 $6,704,734 $6,284,055
Allowance Acquired in Acquisition - 21,697 -
Provision For Loan Losses 895,000 600,000 660,000
Charge Offs (249,673) (132,712) (301,650)
Recoveries 124,644 103,072 62,329
---------- ---------- ----------
Total Allowance For Loan Losses $8,066,762 $7,296,791 $6,704,734
========== ========== ==========
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.
2008 2007
------------ ------------
Non-Accrual Loans $6,019,000 $1,055,000
========== ==========
Interest Income That Would Have Been
Recognized Under Original Terms $ 238,000 $ 107,000
========== ==========
At March 31, 2008 and 2007, impaired loans amounted to $4.5 million and $1.5
million, respectively. Losses on impaired loans are accounted for in the
allowance for loan loss. Valuation allowances for impaired loans totaled
$588,000 and $320,000 for March 31, 2008 and 2007, respectively. The average
recorded investment in impaired loans was $1.9 million and $1.6 million for
the years ended March 31, 2008 and 2007, respectively.
The Bank blanket pledges its portfolio of single-family mortgage loans to
secure FHLB advances.
39
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(6) Premises and Equipment, Net
---------------------------
Premises and equipment, net, at March 31 are summarized as follows:
2008 2007
------------ ------------
Land $ 5,471,503 $ 5,141,399
Buildings And Improvements 16,597,627 10,790,875
Furniture And Equipment 8,924,922 7,337,134
Construction In Progress 153,505 1,816,230
----------- -----------
31,147,557 25,085,638
Less Accumulated Depreciation (9,603,177) (9,190,446)
----------- -----------
Total Premises And Equipment, Net $21,544,380 $15,895,192
=========== ===========
Depreciation expense for the years ended March 31, 2008, 2007, and 2006 was
approximately $1,099,000, $1,012,000, and $965,000, respectively.
The Bank has entered into non-cancelable operating leases related to buildings
and land. At March 31, 2008, future minimum payments under non-cancelable
operating leases with initial or remaining terms of one year or more are as
follows (by fiscal year):
2009 $ 438,714
2010 430,750
2011 430,099
2012 400,699
2013 400,937
Thereafter 2,699,862
----------
$4,801,061
==========
Total rental expense amounted to $435,000, $343,000, and $295,000 for the
years ended March 31, 2008, 2007 and 2006, respectively. Four lease
agreements with monthly expenses of $8,250, $7,792, $5,886, and $800 have
multiple renewal options totaling 20, 45, 30, and 10 years, respectively.
(7) Intangible Assets and Goodwill
------------------------------
Intangible assets and goodwill are the result of the Collier Jennings
acquisition in July 2006. Changes in intangible assets and goodwill for the
years ended March 31 consisted of the following:
2008 2007
------------ ------------
Customer List
Balance At Beginning Of Year $ 341,250 $ -
Acquired - 375,000
Amortization (50,004) (33,750)
---------- ----------
Balance At End Of Year 291,246 341,250
---------- ----------
Employment Contracts
Balance At Beginning Of Year 191,250 -
Acquired - 225,000
Amortization 39,996 33,750
---------- ----------
Balance At End Of Year 151,254 191,250
---------- ----------
Total Intangibles 442,500 532,500
Goodwill 1,197,954 1,197,954
---------- ----------
Total $1,640,454 $1,730,454
========== ==========
40
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(8) FHLB Stock
----------
Every federally insured savings institution is required to invest in FHLB
stock. No ready market exists for this stock and it has no quoted fair value.
However, because redemption of this stock has historically been at par, it is
carried at cost.
The Bank, as a member of the FHLB of Atlanta, is required to acquire and hold
shares of capital stock in the FHLB of Atlanta in an amount equal to a
membership component, which is 0.20% of total assets at December 31, 2007 and
2006 plus a transaction component which equals 4.5% of outstanding advances
(borrowings) from the FHLB of Atlanta. The Bank is in compliance with this
requirement with an investment in FHLB of Atlanta stock of $9.5 million and
$8.2 million as of March 31, 2008 and 2007, respectively.
(9) Deposits
--------
Deposits outstanding by type of account are summarized as follows:
At March 31, 2008 At March 31, 2007
----------------------------- -----------------------------
Interest Interest
Weighted Rate Weighted Rate
Rate Range Amount Rate Range
--------- -------- -------- -------- ------- --------
Checking
Accounts $100,585,610 0.47% 0.00-1.98% $105,515,095 0.63% 0.00-2.96%
Money Market
Accts. 143,225,218 2.84% 1.09-3.01% 145,491,774 4.14% 1.09-4.41%
Passbook
Accounts 15,966,557 0.97% 0.00-1.00% 17,458,680 0.98% 0.00-1.51%
------------ ---- --------- ------------ ---- ---------
Total 259,777,385 1.87% 0.00-3.01% 268,465,549 2.55% 0.00-4.41%
------------ ---- --------- ------------ ---- ---------
Certificate
Accounts:
0.00-1.99% - -
2.00-2.99% 14,047,109 2,971,616
3.00-3.99% 59,526,823 36,044,826
4.00-4.99% 68,149,323 35,617,605
5.00-5.99% 189,349,568 180,637,996
------------ ------------
Total 331,072,823 4.75% 2.03-5.84% 255,272,043 4.99% 2.83-5.85%
------------ ---- --------- ------------ ---- ---------
Total
Deposits $590,850,208 3.46% 0.00-5.84% $523,737,592 3.74% 0.00-5.85%
============ ==== ========= ============ ==== =========
The aggregate amount of short-term certificates of deposit with a minimum
denomination of $100,000 was $149.5 million and $110.6 million at March 31,
2008 and 2007, respectively. The amounts and scheduled maturities of all
certificates of deposit at March 31 are as follows:
March 31,
---------------------------
2008 2007
------------ ------------
Within 1 Year $313,602,472 $235,951,662
After 1 Year, Within 2 8,065,206 10,891,655
After 2 Years, Within 3 3,056,613 2,498,279
After 3 Years, Within 4 2,973,423 2,781,426
After 4 Years, Within 5 3,375,109 3,149,021
Thereafter - -
------------ ------------
$331,072,823 $255,272,043
============ ============
41
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(10) Advances From Federal Home Loan Bank (FHLB) And Other Borrowings
----------------------------------------------------------------
Advances from the FHLB at March 31 are summarized by year of maturity and
weighted average interest rate below:
2008 2007
--------------------------- ---------------------------
Year Ending March 31 Amount Weighted Rate Amount Weighted Rate
------------ ------------- ------------ -------------
2008 $ - - $ 10,000,000 4.25%
2009 42,300,000 3.28% 25,000,000 4.75%
2010 10,000,000 4.88% 5,000,000 3.09%
2011 15,000,000 4.87% 10,000,000 4.76%
2012 24,700,000 4.56% 19,700,000 4.77%
2013 10,000,000 4.76% 10,000,000 3.97%
Thereafter 76,234,007 4.25% 73,349,272 4.23%
------------ ---- ------------ ----
$178,234,007 4.18% $153,049,272 4.36%
============ ==== ============ ====
These advances are secured by a blanket collateral agreement with the FHLB by
pledging the Bank's portfolio of residential first mortgage loans and
investment securities with an amortized cost and fair value of $97.1 million
and $98.9 million at March 31, 2008 and $85.3 million and $84.8 million at
March 31, 2007, respectively. Advances are subject to prepayment penalties.
The following tables show callable FHLB advances as of the dates indicated.
These advances are also included in the above table. All callable advances
are callable at the option of the FHLB. If an advance is called, the Bank has
the option to payoff the advance without penalty, re-borrow funds on different
terms, or convert the advance to a three-month floating rate advance tied to
LIBOR.
As of March 31, 2008
------------------------------------------------------------------------------
Borrow Date Maturity Date Amount Int. Rate Type Call Dates
----------- ------------- -------- --------- -------- ---------------
02/20/04 02/20/14 $5,000,000 3.225% 1 Time Call 02/20/09
04/16/04 04/16/14 3,000,000 3.330% 1 Time Call 04/16/08
06/24/05 06/24/15 5,000,000 3.710% 1 Time Call 06/24/10
07/22/05 07/22/15 5,000,000 3.790% 1 Time Call 07/22/08
11/10/05 11/10/15 5,000,000 4.400% 1 Time Call 11/10/09
11/23/05 11/23/15 5,000,000 3.933% Multi-Call 05/25/08 and
quarterly
thereafter
11/29/05 11/29/13 5,000,000 4.320% 1 Time Call 05/29/09
12/14/05 12/14/11 5,000,000 4.640% 1 Time Call 09/14/09
01/12/06 01/12/16 5,000,000 4.450% 1 Time Call 01/12/11
03/01/06 03/03/14 5,000,000 4.720% 1 Time Call 03/03/10
06/02/06 06/02/16 5,000,000 5.160% 1 Time Call 06/02/11
07/11/06 07/11/16 5,000,000 4.800% Multi-Call 07/11/08 and
quarterly
thereafter
10/25/06 10/25/11 5,000,000 4.830% 1 Time Call 10/27/08
11/29/06 11/29/16 5,000,000 4.025% Multi-Call 05/29/08 and
quarterly
thereafter
01/19/07 07/21/14 5,000,000 4.885% 1 Time Call 07/21/11
03/09/07 03/09/12 4,700,000 4.286% Multi-Call 06/09/08 and
quarterly
thereafter
05/24/07 05/24/17 7,900,000 4.375% Multi-Call 05/27/08 and
quarterly
thereafter
06/29/07 06/29/12 5,000,000 4.945% 1 Time Call 06/29/09
07/25/07 07/25/17 5,000,000 4.396% Multi-Call 07/25/08 and
quarterly
thereafter
11/16/07 11/16/11 5,000,000 3.745% Multi-Call 11/17/08 and
quarterly
thereafter
42
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(10) Advances From Federal Home Loan Bank (FHLB) And Other Borrowings,
-----------------------------------------------------------------
Continued
---------
As of March 31, 2007
------------------------------------------------------------------------------
Borrow Date Maturity Date Amount Int. Rate Type Call Dates
----------- ------------- -------- --------- -------- ---------------
11/07/02 11/07/12 $5,000,000 3.354% 1 Time Call 11/07/07
02/20/04 02/20/14 5,000,000 3.225% 1 Time Call 02/20/09
04/16/04 04/16/14 3,000,000 3.330% 1 Time Call 04/16/08
09/16/04 09/16/09 5,000,000 3.090% 1 Time Call 09/17/07
06/24/05 06/24/15 5,000,000 3.710% 1 Time Call 06/24/10
07/22/05 07/22/15 5,000,000 3.790% 1 Time Call 07/22/08
11/10/05 11/10/15 5,000,000 4.400% 1 Time Call 11/10/09
11/23/05 11/23/15 5,000,000 3.933% Multi-Call 11/23/07 and
quarterly
thereafter
11/29/05 11/29/13 5,000,000 4.320% 1 Time Call 05/29/09
12/14/05 12/14/11 5,000,000 4.640% 1 Time Call 09/14/09
01/12/06 01/12/16 5,000,000 4.450% 1 Time Call 01/12/11
03/01/06 03/03/14 5,000,000 4.720% 1 Time Call 03/03/10
03/24/06 03/24/16 5,000,000 4.120% Multi-Call 06/26/07 and
quarterly
thereafter
03/24/06 03/25/13 5,000,000 4.580% 1 Time Call 03/25/08
04/21/06 04/22/13 5,000,000 4.53% Multi-Call 06/26/07 and
quarterly
thereafter
06/02/06 06/02/16 5,000,000 5.16% 1 Time Call 06/02/11
07/11/06 07/11/16 5,000,000 4.80% Multi-Call 07/11/08 and
quarterly
thereafter
10/25/06 10/25/11 5,000,000 4.83% 1 Time Call 10/27/08
11/29/06 11/29/16 5,000,000 4.025% Multi-Call 11/29/07 and
quarterly
thereafter
01/19/07 07/21/14 5,000,000 4.885% 1 Time Call 07/21/11
03/09/07 03/09/12 4,700,000 4.286% Multi-Call 06/11/07 and
quarterly
thereafter
At March 31, 2008 and 2007, the Bank had $60.4 million and $68.2 million in
additional borrowing capacity, respectively at the FHLB.
The Bank had $12.8 million and $8.1 million in other borrowings (non-FHLB
advances) at March 31, 2008 and 2007, respectively. These borrowings consist
of short-term repurchase agreements with certain commercial demand deposit
customers for sweep accounts and the current balance on a revolving line of
credit with another financial institution. At March 31, 2008 and 2007,
short-term repurchase agreements were $9.8 million and $8.1 million,
respectively. The repurchase agreements typically mature within one to three
days and the interest rate paid on these borrowings floats monthly with money
market type rates. At March 31, 2008 and 2007 the interest rate paid on the
repurchase agreements was 3.01% and 4.41%, respectively. The Bank had pledged
as collateral for these repurchase agreements investment securities with
amortized costs and fair values of $27.8 million and $28.2 million at March
31, 2008 and $23.4 million and $23.4 million at March 31, 2007, respectively.
In December 2007, the Company entered into a line of credit in the amount of
$10 million with another financial institution. At March 31, 2008, the balance
on the line of credit was $3.0 million. The unsecured line of credit has an
interest rate equal to one month LIBOR plus 2.5% and matures on December 1,
2008.
(11) Junior Subordinated Debentures
------------------------------
On September 21, 2006, Security Federal Statutory Trust (the "Trust"), a
wholly-owned subsidiary of the Company, issued and sold fixed and floating
rate capital securities of the Trust (the "Capital Securities"), which are
reported on the consolidated balance sheet as junior subordinated debentures,
generating proceeds of $5.0 million. The Trust loaned these proceeds to the
Company to use for general corporate purposes, primarily to provide capital to
the Bank.
The Capital Securities accrue and pay distributions annually at a rate per
annum equal to a blended rate of 5.69% at March 31, 2008. One-half of the
Capital Securities issued in the transaction has a fixed rate of 6.88% and the
remaining half has a floating rate of three-month LIBOR plus 170 basis points,
which was 4.50% at March 31, 2008. The distribution rate payable on the
Capital Securities is cumulative and payable quarterly in arrears. The Company
has the right, subject to events of default, to defer payments of interest on
the Capital Securities for a period not to exceed 20 consecutive quarterly
periods, provided that no extension period may extend beyond the maturity date
of December 15, 2036. The Company has no current intention to exercise its
right to defer payments of interest on the Capital Securities.
43
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(11) Junior Subordinated Debentures, Continued
-----------------------------------------
The Capital Securities mature or are mandatorily redeemable upon maturity on
December 15, 2036, and or upon earlier optional redemption as provided in the
indenture. The Company has the right to redeem the Capital Securities in whole
or in part, on or after September 15, 2011. The Company may also redeem the
capital securities prior to such dates upon occurrence of specified conditions
and the payment of a redemption premium.
(12) Income Taxes
------------
Income tax expense is comprised of the following:
For the Years Ended March 31,
-------------------------------------
2008 2007 2006
---------- ---------- ----------
Current:
Federal $2,293,975 $1,995,334 $1,534,117
State 143,413 136,437 155,772
---------- ---------- ----------
Total Current Tax Expense 2,437,388 2,131,771 1,689,889
---------- ---------- ----------
Deferred:
Federal (320,901) 7,241 77,600
State (36,742) 2,471 10,127
---------- ---------- ----------
Total Deferred Tax Expense (357,643) 9,712 87,727
---------- ---------- ----------
Total Income Tax Expense $2,079,745 $2,141,483 $1,777,616
========== ========== ==========
The Company's income taxes differ from those computed at the statutory federal
income tax rate, as follows:
For the Years Ended March 31,
-------------------------------------
2008 2007 2006
---------- ---------- ----------
Tax At Statutory Income Tax Rate $2,162,177 $2,131,132 $1,900,759
State Tax And Other (82,432) 10,351 (123,143)
---------- ---------- ----------
Total Income Tax Expense $2,079,745 $2,141,483 $1,777,616
========== ========== ==========
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,
2008 2007
---------- ----------
Deferred Tax Assets:
Provision For Loan Losses $3,053,907 $2,769,862
Goodwill Tax Basis Over Financial Statement Basis 56,339 152,917
Net Fees Deferred For Financial Reporting 165,544 164,914
Unrealized Loss on Securities Available for Sale - 457,470
Other 389,225 177,591
---------- ----------
Total Gross Deferred Tax Assets 3,665,015 3,722,754
---------- ----------
Deferred Tax Liabilities:
FHLB Stock Basis Over Tax Basis 126,565 126,565
Depreciation 234,990 182,310
Other 78,378 55,400
Intangibles 165,052 198,622
Unrealized Gain on Securities Available for Sale 1,471,283 -
---------- ----------
Total Gross Deferred Tax Liability 2,076,268 562,897
---------- ----------
Net Deferred Tax Asset $1,588,747 $3,159,857
========== ==========
No valuation allowance for deferred tax assets was required at March 31, 2008
and 2007. 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.
44
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(13) 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
judgments by regulators with regard to components, risk weightings, and other
factors.
As of March 31, 2008 and 2007, 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
Actual For Capital Adequacy Action Provisions
--------------- -------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------- ------- ------ -----
(Dollars in Thousands)
March 31, 2008
Tier 1 Risk-Based
Core Capital (To
Risk Weighted
Assets) $52,232 9.4% $22,250 4.0% $33,375 6.0%
Total Risk-Based
Capital (To Risk
Weighted Assets) 59,183 10.6% 44,485 8.0% 55,065 10.0%
Tier 1 Leverage
(Core) Capital
(To Adjusted
Tangible Assets) 52,232 6.3% 33,377 4.0% 41,722 5.0%
Tangible Capital
(To Tangible
Assets) 52,232 6.3% 16,688 2.0% 41,719 5.0%
March 31, 2007
Tier 1 Risk-Based
Core Capital (To
Risk Weighted
Assets) $45,588 9.5% $19,251 4.0% $28,877 6.0%
Total Risk-Based
Capital (To Risk
Weighted Assets) 51,582 10.7% 38,503 8.0% 48,128 10.0%
Tier 1 Leverage
(Core) Capital
(To Adjusted
Tangible Assets) 45,588 6.2% 29,474 4.0% 36,843 5.0%
Tangible Capital
(To Tangible
Assets) 45,588 6.2% 14,737 2.0% 36,843 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").
(14) Employee Benefit Plans
----------------------
The Company is participating in a multiple employer defined contribution
employee benefit plan covering substantially all employees with six months or
more of service. The Company matches a portion of the employees'
contributions and the plan has a discretionary profit sharing provision. The
total employer contributions were $191,000, $349,000, and $113,000 for the
years ended March 31, 2008, 2007, and 2006, respectively.
45
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(14) Employee Benefit Plans, Continued
---------------------------------
The Company had an Employee Stock Ownership Plan ("ESOP") for the exclusive
benefit of employee participants. The discretionary contributions for the
year ended March 31, 2006 was $231,000. There were no contributions for the
years ended March 31, 2008 and 2007. The ESOP from time to time borrowed funds
from financial institutions to purchase the Company's stock. The entire
balance of the loan was paid off in June 2006. The Company carried the debt
as a liability and a reduction in equity, although the Company neither
endorsed nor guaranteed the loan. The loan was repaid by Company
contributions to the trustee, who in turn made the loan payments to the
financial institution. Because of the high cost of maintaining the ESOP,
including legal, accounting, and audit fees, and the fact the ESOP had no more
stock to allocate, the Company terminated the plan effective December 31,
2007.
The Company has an Employee Stock Purchase Plan ("ESPP"). The ESPP allows
employees of the Company to purchase stock quarterly at a 15% discount through
payroll deduction. The ESPP, which was approved by stockholders in July
2005, became effective in January 2007. Participation is voluntary.
Employees are limited to investing $25,000 or 5% of their annual salary,
whichever is lower, during the year. At March 31, 2008, there were 30
employees participating.
Certain officers of the Company participate in a supplemental retirement plan.
These benefits are not qualified under the Internal Revenue Code and they are
not funded. During the years ended March 31, 2008 and 2007, the Company
incurred expenses of $224,000 and $167,000, respectively, for this plan.
Certain officers and directors of the Company participate in an incentive and
non-qualified 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 and non-qualified stock option plan for the years ended March 31,
2008, 2007, and 2006.
2008 2007 2006
---------------- ----------------- -----------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Balance, Beginning of
Year 99,600 $20.55 118,046 $19.50 135,292 $19.09
Options granted 23,000 23.68 14,000 23.03 6,500 23.91
Options exercised 6,300 16.67 25,196 17.40 14,396 15.45
Options forfeited 5,200 17.40 7,250 19.27 9,350 19.52
------- ------- -------
Balance, March 31 111,100 $21.55 99,600 $20.55 118,046 $19.50
======= ======= =======
Options Exercisable 74,100 $20.60 85,600 $20.14 118,046 $19.50
======= ======= =======
Options Available
For Grant 127,267 59,000 13,750
======= ======= =======
Stock options outstanding as of March 31, 2008 are as follows:
Weighted Average
Number of Remaining
Range of Exercise Prices Option Shares Contractual Weighted Average
Low/High Outstanding Life (Years) Exercise Price
------------- ------------ ----------------
$16.67 / $21.00 40,600 4.18 $18.63
$21.01 / $24.61 70,500 7.76 23.23
------- ---- ------
111,100 6.45 $20.60
======= ==== ======
The aggregate intrinsic value of the stock options outstanding and exercisable
at March 31, 2008 and 2007 amounted to $198,000 and $485,000, respectively.
Total compensation expense related to stock options was $20,500 and $7,700 for
the period ended March 31, 2008 and 2007, respectively. As of March 31, 2008,
there was $258,000 of total unrecognized compensation cost related to
non-vested stock options. The cost is expected to be recognized over a
weighted average period of seven years.
46
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(14) Employee Benefit Plans, Continued
---------------------------------
At March 31, 2008, the Company had the following options outstanding:
Outstanding
Grant Date Options Option Price Expiration Date
---------- ----------- ------------ ---------------
10/19/99 20,100 $16.67 9/30/05 to 9/30/09
9/1/03 3,000 $24.00 8/31/13
12/1/03 3,000 $23.65 11/30/13
1/01/04 6,500 $24.22 12/31/13
3/8/04 13,000 $21.43 3/8/14
6/7/04 2,000 $24.00 6/7/14
1/1/05 20,500 $20.55 12/31/14
1/1/06 6,000 $23.91 1/1/16
8/24/06 14,000 $23.03 08/24/16
5/24/07 2,000 $24.34 5/24/17
7/9/07 1,000 $24.61 7/9/17
10/1/07 2,000 $24.28 10/1/17
1/1/08 18,000 $23.49 1/1/18
All options issued prior to January 16, 2003 must be exercised within one year
of the original vesting schedule, except those granted during the year ended
March 31, 2004 through March 31, 2006, which may be exercised anytime before
the end of the tenth year after the grant date. All options granted prior to
March 31, 2006 are 100% vested. Options granted after March 31, 2006 vest 20%
per year every year after the end of five years after the date of the grant.
Those options granted after March 31, 2006 may be exercised as they vest in
years six through ten, or until the end of year ten after the grant date.
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 $0.28, $0.24, and $0.16 per share
for options granted during the years ended March 31, 2008, 2007, and 2006,
respectively; expected weighted average volatility of 20.4% for options
granted in 2008, 30.2% for options granted in 2007, and 39.8% for options
granted in 2006; risk-free interest rate of 3.95% for options granted in 2008,
4.36% for options granted in 2007, and 4.42% for options granted in 2006, and
expected lives of 8.5 to 9.0 years.
(15) Bank Owned Life Insurance
-------------------------
On May 31, 2007, March 31, 2006 and July 1, 2006, the Company purchased bank
owned life insurance. The cash value of the life insurance policies are
recorded as a separate line item in the accompanying balance sheets at $8.3
million, $5.8 million and $5.0 million at March 31, 2008, 2007 and 2006,
respectively. The insurance provides key person life insurance on certain
officers of the Company. The earnings-portion of the insurance policies grows
tax deferred and helps offset the cost of the Company's benefits programs.
The Company recorded earnings of $327,000 and $243,000 for the growth in the
cash value of life insurance during the years ended March 31, 2008 and 2007,
respectively.
47
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(16) Commitments and Contingencies
-----------------------------
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company is a
defendant in certain claims and legal actions arising in the ordinary course
of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a
material adverse effect on the consolidated financial condition of the
Company.
In conjunction with its lending activities, the Bank enters into various
commitments to extend credit and issue letters of credit. Loan commitments
(unfunded loans and unused lines of credit) and letters of credit are issued
to accommodate the financing needs of the Bank's customers. Loan commitments
are agreements by the Bank to lend at a future date, so long as there are no
violations of any conditions established in the agreement. Letters of credit
commit the Bank to make payments on behalf of customers when certain specified
events occur.
Financial instruments where the contract amount represents the Bank's credit
risk include commitments under pre-approved but unused lines of credit of
$66.9 million and $83.5 million, undisbursed loans in process totaled $8.1
million and $6.4 million, and letters of credit of $617,000 and $1.0 million
at March 31, 2008 and 2007, respectively. At March 31, 2008 and 2007, the
fair value of standby letters of credit was immaterial.
These loan and letter of credit commitments are subject to the same credit
policies and reviews as loans on the balance sheet. Collateral, both the
amount and nature, is obtained based upon management's assessment of the
credit risk. Since many of the extensions of credit are expected to expire
without being drawn, the total commitment amounts do not necessarily represent
future cash requirements. In addition to these loan commitments noted above,
the Bank had unused credit card loan commitments of $3.7 million and $3.6
million at March 31, 2008 and 2007, respectively. Outstanding commitments on
mortgage loans not yet closed amounted to $585,000 and $0 at March 31, 2008
and 2007, respectively. These commitments, which are funded subject to
certain limitations, extend over varying periods of time with the majority
being funded within 45 days. At March 31, 2008 and 2007, the Bank had
outstanding commitments to sell approximately $2.3 and $1.5 million of loans,
respectively, which encompassed the Bank's held for sale loans. The Bank also
has commitments to sell mortgage loans not yet closed, on a best efforts
basis. Best efforts means the Bank suffers no penalty if they are unable to
deliver the loans to the potential buyers. The fair value of the Bank's
commitment to originate mortgage loans at committed interest rates and to sell
such loans to permanent investors is insignificant.
48
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(17) Related Party Transactions
--------------------------
Certain directors, executive officers and companies with which they are
affiliated are customers of and have banking transactions with the Bank in the
ordinary course of business. These loans were made on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time for comparable arms-length transactions.
A summary of loan transactions with directors, including their affiliates, and
executive officers follows:
For the years ended March 31,
------------------------------------
2008 2007 2006
--------- --------- ---------
Balance, beginning of year $ 652,101 $420,239 $550,010
New loans 1,059,347 274,797 255,278
Less loan payments 539,347 42,935 385,049
---------- -------- --------
Balance, end of year $1,172,101 $652,101 $420,239
========== ======== ========
Loans to all employees, officers, and directors of the Company, in the
aggregate constituted approximately 11.3% and 8.52% of the Company's total
shareholders' equity at March 31, 2008 and 2007, respectively. At March 31,
2008 and 2007, deposits from executive officers and directors of the Bank and
Company and their related interests in the aggregate approximated $4.6 million
and $4.7 million, respectively.
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 Company
incurred expenses of $70,000, $65,000, and $51,000 for rent for the years
ended March 31, 2008, 2007, and 2006, respectively. The Company increased the
amount of office space covered by that lease during fiscal 2007. On July 1,
2006, the Company began renting office space from another officer. On that
lease, the Company incurred rent expense of $41,400 and $31,000 during the
year ended March 31, 2008 and 2007, 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.
49
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(18) 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,
---------------------------
2008 2007
----------- -----------
Assets:
Cash $ 509,783 $ 2,377,723
Investment Securities, Available For Sale 89,250 103,286
Investment in Security Federal Statutory Trust 155,000 155,000
Investment In Security Federal Bank 56,276,147 46,569,777
Accounts Receivable And Other Assets 85,426 81,695
----------- -----------
Total Assets $57,115,606 $49,287,481
=========== ===========
Liability And Shareholders' Equity:
Accounts Payable And Other Liabilities $ 46,881 $ 21,961
Other Borrowings 3,000,000 -
Junior Subordinated Debentures 5,155,000 5,155,000
Mandatorily Redeemable Financial Instrument 1,417,312 1,417,312
Shareholders' Equity 47,496,413 42,693,208
----------- -----------
Total Liabilities And Shareholders' Equity $57,115,606 $49,287,481
=========== ===========
Condensed Statements of Income Data
For the Years Ended March 31,
------------------------------------
2008 2007 2006
---------- ---------- ----------
Income:
Equity In Earnings Of Security Federal
Bank $4,554,124 $4,246,503 $3,821,229
Interest Income 10,897 5,767 -
Miscellaneous Income 175 7,887 -
---------- ---------- ----------
Total Income 4,565,196 4,260,157 3,821,229
---------- ---------- ----------
Expenses:
Interest Expense 431,839 191,811 -
Other Expenses 22,013 15,310 13,762
---------- ---------- ----------
Total Expenses 453,852 207,121 13,762
---------- ---------- ----------
Income Before Income Taxes 4,111,344 4,053,036 3,807,467
Income Tax Benefit (168,255) (73,517) (5,384)
========== ========== ==========
Net Income $4,279,599 $4,126,553 $3,812,851
========== ========== ==========
50
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(18) Security Federal Corporation Condensed Financial Statements (Parent
-------------------------------------------------------------------
Company Only), Continued
------------------------
Condensed Statements of Cash Flow Data
For the Years Ended March 31,
---------------------------------------
2008 2007 2006
----------- ----------- -----------
Operating Activities:
Net Income $ 4,279,599 $ 4,126,553 $ 3,812,851
Adjustments To Reconcile Net Income
To Net Cash Used In Operating
Activities:
Equity In Earnings Of Security
Federal Bank (4,554,124) (4,246,503) (3,821,229)
Stock Compensation Expense 20,518 7,686 -
Increase (Decrease) In Accounts
Receivable And Other Assets 918 (40,363) (5,384)
Increase In Accounts Payable 24,914 12,859 -
----------- ----------- -----------
Net Cash Used In Operating Activities (228,175) (139,768) (13,762)
----------- ----------- -----------
Investing Activities:
Purchase Of Investment Securities - - (102,938)
Investment in Security Federal
Statutory Trust - (155,000) -
Additional Investment in Security
Federal Bank (2,000,000) (4,597,319) -
Dividend Received From Security
Federal Bank - 1,000,000 -
----------- ----------- -----------
Net Cash Used In Investing Activities (2,000,000) (3,752,319) (102,938)
----------- ----------- -----------
Financing Activities:
Exercise Of Stock Options 105,021 438,465 222,450
Employee Stock Purchase Plan
Purchases 96,629
Purchase Of Treasury Stock, At Cost (2,118,226) (412,564) (73,567)
Proceeds From Junior Subordinated
Debenture - 5,155,000 -
Proceeds From Mandatorily Redeemable
Financial Instrument - 1,417,312 -
Proceeds From Line of Credit 3,000,000 - -
Dividends Paid (723,189) (623,387) (406,749)
----------- ----------- -----------
Net Cash Provided By (Used) In
Financing Activities 360,235 5,974,826 (257,866)
----------- ----------- -----------
Net Increase (Decrease) In Cash (1,867,940) 2,082,739 (374,566)
Cash At Beginning Of Year 2,377,723 294,984 669,550
----------- ----------- -----------
Cash At End Of Year $ 509,783 $ 2,377,723 $ 294,984
=========== =========== ===========
(19) Carrying Amounts and Fair Value of Financial Instruments
--------------------------------------------------------
The carrying amounts and fair value of financial instruments are summarized
below:
At March 31,
--------------------------------------------
2008 2007
--------------------- ---------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In Thousands)
Financial Assets:
Cash And Cash Equivalents $ 10,539 10,539 $ 13,438 13,438
Investment And Mortgage-Back
Securities $264,312 264,664 $249,750 249,053
Loans Receivable, Net $517,932 525,384 $436,038 439,785
FHLB Stock $ 9,497 9,497 $ 8,209 8,209
Financial Liabilities:
Deposits:
Checking, Savings, And Money
Market Accounts $259,777 259,777 $268,466 268,466
Certificate Accounts $331,073 336,352 $255,272 255,068
Advances From FHLB $178,234 185,693 $153,049 152,595
Other Borrowed Money $ 12,784 12,784 $ 8,088 8,088
Junior Subordinated Debentures $ 5,155 5,155 $ 5,155 5,155
Mandatorily Redeemable
Financial Instrument $ 1,417 1,417 $ 1,417 1,403
51
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(19) Carrying Amounts and Fair Value of Financial Instruments, Continued
-------------------------------------------------------------------
At March 31, 2008, the Bank had $79.3 million of off-balance sheet financial
commitments. These commitments are to originate loans and unused consumer
lines of credit and credit card lines. Because these obligations are based on
current market rates, if funded, the original principal is considered to be a
reasonable estimate of fair value.
Fair value estimates are made at a specific point in time, based on relevant
market data and information about the financial instrument. These estimates
do not reflect any premium or discount that could result from offering for
sale the Bank's entire holdings of a particular financial instrument. Because
no active market exists for a significant portion of the Bank's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, current interest rates
and prepayment trends, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in any of these assumptions used in
calculating fair value would also significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. For example, the Bank has significant assets and
liabilities that are not considered financial assets or liabilities including
deposit franchise values, loan servicing portfolios, deferred tax liabilities,
and premises and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in any of these
estimates. The values used are provided from the OTS interest rate risk
model.
The Company has used management's best estimate of fair value on the above
assumptions. Thus, the fair values presented may not be the amounts, which
could be realized, in an immediate sale or settlement of the instrument. In
addition, any income taxes or other expenses that would be incurred in an
actual sale or settlement are not taken into consideration in the fair value
presented.
52
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(20) Quarterly Financial Data (Unaudited)
------------------------------------
Unaudited condensed financial data by quarter for fiscal year 2008 and 2007 is
as follows (amounts, except per share data, in thousands):
Quarter ended
-------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31,
2007-2008 2007 2007 2007 2008
---------- ---------- ---------- ----------
Interest Income $ 11,906 $ 12,647 $ 12,737 $ 12,342
Interest Expense 6,929 7,487 7,758 7,370
---------- ---------- ---------- ----------
Net Interest Income 4,977 5,160 4,979 4,972
Provision For Loan Losses 150 150 150 445
---------- ---------- ---------- ----------
Net Interest Income After
Provision For Loan
Losses 4,827 5,010 4,829 4,527
Non-interest Income 1,061 1,049 1,028 1,351
Non-interest Expense 4,251 4,381 4,328 4,362
---------- ---------- ---------- ----------
Income Before Income Tax 1,637 1,678 1,529 1,516
Provision For Income taxes 541 550 488 501
---------- ---------- ---------- ----------
Net Income $ 1,096 $ 1,128 $ 1,041 $ 1,015
========== ========== ========== ==========
Basic Net Income Per
Common Share $ 0.42 $ 0.43 $ 0.40 $ 0.40
========== ========== ========== ==========
Diluted Net Income Per
Common Share $ 0.42 $ 0.43 $ 0.40 $ 0.40
========== ========== ========== ==========
Basic Weighted Average
Shares Outstanding 2,609,409 2,602,072 2,585,234 2,535,859
========== ========== ========== ==========
Diluted Weighted Average
Shares Outstanding 2,618,889 2,610,567 2,588,318 2,535,859
========== ========== ========== ==========
Quarter ended
-------------------------------------------------
June 30, Sept. 30, Dec. 31, Mar. 31,
2006-2007 2006 2006 2006 2007
---------- ---------- ---------- ----------
Interest Income $ 9,625 $ 10,283 $ 10,814 $ 11,376
Interest Expense 5,214 5,744 6,380 6,595
---------- ---------- ---------- ----------
Net Interest Income 4,411 4,539 4,434 4,781
Provision For Loan Losses 150 150 150 150
---------- ---------- ---------- ----------
Net Interest Income After
Provision For Loan
Losses 4,261 4,389 4,284 4,631
Non-interest Income 752 913 988 1,208
Non-interest Expense 3,444 3,729 3,817 4,168
---------- ---------- ---------- ----------
Income Before Income Tax 1,569 1,573 1,455 1,671
Provision For Income taxes 547 546 478 571
---------- ---------- ---------- ----------
Net Income $ 1,023 $ 1,027 $ 977 $ 1,100
========== ========== ========== ==========
Basic Net Income Per Common
Share $ 0.40 $ 0.39 $ 0.37 $ 0.42
========== ========== ========== ==========
Diluted Net Income Per
Common Share $ 0.40 $ 0.39 $ 0.37 $ 0.42
========== ========== ========== ==========
Basic Weighted Average
Shares Outstanding 2,538,951 2,610,605 2,617,037 2,611,507
========== ========== ========== ==========
Diluted Weighted Average
Shares Outstanding 2,564,893 2,622,996 2,625,945 2,620,375
========== ========== ========== ==========
53
SHAREHOLDERS INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held at 2:00 p.m., Thursday, July
17, 2008 at the City of Aiken Municipal Conference Center, 215 The Alley,
Aiken, South Carolina.
STOCK LISTING
The Company's stock is traded on the Over-The-Counter-Bulletin Board under the
symbol "SFDL.OB." The stock began trading on the Bulletin Board in October
2003.
PRICE RANGE OF COMMON STOCK
The table below shows the range of high and low bid prices. These prices
represent actual transactions and do not include retail markups, markdowns or
commissions. Market makers include Sterne, Agee, and Leach, Inc., Morgan
Keegan and Company, Inc., A.G. Edwards and Sons, Inc., Hill, Thompson, and
Magid, and Monroe Securities, Inc.
Quarter Ending High Low
-------------- ------ ------
06-30-05 $21.75 $21.75
09-30-05 $29.00 $29.00
12-31-05 $23.50 $23.50
03-31-06 $24.25 $24.25
06-30-06 $25.50 $22.70
09-30-06 $23.50 $22.10
12-31-06 $24.00 $23.00
03-31-07 $25.00 $23.30
06-30-07 $24.75 $24.00
09-30-07 $24.85 $24.10
12-31-07 $24.15 $22.75
03-31-08 $23.00 $23.00
As of March 31, 2008, the Company had approximately 304 shareholders and
2,532,192 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 paid $0.02 per share cash dividends for each of the quarters during
fiscal 2003 and 2004 and the first quarter for each of fiscal 2004 and 2005.
The Company paid $0.03 per share cash dividend in each of the last three
quarters of 2004 and 2005. The Company paid $0.04 per share cash dividends
for each of the quarters during fiscal 2005 and 2006, $0.06 per share cash
dividends for each of the quarters during fiscal 2006 and 2007, and $0.07 per
share cash dividends for each of the quarters during fiscal 2007 and 2008.
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.
54
A Familiar Face
We are pleased to announce that Richard Harmon has joined Security Federal as
Senior Vice President of Mortgage Lending. He is responsible for leading and
managing construction lending for the markets covering Aiken County in South
Carolina and Richmond/Columbia Counties in Georgia. He is also responsible
for mortgage lending bank-wide. Richard has over 22 years of banking
experience and is a board member for Habitat for Humanity. He serves as a
Deacon and chairman of the finance committee at First Baptist Church of
Montmorenci and is a resident of Aiken, SC.
We are fortunate to have such an experienced and dedicated member on the
Security Federal Bank team.
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, 2008 with the Securities and Exchange Commission. Copies
of Form 10-K, Security Federal Corporation's annual report, and the Company's
quarterly reports may be obtained from and inquiries may be addressed to Ms.
Beverly Bradham of Security Federal Corporation.
GENERAL INQUIRIES TRANSFER AGENT SPECIAL COUNSEL
Ms. Beverly Bradham Security Federal Breyer & Associates, PC
Security Federal Corp. Corporation Suite 785
238 Richland Ave., NW 238 Richland Ave., NW 8180 Greensboro Drive
P.O. Box 810 P.O. Box 810 McLean, VA 22102
Aiken, SC 29802-0810 Aiken, SC 29802-0810
Phone: 803-641-3000
Toll free: 866-851-3000
INDEPENDENT AUDITORS
Elliott Davis, LLC
1901 Main Street
Suite 1650
P.O. Box 2227
Columbia, SC 29202-2227
www.securityfederalbank.com
-55
BOARD OF DIRECTORS
T. Clifton Weeks Timothy W. Simmons J. Chris Verenes
Chairman President/CEO President
Security Federal Corp. Security Federal Corp. Security Federal Bank
Aiken, SC Aiken, SC Aiken, SC
Dr. Robert E. Alexander G. L. Toole, III Roy G. Lindburg
Chancellor Emeritus Attorney-At-Law Executive Vice President/
Univ. of SC at Aiken Aiken, SC CFO
Aiken, SC Security Federal Corp.
Aiken, SC
Hon. William Clyburn Thomas L. Moore Francis M. Thomas
Member of the South Executive Vice President Executive Vice President
Carolina House of Community Financial Security Federal Bank
Representatives Services Aiken, SC
Aiken, SC Association of America
Alexandria, VA
Directors Emeritus: In Appreciation
------------------
Harry O. Weeks, Jr.
Walter E. Brooker, Sr. Business Dev. Executive
President, Brooker's Inc. Hutson-Etherredge Co.
Denmark, SC Aiken, SC
Harry O. Weeks, Jr. Harry O. (Spooky) Weeks, Jr. retired from our
Business Dev. Executive Board of Directors on April 1, 2008 after
Hutson-Etherredge Co thirty years of dedicated service. His con-
Aiken, SC tributions to our Board's efforts through
his service on the Audit Committe and as
Chairman of the Trust Review Committee were
significant. His guidance and advice from
over forty-three years experience in the
insurance industry were invaluable, as the
Bank, not only accessed coverage for its
own operations, but expanded its lines of
services to include insurance products. We
are very grateful for Spooky's many years
of dedicated service and look forward to
his continued council as Director Emeritus.
www.securityfederalbank.com
-56
BANK ADVISORY BOARDS
NORTH AUGUSTA-----------------------------------------------------------------
P. Richard Borden Rev. G.L. Brightharp Helen H. Butler
Owner Owner Retired Banker
Borden Pest Control G.L. Brightharp & North Augusta, SC
North Augusta, SC Sons Mortuary
North Augusta, SC
William M. Hixon Thomas L. Moore John P. Potter
Owner Executive Vice President Director of Finance
Hixon Realty Community Financial City of North
North Augusta, SC Services Augusta
Association of America North Augusta, SC
Alexandria, VA
WAGENER-----------------------------------------------------------------------
M. Judson Busbee Chad G. Ingram Mary T. Lybrand
Owner President Retired Banker
Busbee Hardware Garvin Oil Company Wagener, SC
Wagener, SC Wagener, SC
Dr. Michael L. Miller Richard H. Sumpter
Anesthesiologist Retired Educator
Palmetto Health Wagener, SC
Richland Memorial Hosp.
Columbia, SC
MIDLAND VALLEY----------------------------------------------------------------
Charles A. Hilton Rev. Nathaniel Irvin, Sr. Rev. Stephen Phillips
General Manager Pastor Pastor
Breezy Hill Old Storm Branch Christian Heritage
Water & Sewer Baptist Church Church
Graniteville, SC Clearwater, SC Graniteville, SC
Thomas L. Moore Glenda K. Napier Carlton B. Shealy
Executive Vice President Co-Owner Owner
Community Financial Napier Funeral Home C. Shealy Realty
Services Association of Graniteville, SC Builders &
America Developers
Alexandria, VA North Augusta, SC
WEST COLUMBIA - LEXINGTON-----------------------------------------------------
Eleanor Powell Clark L. Todd Sease Sen. Nikki G. Setzler
Owner/Operator Partner Sr. Partner
B & E Enterprises Inc. Jumper, Carter, Sease Setzler & Scott, PA
dba McDonald's Architects, PA Law Firm
Columbia, SC West Columbia, SC West Columbia, SC
Jan Hook-Stamps
Owner
Elante Day Spa
West Columbia, SC
Sandra Dooley Parker G. Scott Middleton Dianne Light
Attorney CEO/Owner Owner
Dooley, Dooley, Spence, Agape Assisted Living/ Dianne's on Devine
Parker & Hipp, PA Nursing & Related Com. & DiPrato's Deli
Lexington, SC West Columbia, SC Columbia, SC
Donald T. Martin
Controller, CPA
Nexsen, Pruet, LLC
Columbia, SC
www.securityfederalbank.com
-57
MANAGEMENT TEAM & BRANCH LOCATIONS
MANAGEMENT TEAM
T. Clifton Weeks - Chairman of Security Federal Corporation
Timothy W. Simmons - Chairman and Chief Executive Officer, Security Federal
Bank
G.L. Toole, III - Vice President
Robert E. Alexander - Corporate Secretary
J. Chris Verenes - President, Security Federal Bank
Roy G. Lindburg - Executive Vice President and Chief Financial Officer
Margaret A. Hurt - Controller
Jessica C. Thompson - Treasurer
Francis M. Thomas - Executive Vice President
Marian A. Shapiro - Executive Vice President - SC Midlands Area Executive
Lynn B. Shepard - Senior Vice President - Senior Operations Officer
Sandra M. Bartlett - Senior Vice President - Human Resources
Carol P. McCleskey - Senior Vice President - Branch Administration
William O. Boyte, III - Senior Vice President - Construction Lending -
SC Midlands Area
Richard T. Harmon - Senior Vice President - Mortgage Lending
Paul T. Rideout - Vice President - Business Development/Commercial Loans
Audrey T. Varn - President - Security Federal Trust and Investments
Thomas R. Crawford, Jr. - Senior Vice President - Georgia Market Area
Executive
Dorothy E. Brandon - Vice President - Construction Lending Georgia Market Area
Gerald D. Jennings - President - Security Federal Insurance
G. David Jennings - Vice President - Premium Financing
Terry L. Gilman - Vice President - Insurance Operations
Martha A. Crumpton - Vice President, Accounting - Security Federal Insurance
Duane T. Carpen - Vice President - Preferred Market - Security Federal
Insurance
Monica M. Marzullo - Vice President, Retail Operations - Security Federal
Insurance
Gabriele C. Dukes - Vice President - Financial Counseling
Janice S. Hauerwas - Vice President - Mortgage Loan Originator
Gregory D. Warfield - Vice President - Mortgage Loan Originator
Stanley D. Carter - Vice President - Mortgage Loan Originator
Josephine J. Quiller - Vice President - Mortgage Lending
James E. Bristow - Vice President - Business Development/Commercial Loans
Michael C. Strange - Vice President - Business Development/Commercial Loans
Elsie K. Dicks - Vice President - Credit Administration
Patricia B. Moseley - Vice President - Loan Servicing
Ronald R. Davis - Vice President - Senior Auditor
Laura B. Conway - Vice President - Operations Auditor
Thomas H. Wessell - Vice President - Information Technology
Donald J. Krafnick - Vice President - Human Resources
BRANCH LOCATIONS
Whiskey Road, Aiken, SC
1705 Whiskey Road, Aiken SC
Dana S. Hall - Assistant Vice President/Manager
North Augusta, SC
315 E. Martintown Road, N. Augusta, SC
Kathy S. Williamson - Assistant Vice President/Manager
Laurens Street, Aiken, SC
100 Laurens Street, Aiken SC
Vicky W. Moseley - Assistant Vice President/Manager
Richland Avenue, Aiken, SC
1665 Richland Ave, Aiken SC
Melanie Mackay - Assistant Vice President/Manager
South Side, Aiken, SC
2587 Whiskey Road, Aiken SC
Joshua J. Booth - Assistant Vice President/Manager
Graniteville, SC
50 Canal Street, Graniteville, SC
Tonya L. Key - Assistant Vice President/Manager
Langley, SC
2812 Augusta Street, Langley, SC
Pat W. Guglieri - Assistant Vice President/Manager
Clearwater, SC
4568 Jefferson Davis Highway, Clearwater, SC
Gail W. Dotson - Assistant Vice President/Manager
Wagener, SC
118 Main Street, Wagener, SC
D. Scott Tindal - Assistant Vice President/Manager
West Columbia, SC
1185 Sunset Boulevard, W. Columbia, SC
Mary B. Clark, Assistant Vice President/Manager
Lexington, SC
5446 Sunset Boulevard, Lexington SC
Marianne M. Pappacoda - Assistant Vice President/Manager
Assembly Street, Columbia, SC
1900 Assembly Street, Columbia, SC
Lynn P. Derrick - Assistant Vice President/Manager
Evans, GA
7004 Evans Town Center Boulevard, Evans, GA
Connie A. Redmond - Assistant Vice President/Manager
www.securityfederalbank.com
-58
SECURITY FEDERAL INSURANCE
Security Federal is committed to the personal lines property and casualty
insurance marketplace, and represents a number of well-known, established
insurance companies providing personal insurance products and services.
Three non-bank retail locations from our recent acquisition of the Collier-
Jennings Companies service over $4,000,000 of personal lines insurance for
consumers in the Aiken-Augusta Metro Area under the direction of Monica
Marzullo, VP for Retail Operations.
Duane Carpen, VP for Preferred Markets, heads up a special program integrating
The Travelers insurance products into Security Federal Bank's branch network
of financial centers located in the Aiken-Augusta and Columbia SC Metro Areas.
This strategic alliance offers our bank customers the continued security and
trust they've come to appreciate when making important choices regarding their
financial affairs.
Insurers Represented
--------------------
Affirmative Insurance Company
Assurance America Group
American Modern Home Ins Co.
Bristol West Ins. Group
Dairyland/Patriot General Ins. Co.
Everest Insurance Company
Foremost Insurance Group
Gainsco Insurance Company
GMAC Insurance Group
Hartford Group
Infinity Insurance Group
Lincoln General Ins. Co.
Mendota Insurance Company
Omni Insurance Company
Orion Auto/Viking Insurance Company
Permanent General Insurance Company
Progressive Insurance Group
Safeco Insurance Companies
Southern General Insurance Company
Southern United Insurance Group
Travelers Insurance Group
Victoria Insurance Company
Security Federal Premium Finance
--------------------------------
The Collier-Jennings Companies acquisition in June 2006 brought to Security
Federal Bank the local operations of a licensed premium finance company.
Security Federal Premium Finance is now expanding its operations throughout
the state of South Carolina. The premium finance operations are managed by
David Jennings, a Vice President of the company, who has over ten years
experience with this specialized lending unit of the company.
www.securityfederalbank.com
-59
Exhibit 21
Subsidiaries of the Registrant
State of Percentage
Parent Subsidiary Incorporation of Ownership
------ ---------- ------------- ------------
Security Federal Security Federal Bank United States 100%
Corporation
Federal Trust South Carolina 100%
Security Federal Bank Security Federal South Carolina 100%
Insurance, Inc.
Security Federal South Carolina 100%
Investments, Inc.
Security Federal South Carolina 100%
Trust, Inc.
Security Financial South Carolina 100%
Services Corporation
Exhibit 23
Consent of Elliott Davis, LLC
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------
The Board of Directors
Security Federal Corporation
We consent to incorporation by reference in the Registration Statement No.
333-31500, 333-102337 and 333-136813 on Form S-8 of our report dated June 9,
2008, relating to the consolidated balance sheet of Security Federal
Corporation and subsidiaries as of March 31, 2008 and the related consolidated
statements of income, shareholders' equity and cash flows for the year then
ended, which report appears in the March 31, 2008 Annual Report on Form 10-K.
/s/ Elliott Davis, LLC
Columbia South Carolina
June 27, 2008
Exhibit 31.1
Certification Required
by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934
I, Timothy W. Simmons, certify that:
1. I have reviewed this annual report on Form 10-K of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 27, 2008
/s/Timothy W. Simmons
-------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
Exhibit 31.2
Certification Required
by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934
I, Roy G. Lindburg, certify that:
1. I have reviewed this annual report on Form 10-K of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record,process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: June 27, 2008
/s/Roy G. Lindburg
-------------------------------------
Roy G. Lindburg
Chief Financial Officer
Exhibit 32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF SECURITY FEDERAL CORPORATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned hereby certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and in connection with this Annual Report on Form
10-K, that:
1. the report fully complies with the requirements of Sections 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the report fairly presents, in all
material respects, the company's financial condition and results of
operations.
/s/Timothy W. Simmons /s/Roy G. Lindburg
------------------------------------- -------------------------------------
Timothy W. Simmons Roy G. Lindburg
President and Chief Executive Officer Chief Financial Officer
Dated: June 27, 2008