-----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, TzdyCOjuzI06uWnmp8t17VeW8Ad1lzKgC7Z4KoMP/zv6SWuneURoCr20yDxOyE+o /UR8sAtwJ01ahxVtdVqw5A== 0000939057-06-000040.txt : 20061006 0000939057-06-000040.hdr.sgml : 20061006 20060213151403 ACCESSION NUMBER: 0000939057-06-000040 CONFORMED SUBMISSION TYPE: CORRESP PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 20060213 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: CORRESP BUSINESS ADDRESS: STREET 1: 238 RICHLAND AVENUE WEST CITY: AIKEN STATE: SC ZIP: 29801 BUSINESS PHONE: 8036413000 MAIL ADDRESS: STREET 1: 238 RICHLAND AVENUE WEST CITY: AIKEN STATE: SC ZIP: 29801 FORMER COMPANY: FORMER CONFORMED NAME: SECURITY FEDERAL CORPORATION DATE OF NAME CHANGE: 19920703 CORRESP 1 filename1.txt February 13, 2006 Via Telecopy and EDGAR - ---------------------- Mr. John P. Nolan Accounting Branch Chief Division of Corporate Finance Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Security Federal Corporation ("Company") File No.000-16120 -------------------------------------------------- Form 10-K for the fiscal year ended March 31, 2005 Dear Mr. Nolan: This letter is to acknowledge receipt of the comment letter, dated January 31, 2006, regarding the Form 10-K for the fiscal year ended March 31, 2005 (the "Comment Letter"). The following supplemental response is provided in connection with your comment on Note 3 to our Consolidated Financial Statements: Notes to Consolidated Financial Statements - ------------------------------------------ Note 3 Investment and Mortgage-Backed Securities, Available for Sale - page 35 - ------------------------------------------------------------------------------ Comment: We note that you have both available for sale securities and held to maturity securities, as disclosed in Note 4, that have unrealized losses for 12 months or longer as of March 31, 2005. Please provide us with your comprehensive analysis describing how you determined that these mortgage-backed securities and agency securities were not other than temporarily impaired as of March 31, 2005. Refer to SAB Topic 5M and include the following in your analysis: * the nature and terms of each significant investment; * the duration and extent to which the market value has been less than cost; * the time period you estimate until the forecasted recovery of fair value up to the cost of the investment and your basis for that estimate; Mr. John P. Nolan February 13, 2006 Page 2 * a schedule or table listing each individual security that had unrealized losses for 12 months or longer at March 31, 2005, including acquisition cost, carrying value and unrealized losses; and * a rollforward of the schedule or table listed above for the period ended December 31, 2005. Response: Please see Exhibit A, which is attached hereto, for the detailed analysis for this response. This response also covers held to maturity securities that have unrealized losses for 12 months or longer as of March 31, 2005 contained in Note 4. Exhibit A shows the nature and terms of each of the 40 investment securities with unrealized losses of 12 months or greater at March 31, 2005. It also shows the durations and extent to which the market value has been less than cost, the estimated time for recovery of fair market value up to the cost of the investment and our basis for the estimate. Exhibit A also shows, for each of the 40 investment securities, our acquisition cost, carrying value, and unrealized losses at March 31, 2005. The table also shows a roll-forward of those securities at December 31, 2005 and the same detailed information that was provided for March 31, 2005. We have concluded that the impairment of these securities is temporary. The sole cause of the impairment is the rise in market interest rates. We feel that the Fed will raise rates another 25 basis points at its next meeting and then, as many experts suggest, may begin easing rates in late 2006 or early 2007. The Ginnie Mae securities are backed by the full faith and credit of the federal government. The Fannie Maes, Freddie Macs, and FHLB securities are backed by the implied guarantee of the government. Security Federal has the ability to hold the 40 securities to maturity or near maturity. As these securities approach maturity and shorten in duration, the market values will naturally approach par. If market rates do stabilize or fall, this will bolster the market values. Security Federal has strong cash flow from deposit inflows, loan repayments, mortgage-backed securities repayments, and borrowing capacity. At March 31, 2005, the total cost of the 40 securities, $38.8 million, constituted 16% of Security Federal's total investment portfolio. We estimate the weighted average time to regain market value on the 40 securities back up to cost is approximately three years, which is a conservative estimate. We will continue to receive monthly payments on the mortgage-backed securities. At December 31, 2005, the amortized cost of the 40 securities had been reduced by $7.1 million, or 18% of the cost at 3/31/05. As the adjustable rate mortgage-backs re-price upward, the pre-payments on those securities will increase. Nine of the ten agency bonds in the held to maturity portfolio have step Mr. John P. Nolan February 13, 2006 Page 2 up features, although many of the steps are small in stature. These bonds will be called as they shorten in maturity and step higher in rate. We acknowledge that Security Federal Corporation is responsible for the adequacy and accuracy of the disclosure in the filing; that staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and that Security Federal Corporation may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. * * * * * If you have any questions concerning this matter, please contact the undersigned at(803)641-3070. Sincerely, /s/Roy G. Lindburg Roy G. Lindburg Chief Financial Officer cc: John Spitz, Staff Accountant, SEC Jason Caskey, Elliott Davis, LLC John F. Breyer, Jr., Breyer & Associates PC EXHIBIT A AVAILABLE FOR SALE SECURITIES IN MORE THAN 12 MONTHS OF LOSS POSITION AS OF 3/31/05 Acquist. Acquisition Cusip Type Description Date Cost 36225CUB0 GNMA2 80577 1x1 ARM, rate adjust 4/05 7/26/02 $497,094 36225CTZ9 GNMA2 80567 1x1 ARM, rate adjust 4/05 8/9/02 1,970,769 36225CMJ2 GNMA2 80360 1x1 ARM, rate adjust 4/05 7/26/02 998,946 36225CUC8 GNMA2 80578 1x1 ARM, rate adjust 4/05 11/24/03 1,963,851 36225CT22 GNMA2 80568 1x1 ARM, rate adjust 4/05 12/23/02 1,330,953 36225CXG6 GNMA2 80678 1x1 ARM, rate adjust 4/05 3/24/03 1,269,141 36225CF27 GNMA2 80184 1x1 ARM, rate adjust 7/05 2/12/03 1,552,460 36225CXZ4 GNMA2 80695 1x1 ARM, rate adjust 7/05 5/22/03 2,039,375 36225CX92 GNMA2 80703 1x1 ARM, rate adjust 7/05 8/21/03 1,563,990 36225CY34 GNMA2 80729 1x1 ARM, rate adjust 10/05 12/23/03 1,571,369 36225CYE0 GNMA2 80708 1x1 ARM, rate adjust 10/05 7/23/03 1,550,311 36225CYG5 GNMA2 80710 1x1 ARM, rate adjust 10/05 7/23/03 1,558,125 36225CXH4 GNMA2 80679 1x1 ARM, rate adjust 1/06 3/24/03 1,526,250 Subtotal 19,392,634 31990UMR4 FNMA 656568 5x1 ARM, rate adjusts 4/08 4/25/03 1,527,656 31401D3F6 FNMA 705598 5x1 ARM, rate adjusts 5/08 5/22/03 1,542,188 31401EAM1 FNMA 705712 5x1 ARM, rate adjusts 5/08 5/22/03 1,549,219 31401EAQ2 FNMA 705715 5x1 ARM, rate adjusts 6/08 6/23/03 1,548,750 31401D3T6 FNMA 705610 5x1 ARM, rate adjusts 6/08 6/23/03 1,544,063 31402ENR5 FNMA 726800 5x1 ARM, rate adjusts 7/08 8/21/03 1,513,920 31404FV59 FNMA 767536 5x1 ARM, rate adjusts 2/09 3/11/04 1,538,804 Subtotal 10,764,600 31400DXG2 FNMA 684779 7x1 ARM, rate adjusts 10/09 3/24/03 1,308,367 31371KYX3 FNMA 254626 7 year balloon, matures 12/09 7/10/03 1,306,275 31282R4J0 FHLMC M80825 7 year balloon, matures 6/10 6/23/03 1,538,906 31401YWQ4 FNMA 722555 7x1 ARM, rate adjusts 7/10 7/29/03 1,543,594 Subtotal 5,697,142 3128H4Z85 FHLMC E97067 10 year fixed, matures 6/13 7/30/03 1,528,404 31371K5T4 FNMA 254758 10 year fixed, matures 6/13 6/17/03 1,549,213 31371LB99 FNMA 254864 10 year fixed, matures 8/13 7/17/03 1,557,188 31371LB81 FNMA 254863 10 year fixed, matures 8/13 7/17/03 1,550,625 31371LB81 FNMA 254863 10 year fixed, matures 8/13 7/17/03 1,539,844 Subtotal 7,725,274 31335HXR9 FHLMC C90688 20 year fixed, matures 4/23 6/12/03 1,534,688 Subtotal 1,534,688 Total-AFS 45,114,338
AS OF 3/31/05 At 3/31/05, # months # of months till Amortized Fair Unrealized 3/31/05 of Loss cost recovery and Cusip Cost Value Loss Coupon Position the basis for that estimate 36225CUB0 $222,856 $222,698 ($158) 2.75% 19 5 actual due to rate adjust, went back due to rate incr. 36225CTZ9 845,915 845,731 (184) 2.75% 19 2 actual due to rate adjust, went back due to rate incr. 36225CMJ2 573,473 572,8 46 (627) 2.75% 19 5 actual due to rate adjust, went back due to rate incr. 36225CUC8 1,188,829 1,187,397 (1,432) 2.75% 16 1 actual due to rate adjust, went back due to rate incr. 36225CT22 541,628 539,885 (1,743) 2.75% 19 6 actual due to rate adjust, went back due to rate incr. 36225CXG6 840,723 832,977 (7,746) 2.75% 16 12 est. due to rate adjust to 4.75% on 4/06 36225CF27 577,105 573,672 (3,433) 3.38% 25 2 actual due to rate adjust, went back due to rate incr. 36225CXZ4 1,292,783 1,285,335 (7,448) 3.38% 21 15 est. due to rate adjust to 5.375% on 7/06 36225CX92 907,395 899,751 (7,644) 3.38% 19 2 actual due to rate adjust, went back due to rate incr. 36225CY34 947,083 938,349 (8,734) 3.50% 15 18 est. due to rate adjust to 5.5% on 10/06 36225CYE0 992,818 974,871 (17,947) 3.50% 19 18 est. due to rate adjust to 5.5% on 10/06 36225CYG5 934,239 915,589 (18,650) 3.50% 19 18 est. due to rate adjust to 5.5% on 10/06 36225CXH4 929,878 920,293 (9,585) 2.75% 20 21 est. due to rate adjust to 4.75% on 1/07 10,794,725 10,709,394 (85,331) 3.11% 19 11 WEIGHTED AVERAGE 31990UMR4 958,588 940,588 (18,000) 4.00% 20 36 est. due to rate adjust to 6% on 4/08 & then a 1 yr arm' 31401D3F6 1,058,503 1,037,014 (21,489) 3.94% 21 37 est due to rate adjust to 5.9% on 5/08 & then a 1 year arm 31401EAM1 1,057,993 1,027,770 (30,223) 4.00% 19 37 est due to rate adjust to 6% on 5/08 & then a 1 yr arm 31401EAQ2 1,081,568 1,050,305 (31,263) 4.01% 20 38 est due to rate adjust to 6% on 6/08 & then a 1 yr arm 31401D3T6 1,137,114 1,104,314 (32,800) 3.78% 20 38 est due to rate adjust to 5.8% on 6/08 & then a 1 year 31402ENR5 1,182,754 1,151,111 (31,643) 3.58% 19 39 est due to rate adjust to 5.6% on 7/08 & then a 1 year 31404FV59 1,218,207 1,184,021 (34,186) 4.25% 12 46 est due to rate adjust to 6.2% on 2/09 & then a 1 year 7,694,727 7,495,123 (199,604) 3.94% 19 39 WEIGHTED AVERAGE 31400DXG2 460,327 452,195 (8,132) 5.14% 23 53 est due to rate adjust to 6.8% on 10/09 & then a 1 yr 31371KYX3 625,347 611,957 (13,390) 4.50% 20 32 due to paydowns, and rates going down in 12 months 31282R4J0 1,147,519 1,112,652 (34,867) 4.00% 20 50 due to paydowns, and rates going down in 12 months 31401YWQ4 1,328,424 1,267,963 (60,461) 4.01% 19 62 est due to rate adjust to 6.8% on 7/10 & then a 1 yr 3,561,617 3,444,767 (116,850) 4.24% 20 52 WEIGHTED AVERAGE 3128H4Z85 984,410 956,063 (28,347) 4.50% 19 50 due to paydowns, and rates going down in 12 months 31371K5T4 1,053,902 1,024,877 (29,025) 4.50% 21 50 due to paydowns, and rates going down in 12 months 31371LB99 1,132,909 1,102,954 (29,955) 4.50% 19 51 due to paydowns, and rates going down in 12 months 31371LB81 1,159,201 1,115,873 (43,328) 4.00% 19 65 due to paydowns, and rates going down in 12 months 31371LB81 1,154,088 1,115,873 (38,215) 4.00% 19 65 due to paydowns, and rates going down in 12 months 5,484,510 5,315,640 (168,870) 4.29% 19 57 WEIGHTED AVERAGE 31335HXR9 1,298,716 1,221,547 (77,169) 4.50% 20 120 due to paydowns, and rates going down in 12 months 1,298,716 1,221,547 (77,169) 4.50% 20 120 WEIGHTED AVERAGE 28,834,295 28,186,471 (647,824) 3.76% 19 37 WEIGHTED AVERAGE
AS OF 12/31/05 At 12/31/05 # months # of months till Amortized Fair Unrealized 12/31/05 of Loss cost recovery and Cusip Cost Value Loss Coupon Position the basis for that estimate 36225CUB0 $138,745 $138,223 ($522) 3.75% 3 3 est. due to rate adjust to 4.75% on 4/06 36225CTZ9 585,645 583,656 (1,989) 3.75% 3 3 est. due to rate adjust to 4.75% on 4/06 36225CMJ2 460,585 458,907 (1,678) 3.75% 3 3 est. due to rate adjust to 4.75% on 4/06 36225CUC8 817,698 816,225 (1,473) 3.75% 1 3 est. due to rate adjust to 4.75% on 4/06 36225CT22 361,874 360,702 (1,172) 3.75% 2 3 est. due to rate adjust to 4.75% on 4/06 36225CXG6 424,544 420,988 (3,556) 3.75% 25 3 est. due to rate adjust to 4.75% on 4/06 36225CF27 441,332 436,759 (4,573) 4.38% 2 6 est. due to rate adjust to 5.375% on 7/06 36225CXZ4 780,696 770,212 (10,484) 4.38% 30 6 est. due to rate adjust to 5.375% on 7/06 36225CX92 582,509 574,638 (7,871) 4.38% 6 6 est. due to rate adjust to 5.375% on 7/06 36225CY34 673,165 663,789 (9,376) 4.50% 24 9 est. due to rate adjust to 5.5% on 10/06 36225CYE0 699,839 684,254 (15,585) 4.50% 28 9 est. due to rate adjust to 5.5% on 10/06 36225CYG5 628,677 615,046 (13,631) 4.50% 28 9 est. due to rate adjust to 5.5% on 10/06 36225CXH4 576,177 570,882 (5,295) 3.75% 29 12 est. due to rate adjust to 4.75% on 1/07 7,171,486 7,094,281 (77,205) 4.12% 16 6 WEIGHTED AVERAGE 31990UMR4 720,567 700,484 (20,083) 3.99% 29 27 est. due to rate adjust to 6% on 4/08 & then a 1 yr arm 31401D3F6 802,670 775,277 (27,393) 3.93% 30 28 est due to rate adjust to 5.9% on 5/08 & then a 1 year 31401EAM1 808,846 778,230 (30,616) 4.01% 28 28 est due to rate adjust to 6% on 5/08 & then a 1 yr arm 31401EAQ2 860,424 829,013 (31,411) 4.00% 29 29 est due to rate adjust to 6% on 6/08 & then a 1 yr arm 31401D3T6 834,002 798,779 (35,223) 3.78% 29 29 est due to rate adjust to 5.8% on 6/08 & then a 1 year 31402ENR5 970,867 929,121 (41,746) 3.59% 28 30 est due to rate adjust to 5.6% on 7/08 & then a 1 year 31404FV59 952,139 923,711 (28,428) 4.23% 21 37 est due to rate adjust to 6.2% on 2/09 & then a 1 year 5,949,515 5,734,615 (214,900) 3.93% 28 30 WEIGHTED AVERAGE 31400DXG2 365,962 357,044 (8,918) 5.13% 32 44 est due to rate adjust to 6.8% on 10/09 & then a 1 yr 31371KYX3 485,131 468,119 (17,012) 4.50% 29 23 due to paydowns, and rates going down in 12 months 31282R4J0 956,050 914,155 (41,895) 4.00% 29 41 due to paydowns, and rates going down in 12 months 31401YWQ4 1,067,243 1,011,269 (55,974) 4.00% 28 53 est due to rate adjust to 6.8% on 7/10 & then a 1 yr 2,874,386 2,750,587 (123,799) 4.23% 29 43 WEIGHTED AVERAGE 3128H4Z85 799,508 773,036 (26,472) 4.50% 28 41 due to paydowns, and rates going down in 12 months 31371K5T4 864,445 830,882 (33,563) 4.50% 30 41 due to paydowns, and rates going down in 12 months 31371LB99 940,629 904,585 (36,044) 4.50% 28 42 due to paydowns, and rates going down in 12 months 31371LB81 972,646 921,315 (51,331) 4.00% 28 56 due to paydowns, and rates going down in 12 months 31371LB81 969,338 921,315 (48,023) 4.00% 28 56 due to paydowns, and rates going down in 12 months 4,546,566 4,351,133 (195,433) 4.29% 28 48 WEIGHTED AVERAGE 31335HXR9 1,160,336 1,088,795 (71,541) 4.50% 29 111 due to paydowns, and rates going down in 12 months 1,160,336 1,088,795 (71,541) 4.50% 29 111 WEIGHTED AVERAGE 21,702,289 21,019,411 (682,878) 4.14% 24 32 WEIGHTED AVERAGE
HELD TO MATURITY SECURITIES IN MORE THAN 12 MONTHS OF LOSS POSITION AS OF 3/31/05 Acquist. Acquist. Cusip Type Description Date Cost 31339XQV9 FHLB Step Steps to 5% in 606 6/26/03 999,375 31339Y7K2 FHLB Step Steps to 5% in 7/06 7/16/03 1,000,000 31339YJU7 FHLB Step Steps to 5% in 7/06 7/23/03 1,000,000 31339XDG6 FHLB Step Steps to 5% in 6/08 6/19/03 997,500 31339XPQ1 FHLB Step Steps to 5% in 6/08 6/26/03 998,750 31339XGT5 FHLB Step Steps to 4.5% in 6/06 6/26/03 1,000,000 31339YAU6 FHLB Step Steps to 4% in 7/06 7/15/03 1,000,000 31339Y3D2 FHLB Step Steps to 4% in 7/06 7/16/03 998,750 31339XVU5 FHLB Step Steps to 3.75% in 7/06 7/9/03 1,000,000 31331QA98 FFCB 4.74% coup Prob. Call 4/11, Mat. 4/13 7/1/03 1,038,923 Total-HTM 10,033,298 Grand Total 55,147,636
AS OF 3/31/05 At 3/31/05, # months # of months till Amortized Fair Unrealized 3/31/05 of Loss cost recovery and Cusip Cost Value Loss Coupon Position the basis for that estimate 31339XQV9 $999,687 $967,500 ($32,187) 3.00% 20 15 1x call at step, then becomes a 7 year 31339Y7K2 1,000,000 969,060 (30,940) 3.25% 19 16 1x call at step, then becomes a 7 year bullet 31339YJU7 1,000,000 971,880 (28,120) 3.50% 19 16 1x call at step, then becomes a 7 year bullet 31339XDG6 998,122 945,000 (53,122) 4.25% 20 75 quarterly call, mat 6/18, 5% til 6/13, then 6.5% 31339XPQ1 999,054 943,130 (55,924) 4.00% 20 63 quarterly call, mat 6/18, 5% til 6/13, then 7% 31339XGT5 1,000,000 963,130 (36,870) 3.50% 20 39 semiannl call, mat 6/15, steps every 3 yrs, 5.5, 6.5% 31339YAU6 1,000,000 961,880 (38,120) 3.50% 19 51 semiannl call, mat 7/13, steps annually up .25% 31339Y3D2 999,341 954,380 (44,961) 3.00% 19 51 qrtly call, mat 7/12, steps every 3 yrs then 6% last 31339XVU5 1,000,000 952,190 (47,810) 3.25% 19 63 s/a call, mat 7/13, steps ann 4, 4.25, 4.5, 5, 5.5, 6% 31331QA98 1,014,640 977,810 (36,830) 4.74% 19 72 continous call, expected call on 4/11, matures 4/13 10,010,844 9,605,960 (404,884) 3.60% 19 46 WEIGHTED AVERAGE 38,845,139 37,792,431 (1,052,708) 3.72% 19 39 WEIGHTED AVERAGE
AS OF 12/31/05 At 12/31/05, # months # of months till Amortized Fair Unrealized 12/31/05 of Loss cost recovery and Cusip Cost Value Loss Coupon Position the basis for that estimate 31339XQV9 $999,881 $969,690 ($30,191) 3.00% 29 24 1x call at step, then becomes a 7 year no bullet 31339Y7K2 1,000,000 969,690 (30,310) 3.25% 28 25 1x call at step, then becomes a 7 year no bullet 31339YJU7 1,000,000 970,940 (29,060) 3.50% 28 25 1x call at step, then becomes a 7 year bullet 31339XDG6 998,566 944,060 (54,506) 4.25% 29 66 quarterly call, mat 6/18, 5% til 6/13, then 6.5% 31339XPQ1 999,300 943,130 (56,170) 4.00% 29 54 quarterly call, mat 6/18, 5% til 6/13, then 7% 31339XGT5 1,000,000 964,060 (35,940) 3.50% 29 30 semiannl call, mat 6/15, steps every 3 yrs, 5.5, 6.5% 31339YAU6 1,000,000 957,810 (42,190) 3.75% 28 42 semiannl call, mat 7/13, steps annually up .25% 31339Y3D2 999,723 958,440 (41,283) 3.00% 28 42 qrtly call, mat 7/12, steps every 3 yrs then 6% last 31339XVU5 1,000,000 950,000 (50,000) 3.50% 28 54 s/a call, mat 7/13, steps ann 4, 4.25, 4.5, 5, 5.5, 6% 31331QA98 1,003,686 972,190 (31,496) 4.74% 28 63 continous call, expected call on 4/11, matures 4/13 10,001,156 9,600,010 (401,146) 3.65% 28 43 WEIGHTED AVERAGE 31,703,445 30,619,421 (1,084,024) 3.98% 25 35 WEIGHTED AVERAGE
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