-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ol6aSqPxrcId+BP83ETzvmmzRZV3XYgrvSMRKExiz4NcDThJRLpGVrVpDpTK5thU yjqT2Q/sa0EXEiBXV4wn2A== 0000939057-05-000332.txt : 20051109 0000939057-05-000332.hdr.sgml : 20051109 20051109154704 ACCESSION NUMBER: 0000939057-05-000332 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051109 DATE AS OF CHANGE: 20051109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURITY FEDERAL CORPORATION CENTRAL INDEX KEY: 0000818677 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 570858504 STATE OF INCORPORATION: SC FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16120 FILM NUMBER: 051189950 BUSINESS ADDRESS: STREET 1: 1705 WHISKEY RD.S. CITY: AIKEN STATE: SC ZIP: 29803 BUSINESS PHONE: 8036413070 MAIL ADDRESS: STREET 1: PO BOX 810 CITY: AIKEN STATE: SC ZIP: 29802 10-Q 1 q205.txt SECURITY FEDERAL CORPORATION FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10 - Q (Mark one) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD: FROM: TO: ------------------ ----------------- COMMISSION FILE NUMBER: 0-16120 SECURITY FEDERAL CORPORATION South Carolina 57-0858504 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1705 WHISKEY ROAD, AIKEN, SOUTH CAROLINA 29801 (Address of Principal Executive Office And Zip code) (803) 641-3000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] ------- ------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] ------- ------- Indicate by check mark whether the registrant is a shell corporation (defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] ------- ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. CLASS: OUTSTANDING SHARES AT: SHARES: ---------- ------------------------ --------- Common Stock, par October 31, 2005 2,535,176 value $0.01 per share INDEX - ---------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO. Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets at September 30, 1 2005 and March 31, 2005 Consolidated Statement of Income for the Three 2 and Six Months Ended September 30, 2005 and 2004 Consolidated Statements of Shareholders' Equity and 4 Comprehensive Income at September 30, 2004 and 2005 Consolidated Statements of Cash Flows for the Six 5 Months Ended September 30, 2005 and 2004 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial 13 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market 19 Risk Item 4. Controls and Procedures 19 - ----------------------------------------------------------------------------- PART II. OTHER INFORMATION Item 1. Legal Proceedings 21 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21 Item 3. Defaults Upon Senior Securities 21 Item 4. Submission of Matters to Vote of Security Holders 21 Item 5. Other Information 21 Item 6. Exhibits 21 Signatures 22 - ----------------------------------------------------------------------------- SCHEDULES OMITTED All schedules other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information is included in the consolidated financial statements and related notes. Part I. Financial Information Item 1. Financial Statements (Unaudited) Security Federal Corporation and Subsidiaries Consolidated Balance Sheets September 30, March 31, 2005 2005 ------------- ------------ Assets: (Unaudited) (Audited) Cash And Cash Equivalents $ 11,734,768 $ 7,916,488 Investment And Mortgage-Backed Securities: Available For Sale: (Amortized cost of $166,124,010 at September 30, 2005 and $166,364,642 at March 31, 2005) 164,815,710 164,814,819 Held To Maturity: (Fair value of $75,100,110 at September 30, 2005 and $74,770,902 at March 31, 2005) 75,996,110 76,260,904 ------------- ------------- Total Investment And Mortgage-Backed Securities 240,811,820 241,075,723 ------------- ------------- Loans Receivable, Net: Held For Sale 1,738,872 2,277,762 Held For Investment:(Net of allowance of $6,532,667 at September 30, 2005 and $6,284,055 at March 31, 2005) 338,032,685 314,611,373 ------------- ------------- Total Loans Receivable, Net 339,771,557 316,889,135 ------------- ------------- Accrued Interest Receivable: Loans 1,009,041 901,872 Mortgage-Backed Securities 526,997 555,933 Investments 865,139 721,744 Premises And Equipment, Net 8,664,918 7,914,043 Federal Home Loan Bank Stock, At Cost 6,402,200 6,234,500 Repossessed Assets Acquired In Settlement Of Loans 24,370 53,000 Other Assets 3,735,595 3,716,035 ------------- ------------- Total Assets $ 613,546,405 $ 585,978,473 ============= ============= Liabilities And Shareholders' Equity Liabilities: Deposit Accounts $ 449,667,396 $ 430,287,391 Advances From Federal Home Loan Bank 116,938,000 112,038,000 Other Borrowed Money 6,102,477 5,594,157 Advance Payments By Borrowers For Taxes And Insurance 743,637 417,410 Other Liabilities 2,948,284 2,530,450 ------------- ------------- Total Liabilities 576,399,794 550,867,408 ------------- ------------- Shareholders' Equity: Serial Preferred Stock, $.01 Par Value; Authorized Shares - 200,000; Issued And Outstanding Shares - None - - Common Stock, $.01 Par Value; Authorized Shares - 5,000,000; Issued - 2,544,888 And Outstanding Shares - 2,535,632 At September 30, 2005 And 2,543,838 And 2,522,127 At March 31, 2005 25,549 25,438 Additional Paid-In Capital 4,365,897 4,181,804 Treasury Stock, (At Cost, 9,712 and 8,077 Shares, Respectively) (200,256) (165,089) Indirect Guarantee Of Employee Stock Ownership Trust Debt (215,503) (276,217) Accumulated Other Comprehensive Income (Loss) (811,669) (961,504) Retained Earnings, Substantially Restricted 33,982,593 32,306,633 ------------- ------------- Total Shareholders' Equity 37,146,611 35,111,065 ------------- ------------- Total Liabilities And Shareholders' Equity $ 613,546,405 $ 585,978,473 ============= ============= See accompanying notes to consolidated financial statements. 1 Security Federal Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) Three Months Ended September 30, --------------------------------- 2005 2004 --------------- ------------- Interest Income: Loans $ 5,603,084 $ 4,016,449 Mortgage-Backed Securities 1,357,721 1,890,851 Investment Securities 852,548 328,646 Other 22,060 6,129 --------------- ------------- Total Interest Income 7,835,413 6,242,075 --------------- ------------- Interest Expense: NOW And Money Market Accounts 1,293,353 968,523 Passbook Accounts 44,920 43,569 Certificate Accounts 1,340,794 851,749 Advances And Other Borrowed Money 1,104,785 1,016,367 --------------- ------------- Total Interest Expense 3,783,852 2,880,208 --------------- ------------- Net Interest Income 4,051,561 3,361,867 Provision For Loan Losses 165,000 195,000 Net Interest Income After Provision --------------- ------------- For Loan Losses 3,886,561 3,166,867 --------------- ------------- Other Income: Net Gain On Sale Of Investments 31,422 - Gain On Sale Of Loans 118,253 116,398 Loan Servicing Fees 52,191 43,469 Service Fees On Deposit Accounts 288,867 311,684 Other 257,949 252,857 --------------- ------------- Total Other Income 748,682 724,408 --------------- ------------- General And Administrative Expenses: Salaries And Employee Benefits 1,835,356 1,586,088 Occupancy 319,330 269,173 Advertising 43,521 42,903 Depreciation And Maintenance Of Equipment 258,318 261,098 FDIC Insurance Premiums 14,167 14,192 Other 700,962 537,910 --------------- ------------- Total General And Administrative Expenses 3,171,654 2,711,364 --------------- ------------- Income Before Income Taxes 1,463,589 1,179,911 Provision For Income Taxes 513,909 379,905 --------------- ------------- Net Income $ 949,680 $ 800,006 =============== ============= Basic Net Income Per Common Share $ 0.38 $ 0.32 =============== ============= Diluted Net Income Per Common Share $ 0.37 $ 0.31 =============== ============= Cash Dividend Per Share On Common Stock $ 0.04 $ 0.03 =============== ============= Basic Weighted Average Shares Outstanding 2,527,533 2,519,627 =============== ============= Diluted Weighted Average Shares Outstanding 2,585,543 2,555,774 =============== ============= See accompanying notes to consolidated financial statements. 2 Security Federal Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) Six Months Ended September 30, -------------------------------- 2005 2004 -------------- ------------- Interest Income: Loans $ 10,788,206 $ 7,851,710 Mortgage-Backed Securities 2,751,008 2,769,212 Investment Securities 1,672,105 1,651,924 Other 36,287 12,729 -------------- ------------- Total Interest Income 15,247,606 12,285,575 -------------- ------------- Interest Expense: NOW And Money Market Accounts 2,546,536 1,863,136 Passbook Accounts 89,119 86,968 Certificate Accounts 2,553,377 1,622,617 Advances And Other Borrowed Money 2,084,022 1,903,137 -------------- ------------- Total Interest Expense 7,273,054 5,475,858 -------------- ------------- Net Interest Income 7,974,552 6,809,717 Provision For Loan Losses 330,000 390,000 -------------- ------------- Net Interest Income After Provision For Loan Losses 7,644,552 6,419,717 -------------- ------------- Other Income: Net Gain On Sale Of Investments 48,962 - Gain On Sale Of Loans 253,563 238,823 Loan Servicing Fees 100,759 87,106 Service Fees On Deposit Accounts 572,064 625,364 Other 463,709 432,070 -------------- ------------- Total Other Income 1,439,057 1,383,363 -------------- ------------- General And Administrative Expenses: Salaries And Employee Benefits 3,596,303 3,184,913 Occupancy 631,177 523,708 Advertising 68,990 74,525 Depreciation And Maintenance Of Equipment 510,119 537,022 FDIC Insurance Premiums 28,686 28,897 Other 1,332,503 1,056,077 -------------- ------------- Total General And Administrative Expenses 6,167,778 5,405,142 -------------- ------------- Income Before Income Taxes 2,915,831 2,397,938 Provision For Income Taxes 1,036,909 795,905 -------------- ------------- Net Income $ 1,878,922 $ 1,602,033 ============== ============= Basic Net Income Per Common Share $ 0.74 $ 0.64 ============== ============= Diluted Net Income Per Common Share $ 0.73 $ 0.63 ============== ============= Cash Dividend Per Share On Common Stock $ 0.08 $ 0.04 ============== ============= Basic Weighted Average Shares Outstanding 2,528,961 2,521,144 ============== ============= Diluted Weighted Average Shares Outstanding 2,570,874 2,559,333 ============== ============= See accompanying notes to consolidated financial statements. 3 Security Federal Corporation and Subsidiaries Consolidated Statements of Shareholders' Equity and Comprehensive Income (Unaudited) Accumulated Indirect Other Additional Guarantee Comprehen- Common Paid-In Treasury of sive Income Retained Stock Capital Stock ESOP Debt (Loss) Earnings Total -------- ---------- -------- ---------- ----------- ----------- ----------- Balance At March 31, 2004 $ 25,333 $4,013,674 $ - $ (336,972) $ 689,755 $29,080,125 $33,471,915 Net Income - - - - - 1,602,033 1,602,033 Other Comprehensive Income, Net Of Tax: Unrealized Holding Losses On Securities Available For Sale - - - - (482,057) - (482,057) ---------- Comprehensive Income - - - - - - 1,119,976 Decrease In Indirect Guarantee Of ESOP Debt - - - 60,755 - - 60,755 Exercise Of Stock Options 60 109,920 - - - - 109,980 Cash Dividends - - - - - (126,664) (126,664) -------- ---------- -------- --------- ---------- ----------- ----------- Balance At September 30, 2004 $ 25,393 $4,123,594 $ - $(276,217) $ 207,698 $30,555,494 $34,635,762
Accumulated Indirect Other Additional Guarantee Comprehen- Common Paid-In Treasury of sive Income Retained Stock Capital Stock ESOP Debt (Loss) Earnings Total -------- ---------- -------- ---------- ----------- ----------- ----------- Balance At March 31, 2005 $ 25,438 $4,181,804 $(165,089) $ (276,217) $ (961,504) $32,306,633 $35,111,065 Net Income - - - - - 1,878,922 1,878,922 Other Comprehensive Income, Net Of Tax: Unrealized Holding Gains On Securities Available For Sale - - - - 119,479 - 119,479 Plus Reclassification Adjustments For Gains Included In Net Income - - - - 30,356 - 30,356 ----------- Comprehensive Income - - - - - - 2,028,757 Purchase Of Treasury Stock At Cost, 1,635 shares (35,167) - - - (35,167) Exercise Of Stock Options 111 184,093 - - - - 184,204 Decrease In Indirect Guarantee Of ESOP Debt - - - 60,714 - - 60,714 Cash Dividends - - - - - (202,962) (202,962) ------- ---------- --------- --------- --------- ----------- ----------- Balance At September 30, 2005 $25,549 $4,365,897 $(200,256) $(215,503) $(811,669) $33,982,593 $37,146,611
See accompanying notes to consolidated financial statements. 4 Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Six Months Ended September 30, ------------------------------- 2005 2004 --------------- ------------ Cash Flows From Operating Activities: Net Income $ 1,878,922 $ 1,602,033 Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation Expense 483,323 430,528 Discount Accretion And Premium Amortization 539,604 627,920 Provisions For Losses On Loans And Real Estate 330,000 390,000 Gain On Sale Of Loans (253,563) (238,823) Gain On Sale Of Mortgage Backed Securities Available For Sale (48,962) - Loss (Gain) On Sale Of Real Estate 23,466 (31,773) Amortization Of Deferred Fees On Loans (99,944) (99,639) Proceeds From Sale Of Loans Held For Sale 16,079,996 13,442,690 Origination Of Loans For Sale (15,287,543) (13,087,306) (Increase) Decrease In Accrued Interest Receivable: Loans (107,169) 42,509 Mortgage-Backed Securities 28,936 (24,523) Investments (143,395) 41,849 Increase In Advance Payments By Borrowers 326,227 305,851 Loss (Gain) On Disposition of Premises and Equipment 806 (3,325) Other, Net 367,310 (935,431) --------------- ------------ Net Cash Provided (Used) By Operating Activities 4,118,014 2,462,560 --------------- ------------ Cash Flows From Investing Activities: Principal Repayments On Mortgage-Backed Securities Available For Sale 26,938,831 26,013,326 Principal Repayments On Mortgage-Backed Securities Held To Maturity 10,407 71,484 Purchase Of Investment Securities Available For Sale (16,065,257) - Purchase Of Investment Securities Held To Maturity - (11,991,800) Purchase Of Mortgage-Backed Securities Available For Sale (19,373,356) (37,197,817) Maturities Of Investment Securities Available For Sale 4,457,139 9,000,000 Maturities Of Investment Securities Held To Maturity - 12,000,000 Proceeds From Sale Of Mortgage-Backed Securities Available For Sale 3,797,360 - Proceeds From Sale Of Mortgage-Backed Securities Held To Maturity 249,650 - Purchase Of FHLB Stock (2,307,100) (2,132,500) Redemption Of FHLB Stock 2,139,400 1,981,100 (Increase) Decrease In Loans To Customers (23,722,352) (19,957,332) Proceeds From Sale Of Repossessed Assets 76,148 171,539 Purchase And Improvement Of Premises And Equipment (1,235,004) (1,699,450) Proceeds from Sale of Premises And Equipment - 3,325 --------------- ------------ Net Cash Used By Investing Activities (25,034,134) (23,738,125) --------------- ------------ Cash Flows From Financing Activities: Increase In Deposit Accounts 19,380,005 18,823,965 Proceeds From FHLB Advances 81,095,000 68,328,000 Repayment Of FHLB Advances (76,195,000) (64,183,000) Net Proceeds Of Other Borrowings 508,320 437,731 Dividends To Shareholders (202,962) (126,664) Purchase Of Treasury Stock (35,167) - Proceeds From Exercise of Stock Options 184,204 109,980 --------------- ------------ Net Cash Provided By Financing Activities 24,734,400 23,390,012 --------------- ------------ (Continued) 5 Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Six Months Ended September 30, ------------------------------- 2005 2004 --------------- -------------- Net Increase In Cash And Cash Equivalents 3,818,280 2,114,447 Cash And Cash Equivalents At Beginning Of Period 7,916,488 6,749,211 --------------- -------------- Cash And Cash Equivalents At End Of Period $ 11,734,768 $ 8,863,658 =============== ============== Supplemental Disclosure Of Cash Flows Information: Cash Paid During The Period For Interest $ 7,206,369 $ 5,453,627 Cash Paid During The Period For Income Taxes $ 698,195 $ 1,257,012 Additions To Repossessed Acquired Through Foreclosure $ 70,984 $ 185,897 Decrease In Unrealized Net Loss (Gain) On Securities Available For Sale, Net Of Taxes $ 149,835 $ (482,057) See accompanying notes to consolidated financial statements. 6 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and accounting principles generally accepted in the United States of America; therefore, they do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows. Such statements are unaudited but, in the opinion of management, reflect all adjustments, which are of a normal recurring nature and necessary for a fair presentation of results for the selected interim periods. Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the audited financial statements appearing in Security Federal Corporation's (the "Company") 2005 Annual Report to Shareholders when reviewing interim financial statements. The results of operations for the six-month period ended September 30, 2005 are not necessarily indicative of the results that may be expected for the entire fiscal year. This Quarterly Report on Form 10-Q contains certain forward-looking statements with respect to the financial condition, results of operations, and business of the Company. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those anticipated by such forward-looking statements include, but are not limited to, changes in interest rates, the demand for loans, the regulatory environment, general economic conditions and inflation, and the securities markets. Management cautions readers of this Form 10-Q not to place undue reliance on the forward-looking statements contained herein. 2. Principles of Consolidation The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Security Federal Bank (the "Bank"), and the Bank's wholly owned subsidiaries, Security Federal Insurance, Inc. ("SFINS"), Security Federal Investments, Inc. ("SFINV"), Security Federal Trust, Inc. ("SFT"), and Security Financial Services Corporation ("SFSC"). The Bank is primarily engaged in the business of accepting savings and demand deposits and originating mortgage and other loans to individuals and small businesses for various personal and commercial purposes. SFINS, SFINV, and SFT were formed during the year ended March 31, 2002 and began operation during the December 2001 quarter. SFINS is an insurance agency offering business, health, home and life insurance. SFINV engages primarily in investment brokerage services. SFT offers trust, financial planning and financial management services. SFSC is currently inactive. 3. Loans Receivable, Net Loans receivable, net, at September 30, 2005 and March 31, 2005 consisted of the following: Loans held for sale were $1,738,872 and $2,227,762 at September 30, 2005 and March 31, 2005, respectively. September 30, March 31, 2005 2005 Loans Held For Investment: ------------ ------------ Residential Real Estate $120,157,704 $122,622,347 Consumer 54,416,383 50,844,192 Commercial Business And Real Estate 180,272,816 162,217,200 ------------ ------------ 354,846,903 335,683,739 ------------ ------------ Less: Allowance For Possible Loan Loss 6,532,667 6,284,055 Loans In Process 10,130,038 14,626,913 Deferred Loan Fees 151,513 161,398 ------------ ------------ 16,814,218 21,072,366 ------------ ------------ $338,032,685 $314,611,373 ============ ============ The following is a reconciliation of the allowance for loan losses for the six months ending: September 30, September 30, 2005 2004 ------------ ------------ Beginning Balance $ 6,284,055 $ 5,763,935 Provision 330,000 390,000 Charge-offs (121,220) (190,831) Recoveries 39,832 120,042 ------------ ------------ Ending Balance $ 6,532,667 $ 6,083,146 ============ ============ 7 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 4. Securities Investment and Mortgage-Backed Securities, Held to Maturity - ----------------------------------------------------------- The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment and mortgage-backed securities held to maturity are as follows: Gross Gross September 30, 2005 Amortized Unrealized Unrealized - ------------------ Cost Gains Losses Fair Value ------------ ---------- ---------- ------------ US Government And Agency Obligations $ 75,996,110 $ 310 $ 896,310 $ 75,100,110 ============ ========== ========== ============ March 31, 2005 - -------------- US Government And Agency Obligations $ 76,000,847 $ - $1,504,761 $ 74,496,086 Mortgage-Backed Securities 260,057 14,759 - 274,816 ------------ ---------- ---------- ------------ Total $ 76,260,904 $ 14,759 $1,504,761 $ 74,770,902 ============ ========== ========== ============ Investment And Mortgage-Backed Securities, Available For Sale - ------------------------------------------------------------- The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment and mortgage-backed securities available for sale are as follows: Gross Gross September 30, 2005 Amortized Unrealized Unrealized - ------------------ Cost Gains Losses Fair Value ------------ ---------- ----------- ------------- US Government And Agency Obligations $ 16,972,389 $ 579 $ 75,779 $ 16,897,189 Mortgage-Backed Securities 149,048,683 339,732 1,572,832 147,815,583 Stock 102,938 - - 102,938 ------------ ---------- ----------- ------------- Total $166,124,010 $ 340,311 $ 1,648,611 $ 164,815,710 ============ ========== =========== ============= March 31, 2005 - -------------- US Government And Agency Obligations $ 5,469,678 $ 4,648 $ 19,063 $ 5,455,263 Mortgage-Backed Securities 160,894,954 457,081 1,992,479 159,359,556 ------------ ---------- ----------- ------------- Total $166,364,632 $ 461,729 $ 2,011,542 $ 164,814,819 ============ ========== =========== ============= During the quarter ended September 30, 2005, three mortgage-backed securities classified as held to maturity were sold. All three securities have paid down at least 90% therefore meeting the intent requirement of Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investment in Debt and Equity Securities." Proceeds from the sales totaled $250,000. 8 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 5. Deposit Accounts A summary of deposit accounts by type with weighted average rates is as follows: September 30, 2005 March 31, 2005 -------------------- ------------------ Balance Rate Balance Rate Demand Accounts: -------------------- ------------------ Checking $ 100,529,798 0.64% $ 88,169,885 0.65% Money Market 161,145,403 2.97% 164,088,081 2.57% Regular Savings 17,448,054 0.98% 17,743,659 0.98% ------------- ------------ Total Demand Accounts 279,123,255 2.01% 270,001,625 1.84% ------------- ------------ Certificate Accounts: 0-4.99% 160,780,091 150,486,280 5.00-6.99% 9,764,050 9,799,486 ------------- ------------ Total Certificate Accounts 170,544,141 3.32% 160,285,766 2.92% ------------- ------------ Total Deposit Accounts $ 449,667,396 2.00% $430,287,391 2.24% ============= ============ 6. Advances From Federal Home Loan Bank ("FHLB") FHLB advances are summarized by year of maturity and weighted average interest rate in the table below: September 30, 2005 March 31, 2005 ------------------- ------------------ Balance Rate Balance Rate Fiscal Year Due: ------------------- ------------------ 2006 $ 35,575,000 4.43% $ 40,675,000 4.09% 2007 18,000,000 2.83% 18,000,000 2.83% 2008 5,000,000 3.09% 10,000,000 2.96% 2009 25,000,000 3.05% 25,000,000 3.05% 2010 5,000,000 3.09% 5,000,000 3.09% Thereafter 28,363,000 3.40% 13,363,000 3.21% ------------ ------------ Total Advances $116,938,000 3.52% $112,038,000 3.41% ============ ============ These advances are secured by a blanket collateral agreement with the FHLB by pledging the Bank's portfolio of residential first mortgage loans and approximately $56.2 million in investment securities at September 30, 2005. Advances are subject to prepayment penalties. The following table shows callable FHLB advances as of the dates indicated. These advances are also included in the above table. All callable advances are callable at the option of the FHLB. If an advance is called, the Bank has the option to payoff the advance without penalty, re-borrow funds on different terms, or convert the advance to a three-month floating rate advance tied to LIBOR. As of September 30, 2005 - ----------------------------------------------------------------------------------------------------------- Borrow Date Maturity Date Amount Int. Rate Type Call Dates - ----------- ------------- ---------- --------- ----------- --------------------------------- 11/07/02 11/07/12 5,000,000 3.354% 1 Time Call 11/07/07 10/24/03 10/24/08 10,000,000 2.705% Multi-call 10/24/06 and quarterly thereafter 12/10/03 12/10/08 5,000,000 2.16% Multi-call 12/12/05 and quarterly thereafter 02/20/04 02/20/14 5,000,000 3.225% 1 Time Call 02/20/09 04/16/04 04/16/14 3,000,000 3.33% 1 Time Call 04/16/08 09/16/04 09/16/09 5,000,000 3.09% 1 Time Call 09/17/07 06/24/05 06/24/15 5,000,000 3.71% 1 Time Call 06/24/10 06/24/05 06/24/10 5,000,000 3.1816% 1 Time Call 06/26/06 07/22/05 07/22/15 5,000,000 3.79% 1 Time Call 07/22/08
9 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued As of March 30, 2005 - ----------------------------------------------------------------------------------------------------------- Borrow Date Maturity Date Amount Int. Rate Type Call Dates - ----------- ------------- ---------- --------- ----------- --------------------------------- 11/10/00 11/10/05 5,000,000 5.85% Multi-Call 05/10/05 and quarterly thereafter 09/04/02 09/04/07 5,000,000 2.82% 1 Time Call 09/06/05 11/07/02 11/07/12 5,000,000 3.35% 1 Time Call 11/07/07 10/24/03 10/24/08 10,000,000 2.705% Multi-Call 10/24/06 and quarterly thereafter 12/10/03 12/10/08 5,000,000 2.16% Multi-Call 12/12/05 and quarterly thereafter 02/20/04 02/20/14 5,000,000 2.14% 1 Time Call 02/20/09 04/16/04 04/16/14 3,000,000 3.33% 1 Time Call 04/16/08
7. Regulatory Matters The following table reconciles the Bank's shareholders' equity to its various regulatory capital positions: September 30, March 31, 2005 2005 (In Thousands) --------------------------------- Bank's Shareholders' Equity $ 36,724 $ 34,690 Unrealized Loss (Gain) On Available For Sale Of Securities, Net Of Tax 812 962 Reduction For Goodwill And Other Intangibles - - ------------- ------------ Tangible Capital 37,536 35,652 Qualifying Core Deposits And Intangible Assets - - ------------- ------------ Core Capital 37,536 35,652 Supplemental Capital 4,512 4,236 Assets Required To Be Deducted (10) (30) ------------- ------------ Risk-Based Capital $ 42,038 $ 39,858 ============= ============ The following table compares the Bank's capital levels relative to the applicable regulatory requirements at September 30, 2005: (Dollars in Thousands) ---------------------------------------------------------------------------------- Amt. Required % Required Actual Amt. Actual % Excess Amt. Excess % ---------------------------------------------------------------------------------- Tangible Capital $ 12,287 2.0% $ 37,536 6.11% $ 25,249 4.11% Tier 1 Leverage (Core) Capital 24,573 4.0% 37,536 6.11% 12,963 2.11% Total Risk-Based Capital 28,892 8.0% 42,038 11.64% 13,146 3.64% Tier 1 Risk-Based (Core) Capital 14,437 4.0% 37,536 10.40% 23,099 6.40%
8. Earnings Per Share The Company calculates earnings per share ("EPS") in accordance with SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies the computation, presentation and disclosure requirements for EPS for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market. This standard specifies computation and presentation requirements for both basic EPS and, for entities with complex capital structures, diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding. Diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. The dilutive effect of options outstanding under the Company's stock option plan is reflected in diluted earnings per share by application of the treasury stock method. 10 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued The following table provides a reconciliation of the numerators and denominators of the basic and diluted EPS computations: For the Quarter Ended -------------------------------------------------------- September 30, 2005 -------------------------------------------------------- Income (Numerator) Amount Shares (Denominator) Per Share ------------------ -------------------- ----------- Basic EPS $ 949,680 2,527,533 $ 0.38 Effect of Diluted Securities: Stock Options - 48,466 (0.008) ESOP - 9,544 (0.002) ----------------- -------------------- ----------- Diluted EPS $ 949,680 2,585,543 $ 0.37 ================= ==================== =========== For the Quarter Ended -------------------------------------------------------- September 30, 2004 -------------------------------------------------------- Income (Numerator) Amount Shares (Denominator) Per Share ------------------ -------------------- ----------- Basic EPS $ 800,006 2,519,627 $ 0.32 Effect of Diluted Securities: Stock Options - 22,417 (0.006) ESOP - 13,730 (0.004) ----------------- ------------------- ----------- Diluted EPS $ 800,006 2,555,774 $ 0.31 ================= =================== =========== For the Six Months Ended -------------------------------------------------------- September 30, 2005 -------------------------------------------------------- Income (Numerator) Amount Shares (Denominator) Per Share ------------------ -------------------- ----------- Basic EPS $ 1,878,922 2,528,961 $ 0.74 Effect of Diluted Securities: Stock Options - 30,670 (0.007) ESOP - 11,243 (0.003) ----------------- ------------------- ----------- Diluted EPS $ 1,878,922 2,570,874 $ 0.73 ================= =================== =========== For the Six Months Ended -------------------------------------------------------- September 30, 2004 -------------------------------------------------------- Income (Numerator) Amount Shares (Denominator) Per Share ------------------ -------------------- ----------- Basic EPS $ 1,602,033 2,521,114 $ 0.64 Effect of Diluted Securities: Stock Options - 26,009 (0.007) ESOP - 12,210 (0.003) ----------------- ------------------- ----------- Diluted EPS $ 1,602,033 2,559,333 $ 0.63 ================== =================== =========== 11 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 9. Stock-Based Compensation The Company has a stock-based employee compensation plan which is accounted for under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation cost is reflected in net income, as all stock options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," had been applied to stock-based employee compensation for the six months and three months ended September 30, 2005 and 2004, respectively. Three Months Ended Six Months Ended September 30, September 30, 2005 2004 2005 2004 --------- --------- ---------- ---------- Net income, as reported $ 949,680 $ 800,006 $1,878,922 $1,602,033 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect $ (30,570) $ (57,124) $ (61,140) $ (114,248) Net Income, Pro Forma $ 919,110 $ 742,882 $1,817,782 $1,487,785 Basic earnings share: As Reported $ 0.38 $ 0.32 $ 0.74 $ 0.64 Pro Forma $ 0.36 $ 0.30 $ 0.72 $ 0.59 Diluted earnings share: As reported $ 0.37 $ 0.31 $ 0.73 $ 0.63 Pro forma $ 0.36 $ 0.29 $ 0.71 $ 0.58 12 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Changes in Financial Condition Total assets of the Company increased $27.6 million or 4.7% to $613.5 million during the six months ended September 30, 2005 primarily as a result of an increase of $3.8 million or 48.2% in cash and cash equivalents and an increase of $22.9 million or 7.2% in net loans receivable. Residential real estate loans, net of loans in process, increased $2.0 million or 1.9% during the six months ended September 30, 2005, commercial loans increased $18.1 million or 11.1%, while consumer loans increased $3.6 million or 7.0%. Loans held for sale decreased $489,000 or 21.9% during the same period. Repossessed assets decreased $29,000 to $24,000 during the six months ended September 30, 2005. Non-accrual loans totaled $1.2 million at September 30, 2005 compared to $2.4 million at March 31, 2005. The decrease in non- accrual loans is attributable to collection efforts. The Bank classifies all loans as non-accrual when they become 90 days or more delinquent. At September 30, 2005, the Bank held $1.4 million in impaired loans compared to $1.2 million at March 31, 2005. The Bank includes troubled debt restructuring ("TDR") within the meaning of SFAS No. 114 in impaired loans. At September 30, 2005, the Bank had six loans totaling $425,000 in TDR's compared to six loans totaling $434,000 at March 31, 2005. Included in the six loans is a consumer loan TDR of $13,000 secured by a second mortgage on a residential dwelling, which was over 60 days delinquent as of September 30, 2005. The other five TDR's consisted of a commercial loan TDR of $204,000 secured by equipment, two consumer loans totaling $137,000 secured by residential dwellings, a $18,000 unsecured commercial loan, and a $54,000 commercial loan secured by two rental properties, all of which were current as of September 30, 2005. Deposits increased $19.4 million or 4.5% to $449.7 million during the six months ended September 30, 2005 as a result of competitive rates offered by the Bank. FHLB advances increased $4.9 million or 4.4% to $116.9 million during the same period. Other borrowings, consisting of commercial repurchase sweep accounts, increased $508,000 or 9.1% to $6.1 million during the six-month period. The Board of Directors of the Company declared the 58th and 59th consecutive quarterly dividend of $.04 and $.04 per share, in April and July 2005, respectively, which totaled $203,000. The employee stock ownership trust paid $61,000 of principal on the employee stock ownership plan loan during the six-month period. Unrealized net losses on securities available for sale, net of tax, decreased $150,000 during the six months ended September 30, 2005 as a result of slight decrease in interest rates. The Company's net income for the six-month period was $1.9 million. These items, in total, increased shareholders' equity by $2.0 million or 5.8% during the six months ended September 30, 2005. Book value per share was $14.59 at September 30, 2005 compared to $13.92 at March 31, 2005. Liquidity and Capital Resources In accordance with Office of Thrift Supervision ("OTS") regulations, the Company is required to maintain sufficient liquidity to operate in a safe and sound manner. The Company's current liquidity level is deemed adequate to meet the requirements of normal operations, potential deposit outflows, and loan demand while still allowing for optimal investment of funds and return on assets. Loan repayments and maturities of investments are a significant source of funds, whereas loan disbursements and the purchase of investments are a primary use of the Company's funds. During the six months ended September 30, 2005, loan disbursements exceeded loan repayments resulting in a $22.9 million or 7.2% increase in total net loans receivable. Deposits and other borrowings are also an important source of funds for the Company. During the six months ended September 30, 2005, deposits increased $19.4 million and FHLB advances increased $4.9 million. The Bank had $67.1 million in additional borrowing capacity at the FHLB at the end of the period. At September 30, 2005, the Bank had $123.4 million of certificates of deposit maturing within one year. Based on previous experience, the Bank anticipates a significant portion of these certificates will be renewed. 13 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources, Continued Through its operations, the Bank has made contractual commitments to extend credit in the ordinary course of its business activities. These commitments are legally binding agreements to lend money to the Bank's customers at predetermined interest rates for a specified period of time. At September 30, 2005, the Bank had $29.7 million in unused consumer lines of credit, including home equity lines and unsecured lines. The Bank also had $32.9 million in unused commercial lines of credit and $1.1 million in letters of credit committed to customers. The majority of the $63.7 million will not be drawn at the same time. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, by the Bank upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate. The Bank manages the credit risk on these commitments by reviewing them based on normal underwriting and risk management processes. Historically, the Company's cash flows from operating activities have been relatively stable. The cash flow from investing activities have had a trend of increasing outflows as a result of increases in purchases of mortgage-backed and investment securities. The cash flows from financing activities have had a trend of increased inflows as a result of increases in FHLB advances. Management believes that the Company's liquidity will continue to be supported by the Company's deposit base and borrowing capacity during the next year. Critical Accounting Policies The Company has adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States in the preparation of the Company's Consolidated Financial Statements. The Company's significant accounting policies are described in the footnotes to the audited Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended March 31, 2005. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities. Management considers these accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which management believes to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the Company's carrying values of assets and liabilities and results of operations. The allowance for loan losses is a critical accounting policy that requires the most significant judgements and estimates used in preparation of the Company's consolidated financial statements. The Company provides for loan losses using the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to the allowance for loan losses. Additions to the allowance for loan losses are provided by charges to operations based on various factors, which, in Management's judgment, deserve current recognition in estimating possible losses. Such factors considered by Management include the fair value of the underlying collateral, stated guarantees by the borrow, if applicable, the borrower's ability to repay from other economic resources, growth and composition of the loan portfolios, the relationship of the allowance for loan losses to the outstanding loans, loss experience, delinquency trends, and general economic conditions. Management evaluates the carrying value of the loans periodically and the allowance is adjusted accordingly. While Management uses the best information available to make evaluations, future adjustments may be necessary if economic conditions differ substantially from the assumptions used in making these evaluations. Allowance for loan losses are subject to periodic evaluations by various authorities and may be subject to adjustments based upon the information that is available at the time of their examination. The Company values impaired loans at the loan's fair value if it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement at the present value of expected cash flows, the market price of the loan, if available, or the value of the underlying collateral. Expected cash flows are required to be discounted at the loan's effective interest rate. When the ultimate collectibility of an impaired loan's principal is in doubt, wholly or partially, all cash receipts are applied to principal. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first to interest then to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off. 14 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Accounting and Reporting Changes The following is a summary of recent authoritative pronouncements that affect accounting, reporting, and disclosure of financial information by the Company: In April 2005, the Securities and Exchange Commission's ("SEC") Office of the Chief Accountant and its Division of Corporation Finance has released Staff Accounting Bulletin ("SAB") No. 107 to provide guidance regarding the application of Financial Accounting Standards Board ("FASB") Statement No. 123 (revised 2004), "Share-Based Payment." Statement No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SAB 107 provides interpretive guidance related to the interaction between Statement No. 123(R) and certain SEC rules and regulations, as well as the staff's views regarding the valuation of share- based payment arrangements for public companies. SAB 107 also reminds public companies of the importance of including disclosures within filings made with the SEC relating to the accounting for share-based payment transactions, particularly during the transition to Statement No. 123(R). In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions." The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, APB Opinion No. 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. APB Opinion No. 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this Statement shall be applied prospectively. The adoption of this Statement is not expected to have a material impact on the financial condition or operating results of the Company. In December 2004, the FASB issued SFAS No, 123 (revised 2004), "Share-Based Payments" ("SFAS No. 123(R)"). SFAS No. 123(R) will require companies to measure all employee stock-based compensation awards using a fair value method and record such expense in their financial statements. In addition, the adoption of SFAS No. 123(R) requires additional accounting and disclosure related to the income tax and cash flow effects resulting from share-based payments arrangements. SFAS No. 123(R) is effective beginning as of the first interim or annual reporting period beginning after June 15, 2005. The Company is currently evaluating the impact that the adoption of SFAS No. 123(R) will have on its financial position, results of operations and cash flow. In March 2004, the SEC issued SAB No. 105, "Application of Accounting Principles to Loan Commitments," to inform registrants of the staff's view that the fair value of the recorded loan commitments should not consider the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB No. 105 must be applied to the loan commitments accounted for as derivatives that are entered into after March 31, 2004. The Staff will not object to the application of existing accounting practices to loan commitments accounted for as derivatives that are entered into on or before March 31, 2004, with appropriate disclosures. The Company adopted the provisions of SAB No. 105 on April 1, 2004. The adoption of SAB No. 105 did not have a material impact on the Company's financial condition or results of operations. In December 2003, the FASB issued FIN No. 46 (revised), "Consolidation of Variable Interest Entities" ("FIN No. 46(R)"), which addresses consolidation by business enterprises of variable interest entities. FIN No. 46(R) requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. FIN No. 46(R) also requires disclosure about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. FIN No. 46(R) provides guidance for determining whether an entity qualifies as a variable interest entity by considering, among other considerations, whether the entity lacks sufficient equity holders lack adequate decision-making ability. The consolidation requirements of FIN No. 46(R) applied immediately to variable interest created after January 31, 2003. The consolidation requirements applied to the Company's existing variable entities in the first reporting ending after March 15, 2004. Certain of the disclosure requirements applied to all financial statements issued after December 31, 2003, regardless of when the variable interest entity was established. The adoption of FIN No. 46(R) did not have any impact on the Company's financial position or results of operations. 15 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Accounting and Reporting Changes, Continued In November 2003, the Emerging Issues Task Force ("EITF") reached a consensus that certain quantitative and qualitative disclosures should be required for debt and marketable equity securities classified as available-for-sale or held-to-maturity under SFAS No. 115 and SFAS No. 124 that are impaired at the balance sheet data but for which other-than-temporary impairments has not been recognized. Accordingly the EITF issued EITF No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." This issue addresses the meaning of other-than-temporary impairments and its application to investments classified as either available-for-sale or held-to-maturity under SFAS No. 115 and provides guidance on quantitative and qualitative disclosures. The disclosure requirements of EITF No. 03-1 are effective for financial statements for fiscal years ending after June 15, 2004. The effective date for the measurement and recognition guidance of EITF No. 03-1 has been delayed. The FASB staff has issued a proposed Board-directed FASB Staff Position ("FSP"), FSP EITF 03-1-a, "Implementation Guidance for the Application of Paragraph 16 of Issue No. 03-1." The proposed FSP would provide implementation guidance with respect to debt securities that are impaired due to interest rates and/or sector spreads and analyzed for other-than-temporary impairments under the measurement and recognition requirements of EITF No. 03-1. The delay of the effective date for the measurement and recognition requirements of EITF No. 03-1 will be superseded concurrent with the final issuance of FSP EITF 03-1-a. Adopting the disclosure provisions of EITF No. 03-1 did not have any impact on the Company's financial position or results of operations. Impact of Inflation and Changing Prices The consolidated financial statements, related notes, and other financial information presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in relative purchasing power over time due to inflation. Unlike industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than does inflation. See "Item 3. Quantitative and Qualitative Disclosures about Market Risk" for additional discussions of changes in interest rates. 16 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 - ------------------------------------------------------------------- Net Income Net income was $950,000 for the three months ended September 30, 2005, representing an increase in earnings of $150,000 or 18.7% from $800,000 for the same period in 2004. The primary reason for the increased earnings was an increase in net interest income offset partially by an increase in general and administrative expenses. Net Interest Income Net interest income increased $690,000 or 20.5% to $4.1 million during the three months ended September 30, 2005 as a result of an increase in interest income offset in part by an increase in interest expense. Average interest earning assets increased $49.7 million while average interest-bearing liabilities increased $41.4 million. The interest rate spread increased 20 basis points to 2.52% during the three months ended September 30, 2005 compared to the same period in 2004. Interest income on loans increased $1.6 million or 39.5% to $5.6 million during the three months ended September 30, 2005 as a result of the average loan portfolio balance increasing by $57.0 million and the yield in the loan portfolio increasing 82 basis points. Because of a 16 basis point increase in the yield in the investment portfolio, interest income from investment, mortgage-backed, and other securities increased $6,700 or 0.3% despite a decrease in the average balance of the investment portfolio of $11.5 million. Total interest income increased $1.6 million or 25.5% to $7.8 million for the three months ended September 30, 2005 from $6.2 million for the same period in 2004. Total interest expense increased $904,000 or 31.4% to $3.8 million during the three months ended September 30, 2005 compared to $2.9 million for the same period one-year earlier. Interest expense on deposits increased $815,000 or 43.7% during the period as average interest bearing deposits grew $29.5 million compared to the average balance in the three months ended September 30, 2004 while the cost of deposits increased 66 basis points. Interest expense on advances and other borrowings increased $88,000 or 8.7% as the cost of debt outstanding decreased 6 basis points during the 2005 period compared to 2004 while average total borrowings outstanding increased approximately $11.9 million. Provision for Loan Losses The Bank's provision for loan losses was $165,000 during the three months ended September 30, 2005 compared to $195,000 for the quarter ended September 30, 2004. The amount of the provision is determined by management's on-going monthly analysis of the loan portfolio. Non-accrual loans, which are loans delinquent 90 days or more, were $1.2 million at September 30, 2005 compared to $2.4 million at March 31, 2005. The decrease in non-accrual loans is a result of collection efforts. The ratio of allowance for loan losses to the Company's total loans was 1.89% at September 30, 2005 compared to 1.94% at March 31, 2005. Net charge-offs were $60,000 during the three months ended September 30, 2005 compared to $33,000 during the same period in 2004. Other Income Total other income increased $24,000 or 3.4% to $749,000 during the three months ended September 30, 2005 compared to $724,000 for the same period a year ago, primarily as a result of an increase in net gain on sale of investments. Gain on sale of loans increased $1,900 or 1.6% to $118,000 during the period as the origination and sale of fixed rate mortgages increased. Loan servicing fees increased $8,700 or 20.1% to $52,000 while service fees on deposit accounts decreased $23,000 or 7.3% to $289,000. Other miscellaneous income including credit life insurance commissions, net gain on sale of repossessed assets, safe deposit rental income, annuity and stock brokerage commissions, trust fees, and other miscellaneous fees increased $5,100 or 2.0% to $258,000 during the three months ended September 30, 2005 compared to $253,000 for the same period last year. 17 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005, CONTINUED - ------------------------------------------------------------------------------ General and Administrative Expenses General and administrative expenses increased $460,000 or 17.0% to $3.2 million during the three months ended September 30, 2005 compared to $2.7 million for the same period in 2004. Salaries and employee benefits expense increased $249,000 or 15.7%. Occupancy expense increased $50,000 or 18.6% primarily as a result of branch renovations, additional office space being rented and increases in landscaping costs. Advertising expense increased $600 to $44,000. Depreciation and maintenance of equipment expense decreased $2,800 or 1.1% to $258,000 during the quarterly period. FDIC insurance premiums remained the same at $14,000 during the quarters ended September 2005 and 2004. Other miscellaneous expense, consisting of legal, professional, and consulting expenses, stationery and office supplies, and other sundry expenses, increased $163,000 or 30.3% to $701,000 for the three months ended September 30, 2005 compared to the three months ended September 30, 2004. RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2005 - ----------------------------------------------------------------- Net Income Net income was $1.9 million for the six months ended September 30, 2005, representing an increase in earnings of $277,000 or 17.3% from $1.6 million for the same period in 2004. The primary reason for the increased earnings was an increase in net interest income offset partially by an increase in general and administrative expenses. Net Interest Income Net interest income increased $1.2 million or 17.1% to $8.0 million during the six months ended September 30, 2005 as a result of an increase in interest income offset in part by an increase in interest expense. Average interest earning assets increased $50.5 million while average interest-bearing liabilities increased $42.8 million. The interest rate spread increased 12 basis points to 2.51% during the six months ended September 30, 2005 compared to the same period in 2004. Interest income on loans increased $2.9 million or 37.4% to $10.8 million during the six months ended September 30, 2005 as a result of the average loan portfolio balance increasing by $63.0 million and the yield in the loan portfolio increasing 66 basis points. Because of a 19 basis point increase in the yield in the investment portfolio, interest income from investment, mortgage-backed, and other securities increased $26,000 or 0.6% despite a decrease in the average balance of the investment portfolio of $12.5 million. Total interest income increased $2.9 million or 24.1% to $15.2 million for the six months ended September 30, 2005 from $12.3 million for the same period in 2004. Total interest expense increased $1.8 million or 32.8% to $7.3 million during the six months ended September 30, 2005 compared to $5.5 million for the same period one-year earlier. Interest expense on deposits increased $1.6 million or 45.2% during the period as average interest bearing deposits grew $33.2 million compared to the average balance in the six months ended September 30, 2004 while the cost of deposits increased 64 basis points. Interest expense on advances and other borrowings increased $181,000 or 9.5% as the cost of debt outstanding increased 2 basis points during the 2005 period compared to 2004 while average total borrowings outstanding increased approximately $9.6 million. Provision for Loan Losses The Bank's provision for loan losses was $330,000 during the six months ended September 30, 2005 compared to $390,000 for the quarter ended September 30, 2004. The amount of the provision is determined by management's on-going monthly analysis of the loan portfolio. Non-accrual loans, which are loans delinquent 90 days or more, were $1.2 million at September 30, 2005 compared to $2.4 million at March 31, 2005. The decrease in non-accrual loans is a result of collection efforts. The ratio of allowance for loan losses to the Company's total loans was 1.89% at September 30, 2005 compared to 1.94 % at March 31, 2005. Net charge-offs were $82,388 during the six months ended September 30, 2005 compared to $71,000 during the same period in 2004. 18 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2005, CONTINUED - ---------------------------------------------------------------------------- Other Income Total other income increased $56,000 or 4.0% to $1.4 million during the six months ended September 30, 2005 compared to the same period a year ago, primarily as a result of an increase in net gain on sale of investments. Gain on sale of loans increased $15,000 or 6.2% to $254,000 during the period as the origination and sale of fixed rate mortgages increased. Loan servicing fees increased $14,000 or 15.7% to $101, 000 while service fees on deposit accounts decreased $53,000 or 8.5% to $572,000. Other miscellaneous income including credit life insurance commissions, net gain on sale of repossessed assets, safe deposit rental income, annuity and stock brokerage commissions, trust fees, and other miscellaneous fees increased $32,000 or 7.3% to $464,000 during the six months ended September 30, 2005. General and Administrative Expenses General and administrative expenses increased $763,000 or 14.1% to $6.2 million during the six months ended September 30, 2005 compared to $5.4 million for the same period in 2004. Salaries and employee benefits expense increased $411,000 or 12.9% to $3.6 million. Occupancy expense increased $107,000 or 20.5% to $631,000 primarily as a result of branch renovations, additional office space being rented and increases in landscaping costs. Advertising expense decreased $5,500 or 7.4% to $69,000. Depreciation and maintenance of equipment expense decreased $27,000 or 5.0% to $510,000 during the six month period compared to $537,000 for the same period last year. FDIC insurance premiums remained the same during the six months ended September 30, 2005 and 2004. Other miscellaneous expense, consisting of legal, professional, and consulting expenses, stationery and office supplies, and other sundry expenses, increased $276,000 or 26.2% to $1.3 million for the six months ended September 30, 2005 compared to $1.1 million for the six months ended September 30, 2004. 19 Security Federal Corporation and Subsidiaries Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises principally from interest rate risk inherent in its lending, investment, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Company manages other risks such as credit quality and liquidity risk in the normal course of business, management considers interest rate risk to be its most significant market risk that could potentially have the largest material effect on the Company's financial condition and results of operations. Other types of market risks such as foreign currency exchange rate risk and commodity price do not arise in the normal course of the Company's business activities. The Company's profitability is affected by fluctuations in the market interest rate. Management's goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. A sudden and substantial increase or decrease in interest rates may adversely impact the Company's earnings to the extent that the interest rates on interest-earning assets and interest-bearing liabilities do not change at the same rate, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using a test that measures the impact on net interest income and net portfolio value of an immediate change in interest rates in 100 basis point increments and by measuring the Bank's interest sensitivity gap ("Gap"). Net portfolio value is defined as the net present value of assets, liabilities, and off-balance sheet contracts. Gap is the amount of interest sensitive assets repricing or maturing over the next twelve months compared to the amount of interest sensitive liabilities maturing or repricing in the same time period. Recent net portfolio value reports furnished by the OTS indicate that the Bank's interest rate risk sensitivity has increased slightly over the past year. For the three and six month periods ended September 30, 2005, the Bank's interest rate spread, defined as the average yield on interest bearing assets less the average rate paid on interest bearing liabilities was 2.52% and 2.51%, respectively. As of the year ended March 31, 2005, the interest rate spread was 2.45%. The interest rate spread increased as a result of the growth of loan receivables. Loan receivables earn a higher yield than investment securities. However, if interest rates were to increase suddenly and significantly, the Bank's net interest income and net interest spread would be compressed. Item 4. Controls and Procedures An evaluation of the Company's disclosure controls and procedures (as defined in Sections 13a - 15(e) and 15d-15(e) of the Securities Exchange Act of 1934) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management as of the end of the period covered by this quarterly report. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission's rules and forms. In the quarter ended September 30, 2005, 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. While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures. The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all error and fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected. 20 Security Federal Corporation and Subsidiaries Part II: Other Information Item 1 Legal Proceedings ----------------- The Company is not engaged in any legal proceedings of a material nature at the present time. From time to time, the Company is a party to legal proceedings in the ordinary course of business wherein it enforces its security interest in mortgage loans it has made. Item 2 Unregistered Sales of Equity Securities and Use Of Proceeds ----------------------------------------------------------- (c)Total No. of Shares Purchased as (d)Maximum No. (a)Total Part of of Shares No. of (b)Average Publicly that May Yet Shares Price Paid Announced Be Purchased Period Purchased per Share Plan(1) Under the Plan - --------------- --------- --------- ---------- -------------- July 1 - July 31, 2005 135 $21.50 135 124,665 (1) August 1 - August 30, 2005 300 $22.00 300 124,365 September 1 - September 30, 2005 - - - - Total 435 $21.84 435 124,365 (1) On May 17, 2005, the Company's Board of Directors authorized a 5% repurchase plan, or 126,000 shares of the Company's outstanding common stock. As of September 30, 2005, 1,635 shares have been repurchased under this program. Item 3 Defaults Upon Senior Securities ------------------------------ None Item 4 Submission Of Matters To A Vote Of Security Holders --------------------------------------------------- The election of directors was presented for vote to the shareholders at the Annual Meeting held July 21, 2005. Votes for Harry O. Weeks, Jr. were as follows: 1,897,350 votes for, 19,301 withheld. Votes for Robert E. Alexander were as follows: 1,897,350 votes for, 19,301 votes withheld. Votes for William Clyburn were as follows: 1,890,797 votes for, 25,854 votes withheld. Votes for Roy G. Lindburg were as follows: 1,894,951 for, 21,700 votes withheld. Directors continuing in office are T. Clifton Weeks, Timothy W. Simmons, G.L. Toole, III, Robert E. Johnson, Thomas L. Moore, and J. Chris Verenes. Item 5 Other Information ----------------- None Item 6 Exhibits -------- (a) Exhibits: 3.1 Articles Of Incorporation (1) 3.2 Articles Of Amendment, Dated August 28, 1998, To Articles Of Incorporation 3.3 Bylaws (2) 10.1 Executive Compensation Plans And Arrangements: 10.2 Salary Continuation Agreements (3) 10.3 Amendment One To Salary Continuation Agreements (4) 10.4 Stock Option Plan (3) 10.5 1999 Stock Option Plan (5) 10.6 2002 Stock Option Plan (6) 10.7 Form of Incentive Stock Option Award Agreement 21 Security Federal Corporation and Subsidiaries Part II: Other Information, Continued 10.8 Form of Non-Qualified Stock Option Award Agreement 10.9 Incentive Compensation Plan (3) 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. 32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act. (1) Filed as an exhibit to the Company's June 23, 1998 proxy statement and incorporated herein by reference. (2) Filed as an exhibit to the Company's Form 8-K filed September 1, 1998 and incorporated herein by reference. (3) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended March 31, 1993 and incorporated herein by reference. (4) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended December 30, 1993 and incorporated herein by reference. (5) Filed as an exhibit to the Company's Registration Statement on Form S-8 filed March 2, 2002 and incorporated herein by reference. (6) Filed as an exhibit to the Company's June 19, 2002 proxy statement and incorporated herein by reference. Signatures Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to the signed on its behalf by the undersigned thereunto duly authorized. SECURITY FEDERAL CORPORATION Date: November 9, 2005 By:/s/Timothy W. Simmons ------------------------------- Timothy W. Simmons President Duly Authorized Representative Date: November 9, 2005 By:/s/Roy R. Lindburg ------------------------------- Roy G. Lindburg Treasurer/CFO Duly Authorized Representative 22 Exhibit 10.7 Form of Incentive Stock Option Award Agreement 23 STOCK OPTION AGREEMENT FOR INCENTIVE STOCK OPTIONS PURSUANT TO THE SECURITY FEDERAL CORPORATION 2002 STOCK OPTION PLAN OPTION for a total of ________________ Shares of common stock, par value $0.01 per share, of SECURITY FEDERAL CORPORATION (the "Company"), which Option is intended to qualify as an Incentive Stock Option under Section 422 of the Internal Revenue Code of 1986, as amended, is hereby granted to ______ (the "Optionee") at an exercise price determined as provided in, and in all respects subject to, the terms, definitions and provisions of the 2002 Stock Option Plan (the "Plan") adopted by the Company, which is incorporated by reference herein, receipt of which is hereby acknowledged. 1. Exercise Price. This Option shall be exercisable at $_______ for each Share, being no less than 100 percent of the fair market value of the common stock of the Company as determined pursuant to the Plan. 2. Exercise of Option. (a) Vesting. This Option shall be exercisable as follows: Years of Employment Percent After Grant Date Exercisable ------------------ ------------ 5 20 6 40 7 60 8 80 9 100 (b) Method of Exercise. The notice of exercise of this Option shall be in the form prescribed by the Committee referred to in Section 3 of the Plan. The date of exercise is the date on which such notice is received by the Company. Such notice shall be accompanied by payment in full of the Exercise Price for the Option Shares to be purchased upon such exercise. Payment shall be made (i) in cash, which may be in the form of a check, money order, cashier's check or certified check, payable to the Company, or (ii) by delivering shares of Common Stock already owned by the Optionee having a Market Value equal to the Exercise Price, or (iii) a combination of cash and such shares. Promptly after such payment, subject to any withholding that may be owed by the Optionee, the Company shall issue and deliver to the Optionee or other person exercising this Option a certificate or certificates representing the shares of Common Stock so purchased, registered in the name of the Optionee (or such other person), or, upon request, in the name of the Optionee (or such other person) and in the name of another in such form of joint ownership as requested by the Optionee (or such other person) pursuant to applicable law. 3. Nontransferability of Option. Except as otherwise provided in the Plan, this Option may not be transferred in any manner otherwise than by will or the laws of descent or distribution and may be exercised during the lifetime of the Optionee only by the Optionee. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 4. Term of Option. Subject to Section 2(a) of this Agreement, this Option is exercisable through and including the tenth anniversary of the date of grant; provided, however, that this Option may be exercised during such term only in accordance with the Plan and this Agreement. 5. Termination of Service or Death of the Optionee. Except as provided in this Section 5 and Section 6, notwithstanding any other provision of this Option to the contrary, this Option shall be exercisable only if the Optionee has not incurred a Termination of Service at the time of such exercise. 24 If the Optionee incurs a Termination of Service for any reason excluding death and Termination of Service for Cause, the Optionee may, but only within the period of three months (or one year in the case of disability, as defined in Section 22(e)(3) of the Code) immediately succeeding such Termination of Service and in no event after the Expiration Date, exercise this Option to the extent the Optionee was entitled to exercise this Option on the date of Termination of Service. If the Optionee incurs a Termination of Service for Cause, all rights under this Option shall expire immediately upon the giving to the Optionee of notice of such termination. In the event of the death of the Optionee prior to the Optionee's Termination of Service or during the three-month period referred to in the immediately preceding paragraph, the person or persons to whom the Option has been transferred by will or by the laws of descent and distribution may, but only to the extent the Optionee was entitled to exercise this Option on the date of the Optionee's death, exercise this Option at any time within one year following the death of the Optionee, but in no event after the Expiration Date. Following the death of the Optionee, the Committee may, in its sole discretion, as an alternative means of settlement of this Option, elect to pay to the person to whom this Option is transferred by will or by the laws of descent and distribution, the amount by which the Market Value per share of Common Stock on the date of exercise of this Option shall exceed the Exercise Price per Option Share, multiplied by the number of Option Shares with respect to which this Option is properly exercised. Any such settlement of this Option shall be considered an exercise of this Option for all purposes of this Option and of the Plan. 6. Plan and Plan Interpretations as Controlling. This Option and the terms and conditions herein set forth are subject in all respects to the terms and conditions of the Plan, which are controlling. All determinations and interpretations made in the discretion of the Committee shall be final and conclusive upon the Optionee or his legal representatives with regard to any question arising hereunder or under the Plan. 7. Optionee Service. Nothing in this Option shall limit the right of the Company or any of its Affiliates to terminate the Optionee's service as a director, emeritus director, or employee, or otherwise impose upon the Company or any of its Affiliates any obligation to employ or accept the services of the Optionee. Optionee ----------------------------------- By: -------------------------------- For the Board of Directors Date of Grant Attest: (Seal) ---------------- --------------------------- 25 Exhibit 10.8 Form of Non-Qualified Stock Option Award Agreement 26 STOCK OPTION AGREEMENT FOR NON-QUALIFIED STOCK OPTIONS PURSUANT TO THE SECURITY FEDERAL CORPORATION 2002 STOCK OPTION PLAN NON-QUALIFIED STOCK OPTION for a total of _____ Shares of common stock, par value $0.01 per share, of SECURITY FEDERAL CORPORATION. (the "Company"), is hereby granted to _________________ (the "Optionee") at an exercise price determined as provided in, and in all respects subject to, the terms, definitions and provisions of the 2002 Stock Option Plan (the "Plan") adopted by the Company, which is incorporated by reference herein, receipt of which is hereby acknowledged. 1. Exercise Price. This Non-Qualified Stock Option shall be exercisable at $____ for each Share, being no less than 100 percent of the fair market value of the common stock of the Company as determined pursuant to the Plan. 2. Exercise of Option. (a) Vesting. This Non-Qualified Stock Option shall be exercisable as follows: Years of Service Percent After Grant Date Exercisable ------------------- -------------- 5 20 6 40 7 60 8 80 9 100 (b) Method of Exercise. This Non-Qualified Stock Option shall be exercisable by a written notice which shall: (i) State the election to exercise the Non-Qualified Stock Option, the number of Shares with respect to which it is being exercised, the person in whose name the stock certificate or certificates for such Shares is to be registered, his address and Social Security Number (or if more than one, the names, addresses and Social Security Numbers of such persons); (ii) Be signed by the person or persons entitled to exercise the Non-Qualified Stock Option and, if the Non-Qualified Stock Option is being exercised by any person or persons other than the Optionee, be accompanied by proof, satisfactory to counsel for the Company, of the right of such person or persons to exercise the Non-Qualified Stock Option; and (iii) Be in writing and delivered in person or by certified mail to the Treasurer of the Company or any other person designated by the Stock Option Committee of the Company. Payment of the purchase price of any Shares with respect to which the Non-Qualified Stock Option is being exercised shall be by certified or bank cashier's or teller's check or as otherwise provided by the Plan. The certificate or certificates for Shares as to which the Non-Qualified Stock Option shall be exercised shall be registered in the name of the person or persons designated by the Optionee. (c) Restrictions on exercise. This Non-Qualified Stock Option may not be exercised if the issuance of the Shares upon such exercise would constitute a violation of any applicable federal or state securities or other law or valid regulation. As a condition to the Optionee's exercise of this option, the Company may require the person exercising this option to make 27 any representation and warranty to the Company as may be required by any applicable law or regulation. 3. Nontransferability of Non-Qualified Stock Option. Except as otherwise provided in the Plan, this Non-Qualified Stock Option may not be transferred in any manner otherwise than by will or the laws of descent or distribution and may be exercised during the lifetime of the Optionee only by the Optionee. The terms of this Non-Qualified Stock Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 4. Term of Non-Qualified Stock Option. Subject to Section 2(a) of this Agreement, this Non-Qualified Stock Option is exercisable through and including the tenth anniversary of the date of grant; provided, however, that this Non-Qualified Stock Option may be exercised during such term only in accordance with the Plan and this Agreement. 5. Plan and Plan Interpretations as Controlling. This Non-Qualified Stock Option and the terms and conditions herein set forth are subject in all respects to the terms and conditions of the Plan, which are controlling. All determinations and interpretations made in the discretion of the Committee shall be final and conclusive upon the Optionee or his legal representatives with regard to any question arising hereunder or under the Plan. 6. Optionee Service. Nothing in this Non-Qualified Stock Option shall limit the right of the Company or any of its Affiliates to terminate the Optionee's service as a director, emeritus director, or employee, or otherwise impose upon the Company or any of its Affiliates any obligation to employ or accept the services of the Optionee. Optionee ----------------------------------- By: -------------------------------- For the Board of Directors Date of Grant Attest: (Seal) ---------------- --------------------------- 28 EXHIBIT 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 29 Certification I, Timothy W. Simmons, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 9, 2005 /s/Timothy W. Simmons ---------------------------- Timothy W. Simmons President and Chief Executive Officer 30 EXHIBIT 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 31 Certification I, Roy G. Lindburg, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 9, 2005 /s/Roy G. Lindburg -------------------------- Roy G. Lindburg Chief Financial Officer 32 EXHIBIT 32 Certification Pursuant to Section 906 of the Sarbanes Oxley Act 33 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF SECURITY FEDERAL CORPORATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on Form 10-Q that: 1. the report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and 2. the information contained in the report fairly presents, in all material respects, the company's financial condition and results of operations. /s/Timothy W. Simmons /s/Roy G. Lindburg - ------------------------------ --------------------------- Timothy W. Simmons Roy G. Lindburg Chief Executive Officer Chief Financial Officer Dated: November 9, 2005. 34 -----END PRIVACY-ENHANCED MESSAGE-----