-----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, D8ctq7kGrmTeJbgvqcDQJGUA4xhZMwgo6B2HT00eFr9icBUoqabEo8Mj2YKyi/Lz L5ghtAhNS2VMpwXS9ntw/Q== 0000939057-06-000315.txt : 20061114 0000939057-06-000315.hdr.sgml : 20061114 20061114170030 ACCESSION NUMBER: 0000939057-06-000315 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061114 DATE AS OF CHANGE: 20061114 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: 061216384 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 q207.txt SECURITY FEDERAL CORPORATION FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark one) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 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 And Zip code) (803) 641-3000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------ ------ Indicate by check mark whether the registrant is 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 corporation (defined in Rule 12b-2 of the Exchange Act). YES NO X ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. CLASS: OUTSTANDING SHARES AT: SHARES: ----------------- ----------------------- ----------------- Common Stock, par October 31, 2006 2,617,864 value $0.01 per share INDEX ============================================================================== PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO. Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets at September 30, 2006 and March 31, 2006 1 Consolidated Statement of Income for the Three and Six Months Ended September 30, 2006 and 2005 2 Consolidated Statements of Shareholders' Equity and Comprehensive Income at September 30, 2005 and 2006 4 Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2006 and 2005 5 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures about Market Risk 27 Item 4. Controls and Procedures 27 ============================================================================== PART II. OTHER INFORMATION Item 1. Legal Proceedings 28 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28 Item 3. Defaults Upon Senior Securities 28 Item 4. Submission of Matters to Vote of Security Holders 28 Item 5. Other Information 28 Item 6. Exhibits 28 Signatures 30 ============================================================================== SCHEDULES OMITTED All schedules other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information is included in the consolidated financial statements and related notes. Part I. Financial Information Item 1. Financial Statements (Unaudited) Security Federal Corporation and Subsidiaries Consolidated Balance Sheets September 30, 2006 March 31, 2006 ------------------ -------------- Assets: (Unaudited) (Audited) Cash And Cash Equivalents $ 8,333,204 $ 14,351,208 Investment And Mortgage-Backed Securities: Available For Sale: (Amortized cost of $166,904,751 at September 30, 2006 and $166,808,236 at March 31, 2006) 164,493,037 163,445,066 Held To Maturity: (Fair value of $67,715,090 at September 30, 2006 and $73,084,450 at March 31, 2006) 68,984,020 74,987,805 ----------------- -------------- Total Investment And Mortgage-Backed Securities 233,477,057 238,432,871 ----------------- -------------- Loans Receivable, Net: Held For Sale 1,080,163 1,320,644 Held For Investment: (Net of allowance of $6,994,623 at September 30, 2006 and $6,704,734 at March 31, 2006) 405,423,683 373,788,432 ----------------- -------------- Total Loans Receivable, Net 406,503,846 375,109,076 ----------------- -------------- Accrued Interest Receivable: Loans 1,349,932 1,096,014 Mortgage-Backed Securities 505,975 508,432 Investments 1,004,508 945,620 Premises And Equipment, Net 13,290,648 11,662,976 Federal Home Loan Bank Stock, At Cost 7,555,600 7,149,800 Bank Owned Life Insurance 5,659,546 5,000,001 Repossessed Assets Acquired In Settlement Of Loans - 91,022 Goodwill 1,197,954 - Other Assets 5,835,416 4,330,795 ----------------- -------------- Total Assets $ 684,713,686 $ 658,677,815 ================= ============== Liabilities And Shareholders' Equity Liabilities: Deposit Accounts $ 487,065,468 $ 479,229,339 Advances From Federal Home Loan Bank 139,956,791 131,363,000 Other Borrowed Money 6,784,047 7,289,773 Advance Payments By Borrowers For Taxes And Insurance 857,848 501,998 Mandatorily Redeemable Financial Instrument 1,417,312 - Junior Subordinated Debentures 5,155,000 - Other Liabilities 3,060,119 2,691,946 ----------------- -------------- Total Liabilities 644,296,585 621,076,056 ----------------- -------------- 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 - 2,632,346 And Outstanding Shares - 2,617,434 At September 30, 2006 And 2,558,234 And 2,537,378 At March 31, 2005 25,758 25,582 Additional Paid-In Capital 4,756,687 4,404,110 Treasury Stock, (At Cost, 14,912 and 11,312 Shares, Respectively) (321,678) (238,656) Indirect Guarantee Of Employee Stock Ownership Trust Debt - (215,503) Accumulated Other Comprehensive Loss (1,496,145) (2,086,509) Retained Earnings, Substantially Restricted 37,452,479 35,712,735 ----------------- -------------- Total Shareholders' Equity 40,417,101 37,601,759 ----------------- -------------- Total Liabilities And Shareholders' Equity $ 684,713,686 $ 658,677,815 ================= ============== See accompanying notes to consolidated financial statements. 1 Security Federal Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) Three Months Ended September 30, -------------------------------- 2006 2005 ------------- ------------ Interest Income: Loans $ 7,672,436 $ 5,655,275 Mortgage-Backed Securities 1,324,065 1,357,721 Investment Securities 1,184,887 852,548 Other 17,989 22,060 ------------- ------------ Total Interest Income 10,199,377 7,887,604 ------------- ------------ Interest Expense: NOW And Money Market Accounts 1,716,286 1,293,353 Passbook Accounts 42,030 44,920 Certificate Accounts 2,436,345 1,340,794 Advances And Other Borrowed Money 1,539,665 1,104,785 Junior Subordinated Debentures 10,002 - ------------- ------------ Total Interest Expense 5,744,328 3,783,852 ------------- ------------ Net Interest Income 4,455,049 4,103,752 Provision For Loan Losses 150,000 165,000 ------------- ------------ Net Interest Income After Provision For Loan Losses 4,305,049 3,938,752 ------------- ------------ Other Income: Net Gain On Sale Of Investments - 31,422 Gain On Sale Of Loans 93,998 118,253 Service Fees On Deposit Accounts 291,635 288,867 Income From Cash Value Of Life Insurance 62,037 - Commissions On Insurance 209,246 8,078 Other Agency Income 94,308 - Trust Income 121,556 109,322 Other 123,822 140,549 ------------- ------------ Total Other Income 996,602 696,491 ------------- ------------ General And Administrative Expenses: Salaries And Employee Benefits 2,303,160 1,835,356 Occupancy 350,668 319,330 Advertising 61,301 43,521 Depreciation And Maintenance Of Equipment 316,326 258,318 FDIC Insurance Premiums 14,820 14,167 Other 682,926 700,962 ------------- ------------ Total General And Administrative Expenses 3,729,201 3,171,654 ------------- ------------ Income Before Income Taxes 1,572,450 1,463,589 Provision For Income Taxes 545,451 513,909 ------------- ------------ Net Income $ 1,026,999 $ 949,680 ============= ============ Basic Net Income Per Common Share $ 0.39 $ 0.38 ============= ============ Diluted Net Income Per Common Share $ 0.39 $ 0.37 ============= ============ Cash Dividend Per Share On Common Stock $ 0.06 $ 0.04 ============= ============ Basic Weighted Average Shares Outstanding 2,610,605 2,527,533 ============= ============ Diluted Weighted Average Shares Outstanding 2,622,996 2,585,543 ============= ============ See accompanying notes to consolidated financial statements. 2 Security Federal Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) Six Months Ended September 30, ------------------------------ 2006 2005 ------------- ------------ Interest Income: Loans $ 14,693,111 $ 10,888,965 Mortgage-Backed Securities 2,767,415 2,751,008 Investment Securities 2,331,229 1,672,105 Other 32,472 36,287 ------------- ------------ Total Interest Income 19,824,227 15,348,365 ------------- ------------ Interest Expense: NOW And Money Market Accounts 3,297,456 2,546,536 Passbook Accounts 83,906 89,119 Certificate Accounts 4,591,746 2,553,377 Advances And Other Borrowed Money 2,975,392 2,084,022 Junior Subordinated Debentures 10,002 - ------------- ------------ Total Interest Expense 10,958,502 7,273,054 ------------- ------------ Net Interest Income 8,865,725 8,075,311 Provision For Loan Losses 300,000 330,000 ------------- ------------ Net Interest Income After Provision For Loan Losses 8,565,725 7,745,311 ------------- ------------ Other Income: Net Gain On Sale Of Investments - 48,962 Gain On Sale Of Loans 207,253 253,563 Service Fees On Deposit Accounts 569,503 572,064 Income From Cash Value Of Life Insurance 118,545 - Commissions On Insurance 214,635 8,904 Other Agency Income 94,308 - Trust Income 217,556 178,593 Other 326,796 276,212 ------------- ------------ Total Other Income 1,748,596 1,338,298 ------------- ------------ General And Administrative Expenses: Salaries And Employee Benefits 4,428,529 3,596,303 Occupancy 668,263 631,177 Advertising 135,950 68,990 Depreciation And Maintenance Of Equipment 607,795 510,119 FDIC Insurance Premiums 28,962 28,686 Other 1,303,006 1,332,503 ------------- ------------ Total General And Administrative Expenses 7,172,505 6,167,778 ------------- ------------ Income Before Income Taxes 3,141,816 2,915,831 Provision For Income Taxes 1,092,445 1,036,909 ------------- ------------ Net Income $ 2,049,371 $ 1,878,922 ============= ============ Basic Net Income Per Common Share $ 0.80 $ 0.74 ============= ============ Diluted Net Income Per Common Share $ 0.79 $ 0.73 ============= ============ Cash Dividend Per Share On Common Stock $ 0.12 $ 0.08 ============= ============ Basic Weighted Average Shares Outstanding 2,574,778 2,528,961 ============= ============ Diluted Weighted Average Shares Outstanding 2,587,472 2,570,874 ============= ============ See accompanying notes to consolidated financial statements. 3 Security Federal Corporation and Subsidiaries Consolidated Statements of Shareholders' Equity and Comprehensive Income (Unaudited) Accumulated Additional Indirect Other Common Paid-In Treasury Guarantee of Comprehensive Retained Stock Capital Stock ESOP Debt Income (Loss) Earnings Total ------- ---------- -------- ----------- ------------- ---------- ---------- Balance At March 31, 2005 $ 25,438 $4,181,804 $(165,089) $ (276,217) $ (961,504) $32,306,633 $35,111,065 Net Income - - - - - 1,878,922 1,878,922 Other Comprehensive Income, Net Of Tax: Unrealized Holding Gains On Securities Available For Sale - - - - 119,479 - 119,479 Plus Reclassification Adjustments For Gains Included In Net Income - - - - 30,356 - 30,356 --------- Comprehensive Income - - - - - - 2,028,757 Purchase Of Treasury Stock At Cost, 1,635 shares (35,167) - - - (35,167) Decrease In Indirect Guarantee Of ESOP Debt - - - 60,714 - - 60,714 Exercise Of Stock Options 111 184,093 - - - - 184,204 Cash Dividends - - - - - (202,962) (202,962) ------- ---------- -------- ----------- ------------- ---------- ---------- Balance At September 30, 2005 $ 25,549 $4,365,897 $(200,256) $ (215,503) $ (811,669) $33,982,593 $37,146,611
Accumulated Additional Indirect Other Common Paid-In Treasury Guarantee of Comprehensive Retained Stock Capital Stock ESOP Debt Income (Loss) Earnings Total ------- ---------- -------- ----------- ------------- ---------- ---------- Balance At March 31, 2006 $25,582 $4,404,110 $(238,656) $(215,503) $(2,086,509) $35,712,735 $37,601,759 Net Income - - - - - 2,049,371 2,049,371 Other Comprehensive Income, Net Of Tax: Unrealized Holding Gains On Securities Available For Sale - - - - 590,364 - 590,364 --------- Comprehensive Income - - - - - - 2,639,735 Purchase Of Treasury Stock At Cost, 3,600 shares (83,022) - - - (83,022) Decrease In Indirect Guarantee Of ESOP Debt - - - 215,503 - - 215,503 Exercise Of Stock Options 176 350,656 - - - - 350,832 Stock Compensation Expense - 1,921 - - - - 1,921 Cash Dividends - - - - - (309,627) (309,627) ------- ---------- -------- ----------- ------------- ---------- ---------- Balance At September 30, 2006 $25,758 $4,756,687 $(321,678) $ - $(1,496,145) $37,452,479 $40,417,101 ======= ========== ======== =========== ============= ========== ========== See accompanying notes to consolidated financial statements.
4 Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Six Months Ended September 30, --------------------------------- 2006 2005 ------------ -------------- Cash Flows From Operating Activities: Net Income $ 2,049,371 $ 1,878,922 Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: Depreciation Expense 479,490 483,323 Amortization Of Intangible Assets 22,500 - Stock Option Compensation Expense 1,921 - Discount Accretion And Premium Amortization 225,592 539,604 Provisions For Losses On Loans And Real Estate 300,000 330,000 Gain On Sale Of Loans (207,253) (253,563) Gain On Sale Of Mortgage Backed Securities Available For Sale - (48,962) Loss (Gain) On Sale Of Real Estate (48,678) 23,466 Amortization Of Deferred Fees On Loans (105,427) (99,944) Proceeds From Sale Of Loans Held For Sale 12,465,483 16,079,996 Origination Of Loans For Sale (12,017,749) (15,287,543) (Increase) Decrease In Accrued Interest Receivable: Loans (253,918) (107,169) Mortgage-Backed Securities 2,457 28,936 Investments (58,888) (143,395) Increase In Advance Payments By Borrowers 355,850 326,227 Loss On Disposition of Premises and Equipment 215 806 Other, Net (1,085,177) 367,310 ------------ -------------- Net Cash Provided By Operating Activities 2,125,789 4,118,014 ------------ -------------- Cash Flows From Investing Activities: Principal Repayments On Mortgage-Backed Securities Available For Sale 19,367,854 26,938,831 Principal Repayments On Mortgage-Backed Securities Held To Maturity - 10,407 Purchase Of Investment Securities Available For Sale (7,971,845) (16,065,257) Purchase Of Mortgage-Backed Securities Available For Sale (13,227,369) (19,373,356) Maturities Of Investment Securities Available For Sale 1,513,036 4,457,139 Maturities Of Investment Securities Held To Maturity 6,000,000 - Proceeds From Sale Of Mortgage-Backed Securities Available For Sale - 3,797,360 Proceeds From Sale Of Mortgage-Backed Securities Held To Maturity - 249,650 Purchase Of FHLB Stock (3,432,000) (2,307,100) Redemption Of FHLB Stock 3,026,200 2,139,400 Increase In Loans To Customers (31,829,824) (23,722,352) Proceeds From Sale Of Repossessed Assets 139,700 76,148 Purchase And Improvement Of Premises And Equipment (2,107,377) (1,235,004) Purchase Of Bank Owned Life Insurance (659,545) - ------------ -------------- Net Cash Used By Investing Activities (29,181,170) (25,034,134) ------------ -------------- Cash Flows From Financing Activities: Increase In Deposit Accounts 7,836,129 19,380,005 Proceeds From FHLB Advances 138,579,250 81,095,000 Repayment Of FHLB Advances (129,985,459) (76,195,000) Net (Repayment) Proceeds Of Other Borrowings (505,726) 508,320 Proceeds From Junior Subordinated Debentures 5,155,000 - Dividends To Shareholders (309,627) (202,962) Purchase Of Treasury Stock (83,022) (35,167) Proceeds From Exercise of Stock Options 350,832 184,204 ------------ -------------- Net Cash Provided By Financing Activities 21,037,377 24,734,400 ------------ -------------- (Continued) 5 Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Six Months Ended September 30, --------------------------------- 2006 2005 ------------- -------------- Net (Decrease) Increase In Cash And Cash Equivalents (6,018,004) 3,818,280 Cash And Cash Equivalents At Beginning Of Period 14,351,208 7,916,488 ------------- -------------- Cash And Cash Equivalents At End Of Period $ 8,333,204 $ 11,734,768 ============= ============== Supplemental Disclosure Of Cash Flows Information: Cash Paid During The Period For Interest $ 10,726,724 $ 7,206,369 Cash Paid During The Period For Income Taxes $ 579,000 $ 698,195 Additions To Repossessed Acquired Through Foreclosure $ - $ 70,984 Decrease In Unrealized Net Loss On Securities Available For Sale, Net Of Taxes $ 590,364 $ 149,835 Issuance Of A Mandatorily Redeemable Financial Instrument Through The Issuance Of Common Stock 1,417,312 - See accompanying notes to consolidated financial statements. 6 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and accounting principles generally accepted in the United States of America; therefore, they do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows. Such statements are unaudited but, in the opinion of management, reflect all adjustments, which are of a normal recurring nature and necessary for a fair presentation of results for the selected interim periods. Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the audited financial statements appearing in Security Federal Corporation's (the "Company") 2006 Annual Report to Shareholders when reviewing interim financial statements. The results of operations for the six month period ended September 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 the Company and its wholly owned subsidiary, Security Federal Bank (the "Bank"), and the Bank's wholly owned subsidiaries, Security Federal Insurance, Inc. ("SFINS"), Security Federal Investments, Inc. ("SFINV"), Security Federal Trust, Inc. ("SFT"), and Security Financial Services Corporation ("SFSC"). The Bank is primarily engaged in the business of accepting savings and demand deposits and originating mortgage and other loans to individuals and small businesses for various personal and commercial purposes. SFINS, SFINV, and SFT were formed during the year ended March 31, 2002 and began operation during the December 2001 quarter. SFINS is an insurance agency offering business, health, home and life insurance. SFINV engages primarily in investment brokerage services. SFT offers trust, financial planning and financial management services. SFSC is currently inactive. 3. 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. The Company believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of the 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. 7 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 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. Acquisition On June 30, 2006, the Company completed the acquisition of the insurance and premium finance businesses of Collier-Jennings Financial Corporation and it subsidiaries Collier-Jennings, Inc., The Auto Insurance Store, Inc., and Collier-Jennings Premium Pay Plans, Inc (the "Collier-Jennings Companies"). The purpose of the acquisition was to expand the insurance services and increase non-interest income. The shareholder of the Collier-Jennings Companies received $180,000 in cash and 54,512 shares of the Company's common stock valued at $26 per share for an approximate purchase price of $1,597,312. The Company will release the shares to the 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. A summary of the purchase price of the transaction is as follows: The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at June 30, 2006, the date of acquisition, including subsequent adjustments to the allocation of the purchase price. Cash And Cash Equivalents $ 43,192 Accounts Receivable 784,247 Premises And Equipment 41,696 Other Assets 56,289 Intangible Assets 600,000 Goodwill 1,197,954 ------------- Total Assets Acquired 2,723,378 ------------- Notes Payable 386,185 Other Liabilities 739,881 Total Liabilities Assumed 1,126,066 ------------- Net Assets Acquired $ 1,597,312 ============= 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. 8 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 ------------------------------------------------------------ September 30, 2006 ------------------------------------------------------------ Income (Numerator) Amount Shares (Denominator) Per Share ------------------------- -------------------- ---------- Basic EPS $ 1,026,999 2,610,605 $ 0.39 Effect of Diluted Securities: Stock Options - 12,391 - ------------------------- -------------------- ---------- Diluted EPS $ 1,026,999 2,622,996 $ 0.39 ========================= ==================== ========== For the Quarter Ended ------------------------------------------------------------ September 30, 2005 ------------------------------------------------------------ Income (Numerator) Amount Shares (Denominator) Per Share ------------------------- -------------------- ---------- Basic EPS $ 949,680 2,527,533 $ 0.38 Effect of Diluted Securities: Stock Options - 48,466 (0.008) ESOP - 9,544 (0.002) ------------------------- -------------------- ---------- Diluted EPS $ 949,680 2,585,543 $ 0.37 ========================= ==================== ========== For the Six Months Ended ------------------------------------------------------------ September 30, 2006 ------------------------------------------------------------ Income (Numerator) Amount Shares (Denominator) Per Share ------------------------- -------------------- ---------- Basic EPS $ 2,049,371 2,574,778 $ 0.80 Effect of Diluted Securities: Stock Options - 12,694 (0.01) ------------------------- -------------------- ---------- Diluted EPS $ 2,049,371 2,587,472 $ 0.79 ========================= ==================== ========== For the Six Months Ended ------------------------------------------------------------ September 30, 2005 ------------------------------------------------------------ Income (Numerator) Amount Shares (Denominator) Per Share ------------------------- -------------------- ---------- Basic EPS $ 1,878,922 2,528,961 $ 0.74 Effect of Diluted Securities: Stock Options - 30,670 (0.007) ESOP - 11,243 (0.003) ------------------------- -------------------- ---------- Diluted EPS $ 1,878,922 2,570,874 $ 0.73 ========================= ==================== ========== 9 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 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. 123R, 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 123R 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. Three Months Ended Six Months Ended September 30, September 30, ------------------------- -------------------------- 2006 2005 2006 2005 ----------- ---------- ----------- ------------ Net income, as reported $1,026,999 $ 949,680 $2,049,371 $1,878,922 Add: Stock-based compensation expense included in reported net income, net of related tax effects 1,921 - 1,921 - Deduct: Stock-based compen- sation expense determined under fair market value based method on all awards, net of related tax effects (1,921) (30,570) (1,921) (61,140) ----------- ---------- ----------- ----------- Pro forma net income including stock-based compensation cost based on fair-value method $1,026,999 $ 919,110 $2,049,371 $1,817,782 =========== ========== =========== =========== Earnings per share: Basic - as reported $ 0.39 $ 0.38 $ 0.80 $ 0.74 Basic - pro forma $ 0.39 $ 0.36 $ 0.80 $ 0.72 Diluted - as reported $ 0.39 $ 0.37 $ 0.79 $ 0.73 Diluted - pro forma $ 0.39 $ 0.36 $ 0.79 $ 0.71 The following is a summary of the activity under the Company's incentive stock option plan. Three Months Ended Six Months Ended September 30, 2006 September 30, 2006 ------------------------ ------------------------ Weighted Weighted Average Average Shares Exercise Price Shares Exercise Price ------------------------- ------------------------ Balance, Beginning of Period/Year 118,046 $19.50 118,046 $19.50 Options granted 13,500 23.03 13,500 23.03 Options exercised 19,600 17.90 19,600 17.90 Options forfeited 500 24.22 500 24.22 --------- --------- Balance, September 30, 2006 111,446 $20.19 111,446 $20.19 ========= ========= Options Exercisable 97,946 $19.80 97,946 $19.80 ========= ========= Options Available For Grant 50,750 50,750 ========= ========= 10 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 6. Stock-Based Compensation, Continued The following table summarizes the stock-based awards granted by the Company, the fair market value of each award granted as estimated on the date of grant using the Black-Scholes option-pricing model, and the weighted average assumptions used for such grants for the periods indicated For Awards Granted During For Awards Granted During The Three Month Period Ended The Six Month Period Ended September 30, September 30, --------------------------- -------------------------- 2006 2005 2006 2005 ---------- --------- ----------- ---------- Awards granted 13,500 - 13,500 - Dividend Yield 1.03% - 1.03% - Expected Volatility 30.21% - 30.21% - Risk-free interest rate 4.36% - 4.36% - Expected life 9.01 - 9.01 - At September 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 36,900 $16.67 9/30/05 to 9/30/09 9/1/03 3,000 $24.00 8/31/13 12/1/03 3,000 $23.65 11/30/13 1/01/04 8,000 $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 22,000 $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 8/24/06 13,500 $23.03 8/24/16 7. Accounting and Reporting Changes The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and / or disclosure of financial information by the Company. In February 2006, 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. 11 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. In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes". FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises' financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently analyzing the effects of FIN 48. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for the Company on January 1, 2008 and is not expected to have a significant impact on the Company's financial statements. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" ("SFAS 158"), which amends SFAS 87 and SFAS 106 to require recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement date the date at which the benefit obligation and plan assets are measured is required to be the company's fiscal year end. SFAS 158 is effective for publicly-held companies for fiscal years ending after December 15, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. The Company is currently analyzing the effects of SFAS 158 but does not expect its implementation will have a significant impact on the Company's financial conditions or results of operations. In September, 2006, the FASB ratified the consensuses reached by the FASB's Emerging Issues Task Force (EITF) relating to EITF 06-4 "Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements". EITF 06-4 addresses employer accounting for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods should recognize a liability for future benefits in accordance with FASB SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", or Accounting Principles Board (APB) Opinion No. 12, "Omnibus Opinion 1967". EITF 06-4 is effective for fiscal years beginning after December 15, 2006. Entities should recognize the effects of applying this Issue through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. The Company does not believe the adoption of EITF 06-4 will have a material impact on its financial position, results of operations and cash flows. 12 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 7. Accounting and Reporting Changes, Continued On September 13, 2006, the SEC issued Staff Accounting Bulleting No. 108 ("SAB 108"). SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, Companies might evaluate the materiality of financial statement misstatements using either the income statement or balance sheet approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatement present in a company's balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. The Company has analyzed SAB 108 and determined that upon adoption it will have no impact on the reported results of operations or financial conditions. 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 September 30, 2006 Amortized Unrealized Unrealized - ------------------ Cost Gains Losses Fair Value ------------ ----------- ----------- ------------ US Government and Agency Obligations $ 34,933,258 $ 4,884 $ 225,487 $ 34,712,655 Mortgage-Backed Securities 131,868,555 139,918 2,333,091 129,675,382 Equity Securities 102,938 2,062 - 105,000 ------------ ---------- ----------- ------------ Total $166,904,751 $ 146,864 $ 2,558,578 $164,493,037 ============ ========== =========== ============ 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 ============ ========== =========== ============ Investment and Mortgage-Backed Securities, Held to Maturity - ----------------------------------------------------------- The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment and mortgage-backed securities held to maturity are as follows: Gross Gross September 30, 2006 Amortized Unrealized Unrealized - ------------------ Cost Gains Losses Fair Value ------------ ------------ ------------ ------------- US Government and Agency Obligations $ 68,984,020 $ 1,250 $ 1,270,180 $ 67,715,090 ============ =========== =========== ============ March 31, 2006 - -------------- US Government and Agency Obligations $ 74,987,805 $ - $ 1,903,355 $ 73,084,450 ============ =========== =========== ============ 13 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 9. Loans Receivable, Net Loans receivable, net, at September 30, 2006 and March 31, 2006 consisted of the following: September 30, March 31, 2006 2006 ---------------- --------------- Residential Real Estate $ 125,735,509 $ 122,026,298 Consumer 62,678,103 58,612,669 Commercial Business & Real Estate 231,493,594 209,214,332 Loans Held For Sale 1,080,163 1,320,644 --------------- --------------- 420,987,369 391,173,943 --------------- --------------- Less: Allowance For Possible Loan Loss 6,994,623 6,704,734 Loans In Process 7,198,711 9,185,133 Deferred Loan Fees 290,189 175,000 --------------- --------------- 14,483,523 16,064,867 --------------- --------------- $ 406,503,846 $ 375,109,076 =============== =============== 14 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 September 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 September 30, 2006 and March 31, 2006 General - Total assets increased $26.0 million or 4.0% to $684.7 million at September 30, 2006 from $658.7 million at March 31, 2006. The primary reason for the growth in total assets was a $31.4 million or 8.4% increase in net loans receivable to $406.5 million. For the six months ended September 30, 2006, the demand for loans was funded with decreased cash and cash equivalents of $6.0 million or 42.0%, decreased investments and mortgage-backed securities, held to maturity of $6.0 million or 8.0% and increased deposits of $7.8 million or 1.6% and advances from the Federal Home Loan Bank ("FHLB") of $8.6 million or 6.5%. Assets - The increases and decreases in total assets were primarily concentrated in the following asset categories: Increase (Decrease) ------------------------- September 30, March 31, 2006 2006 Amount Percent ------------- ------------ ------------ ----------- Cash And Cash Equivalents $ 8,333,204 $ 14,351,208 $(6,018,004) (41.9)% Investment And Mortgage-Backed Securities - Available For Sale 164,493,037 163,445,066 1,047,971 0.6 Investment And Mortgage-Backed Securities - Held To Maturity 68,984,020 74,987,805 (6,003,785) (8.0) Loan Receivable, Net 406,503,846 375,109,076 31,394,770 8.4 Premises And Equipment, Net 13,290,648 11,662,976 1,627,672 14.0 FHLB Stock, At Cost 7,555,600 7,149,800 405,800 5.7 Bank Owned Life Insurance 5,659,546 5,000,001 659,545 13.2 Goodwill 1,197,954 - 1,197,954 100.0 Other Assets 5,835,416 4,330,795 1,504,621 34.7 Cash and cash equivalents decreased $6.0 million to $8.3 million at September 30, 2006 from $14.4 million at March 31, 2006. The reason for the decrease is the Company used cash and cash equivalents to fund loans. Investments and mortgage-backed securities decreased $5.0 million or 2.1% to $233.5 million at September 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 and calls and maturities on investments offset partially by purchases of mortgage-backed securities and investments and an increase in market value on mortgage-backed securities and investments. 15 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued Loans receivable, net increased $31.4 million or 8.4% to $406.5 million at September 30, 2006 from $375.1 million at March 31, 2006. Residential real estate loans increased $3.7 million to $125.7 million at September 30, 2006 from $122.0 million at March 31, 2006. Consumer loans increased $4.3 million to $62.9 million at September 30, 2006 from $58.6 million at March 31, 2006. The increase in consumer loans is attributable to a special rate promotion that was being advertised in print media. Commercial business and real estate loans increased $22.3 million to $231.5 million at September 30, 2006 from $209.2 million at March 31, 2006. The increase in commercial loans was attributable to the Company's continued focus on originating this type of loan. Loans held for sale decreased $240,000 to $1.1 million at September 30, 2006 from $1.3 million at March 31, 2006. Premises and equipment, net increased $1.6 million to $13.3 million at September 30, 2006 from $11.7 million at March 31, 2006. The majority of the increase is for furniture and equipment and acquisition of land in Ballentine, South Carolina for a new branch office. FHLB stock, at cost increased $406,000 to $7.6 million at September 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 $660,000 to $5.7 million at September 30, 2006 from $5.0 million at March 31, 2006. The Company purchased additional life insurance to provide key man life insurance for additional officers and the cash surrender value continues to increase. Goodwill was $1.2 million at September 30, 2006 compared to zero at March 31, 2006. Goodwill is related to the acquisition of the Collier-Jennings Companies. Other assets increased $1.5 million to $5.8 million at September 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-net associated with the acquisition of the Collier-Jennings Companies are included in other assets. Liabilities Deposit Accounts Balance ------------------- September 30, 2006 March 31, 2006 Increase (Decrease) ---------------------- -------------------- -------------------- Weighted Weighted Balance Rate Balance Rate Amount Percent ------------ ------- ------------ ------ ----------- ------- Demand Accounts: Checking $ 99,608,861 0.72% $105,347,713 0.97% $(5,738,852) (5.4)% Money Market 148,322,351 4.13 151,494,548 3.50 (3,172,197) (2.1) Regular Savings 16,942,017 0.98 17,795,109 0.98 (853,092) (4.8) ----------- ------- ------------ ------ ----------- ------- Total 264,873,229 2.65 274,637,370 2.36 (9,764,141) (3.6) ------------ ------- ------------ ------ ----------- ------- Certificate Accounts 0.00 - 1.99% - 59,797 (59,797) (100.0) 2.00 - 2.99% 6,624,992 26,836,415 (20,211,423) (75.3) 3.00 - 3.99% 39,294,594 72,831,817 (33,537,223) (46.1) 4.00 - 4.99% 95,091,801 94,240,989 850,812 0.9 5.00 - 5.99% 81,180,852 10,622,951 70,557,901 664.2 ------------ ------- ------------ ------ ----------- ------ Total 222,192,239 4.61 204,591,969 3.98 17,600,270 8.6 ------------ ------- ------------ ------ ----------- ------ Total Deposits$487,065,468 3.54% $479,229,339 3.05% $7,836,129 1.6% ============ ======= ============ ====== =========== ====== 16 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued Advances From FHLB - FHLB advances are summarized by year of maturity and weighted average interest rate in the table below: Balance --------------------- September 30, 2006 March 31, 2006 Increase (Decrease) --------------------- -------------------- --------------------- Fiscal Year Due: Balance Rate Balance Rate Balance Percent ------------- ----- ------------ ----- ----------- --------- 2007 11,600,000 4.09% 18,000,000 2.83% $(6,400,000) (35.56)% 2008 10,000,000 4.25 5,000,000 3.09 5,000,000 100.00 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 4.76 20,000,000 4.37 (5,000,000) (25.00) Thereafter 78,356,791 4.19 63,363,000 4.04 14,993,791 23.66 ------------ ------------ ----------- ------- Total Advances $139,956,791 4.09% $131,363,000 3.74% $ 8,593,791 6.54% ============ ============ =========== ======= These advances are secured by a blanket collateral agreement with the FHLB by pledging the Bank's portfolio of residential first mortgage loans and investment securities with approximate amortized cost and fair value of $77.6 million and $76.4 million at September 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 September 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 4.770 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 5.160 1 Time Call 06/02/11 07/11/06 07/11/08 5,000,000 4.800% Multi-Call 07/11/08 and quarterly thereafter 17
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 was 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. Junior Subordinated Debentures - On September 21, 2006, Security Federal Statutory Trust (the "Trust"), wholly-owned subsidiary of the Company, issued and sold fixed and floating rate capital securities of the trust (the "Capital Securities"), which are reported on the consolidated balance sheet as junior subordinated debentures, generating proceeds of $5.0 million. The Trust loaned these proceeds to the Company to use for general corporate purposes, primarily to provide capital to the Bank. The debentures qualify as Tier 1 capital under Federal Reserve Board guidelines. The Capital Securities in the transaction accrue and pay distributions annually at a rate per annum equal to a blended rate of 6.99% at September 30, 2006. One-half of the offering has a fixed rate of 6.88% and the remaining half has a floating rate of three-month LIBOR plus 170 basis points, which was 7.09% at September 30, 2006. The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears. The Company has the right, subject to events of default, to defer payments of interest on the Capital Securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity date of December 15, 2036. The Company has no current intention to exercise its right to defer payments of interest on the Capital Securities. The Capital Securities mature or are mandatorily redeemable upon maturity on December 15, 2036, and or upon earlier optional redemption as provided in the indenture. The Company has the right to redeem the Capital Securities in whole or in part, on or after September 15, 2011. The Company may also redeem the capital securities prior to such dates upon occurrence of specified conditions and the payment of a redemption premium Equity - Shareholders' equity increased $2.8 million or 7.5% to $40.4 million at September 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 six-month period. Accumulated Other Comprehensive Loss, net of tax, decreased $590,000 to $1.5 million during the six months ended September 30, 2006. The Company's net income for the six-month period was $2.0 million. The Board of Directors of the Company declared the 62nd and 63rd consecutive quarterly dividend, which was $.06 per share, in April and August 2006, which totaled $310,000. Book value per share was $15.44 at September 30, 2006 compared to $14.82 at March 31, 2006. 18 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 - -------------------------------------------------------------------------------- Net Income - Net income increased $77,000 or 8.1% to $1.0 million for the three months ended September 30, 2006 compared to $950,000 for the three months ended September 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 $351,000 or 8.6% to $4.5 million during the three months ended September 30, 2006, compared to $4.1 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 $58.7 million to $643.6 million while average interest-bearing liabilities increased $62.0 million to $595.3 million. The interest rate spread decreased four basis points to 2.48% during the three months ended September 30, 2006 compared to the same period in 2005. The Company's net interest margin was 2.77% and 2.81% for the quarters ended September 30, 2006 and 2005, respectively. Interest Income - Total interest income increased $2.3 million or 29.3% to $10.2 million during the three months ended September 30, 2006 from $7.9 million for the same period in 2005. Total interest income on loans increased $2.0 million or 35.7% to $7.7 million during the three months ended September 30, 2006 as a result of the average loan portfolio balance increasing $68.5 million and the yield in the loan portfolio increasing 92 basis points. Interest income from mortgage-backed securities decreased $34,000 or 2.5% as a result of a decrease in the average balance of the portfolio of $3.8 million. Interest income from investment securities increased $332,000 or 39.0% as a result of an increase in the yield and average balance of the investment securities portfolio. The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the three months ended September 30, 2006 and 2005: Three Months Ended September 30, ---------------------------------------------------------- 2006 2005 ------------------- -------------------- Increase/ (Decrease) In Interest And Average Average Dividend Income Balance Yield Balance Yield From 2005 ------------ ----- ------------ ----- ----------- Loans Receivable, Net $401,747,357 7.64% $333,276,971 6.72% $ 2,017,161 Mortgage-Backed Securities 131,036,771 4.04 134,859,239 4.03 (33,656) Investments 109,441,726 4.33 114,000,237 2.99 332,339 Overnight Time 1,374,907 5.15 2,743,254 3.22 (4,372) Security Federal Statutory Trust 17,222 6.99 - - 301 ------------ ------ ------------ ----- ----------- Total Interest- Earning Assets $643,617,983 6.34% $584,879,701 5.36% $ 2,311,773 ============ ====== ============ ===== =========== Interest Expense - Total interest expense increased $2.0 million or 51.8% to $5.7 million during the three months ended September 30, 2006 compared to $3.8 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 $1.5 million or 56.6% during the period as average interest bearing deposits grew $38.0 million compared to the average balance in the three months ended September 30, 2005 while the cost of deposits increased 102 basis points. Interest expense on advances and other borrowings increased $435,000 or 39.4% as the cost of debt outstanding increased 61 basis points during the 2006 period compared to 2005 while average total borrowings outstanding increased approximately $23.4 million. Interest expense on junior subordinated debentures was $10,000 for the three months ended September 30, 2006 compared to zero for the same period one year ago. The junior subordinated debentures are the result of the Company's $5.0 million trust preferred securities offering. 19 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the three months ended September 30, 2006 and 2005: Three Months Ended September 30, -------------------------------------------------------- 2006 2005 -------------------- -------------------- Increase/ (Decrease) In Interest Average Average Expense Balance Yield Balance Yield From 2005 ------------ ----- ------------ ------ ---------- Now And Money Market Accounts $211,401,478 3.25% $224,400,556 2.31% $ 422,933 Passbook Accounts 16,965,702 0.99 18,115,343 0.99 (2,890) Certificates Accounts 219,210,108 4.45 167,071,454 3.21 1,095,551 FHLB Advances And Other Borrowed Money 147,195,359 4.18 123,760,967 3.57 434,880 Junior Subordinated Debentures 572,778 6.99 - - 10,002 ----------- ----- ----------- ----- ---------- Total Interest- Bearing Liabilities $595,345,425 3.86% $533,348,320 2.84% $1,960,476 =========== ===== =========== ===== ========== 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 September 30, 2006 compared to $165,000 for the quarter ended September 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 September 30, 2006 and 2005 September 30, 2006 September 30, 2005 ------------------ ------------------ Beginning Balance $ 6,853,908 $ 6,428,900 Provision 150,000 165,000 Charge-offs (45,659) (91,316) Recoveries 36,374 30,083 ------------------ ------------------ Ending Balance $ 6,994,623 $ 6,532,667 ================== ================== Allowance For Loan Losses As A Percentage Of Gross Loans Receivable And Loans Held For Sale At The End Of The Period 1.69% 1.76% Allowance For Loan Losses As A Percentage Of Impaired Loans At The End Of The Period 516.15% 478.46% Impaired Loans 1,355,141 1,365,343 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 0.25% 0.46% Loans Receivable, Net $ 406,503,846 $ 339,771,557 20 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued Non-Interest Income - Non-interest income increased $300,000 or 43.1% to $997,000 for the three months ended September 30, 2006 from $696,000 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 September 30, (Decrease) -------------------- ---------------------- 2006 2005 Amounts Percent -------- -------- --------- -------- Gain On Sale Of Investments, Net $ - $ 31,422 $(31,422) (100.0)% Gain On Sale Of Loans 93,998 118,253 (24,255) (20.5) Service Fees On Deposit Accounts 291,635 288,867 2,768 0.96 Income From Cash Value Of Life Insurance 62,037 - 62,037 100.0 Commissions On Insurance 209,246 8,078 201,168 2490.3 Other Agency Income 94,308 - 94,308 100.0 Trust Income 121,556 109,322 12,234 11.2 Other 123,822 140,549 (16,727) (11.9) -------- -------- -------- ------ Total non-interest income $996,602 $696,491 $300,111 43.1% ======== ======== ======== ======= Income from cash value of life insurance was $62,000 for the three months ended September 30, 2006 compared to no income during the same period one year ago. This increase is the result of the Company's purchase of bank owned life insurance for certain officers of the Company. Commissions on insurance and other agency income increased as a result of the Collier-Jennings Companies acquisition. Other miscellaneous income including credit life insurance commissions, safe deposit rental income, annuity and stock brokerage commissions, trust fees, and other miscellaneous fees, decreased $17,000 to $124,000 during the three months ended September 30, 2006 compared to the same period one year ago. Non-Interest Expense - Non-interest expense increased $558,000 or 17.6% to $3.7 million for the three months ended September 30, 2006 from $3.2 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 September 30, (Decrease) ------------------------ -------------------- 2006 2005 Amounts Percent ---------- ---------- --------- --------- Salaries And Employee Benefits $2,303,160 $1,835,356 $ 467,804 25.5% Occupancy 350,668 319,330 31,338 9.8 Advertising 61,301 43,521 17,780 40.9 Depreciation And Maintenance Of Equipment 316,326 258,318 58,008 22.5 FDIC Insurance Premiums 4,820 14,167 653 4.6 Other 682,926 700,962 (18,036) (2.6) ---------- ---------- --------- -------- Total Non-Interest Expenses $3,729,201 $3,171,654 557,547 17.6% ========== ========== ========= ======== Salary and employee benefits increased $468,000 to $2.3 million for the three months ended September 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 and absorbing the Collier-Jennings Companies' employees. Advertising expense increased $18,000 to $61,000 for the three months ended September 30, 2006 from $44,000 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 $32,000 or 6.1% to $545,000 for the three months ended September 30, 2006 from $514,000 for the same period one year ago. Income before income taxes was $1.6 million for the three months ended September 30, 2006 compared to $1.5 million for the three months ended September 30, 2005. The Company's combined federal and state effective income tax rate for the current quarter was 34.7% compared to 35.1% for the same quarter one year ago. 21 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 - ------------------------------------------------------------------------------- Net Income - Net income increased $170,000 or 9.1% to $2.1 million for the six months ended September 30, 2006 compared to $1.9 million for the six months ended September 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 $790,000 or 9.8% to $8.9 million during the six months ended September 30, 2006, compared to $8.1 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 $59.0 million to $639.4 million while average interest-bearing liabilities increased $61.6 million to $591.4 million. The interest rate spread increased one basis point to 2.52% during the six months ended September 30, 2006 compared to the same period in 2005. The Company's net interest margin decreased one basis point to 2.77% for the six months ended September 30, 2006 from 2.78% for the same period last year. Interest Income - Total interest income increased $4.5 million or 29.2% to $19.8 million during the six months ended September 30, 2006 from $15.3 million for the same period in 2005. Total interest income on loans increased $3.8 million or 35.0% to $14.7 million during the six months ended September 30, 2006 as a result of the average loan portfolio balance increasing $64.3 million and the yield in the loan portfolio increasing 91 basis points. Interest income from mortgage-backed securities increased $16,000 or 0.6% 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 $1.1 million. Interest income from investment securities increased $659,000 or 39.42% as a result of an increase in the yield and average balance of the investment securities portfolio. The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the six months ended September 30, 2006 and 2005: Six Months Ended June 30, ---------------------------------------------------------- 2006 2005 ------------------- ------------------- Increase/ (Decrease) In Interest And Average Average Dividend Income Balance Yield Balance Yield From 2005 ----------- ----- ----------- ----- ---------------- Loans Receivable, Net $393,415,196 7.47% $329,082,445 6.56% $ 3,804,146 Mortgage-Backed Securities 133,904,026 4.13 135,029,542 4.07 16,407 Investments 110,848,663 4.21 114,022,782 2.93 659,124 Overnight Time 1,271,278 5.06 2,339,854 3.10 (4,116) Security Federal Statutory Trust 8,611 6.99 - - 301 ------------ ------ ------------ ------- -------------- Total Interest- Earning Assets $639,447,774 6.20% $580,474,623 5.25% $ 4,475,862 ============ ====== ============ ======= ============== 22 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued Interest Expense - Total interest expense increased $3.7 million or 50.7% to $11.0 million during the six months ended September 30, 2006 compared to $7.3 million for the same period one year earlier. The increase in total interest expense is attributable to the increases in short-term interest rates, and the increase in the amount of interest-bearing deposits, and borrowings. Interest expense on deposits increased $2.8 million or 53.7% during the period as average interest bearing deposits grew $34.1 million compared to the average balance in the six months ended September 30, 2006 while the cost of deposits increased 106 basis points. Interest expense on advances and other borrowings increased $891,000 or 42.8% as the cost of debt outstanding increased 57 basis points during the six months ended September 30, 2006 compared to the same period in 2005 while average total borrowings outstanding increased approximately $27.2 million. Interest expense on junior subordinated debentures was $10,000 for the six months ended September 30, 2006 compared to zero for the same period one year ago. The junior subordinated debentures are the result of the Company's $5.0 million trust preferred securities offering. The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the six months ended September 30, 2006 and 2005: Six Months Ended June 30, ----------------------------------------------------------------- 2006 2005 --------------------- ----------------------- Increase/ (Decrease) In Interest Average Average Expense Balance Yield Balance Yield From 2005 ------------- ----- ------------- ------- ------------- Now And Money Market Accounts $212,905,689 3.10% $ 227,926,361 2.23% $ 750,920 Passbook Accounts 17,048,654 0.98 18,102,759 0.98 (5,213) Certificates Accounts 214,810,211 4.28 164,664,372 3.10 2,038,369 FHLB Advances And Other Borrowed Money 146,307,123 4.07 119,108,106 3.50 891,370 Junior Subordinated Debentures 286,389 6.99 - - 10,002 ------------ ----- ------------- ------- ---------- Total Interest- Bearing Liabilities $591,358,066 3.71% $ 529,801,598 2.75% $ 3,685,448 ============ ===== ============= ======= =========== 23 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued 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 $300,000 during the six months ended September 30, 2006 compared to $330,000 for the six months ended September 30, 2005. The $30,000 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 six months ended September 30, 2006 and 2005: September 30, 2006 September 30, 2005 ------------------ ------------------ Beginning Balance $ 6,704,734 $ 6,284,055 Provision 300,000 330,000 Charge-offs (75,278) (121,220) Recoveries 65,167 39,832 ------------------ ------------------ Ending Balance $ 6,994,623 $ 6,532,667 ================== ================== Allowance For Loan Losses As A Percentage Of Gross Loans Receivable And Loans Held For Sale At The End Of The Period 1.69% 1.76% Allowance For Loan Losses As A Percentage Of Impaired Loans At The End Of The Period 516.15% 478.46% Impaired Loans 1,355,141 1,365,343 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 0.25% 0.46% Loans Receivable, Net $ 406,503,846 $ 339,771,557 Non-Interest Income - Non-interest income increased $410,000 or 30.7% to $1.7 million for the six months ended September 30, 2006 from $1.3 million for the same period one year ago. The following table provides a detailed analysis of the changes in the components of non-interest income: Six Months Increase/ Ended September 30, (Decrease) ------------------ ----------------------- 2006 2005 Amounts Percent -------- ------ ---------- --------- Gain On Sale Of Investments, Net $ - $ 48,962 $ (48,962) (100.0)% Gain On Sale Of Loans 207,253 253,563 (46,310) (18.3) Service Fees On Deposit Accounts 569,503 572,064 (2,561) (0.5) Income From Cash Value Of Life Insurance 118,545 - 118,545 100.0 Commissions On Insurance 214,635 8,904 205,731 2310.5 Other Agency Income 94,308 - 94,308 100.0 Trust Income 217,556 178,593 38,963 21.8 Other 326,796 276,212 50,584 18.3 ---------- ---------- ---------- -------- Total non-interest income $1,748,596 $1,338,298 $ 410,298 30.7% ========== ========== ========== ======== Income from cash value of life insurance was $119,000 for the six months ended September 30, 2006 compared to no income during 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. This increase is the result of the Company's purchase of bank owned life insurance for certain officers of the Company. Commissions on insurance and other agency income increased as a result of the Collier-Jennings Companies acquisition. Other miscellaneous income including credit life insurance commissions, safe deposit rental income, annuity and stock brokerage commissions, trust fees, and other miscellaneous fees, increased $51,000 to $327,000 during the six months ended September 30, 2006 compared to the same period one year ago. 24 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued Non-Interest Expense - Non-interest expense increased $1.0 million or 16.3% to $7.2 million for the six months ended September 30, 2006 from $6.2 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: Six Months Ended September 30, Increase/(Decrease) ---------------------- ------------------- 2006 2005 Amounts Percent ---------- ---------- --------- ------- Salaries And Employee Benefits $4,428,529 $3,596,303 $ 832,226 23.1% Occupancy 668,263 631,177 37,086 5.9 Advertising 135,950 68,990 66,960 97.1 Depreciation And Maintenance Of Equipment 607,795 510,119 97,676 19.2 FDIC Insurance Premiums 28,962 28,686 276 1.0 Other 1,303,006 1,332,503 (29,497) (2.2) ---------- ---------- --------- ------- Total Non-Interest Expenses $7,172,505 $6,167,778 1,004,727 16.3% ========== ========== ========= ======= Salary and employee benefits increased $832,000 to $4.4 million for the six months ended September 30, 2006 from $3.6 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 and absorbing the Collier-Jennings Companies' employees. Advertising expense increased $67,000 to $136,000 for the six months ended September 30, 2006 from $69,000 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 $56,000 or 5.4% to $1.1 million for the six months ended September 30, 2006 from $1.0 million for the same period one year ago. Income before income taxes was $3.1 million for the six months ended September 30, 2006 compared to $2.9 million for the six months ended September 30, 2005. The Company's combined federal and state effective income tax rate for the six month ended September 30, 2006 was 34.8% compared to 35.6% for the same period 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 six months ended September 30, 2006 loan disbursements exceeded loan repayments resulting in a $31.4 million or 8.4% increase in total net loans receivable. During the six months ended September 30, 2006, deposits increased $7.8 million and FHLB advances increased $8.6 million. The Bank had $108.6 million in additional borrowing capacity at the FHLB at the end of the period. At September 30, 2006, the Bank had $195.4 million of certificates of deposit maturing within one year. Based on previous experience, the Bank anticipates a significant portion of these certificates will be renewed. The Company has plans to expand its branch network, which could cause earnings to level off or decline for a period of time. The leveling off or decline in earnings will be attributed the lag that exists from the time a branch is built to when it becomes profitable. In the next twelve months, we anticipate investing $5.0 to $6.0 million in land, buildings, and equipment. In the next twenty-four months, we anticipate investing $8.0 to $10.0 million in land, buildings, and equipment. The anticipated costs could be affected by increased construction costs, weather delays, and/or other uncertainties. 25 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued 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 September 30, 2006. After After One Three Greater Within Through Through Than One Three Twelve Within One (Dollars in thousands) Month Months Months One Year Year Total ------ ------- ------- -------- ------ ------- Unused lines of credit $ 3,753 $ 7,268 $33,394 44,415 $40,820 $85,235 Standby letters of credit 247 115 241 603 - 603 ------ ------- ------- -------- ------ ------- Total $ 4,000 $ 7,383 $33,635 $ 45,018 $40,820 $85,838 ====== ======= ======= ======== ====== ======= 26 Security Federal Corporation and Subsidiaries Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises principally from interest rate risk inherent in its lending, investment, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Company manages other risks such as credit quality and liquidity risk in the normal course of business, management considers interest rate risk to be its most significant market risk that could potentially have the largest material effect on the Company's financial condition and results of operations. Other types of market risks such as foreign currency exchange rate risk and commodity price do not arise in the normal course of the Company's business activities. The Company's profitability is affected by fluctuations in the market interest rate. Management's goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. A sudden and substantial increase or decrease in interest rates may adversely impact the Company's earnings to the extent that the interest rates on interest-earning assets and interest-bearing liabilities do not change at the same rate, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using a test that measures the impact on net interest income and net portfolio value of an immediate change in interest rates in 100 basis point increments and by measuring the Bank's interest sensitivity gap ("Gap"). Net portfolio value is defined as the net present value of assets, liabilities, and off-balance sheet contracts. Gap is the amount of interest sensitive assets repricing or maturing over the next twelve months compared to the amount of interest sensitive liabilities maturing or repricing in the same time period. Recent net portfolio value reports furnished by the OTS indicate that the Bank's interest rate risk sensitivity has increased slightly over the past year. The Bank has rated favorably compared to thrift peers concerning interest rate sensitivity. For the six month ended September 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 2.49%. 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 September 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 September 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. 27 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 ----------------------------------------------------------- (d)Maximum Number (a)Total (c)Total Number of of Shares that Number of (b)Average Shares Purchased as May Yet Be Shares Price Paid Part of Publicly Purchased Under Period Purchased per Share Announced Program the Program July 1-July 31, 2006 - - - 114,688 August 1- August 30, 2006 3,600 $23.06 3,600 111,088 September 1- September 30, 2006 - - - 111,088 ------------------------------------------------------------- Total 3,600 $23.06 3,600 111,088 ============================================================= In May 2004, the Company's Board of Directors authorized a 5% repurchase plan, or 126,000 shares of the Company's outstanding common stock. As of September 30, 2006, 14,912 shares have been repurchased under this program. The Company repurchased 3,600 any shares of its outstanding Common Stock during the three months ended September 30, 2006. On August 24, 2006, the Company issued 54,512 shares of its Common Stock, par value $0.01 per share, to Gerald Jennings in connection with the Company 's acquisition of the Collier Jennings Financial Corporation ("Collier Jennings"). Mr. Jennings was the sole shareholder and president of Collier Jennings and received the shares of the Company's Common Stock as part of his consideration for the sale of all of the outstanding shares of Collier Jennings to the Company. As provided in the Merger Agreement and Plan of Merger filed as an exhibit to the Company's Current Report on Form 8-K dated June 9, 2006, the Company will release the shares to Mr. Jennings over a three-year period. Item 3 Defaults Upon Senior Securities ------------------------------- None Item 4 Submission Of Matters To A Vote Of Security Holders --------------------------------------------------- The election of directors was presented for vote to the shareholders at the Annual Meeting held July 21, 2005. Votes for T. Clifton Weeks were as follows: 1,907,513 votes for, 17,866 withheld. Votes for Timothy W. Simmons were as follows: 1,901,928 votes for, 23,451 votes withheld. Votes for Roy G. Lindburg were as follows: 1,901,904 votes for, 23,475 votes withheld. Directors continuing in office are Harry O. Weeks, Jr., Robert E. Alexander, William Clyburn, G.L. Toole, III, Thomas L. Moore, and J. Chris Verenes. Item 5 Other Information ----------------- None 28 Security Federal Corporation and Subsidiaries Part II: Other Information, Continued 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. (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. 29 Security Federal Corporation and Subsidiaries Signatures Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to the signed on its behalf by the undersigned thereunto duly authorized. SECURITY FEDERAL CORPORATION Date: November 14, 2006 By:/s/Timothy W. Simmons -------------------- ------------------------ Timothy W. Simmons President Duly Authorized Representative Date: November 14, 2006 By:/s/Roy G. Lindburg -------------------- ------------------------ Roy G. Lindburg Treasurer/CFO Duly Authorized Representative 30 EXHIBIT 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 31 Certification I, Timothy W. Simmons, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2006 /s/Timothy W. Simmons ----------------------- Timothy W. Simmons President and Chief Executive Officer 32 EXHIBIT 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 33 Certification I, Roy G. Lindburg, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the period presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2006 /s/Roy G. Lindburg ----------------------- Roy G. Lindburg Chief Financial Officer 34 EXHIBIT 32 Certification Pursuant to Section 906 of the Sarbanes Oxley Act CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF SECURITY FEDERAL CORPORATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this Quarterly Report on Form 10-Q that: 1. the report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and 2. the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of Security Federal Corporation. /s/Timothy W. Simmons /s/Roy G. Lindburg ------------------------ ------------------------ Timothy W. Simmons Roy G. Lindburg Chief Executive Officer Chief Financial Officer Dated: November 14, 2006 -----END PRIVACY-ENHANCED MESSAGE-----