-----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, KraSIYPMbxXpu89cFGhkoqz/UlcmhTocrlIsIgcNQmkor6oF/Is043dtUWJ4AoPB fJvEgBNdnK9snPooK1BgTg== 0000939057-06-000236.txt : 20060814 0000939057-06-000236.hdr.sgml : 20060814 20060814151724 ACCESSION NUMBER: 0000939057-06-000236 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060814 DATE AS OF CHANGE: 20060814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURITY FEDERAL CORP 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: 061029675 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 10-Q 1 q0606.txt SECURITY FEDERAL CORPORATION FORM 10-Q 06-30-2006 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 JUNE 30, 2006 ( ) 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 (Exact name of Registrant as specified in Its Charter) South Carolina 57-0858504 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 238 RICHLAND AVENUE, WEST, AIKEN, SOUTH CAROLINA 29801 (Address of Principal Executive Office) (Zip code) (803) 641-3000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------ ----- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "large accelerated filer" and "accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filed [ ] Accelerated filer[ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (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 July 31, 2006 2,608,617 value $0.01 per share INDEX - ------------------------------------------------------------------------------ PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements : Consolidated Balance Sheets at June 30, 2006 and March 31, 2006 1 Consolidated Statements of Income for the Three Months Ended June 30, 2006 and 2005 2 Consolidated Statements of Shareholders' Equity and Comprehensive Income at June 30, 2005 and 2006 3 Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2006 and 2005 4 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 Item 4. Controls and Procedures 20 - ------------------------------------------------------------------------------ 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 a 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 Security Federal Corporation and Subsidiaries Consolidated Balance Sheets June 30, 2006 March 31, 2006 ------------------ --------------- Assets: (Unaudited) (Audited) Cash And Cash Equivalents $ 11,078,009 $ 14,351,208 Investment And Mortgage-Backed Securities: Available For Sale: (Amortized cost of $163,391,871 at June 30, 2006 and $166,808,236 at March 31, 2006) 158,731,338 163,445,066 Held To Maturity: (Fair value of $69,623,220 at June 30, 2006 and $73,084,450 at March 31, 2006) 71,987,413 74,987,805 ------------- ------------- Total Investment And Mortgage-Backed Securities 230,718,751 238,432,871 ------------- ------------- Loans Receivable, Net: Held For Sale 2,476,068 1,320,644 Held For Investment: (Net of allowance of $6,853,908 at June 30, 2006 and $6,704,734 at March 31, 2006) 395,359,383 373,788,432 ------------- ------------- Total Loans Receivable, Net 397,835,451 375,109,076 ------------- ------------- Accrued Interest Receivable: Loans 1,238,672 1,096,014 Mortgage-Backed Securities 499,662 508,432 Investments 892,910 945,620 Premises And Equipment, Net 12,272,082 11,662,976 Federal Home Loan Bank Stock, At Cost 7,763,900 7,149,800 Bank Owned Life Insurance 5,597,509 5,000,001 Repossessed Assets Acquired In Settlement Of Loans 20,000 91,022 Other Assets 7,705,728 4,330,795 ------------- ------------- Total Assets $ 675,622,674 $ 658,677,815 ============= ============= Liabilities And Shareholders' Equity Liabilities: Deposit Accounts $ 480,647,530 $ 479,229,339 Advances From Federal Home Loan Bank 144,585,523 131,363,000 Other Borrowed Money 6,864,849 7,289,773 Advance Payments By Borrowers For Taxes And Insurance 674,298 501,998 Mandatorily Redeemable Financial Instrument 1,440,270 - Other Liabilities 3,528,277 2,691,946 ------------- ------------- Total Liabilities $ 637,740,747 $ 621,076,056 ------------- ------------- 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 - 2,613,629 And Outstanding Shares - 2,602,317 At June 30, 2006 And 2,558,234 And 2,537,378 At March 31, 2006 25,582 25,582 Additional Paid-In Capital 4,404,110 4,404,110 Treasury Stock, (At Cost, 11,312 shares) (238,656) (238,656) Indirect Guarantee Of Employee Stock Ownership Trust Debt - (215,503) Accumulated Other Comprehensive Loss (2,891,401) (2,086,509) Retained Earnings, Substantially Restricted 36,582,292 35,712,735 ------------- ------------- Total Shareholders' Equity $ 37,881,927 $ 37,601,759 ------------- ------------- Total Liabilities And Shareholders' Equity $ 675,622,674 $ 658,677,815 ============= ============= See accompanying notes to consolidated financial statements. 1 Security Federal Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) Three Months Ended June 30, ------------------------------ 2006 2005 ------------ ------------ Interest Income: Loans $ 7,020,675 $ 5,185,122 Mortgage-Backed Securities 1,443,350 1,393,287 Investment Securities 1,146,342 819,557 Other 14,483 14,227 ----------- ------------ Total Interest Income 9,624,850 7,412,193 ----------- ------------ Interest Expense: NOW And Money Market Accounts 1,581,170 1,253,183 Passbook Accounts 41,876 44,199 Certificate Accounts 2,155,401 1,212,583 Advances And Other Borrowed Money 1,435,727 979,237 ----------- ------------ Total Interest Expense 5,214,174 3,489,202 ----------- ------------ Net Interest Income 4,410,676 3,922,991 Provision For Loan Losses 150,000 165,000 ----------- ------------ Net Interest Income After Provision For Loan Losses 4,260,676 3,757,991 ----------- ------------ Non-Interest Income: Net Gain On Sale Of Investments - 17,540 Gain On Sale Of Loans 113,255 135,310 Service Fees On Deposit Accounts 277,868 283,197 Income from cash value of life insurance 56,508 - Other 304,363 254,328 ----------- ------------ Total Other Income 751,994 690,375 ----------- ------------ Non-Interest Expense: Salaries And Employee Benefits 2,125,369 1,760,947 Occupancy 317,595 311,847 Advertising 74,649 25,469 Depreciation And Maintenance Of Equipment 291,469 251,801 FDIC Insurance Premiums 14,142 14,519 Other 620,080 631,541 ----------- ------------ Total Non-Interest Expense 3,443,304 2,996,124 ----------- ------------ Income Before Income Taxes 1,569,366 1,452,242 Provision For Income Taxes 546,994 523,000 ----------- ------------ Net Income $ 1,022,372 $ 929,242 =========== ============ Basic Net Income Per Common Share $ 0.40 $ 0.37 =========== ============ Diluted Net Income Per Common Share $ 0.40 $ 0.36 =========== ============ Cash Dividend Per Share On Common Stock $ 0.06 $ 0.04 =========== ============ Basic Weighted Average Shares Outstanding 2,538,951 2,530,389 =========== ============ Diluted Weighted Average Shares Outstanding 2,564,893 2,556,205 =========== ============ See accompanying notes to consolidated financial statements. 2 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, 2005 $ 25,438 $ 4,181,804 $(165,089) $(276,217) $(961,504) $32,306,633 $35,111,065 Net Income - - - - 929,242 929,242 Other Comprehensive Income, Net Of Tax: Unrealized Holding Gains On Securities Available For Sale - - - - 403,917 - 403,917 Plus Reclassification Adjustments for Gains Included in Net Income - - - - 10,875 - 10,875 ----------- Comprehensive Income - - - - - - 1,344,034 Purchase of Treasury Stock At Cost, 1,200 Shares (25,800) (25,800) Exercise Of Stock Options 6 9,996 10,002 Decrease In Indirect Guarantee Of ESOP Debt - - - 60,714 - - 60,714 Cash Dividends - - - - - (101,449) (101,449) -------- ---------- --------- --------- --------- ----------- ----------- Balance At June 30, 2005 $ 25,444 $4,191,800 $(190,889) $(215,503) $(546,712) $33,134,426 $36,398,566 ======== ========== ========= ========= ========= =========== ===========
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, 2006 $ 25,582 $4,404,110 $(238,656) $(215,503) $(2,086,509) $ 35,712,735 $37,601,759 Net Income - - - - 1,022,372 1,022,372 Other Comprehensive Income, Net Of Tax: Unrealized Holding Losses On Securities Available For Sale - - - - (804,892) - (804,892) ----------- Comprehensive Income - - - - - - 217,480 Decrease In Indirect Guarantee Of ESOP Debt - - - 215,503 - - 215,503 Cash Dividends - - - - - (152,815) (152,815) -------- ----------- --------- ------- ------------ ----------- ----------- Balance At June 30, 2006 $ 25,582 $4,404,110 $(238,656) $ - $ (2,891,401) $36,582,292 $37,881,927 ======== =========== ========= ======= ============ =========== =========== See accompanying notes to consolidated financial statements. 3
Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Three Months Ended June 30, -------------------------------- 2006 2005 ----------- ------------ Cash Flows From Operating Activities: Net Income $ 1,022,372 $ 929,242 Adjustments To Reconcile Net Income To Net Cash (Used) Provided By Operating Activities: Depreciation Expense 232,989 241,003 Discount Accretion And Premium Amortization 122,918 259,436 Provisions For Losses On Loans And Real Estate 150,000 165,000 Gain On Sale Of Loans (113,255) (135,310) Gain On Sale Of Mortgage Backed Securities Available For Sale - (17,540) (Gain) Loss On Sale Of Real Estate (48,678) 14,230 Amortization Of Deferred Fees On Loans (63,989) (48,034) Proceeds From Sale Of Loans Held For Sale 6,154,987 8,285,951 Origination Of Loans For Sale (7,197,156) (6,622,045) (Increase) Decrease In Accrued Interest Receivable: Loans (142,658) (8,484) Mortgage-Backed Securities 8,770 20,508 Investments 52,710 90,377 Increase In Advance Payments By Borrowers 172,300 180,196 Other, Net (390,544) 471,610 ----------- ------------ Net Cash (Used) Provided By Operating Activities (39,234) 3,826,140 ----------- ------------ Cash Flows From Investing Activities: Principal Repayments On Mortgage-Backed Securities Available For Sale 9,666,628 12,417,076 Principal Repayments On Mortgage-Backed Securities Held To Maturity - 5,230 Purchase Of Investment Securities Available For Sale (2,976,845) (8,998,000) Purchase Of Mortgage-Backed Securities Available For Sale (4,614,465) (5,596,261) Proceeds From Sale Of Mortgage-Backed Securites Available For Sale - 1,968,194 Maturities Of Investment Securities Available For Sale 1,218,707 2,190,338 Maturities of Investment Securities Held To Maturity 3,000,000 - Purchase Of FHLB Stock (1,813,100) (1,575,000) Redemption Of FHLB Stock 1,199,000 1,449,000 (Increase) Decrease In Loans To Customers (21,656,962) (18,529,421) Proceeds From Sale Of Repossessed Assets 119,700 16,384 Purchase And Improvement Of Premises And Equipment (842,095) (335,492) Purchase Of Bank Owned Life Insurance (597,508) - ----------- ------------ Net Cash Used By Investing Activities (17,296,940) (16,987,952) ----------- ------------ Cash Flows From Financing Activities: Increase In Deposit Accounts 1,418,191 10,917,946 Proceeds From FHLB Advances 77,845,000 48,195,000 Repayment Of FHLB Advances (64,622,477) (45,270,000) Net Proceeds Of Other Borrowings (424,924) 892,086 Dividends To Shareholders (152,815) (101,449) Purchase Of Treasury Stock - (25,800) Proceeds From Exercise of Stock Options - 10,002 ----------- ------------ Net Cash Provided By Financing Activities 14,062,975 14,617,785 ----------- ------------ (Continued) 4 Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Continued Three Months Ended June 30, --------------------------------- 2006 2005 ------------ ----------- Net (Decrease) Increase In Cash And Cash Equivalents (3,273,199) 1,455,973 Cash And Cash Equivalents At Beginning Of Period 14,351,208 7,916,488\ ------------ ----------- Cash And Cash Equivalents At End Of Period $ 11,078,009 $ 9,372,461 ============ =========== Supplemental Disclosure Of Cash Flows Information: Cash Paid During The Period For Interest $ 5,109,698 $ 3,442,441 Cash Paid During The Period For Income Taxes $ - $ 51,195 Additions To Repossessed Assets Acquired Through Foreclosure $ - $ 54,614 Decrease (Increase) In Unrealized Net Gain On Securities Available For Sale, Net Of Taxes $ (804,892) $ 414,792 Issuance Of A Mandatorily Redeemable Financial Instrument Through The Issuance Of Common Stock $ 1,440,270 - See accompanying notes to consolidated financial statements. 5 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") 2006 Annual Report to Shareholders when reviewing interim financial statements. The results of operations for the three-month period ended June 30, 2006 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 Security Federal Corporation (the "Company") and its wholly owned subsidiary, Security Federal Bank (the "Bank"), and the Bank's wholly owned subsidiaries, Security Federal Insurance, Inc. ("SFINS"), Security Federal Investments, Inc. ("SFINV"), Security Federal Trust, Inc. ("SFT"), and Security Financial Services Corporation ("SFSC"). 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 fiscal 2002 and began operation during the December 2001 quarter. SFINS is an insurance agency offering business, health, home and life insurance. SFINV engages primarily in investment brokerage services. SFT offers trust, financial planning and financial management services. SFSC is currently inactive. 3. Critical Accounting Policies The Company has adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the audited consolidated financial statements at March 31, 2006 included in our 2006 Annual Report to Stockholders, which was filed as an exhibit to our Annual Report on Form 10-K for the year ended March 31, 2006. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations. We believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of our 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. 6 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 3. Critical Accounting Policies, continued The Company values impaired loans at the loan's fair value if it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement at the present value of expected cash flows, the market price of the loan, if available, or the value of the underlying collateral. Expected cash flows are required to be discounted at the loan's effective interest rate. When the ultimate collectibility of an impaired loan's principal is in doubt, wholly or partially, all cash receipts are applied to principal. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first to interest and then to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off. 4. Acquistion On June 30, 2006, the Company completed the acquisition of the insurance and premium finance businesses of Collier-Jennings Financial Corporation and it subsidiaries Collier-Jennings, Inc., The Auto Insurance Store, Inc., and Collier-Jennings Premium Pay Plans, Inc (the "Collier-Jennings Companies"). The purpose of the acquisition was to expand the insurance services and increase non-interest income. The shareholder of the Collier-Jennings Companies received $180,000 in cash and approximately 55,000 shares of the Company's common stock valued at $26 per share for an approximate purchase price of $1,620,270. The Company will release the shares to the shareholder of the Collier-Jennings Companies over a three-year period. The stock is mandatorily redeemable by the shareholder of Collier-Jennings Companies at his option in cumulative increments of 20% per year for a five- year period at the greater of $26 per share or one and one-half times the book value of the Company's stock. 5. Earnings Per Share The Company calculates earnings per share ("EPS") in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 specifies the computation, presentation and disclosure requirements for EPS for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market. This standard specifies computation and presentation requirements for both basic EPS and, for entities with complex capital structures, diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding. Diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. The dilutive effect of options outstanding under the Company's stock option plan is reflected in diluted earnings per share by application of the treasury stock method. 7 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 5. Earnings Per Share, Continued The following table provides a reconciliation of the numerators and denominators of the basic and diluted EPS computations: For the Quarter Ended ---------------------------------------------- June 30, 2006 ---------------------------------------------- Income (Numerator) Shares Amount (Denominator) Per Share ---------- ------------- --------- Basic EPS $ 1,022,372 2,538,951 $ 0.400 Effect of Diluted Securities: Stock Options - 17,971 - ESOP - 7,971 - ----------- ---------- --------- Diluted EPS $ 1,022,372 2,564,893 $ 0.400 =========== ========== ========= For the Quarter Ended ---------------------------------------------- June 30, 2005 ---------------------------------------------- Income (Numerator) Shares Amount (Denominator) Per Share ---------- ------------- --------- Basic EPS $ 929,242 2,530,389 $ 0.370 Effect of Diluted Securities: Stock Options - 20,227 (0.008) ESOP - 5,589 (0.002) --------- --------- --------- Diluted EPS $ 929,242 2,556,205 $ 0.360 ========= ========= ========= 6. Stock-Based Compensation On April 1, 2006, the Company adopted the fair value recognition provisions of Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 123(R), Accounting for Stock-Based Compensation, to account for compensation costs under its stock option plans. The Company previously utilized the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (as amended) ("APB 25"). Under the intrinsic value method prescribed by APB 25, no compensation costs were recognized for the Company's stock options because the option exercise price in its plans equals the market price on the date of grant. Prior to January 1, 2006, the Company only disclosed the pro forma effects on net income and earnings per share as if the fair value recognition provisions of SFAS 123(R) had been utilized. In adopting SFAS No. 123, the Company elected to use the modified prospective method to account for the transition from the intrinsic value method to the fair value recognition method. Under the modified prospective method, compensation cost is recognized from the adoption date forward for all new stock options granted and for any outstanding unvested awards as if the fair value method had been applied to those awards as of the date of grant. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period. 8 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 6. Stock-Based Compensation, Continued Three Months Ended June 30, -------------------------------- 2006 2005 ----------- ------------ Net income as reported $ 1,022,372 $ 929,242 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects - - Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects - (30,570) ----------- ----------- Pro forma net income including stock-based compensation cost based on fair-value method $ 1,022,372 $ 898,672 =========== =========== Earnings per share: Basic - as reported $ 0.40 $ 0.37 =========== =========== Basic - pro forma $ 0.40 $ 0.36 =========== =========== Diluted - as reported $ 0.40 $ 0.36 =========== =========== Diluted - pro forma $ 0.40 $ 0.35 =========== =========== The following is a summary of the activity under the Company's incentive stock option plan for the quarter ended June 30, 2006. Three Months Ended June 30,2006 ---------------------- Weighted Average Exercise Shares Price ---------------------- Balance, Beginning of Year 118,046 $ 19.50 Options granted - - Options exercised - - Options forfeited - - --------- Balance, March 31 118,046 $ 19.50 ========= Options Exercisable 118,046 $ 19.50 ========= Options Available For Grant 13,750 ========= 9 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 6. Stock-Based Compensation, Continued At June 30, 2006, the Company had the following options outstanding: Outstanding Grant Date Options Option Price Expiration Date ---------------- ---------------- ---------------- ---------------- 1/07/97 1,546 $5.33 12/31/05 to 12/31/06 10/19/99 51,000 $16.67 9/30/05 to 9/30/09 1/16/03 1,500 $22.39 12/31/12 9/1/03 3,000 $24.00 8/31/13 12/1/03 3,000 $23.65 11/30/13 1/01/04 8,500 $24.22 12/31/13 3/8/04 13,000 $21.43 2/28/14 6/7/04 2,000 $24.00 5/31/14 1/1/05 26,000 $20.55 12/31/14 1/1/05 2,000 $22.61 12/31/15 1/1/06 6,500 $22.91 12/31/16 7. 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 February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments an amendment of FASB Statements No. 133 and 140." This Statement amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets." SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company does not believe that the adoption of SFAS No. 155 will have a material impact on its financial position, results of operations and cash flows. 10 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 7. Accounting and Reporting Changes, Continued In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets an amendment of FASB Statement No. 140." This Statement amends FASB No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract; requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; permits an entity to choose its subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities; at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity's exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. An entity should adopt SFAS No. 156 as of the beginning of its first fiscal year that begins after September 15, 2006. The Company does not believe the adoption of SFAS No. 156 will have a material impact on its financial position, results of operations and cash flows. Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company's financial position, results of operations and cash flows. 8. Securities Investment And Mortgage-Backed Securities, Available For Sale - -------------------------------------------------------------- The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment and mortgage-backed securities available for sale are as follows: Gross Gross June 30, 2006 Amortized Unrealized Unrealized - ------------------ Cost Gains Losses Fair Value ------------ ---------- ---------- ----------- US Government and Agency Obligations $ 30,229,301 $ - $ 579,950 $ 29,649,351 Mortgage-Backed Securities 133,059,632 50,935 4,131,330 128,979,237 Equity Securities 102,938 - 188 102,750 ------------ -------- ---------- ------------ Total $163,391,871 $ 50,935 $4,711,468 $158,731,338 ============ ======== ========== ============ March 31, 2006 - -------------- US Government and Agency Obligations $ 28,466,546 $ - $ 311,234 $ 28,155,312 Mortgage-Backed Securities 138,238,752 126,648 3,178,584 135,186,816 Equity Securities 102,938 - - 102,938 ------------ -------- ---------- ------------ Total $166,808,236 $126,648 $3,489,818 $163,445,066 ============ ======== ========== ============ 11 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 8.Securities, Continued 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 June 30, 2006 Amortized Unrealized Unrealized - ------------------ Cost Gains Losses Fair Value ------------ ---------- ---------- ----------- US Government and Agency Obligations $ 71,987,413 $ - $2,364,193 $ 69,623,220 ============ ========= ========== ============ March 31, 2006 - ------------------ ------------ --------- ---------- ------------ US Government and Agency Obligations $ 74,987,805 $ - $1,903,355 $ 73,084,450 ============ ========= ========== ============ 9. Loans Receivable, Net Loans receivable, net, at June 30, 2006 and March 31, 2006 consisted of the following: June 30, 2006 March 31, 2006 ----------------- ----------------- Residential Real Estate $ 124,288,489 $ 122,026,298 Consumer 60,350,671 58,612,669 Commercial Business & Real Estate 225,358,542 209,214,332 Loans Held For Sale 2,476,068 1,320,644 ----------------- ----------------- 412,473,770 391,173,943 ----------------- ----------------- Less: Allowance For Possible Loan Loss 6,853,908 6,704,734 Loans In Process 7,512,708 9,185,133 Deferred Loan Fees 271,703 175,000 ----------------- ----------------- 14,638,319 16,064,867 ----------------- ----------------- $ 397,835,451 $ 375,109,076 ================= ================= 12 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Safe Harbor Statement Certain matters in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to, among others, expectations of the business environment in which the Company operates, projections of future performance, perceived opportunities in the market, potential future credit experience, and statements regarding the Company's mission and vision. These forward-looking statements are based upon current management expectations, and may, therefore, involve risks and uncertainties. The Company's actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide range of factors including, but not limited to, the general business environment, interest rates, the South Carolina real estate market, the demand for loans, competitive conditions between banks and non-bank financial services providers, regulatory changes, and other risks detailed in the Company's reports filed with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended March 31, 2006. Forward-looking statements are effective only as of the date that they are made and the Company assumes no obligation to update this information Comparison Of Financial Condition At June 30, 2006 and March 31, 2006 General - Total assets increased $16.9 million or 2.6% to $675.6 million at June 30, 2006 from $658.7 million at March 31, 2006. The primary reason for the growth in total assets was a $22.7 million or 6.1% increase in net loans receivable to $397.8 million. For the quarter ending June 30, 2006, the demand for loans was funded with decreased investments and mortgage-backed securities, available for sale of $4.7 million or 2.9% and investments and mortgage-backed securities, held to maturity of $3.0 million or 4.0% and increased deposits of $1.4 million and advances from the Federal Home Loan Bank ("FHLB") of $13.2 million or 10.1%. Assets - The increases and decreases in total assets were primarily concentrated in the following asset categories: Increase (Decrease) ----------------------- June 30, 2006 March 31, 2006 Amount Percent ------------- -------------- ---------- --------- Cash And Cash Equivalents $ 11,078,009 $ 14,351,208 $ (3,273,199) (22.8)% Investment And Mortgage-Backed Securities - Available For Sale 158,731,338 163,445,066 (4,713,728) (2.9) Investment And Mortgage-Backed Securities-Held - To Maturity 71,987,413 74,987,805 (3,000,392) (4.0) Loan Receivable, Net 397,835,451 375,109,076 22,726,375 6.1 Premises And Equipment, Net 12,272,082 11,662,976 609,106 5.2 FHLB Stock, At Cost 7,763,900 7,149,800 614,100 8.6 Bank Owned Life Insurance 5,597,509 5,000,001 597,508 12.0 Other Assets 7,705,728 4,330,795 3,374,933 77.9 Cash and cash equivalents decreased $3.3 million to $11.1 million at June 30, 2006 from $14.4 million at March 31, 2006. The reason for the decrease is that the Company used cash and cash equivalents to fund loans. Investments and mortgage-backed securities decreased $7.7 million or 3.2% to $230.7 million at June 30, 2006 from $238.4 million at March 31, 2006. The decrease in investments and mortgage-backed securities is attributable to paydowns on mortgage-backed securities, calls and maturities on investments, and a decrease in market value on mortgage-backed securities and investments, offset partially by purchases of mortgage-backed securities and investments. 13 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Loans receivable, net increased $22.7 million or 6.1% to $397.8 million at June 30, 2006 from $375.1 million at March 31, 2006. Residential real estate loans increased $2.3 million to $124.3 million at June 30, 2006 from $122.0 million at March 31, 2006. Consumer loans increased $1.8 million to $60.4 million at June 30, 2006 from $58.6 at March 31, 2006. The increase in consumer loans is attributable to a special rate promotion that is being advertised in print media. Commercial business and real estate loans increased $16.2 million to $225.4 million at June 30, 2006 from $209.2 million at March 31, 2006. The increase in commercial loans is attributable to the Company's continued focus on originating this type of loan. Loans held for sale increased $1.2 million to $2.5 million at June 30, 2006 from $1.3 million at March 31, 2006. Premises and equipment, net increased $609,000 to $12.3 million at June 30, 2006 from $11.7 million at March 31, 2006. The majority of the increase is for furniture and equipment. FHLB stock, at cost increased $614,000 to $7.8 million at June 30, 2006 from $7.2 million at March 31, 2006. The increase is attributable to a FHLB requirement that the Company maintain stock equal to 0.20% of total assets at December 31, 2005 plus a transaction component, which equals 4.5% of outstanding advances (borrowings) from the FHLB of Atlanta. Bank Owned Life Insurance increased $598,000 to $5.6 million at June 30, 2006 from $5.0 million at March 31, 2006. The Company purchased additional life insurance during the quarter ending June 30, 2006 to provide key man life insurance for additional officers. Other assets increased $3.4 million to $7.7 million at June 30, 2006 from $4.3 million at March 31, 2006. The majority of the increase is the result of the acquisition of the Collier-Jennings Companies. Accounts receivable, intangible assets and goodwill associated with the acquisition of the Collier-Jennings Companies are included in other assets. Liabilities Deposit Accounts Balance -------------------- June 30, 2006 March 31, 2006 Increase (Decrease) ------------------- ------------------ -------------------- Weighted Weighted Balance Rate Balance Rate Amount Percent ----------- ---- ------------ ---- ------------ ------- Demand Accounts: Checking $ 98,678,589 0.98% $105,347,713 0.97% $(6,669,124) (6.3)% Money Market 148,885,581 3.83 151,494,548 3.50 (2,608,967) (1.7) Regular Savings 17,001,856 0.98 17,795,109 0.98 (793,253) (4.5) ------------ ---- ------------ ---- ---------- ------ Total 264,566,026 2.58 274,637,370 2.36 (10,071,344) (3.7) ------------ ---- ------------ ---- ---------- ------ Certificate Accounts 0.00 - 1.99% - 59,797 (59,797) (100.0) 2.00 - 2.99% 17,970,170 26,836,415 (8,866,245) (33.0) 3.00 - 3.99% 52,830,050 72,831,817 (20,001,767) (27.5) 4.00 - 4.99% 114,493,335 94,240,989 20,252,346 21.5 5.00 - 5.99% 30,787,949 10,622,951 20,164,998 189.8 ------------ ---- ------------ ---- ---------- ------ Total 216,081,504 4.28 204,591,969 3.98 11,489,535 5.6 ------------ ---- ------------ ---- ---------- ------ Total Deposits $480,647,530 3.35% $479,229,339 3.05% $1,418,191 0.3% ============ ==== ============ ==== ========== ====== 14 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Advances From FHLB FHLB advances are summarized by year of maturity and weighted average interest rate in the table below: Balance -------------------- June 30, 2006 March 31, 2006 Increase (Decrease) ------------------- ------------------ -------------------- Fiscal Year Due: Balance Rate Balance Rate Balance Percent ----------- ---- ------------ ---- ------------ ------- 2007 26,225,000 4.43% 18,000,000 2.83% $8,225,000 45.69% 2008 5,000,000 3.09 5,000,000 3.09 - - 2009 20,000,000 3.28 20,000,000 3.28 - - 2010 5,000,000 3.09 5,000,000 3.09 - - 2011 15,000,000 4.61 20,000,000 4.37 (5,000,000) (25.00) Thereafter 73,360,523 4.15 63,363,000 4.04 9,997,523 15.78 ------------ ----- ------------ ----- ----------- ------ Total Advances $144,585,523 4.06% $131,363,000 3.74% $13,222,523 10.07% ============ ===== ============ ===== =========== ====== These advances are secured by a blanket collateral agreement with the FHLB by pledging the Bank's portfolio of residential firs mortgage loans and investment securities with approximate amortized cost and fair value of $81.3 million and $78.8 million at June 30, 2006. 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 June 30, 2006 - ------------------------------------------------------------------------------------------------------------ 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 02/20/04 02/20/14 5,000,000 3.225 1 Time Call 02/20/09 04/16/04 04/16/14 3,000,000 3.330 1 Time Call 04/16/08 09/16/04 09/16/09 5,000,000 3.090 1 Time Call 09/17/07 06/24/05 06/24/15 5,000,000 3.710 1 Time Call 06/24/10 07/22/05 07/22/15 5,000,000 3.790 1 Time Call 07/22/08 10/21/05 10/21/10 5,000,000 4.325 1 Time Call 10/23/06 11/10/05 11/10/15 5,000,000 4.400 1 Time Call 11/10/09 11/23/05 11/23/15 5,000,000 3.933 Multi-Call 11/23/07 and quarterly thereafter 11/29/05 11/29/13 5,000,000 4.320 1 Time Call 05/29/09 12/14/05 12/14/11 5,000,000 4.640 1 Time Call 09/14/09 01/12/06 01/12/16 5,000,000 4.450 1 Time Call 01/12/11 03/01/06 03/03/14 5,000,000 4.720 1 Time Call 03/03/10 03/24/06 03/24/16 5,000,000 4.120 Multi-Call 03/26/07 and quarterly thereafter 03/24/06 03/25/13 5,000,000 4.580 1 Time Call 03/25/08 04/21/06 04/22/13 5,000,000 4.530 Multi-Call 04/23/07 and quarterly thereafter 06/02/06 06/02/16 5,000,000 5.16% 1 Time Call 06/02/11
15 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations As of March 31, 2006 - ------------------------------------------------------------------------------------------------------------ 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 02/20/04 02/20/14 5,000,000 3.225 1 Time Call 02/20/09 04/16/04 04/16/14 3,000,000 3.330 1 Time Call 04/16/08 09/16/04 09/16/09 5,000,000 3.090 1 Time Call 09/17/07 06/24/05 06/24/15 5,000,000 3.710 1 Time Call 06/24/10 06/24/05 06/24/10 5,000,000 4.092 1 Time Call 06/24/06 07/22/05 07/22/15 5,000,000 3.790 1 Time Call 07/22/08 10/21/05 10/21/10 5,000,000 3.864 1 Time Call 10/23/06 11/10/05 11/10/15 5,000,000 4.400 1 Time Call 11/10/09 11/23/05 11/23/15 5,000,000 3.933 Multi-Call 11/23/07 and quarterly thereafter 11/29/05 11/29/13 5,000,000 4.320 1 Time Call 05/29/09 12/14/05 12/14/11 5,000,000 4.640 1 Time Call 09/14/09 01/12/06 01/12/16 5,000,000 4.450 1 Time Call 01/12/11 03/24/06 03/24/16 5,000,000 4.120 Multi-Call 03/26/07 and quarterly thereafter 03/24/06 03/25/13 5,000,000 4.580 1 Time Call 03/25/08 03/01/06 03/03/14 5,000,000 4.720% 1 Time Call 03/03/10
Mandatorily Redeemable Financial Instrument On June 30, 2006, the Company recorded a $1.4 million mandatorily redeemable financial instrument as a result of the acquisition of the Collier-Jennings Companies. See Note 4, "Acquisition". The shareholder of Collier-Jennings Companies received cash and issued stock to settle the acquisition. The Company will release the shares to the shareholder of Collier-Jennings Companies over a three-year period. The stock is mandatorily redeemable by the shareholder of Collier-Jennings Companies in cumulative increments of 20% per year for a five-year period at the greater of $26 per share or one and one-half times the book value of the Company's stock. Equity - Shareholders' equity increased $280,000 or 1.0% to $37.9 million at June 30, 2006 from $37.6 million at March 31, 2006. The employee stock ownership trust of the Company paid $216,000 of principal on the employee stock ownership plan loan during the three-month period. Accumulated Other Comprehensive Loss, net of tax, increased $805,000 to $2.9 million during the three months ended June 30, 2006. The Company's net income for the three-month period was $1.0 million. The Board of Directors of the Company declared the 62nd consecutive quarterly dividend, which was $.06 per share, in April 2006, which totaled $153,000. Book value per share was $14.56 at June 30, 2006 compared to $14.82 at March 31, 2006. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2006 AND 2005 - --------------------------------------------------------------------------- Net Income - Net income increased $93,000 or 10.0% to $1.0 million for the three months ended June 30, 2006 compared to $929,000 for the three months ended June 30, 2005. The primary reason for the increased earnings was an increase in net interest income and non-interest income offset partially by an increase in non-interest expenses. Net Interest Income - Net interest income increased $488,000 or 12.4% to $4.4 million during the three months ended June 30, 2006, compared to $3.9 million for the same period in 2005, as a result of an increase in interest income offset in part by an increase in interest expense. Average interest earning assets increased $59.3 million to $635.4 million while average interest-bearing liabilities increased $61.1 million to $587.3 million. The interest rate spread increased one basis point to 2.51% during the three months ended June 30, 2006 compared to the same period in 2005. The Company's net interest margin increased 2 basis points to 2.78% for the quarter ended June 30, 2006 from 2.76% for the same quarter last year. The increase in net interest margin is primarily attributable to loan growth. Interest Income - Total interest income increased $2.2 million or 29.9% to $9.6 million during the three months ended June 30, 2006 from $7.4 million for the same period in 2005. Total interest income on loans increased $1.8 million or 35.4% to $7.0 million during the three months ended June 30, 2006 as a result of the average loan portfolio balance increasing $60.1 million and the yield in the loan portfolio increasing 90 basis points. Interest income from mortgage-backed securities increased $50,000 or 3.6% as a result of an increase in the yield in the mortgage-backed portfolio despite a decrease in the average balance of the portfolio of $17.7 million. Interest income from investment securities increased $327,000 or 39.9% as a result of an increase in the yield and average balance of the investment securities portfolio. 16 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the three months ended June 30, 2006 and 2005: Three Months Ended June 30, ---------------------------------------------------------- 2006 2005 ------------------- ------------------- Increase/ (Decrease) In Interest And Average Average Dividend Income Balance Yield Balance Yield From 2005 ----------- ----- ----------- ----- ---------------- Loans Receivable, Net $384,991,473 7.29% $324,841,826 6.39% $ 1,835,553 Mortgage-Backed Securities 136,802,790 4.22 154,508,432 3.61 50,063 Investments 112,271,060 4.08 94,738,838 3.46 326,785 Overnight Time 1,302,992 4.45 1,932,020 2.95 256 ------------ ---- ------------ ----- ----------- Total Interest- Earning Assets $635,368,315 6.06% $576,021,116 5.15% $ 2,212,657 ============ ==== ============ ===== =========== Interest Expense - Total interest expense increased $1.7 million or 49.4% to $5.2 million during the three months ended June 30, 2006 compared to $3.5 million for the same period one-year earlier. The increase in total interest expense is attributable to the increases in short-term interest rates, interest-bearing deposits, and borrowings. Interest expense on deposits increased $1.3 million or 50.5% during the period as average interest bearing deposits grew $30.1 million compared to the average balance in the three months ended June 30, 2005 while the cost of deposits increased 98 basis points. Interest expense on advances and other borrowings increased $456,000 or 46.6% as the cost of debt outstanding increased 53 basis points during the 2006 period compared to 2005 while average total borrowings outstanding increased approximately $31.0 million. The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the three months ended June 30, 2006 and 2005: Three Months Ended June 30, ---------------------------------------------------------- 2006 2005 ------------------- ------------------- Increase/ (Decrease) In Interest And Average Average Dividend Income Balance Yield Balance Yield From 2005 ----------- ----- ----------- ----- ---------------- Now And Money Market Accounts $214,426,429 2.95% $231,490,912 2.17% $ 327,987 Passbook Accounts 17,132,517 0.98 18,090,035 0.98 (2,323) Certificates Accounts 210,361,963 4.10 162,230,838 2.99 942,818 FHLB Advances And Other Borrowed Money 145,409,127 3.95 114,404,114 3.42 456,490 ------------ ----- ----------- ----- ----------- Total Interest- Bearing Liabilities $587,330,036 3.55% $526,215,899 2.65% $ 1,724,972 ============ ==== ============ ==== =========== Provision for Loan Losses - The amount of the provision is determined by management's on-going monthly analysis of the loan portfolio. Management uses three methods to measure the estimate of the adequacy of the allowance for loan losses. These methods incorporate percentage of classified loans, five-year averages of historical loan losses in each loan category and current economic trends, and the assignment of percentage targets of reserves in each loan category. Management has used all three methods for the past seven fiscal years. The Bank's provision for loan losses was $150,000 during the three months ended June 30, 2006 compared to $165,000 for the quarter ended June 30, 2005. The $15,000 or 9.1% decrease reflects the Company's current credit quality and reduction in classified assets, impaired loans and net charge-offs. The following table details selected activity associated with the allowance for loan losses for the three months ended June 30, 2006 and 2005: 17 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations June 30, 2006 June 30, 2005 ---------------- ----------------- Beginning Balance $ 6,704,734 $ 6,284,055 Provision 150,000 165,000 Charge-offs (29,619) (29,904) Recoveries 28,793 9,749 ------------- -------------- Ending Balance $ 6,853,908 $ 6,428,900 ============= ============== Allowance For Loan Losses As A Percentage Of Gross Loans Receivable And Loans Held For Sale At The End Of The Period 1.69% 1.89% Allowance For Loan Losses As A Percentage Of Impaired Loans At The End Of The Period 508.93% 738.95% Impaired Loans 1,346,727 870,000 Nonaccrual Loans And 90 Days Or More Past Due Loans As A Percentage Of Loans Receivable And Loans Held For Sale At The End Of The Period 0.27% 0.49% Loans Receivable, Net $397,835,451 $375,109,076 Non-Interest Income - Non-interest income increased $62,000 or 8.9% to $752,000 for the three months ended June 30, 2006 from $690,000 for the same period one year ago. The following table provides a detailed analysis of the changes in the components of non-interest income: Three Months Increase/ Ended June 30, (Decrease) ------------------ ----------------------- 2006 2005 Amounts Percent -------- ------ --------- ---------- Gain On Sale Of Investments $ - $ 17,540 $(17,540) (100.0)% Gain On Sale Of Loans 113,255 135,310 (22,055) (16.3) Service Fees On Deposit Accounts 277,868 283,197 (5,329) (1.9) Income from cash value of life insurance 56,508 - 56,508 100.0 Other 304,363 254,328 50,035 19.7 -------- -------- ------- ----- Total non-interest income $751,994 $690,375 $61,619 8.9% ======== ======== ======= ===== Income from cash value of life insurance was $57,000 for the three months ended June 30, 2006 compared no income for the same period one year ago. This increase is the result of the Company purchasing bank owned life insurance for certain officers of the Company. Other miscellaneous income including credit life insurance commissions, safe deposit rental income, annuity and stock brokerage commissions, trust fees, and other miscellaneous fees increased $50,000 to $304,000 during the three months ended June 30, 2006 compared to the same period one year ago. Non-Interest Expense - Non-interest expense increased $447,000 or 14.9% to $3.4 million for the three months ended June 30, 2006 from $3.0 million for the same period one year ago. The following table provides a detailed analysis of the changes in the components of non-interest expense: Three Months Increase/ Ended June 30, (Decrease) ------------------ ----------------------- 2006 2005 Amounts Percent -------- ------ --------- ---------- Salaries And Employee Benefits $2,125,368 $1,760,947 $364,422 20.7% Occupancy 317,595 311,847 5,748 1.8 Advertising 74,649 25,469 49,180 193.1 Depreciation And Maintenance Of Equipment 291,469 251,801 39,668 15.8 FDIC Insurance Premiums 14,142 14,519 (377) (2.6) Other 620,080 631,541 (11,461) (1.8) ---------- ---------- -------- ------ Total Non-Interest Expenses $1,569,366 $2,996,124 447,180 14.9% ========== ========== ======== ====== 18 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Salary and employee benefits increased $364,000 to $2.1 million for the three months ended June 30, 2006 from $1.8 million for the same period one year ago. The majority of the increase is the result of hiring additional staff to handle the Company's growth and increased regulatory reporting requirements. Advertising expense increased $49,000 to $74,000 for the three months ended June 30, 2006 from $25,000 for the same period one year ago. The increase is attributable to the Company using more print media advertising to attract deposits and consumer loans. Provision For Income Taxes - Provision for income taxes increased $24,000 or 4.6% to $547,000 for the three months ended June 30, 2006 from $523,000 for the same period one year ago. Income before income taxes was $1.6 million for the three months ended June 30, 2006 compared to $1.5 million for the three months ended June 30, 2005. The Company's combined federal and state effective income tax rate for the current quarter was 34.9% compared to 36.0% for the same quarter one year ago. Liquidity Commitments, Capital Resources , and Impact of Inflation and Changing Prices Liquidity - The Company actively analyzes and manages the Bank's liquidity with the objective of maintaining an adequate level of liquidity and to ensure the availability of sufficient cash flows to support loan growth, fund deposit withdrawals, fund operations, and satisfy other financial commitments. See the "Consolidated Statements of Cash Flows" contained in Item 1 Financial Statements, herein. The primary sources of funds are customer deposits, loan repayments, loan sales, maturing investment securities, and advances from the FHLB. The sources of funds, together with retained earnings and equity, are used to make loans, acquire investment securities and other assets, and fund continuing operations. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage repayments are greatly influenced by the level of interest rates, economic conditions, and competition. Management believes that the Company's current liquidity position and its forecasted operating results are sufficient to fund all of its existing commitments. During the three ended June 30, 2006 loan disbursements exceeded loan repayments resulting in a $22.7 million or 6.1% increase in total net loans receivable. During the three months ended June 30, 2006, d posits increased $1.4 million and FHLB advances increase $10.1 million. The Bank had $57.4 million in additional borrowing capacity at the FHLB at the end of the period. At June 30, 2006, the Bank had $179.8 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. Off-Balance Sheet Commitments - The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company's maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Since some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Collateral is not required to support commitments. The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at June 30, 2006. After After One Three Greater Within Through Through Than (Dollars One Three Twelve Within One in thousands) Month Months Months One Year Year Total ------ ------ ------ -------- ---- ----- Unused lines of credit $ 1,709 $ 3,029 $ 38,199 42,937 $36,204 $79,141 Standby letters of credit 13 2 810 825 100 925 ------- ------- -------- ------- ------- ------- Total $ 1,722 $ 3,031 $ 39,009 $43,762 $36,304 $80,066 ======= ======= ======== ======= ======= ======= 19 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Capital - Consistent with our objective to operate a sound and profitable financial institution, the Company has maintained and will continue to focus on maintaining a "well capitalized" rating from our regulatory authorities. In addition, the Company is subject to certain capital requirements set by our regulatory agencies. At June 30, 2006, the Company exceeded all regulatory capital requirements. The following table reconciles the Bank's stockholder's equity to its various regulatory capital positions: June 30, 2006 March 31, 2006 (Dollars in Thousands) -------------------------------------- Bank's Stockholder's Equity $ 37,605 $ 37,387 Unrealized Loss (Gain) On Available For Sale Of Securities, Net Of Tax 2,891 2,086 Reduction For Goodwill And Other Intangibles - - Tangible Capital 40,496 39,473 Qualifying Core Deposits And Intangible Assets - - Core Capital 40,496 39,473 Supplemental Capital 5,317 5,104 Assets Required To Be Deducted (22) (9) -------- -------- Risk-Based Capital $ 45,791 $ 44,568 ======== ======== The following table compares the Bank's capital levels relative to the applicable regulatory requirements at June 30, 2006: (Dollars in Thousands) --------------------------------------------------------- Amt. % Actual Actual Excess Excess Required Required Amt. % Amt. % --------------------------------------------------------- Tangible Capital $ 13,466 2.0% $ 40,496 5.99% $ 27,030 3.99% Tier 1 Leverage (Core) Capital 27,047 4.0% 40,496 5.99% 13,449 1.99% Tier 1 Risk-Based (Core) Capital 17,014 4.0% 40,496 9.52% 23,482 5.52% Total Risk-Based Capital 34,028 8.0% 45,791 10.77% 11,763 2.77% 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 discussion of changes in interest rates. 20 Security Federal Corporation and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises principally from interest rate risk inherent in its lending, investment, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Company manages other risks such as credit quality and liquidity risk in the normal course of business, management considers interest rate risk to be its most significant market risk that could potentially have the largest material effect on the Company's financial condition and results of operations. Other types of market risks such as foreign currency exchange rate risk and commodity price do not arise in the normal course of the Company's business activities. The Company's profitability is affected by fluctuations in the market interest rate. Management's goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. A sudden and substantial increase or decrease in interest rates may adversely impact the Company's earnings to the extent that the interest rates on interest-earning assets and interest-bearing liabilities do not change at the same rate, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using a test that measures the impact on net interest income and net portfolio value of an immediate change in interest rates in 100 basis point increments and by measuring the Bank's interest sensitivity gap ("Gap"). Net portfolio value is defined as the net present value of assets, liabilities, and off-balance sheet contracts. Gap is the amount of interest sensitive assets repricing or maturing over the next twelve months compared to the amount of interest sensitive liabilities maturing or repricing in the same time period. Recent net portfolio value reports furnished by the OTS indicate that the Bank's interest rate risk sensitivity has increased slightly over the past year. The Bank has rated favorably compared to thrift peers concerning interest rate sensitivity. For the three month period ended June 30, 2006, 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 2.51%. As of the year ended March 31, 2006, the interest rate spread was 2.48%. The interest rate spread increased due to the growth of loan receivables. Loan receivables earn a higher yield than investment securities. However, if interest rates were to increase suddenly and significantly, the Bank's net interest income and net interest spread would be compressed. Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a - 15(e) of the Securities Exchange Act of 1934 ("Act")) was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management as of the end of the period covered by this quarterly report. The Company's Chief Executive Officer and Chief Financial Officer concluded that at June 30, 2006 the Company's disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission's rules and forms. (b) Changes in Internal Controls: In the quarter ended June 30, 2006, 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. 21 Security Federal Corporation and Subsidiaries Part II: Other Information Item 1 Legal Proceedings ----------------- The Company is not engaged in any legal proceedings of a material nature at the present time. From time to time, the Company is a party to legal proceedings in the ordinary course of business wherein it enforces its security interest in mortgage loans it has made. Item 1A Risk Factors ------------ There have been no material changes in the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended March 31, 2006. Item 2 Unregistered sales of Equity Securities and Use Of Proceeds ----------------------------------------------------------- None. 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 June 30, 2006, 1,635 shares have been repurchased under this program. The Company did not repurchase any shares of its outstanding Common Stock during the three months ended June 30, 2006. Item 3 Defaults Upon Senior Securities ------------------------------- None Item 4 Submission Of Matters To A Vote Of Security Holders --------------------------------------------------- None Item 5 Other Information ----------------- None Item 6 Exhibits -------- 3.1 Articles Of Incorporation, as amended (1) 3.2 Bylaws (2) 4 Instruments defining the rights of security holders, including indentures (3) 10.1 Executive Compensation Plans and Arrangements 10.2 1993 Salary Continuation Agreements (4) 10.3 Amendment One to 1993 Salary Continuation Agreement (5) 10.4 Form of 2006 Salary Continuation Agreement(6) 10.4 1999 Stock Option Plan (2) 10.5 1987 Stock Option Plan (4) 10.6 2002 Stock Option Plan (7) 10.7 2004 Employee Stock Purchase Plan (8) 10.8 Incentive Compensation Plan (4) 10.9 Form of Security Federal Bank Salary Continuation Agreement (9) 10.10 Form of Security Federal Split Dollar Agreement (9) 14 Code of Ethics (10) 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act. 32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act. (1) Filed on June 26, 1998, as an exhibit to the Company's Proxy Statement and incorporated herein by reference. (2) Filed on March 2, 2000, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference. (3) Filed on August 12, 1987, as an exhibit to the Company's Registration Statement on Form 8-A and incorporated herein by reference. (4) Filed on June 28, 1993, as an exhibit to the Company's Annual Report on Form 10-KSB and incorporated herein by reference. (5) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1993 and incorporated herein by reference. 22 Security Federal Corporation and Subsidiaries Exhibits, Continued (6) Filed on May 24, 2006 as an exhibit to the Company's Current Report on Form 8-K dated May 18, 2006 and incorporated herein by reference. (7) Filed on June 19, 2002, as an exhibit to the Company's Proxy Statement and incorporated herein by reference. (8) Filed on June 18, 2004, as an exhibit to the Company's Proxy Statement and incorporated herein by reference. (9) Filed on May 24, 2006 as an exhibit to the Current Report on Form 8-K and incorporated herein by reference. (10) Filed on June 29, 2006 as an exhibit to the Company's Annual Report on Form 10-K 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: August 14, 2006 By:/s/Timothy W. Simmons --------------- -------------------------- Timothy W. Simmons President Duly Authorized Representative Date: August 14, 2006 By:/s/Roy G. Lindburg --------------- -------------------------- Roy G. Lindburg Treasurer/CFO Duly Authorized Representative 23 EXHIBIT 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 24 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 periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2006 /s/Timothy W. Simmons ------------------------------------- Timothy W. Simmons President and Chief Executive Officer 25 EXHIBIT 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 26 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 periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2006 /s/Roy G. Lindburg ------------------------------------- Roy G. Lindburg Treasurer and Chief Financial Officer 27 EXHIBIT 32 Certification Pursuant to Section 906 of the Sarbanes-oxley Act 28 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 Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and 2. the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of Security Federal Corporation. /s/Timothy W. Simmons /s/Roy G. Lindburg - ------------------------------------ ------------------------------------ Timothy W. Simmons Roy G. Lindburg President and Chief Executive Officer Treasurer and Chief Financial Officer Dated: August 14, 2006 29 -----END PRIVACY-ENHANCED MESSAGE-----