-----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, TKykFYp306Vff1CgfvaY6bWGdmO3uiSF0Wh7GMb5BBTMJhkgveDo8BONORBOGA6R xW/bwbAMnwKbqnkIe7ibvg== 0000939057-08-000035.txt : 20080214 0000939057-08-000035.hdr.sgml : 20080214 20080214152900 ACCESSION NUMBER: 0000939057-08-000035 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20071231 FILED AS OF DATE: 20080214 DATE AS OF CHANGE: 20080214 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: 08614515 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 q308.txt SECURITY FEDERAL CORPORATION FORM 10-Q UNITED STATES 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 DECEMBER 31, 2007 (__) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD: FROM: TO: -------------- -------------- COMMISSION FILE NUMBER: 0-16120 SECURITY FEDERAL CORPORATION South Carolina 57-0858504 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 1705 WHISKEY ROAD, AIKEN, SOUTH CAROLINA 29801 (Address of Principal Executive Office) (Zip code) (803) 641-3000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "large accelerated filer" and "accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filed [ ] Accelerated filer[ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (defined in Rule 12b-2 of the Exchange Act). YES NO X ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. CLASS: OUTSTANDING SHARES AT: SHARES: -------------------- ------------------------- -------------- Common Stock, par January 31, 2008 2,536,045 value $0.01 per share INDEX - ------------------------------------------------------------------------------ PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO. Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets at December 31, 2007 and March 31, 2007 1 Consolidated Statements of Income for the Three and Nine Months Ended December 31, 2007 and 2006 2 Consolidated Statements of Shareholders' Equity and Comprehensive Income at December 31, 2007 and 2006 4 Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2007 and 2006 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 28 Item 4. Controls and Procedures 28 - ------------------------------------------------------------------------------ PART II. OTHER INFORMATION Item 1. Legal Proceedings 29 Item 1A. Risk Factors 29 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29 Item 3. Defaults Upon Senior Securities 29 Item 4. Submission of Matters to a Vote of Security Holders 29 Item 5 Other Information 29 Item 6. Exhibits 30 Signatures 31 - ------------------------------------------------------------------------------ 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 December 31, 2007 March 31, 2007 ------------------- ---------------- Assets: (Unaudited) (Audited) Cash And Cash Equivalents $ 12,799,687 $ 13,438,129 Investment And Mortgage-Backed Securities: Available For Sale: (Amortized cost of $214,036,848 at December 31, 2007 and $186,970,867 at March 31, 2007) 215,388,331 185,766,296 Held To Maturity: (Fair value of $45,284,720 at December 31, 2007 and $63,441,641 at March 31, 2007) 45,144,829 64,138,589 ------------------- --------------- Total Investment And Mortgage-Backed Securities 260,533,160 249,904,885 ------------------- --------------- Loans Receivable, Net: Held For Sale 2,770,678 1,529,748 Held For Investment: (Net of allowance of $7,648,376 at December 31, 2007 and $7,296,791 at March 31, 2007) 497,320,751 434,508,612 ------------------- --------------- Total Loans Receivable, Net 500,091,429 436,038,360 ------------------- --------------- Accrued Interest Receivable: Loans 1,846,313 1,459,193 Mortgage-Backed Securities 672,182 550,682 Investments 1,153,921 1,181,639 Premises And Equipment, Net 20,501,003 15,895,192 Federal Home Loan Bank Stock, At Cost 9,284,200 8,209,200 Bank Owned Life Insurance 8,225,067 5,783,620 Repossessed Assets Acquired In Settlement Of Loans 477,796 24,909 Intangible Assets, Net 465,000 532,500 Goodwill 1,197,954 1,197,954 Other Assets 3,000,026 3,893,928 ------------------- --------------- Total Assets $ 820,247,738 $ 738,110,191 =================== =============== Liabilities And Shareholders' Equity Liabilities: Deposit Accounts $ 573,915,279 $ 523,737,592 Advances From Federal Home Loan Bank 177,737,852 153,049,272 Other Borrowed Money 12,695,552 8,088,194 Advance Payments By Borrowers For Taxes And Insurance 463,950 486,101 Mandatorily Redeemable Financial Instrument 1,417,312 1,417,312 Junior Subordinated Debentures 5,155,000 5,155,000 Other Liabilities 3,662,886 3,483,512 ------------------- --------------- Total Liabilities $ 775,047,831 $ 695,416,983 ------------------- --------------- 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 - 2,647,891 And Outstanding Shares - 2,536,752 At December 31, 2007 And 2,637,942 And 2,609,116 At March 31, 2007 25,913 25,814 Additional Paid-In Capital 5,039,139 4,850,029 Treasury Stock, (At Cost, 111,139 and 28,826 Shares, at December 31, 2007 and March 31, 2007, Respectively) (2,637,911) (651,220) Accumulated Other Comprehensive Income (Loss) 838,283 (747,316) Retained Earnings, Substantially Restricted 41,934,483 39,215,901 ------------------- --------------- Total Shareholders' Equity $ 45,199,907 $ 42,693,208 ------------------- --------------- Total Liabilities And Shareholders' Equity $ 820,247,738 $ 738,110,191 =================== =============== See accompanying notes to consolidated financial statements. Security Federal Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) Three Months Ended December 31, --------------------------------- 2007 2006 ---------------- -------------- Interest Income: Loans $ 9,416,982 $ 8,012,722 Mortgage-Backed Securities 1,937,244 1,456,544 Investment Securities 1,365,705 1,314,913 Other 17,277 29,551 ---------------- -------------- Total Interest Income 12,737,208 10,813,730 ---------------- -------------- Interest Expense: NOW And Money Market Accounts 1,603,372 1,684,765 Passbook Accounts 38,586 41,189 Certificate Accounts 3,927,298 2,846,184 Federal Home Loan Bank Advances And Other Borrowed Money 2,096,187 1,715,572 Junior Subordinated Debentures 93,267 91,983 ---------------- -------------- Total Interest Expense 7,758,710 6,379,693 ---------------- -------------- Net Interest Income 4,978,498 4,434,037 Provision For Loan Losses 150,000 150,000 ---------------- -------------- Net Interest Income After Provision For Loan Losses 4,828,498 4,284,037 ---------------- -------------- Non-Interest Income: Gain On Sale Of Loans 134,732 88,137 Service Fees On Deposit Accounts 307,045 296,135 Income From Cash Value Of Life Insurance 92,246 62,037 Commissions On Insurance 145,148 198,772 Other Agency Income 19,670 20,248 Trust Income 102,000 110,211 Other 227,250 212,558 ---------------- -------------- Total Non- Interest Income 1,028,091 988,098 ---------------- -------------- General And Administrative Expenses: Salaries And Employee Benefits 2,660,655 2,361,104 Occupancy 425,489 359,530 Advertising 80,857 98,672 Depreciation And Maintenance Of Equipment 333,985 300,211 FDIC Insurance Premiums 15,402 4,624 Amortization of Intangibles 22,500 22,500 Other 789,044 670,071 ---------------- -------------- Total General And Administrative Expenses 4,327,932 3,816,712 ---------------- -------------- Income Before Income Taxes 1,528,657 1,455,423 Provision For Income Taxes 488,046 478,638 ---------------- -------------- Net Income $ 1,040,611 $ 976,785 ================ ============== Basic Net Income Per Common Share $ 0.40 $ 0.37 ================ ============== Diluted Net Income Per Common Share $ 0.40 $ 0.37 ================ ============== Cash Dividend Per Share On Common Stock $ 0.07 $ 0.06 ================ ============== Basic Weighted Average Shares Outstanding 2,585,234 2,617,037 ================ ============== Diluted Weighted Average Shares Outstanding 2,588,318 2,625,945 ================ ============== See accompanying notes to consolidated financial statements. 2 Security Federal Corporation and Subsidiaries Consolidated Statements of Income (Unaudited) Nine Months Ended December 31, -------------------------------- 2007 2006 -------------- -------------- Interest Income: Loans $ 27,625,147 $ 22,789,715 Mortgage-Backed Securities 5,036,650 4,223,959 Investment Securities 4,583,201 3,646,142 Other 45,179 62,023 -------------- -------------- Total Interest Income 37,290,177 30,721,839 -------------- -------------- Interest Expense: NOW And Money Market Accounts 4,931,098 4,982,221 Passbook Accounts 121,535 125,095 Certificate Accounts 10,797,386 7,437,930 Federal Home Loan Bank Advances And Other Borrowed Money 6,047,885 4,690,964 Junior Subordinated Debentures 276,345 101,985 -------------- -------------- Total Interest Expense 22,174,249 17,338,195 -------------- -------------- Net Interest Income 15,115,928 13,383,644 Provision For Loan Losses 450,000 450,000 -------------- -------------- Net Interest Income After Provision For Loan Losses 14,665,928 12,933,644 -------------- -------------- Non-Interest Income: Gain On Sale Of Loans 416,303 295,390 Service Fees On Deposit Accounts 957,790 865,638 Income From Cash Value Of Life Insurance 241,447 180,582 Commissions On Insurance 464,309 413,407 Other Agency Income 75,838 30,674 Trust Income 340,625 327,767 Other 641,747 539,354 -------------- -------------- Total Non-Interest Income 3,138,059 2,652,812 -------------- -------------- General And Administrative Expenses: Salaries And Employee Benefits 7,858,206 6,789,633 Occupancy 1,293,602 1,027,793 Advertising 270,278 234,622 Depreciation And Maintenance Of Equipment 990,601 908,006 FDIC Insurance Premiums 45,599 33,586 Amortization of Intangibles 67,500 45,000 Other 2,434,592 1,950,577 -------------- -------------- Total General And Administrative Expenses 12,960,378 10,989,217 -------------- -------------- Income Before Income Taxes 4,843,609 4,597,239 Provision For Income Taxes 1,579,392 1,571,083 -------------- -------------- Net Income $ 3,264,217 $ 3,026,156 ============== ============== Basic Net Income Per Common Share $ 1.26 $ 1.17 ============== ============== Diluted Net Income Per Common Share $ 1.25 $ 1.16 ============== ============== Cash Dividend Per Share On Common Stock $ 0.21 $ 0.18 ============== ============== Basic Weighted Average Shares Outstanding 2,599,352 2,588,864 ============== ============== Diluted Weighted Average Shares Outstanding 2,605,686 2,600,966 ============== ============== 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, 2006 $ 25,582 $4,404,110 $(238,656) $ (215,503) $(2,086,509) $35,712,735 $37,601,759 Net Income - - - - - 3,026,156 3,026,156 Other Comprehensive Income, Net Of Tax: Unrealized Holding Gains On Securities Available For Sale - - - - 991,431 - 991,431 ----------- Comprehensive Income - - - - - - 4,017,587 Purchase Of Treasury Stock At Cost, 8,553 shares - - (198,399) - - - (198,399) Decrease In Indirect Guarantee Of ESOP Debt - - - 215,503 - - 215,503 Exercise Of Stock Options 212 393,033 - - - - 393,245 Stock Compensation Expense - 4,804 - - - - 4,804 Cash Dividends - - - - - (466,691) (466,691) -------- ---------- --------- ---------- ----------- ----------- ----------- Balance At December 31, 2006 $ 25,794 $4,801,947 $(437,055) $ - $(1,095,078) $38,272,200 $41,567,808 ======== ========== ========= ========== =========== =========== ===========
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, 2007 $ 25,814 $4,850,029 $(651,220) $ - $(747,316) $39,215,901 $42,693,208 Net Income - - - - - 3,264,217 3,264,217 Other Comprehensive Income, Net Of Tax: Unrealized Holding Gains On Securities Available For Sale - - - - 1,585,599 - 1,585,599 ----------- Comprehensive Income - - - - - - 4,849,816 Purchase Of Treasury Stock At Cost, 82,313 shares - - (1,986,691) - - - (1,986,691) Employee Stock Purchase Plan Purchases 36 74,145 - - - - 74,181 Exercise Of Stock Options 63 104,958 - - - - 105,021 Stock Compensation Expense - 10,007 - - - - 10,007 Cash Dividends - - - - - (545,635) (545,635) -------- ---------- ----------- ---------- --------- ---------- ----------- Balance At December 31, 2007 $ 25,913 $5,039,139 $(2,637,911) $ - $ 838,283 $41,934,483 $45,199,907 ======== ========== =========== ========== ========= =========== =========== See accompanying notes to consolidated financial statements.
Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended December 31, --------------------------------- 2007 2006 -------------- -------------- Cash Flows From Operating Activities: Net Income $ 3,264,217 $ 3,026,156 Adjustments To Reconcile Net Income To Net Cash Provided (Used) By Operating Activities: Depreciation Expense 789,116 745,479 Amortization Of Intangible Assets 67,500 45,000 Stock Option Compensation Expense 10,007 4,804 Discount Accretion And Premium Amortization 161,021 321,311 Provisions For Losses On Loans And Real Estate 450,000 450,000 Gain On Sale Of Loans (416,303) (295,390) Gain On Sale Of Real Estate (27,293) (48,678) Amortization Of Deferred Fees On Loans (87,601) (227,638) Loss on Disposition of Premises and Equipment 356 215 Proceeds From Sale Of Loans Held For Sale 25,998,343 17,846,130 Origination Of Loans For Sale (26,822,970) (20,778,758) (Increase) Decrease In Accrued Interest Receivable: Loans (387,120) (388,700) Mortgage-Backed Securities (121,500) (38,533) Investments 27,718 (135,413) Decrease In Advance Payments By Borrowers (22,151) (202,218) Other, Net 99,559 (578,090) -------------- -------------- Net Cash Provided (Used) By Operating Activities 2,982,899 (254,323) -------------- -------------- Cash Flows From Investing Activities: Principal Repayments On Mortgage-Backed Securities Available For Sale 27,258,442 27,419,083 Purchase Of Investment Securities Available For Sale (29,542,601) (18,941,966) Purchase Of Mortgage-Backed Securities Available For Sale (47,317,221) (26,982,890) Maturities Of Investment Securities Available For Sale 22,371,400 4,738,645 Maturities of Investment Securities Held To Maturity 19,000,000 9,000,000 Purchase Of Federal Home Loan Bank Stock (8,272,900) (5,482,400) Redemption Of Federal Home Loan Bank Stock 7,197,900 4,698,800 Increase In Loans To Customers (63,895,411) (43,368,622) Proceeds From Sale Of Repossessed Assets 295,279 139,700 Purchase And Improvement Of Premises And Equipment (5,395,783) (3,679,725) Proceeds From Sale of Premises And Equipment 500 - Purchase Of Bank Owned Life Insurance (2,441,447) (721,582) -------------- -------------- Net Cash Used By Investing Activities (80,741,842) (53,180,957) -------------- -------------- Cash Flows From Financing Activities: Increase In Deposit Accounts 50,177,687 28,332,720 Proceeds From Federal Home Loan Bank Advances 296,700,000 222,223,450 Repayment Of Federal Home Loan Bank Advances (272,011,420) (205,233,409) Net (Repayments) Proceeds Of Other Borrowings 4,607,358 (427,653) Proceeds From Junior Subordinated Debentures - 5,155,000 Dividends To Shareholders (545,635) (466,691) Purchase Of Treasury Stock (1,986,691) (198,399) Proceeds From Employee Stock Purchases 74,181 - Proceeds From Exercise of Stock Options 105,021 393,245 -------------- -------------- Net Cash Provided By Financing Activities 77,120,501 49,778,263 -------------- -------------- (Continued) 5 Security Federal Corporation and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended December 31, -------------------------------- 2007 2006 -------------- ------------- Net Decrease In Cash And Cash Equivalents (638,442) (3,657,017) Cash And Cash Equivalents At Beginning Of Period 13,438,129 14,351,208 -------------- ------------- Cash And Cash Equivalents At End Of Period $ 12,799,687 $ 10,694,191 ============== ============= Supplemental Disclosure Of Cash Flows Information: Cash Paid During The Period For Interest $ 22,011,826 $ 16,896,006 Cash Paid During The Period For Income Taxes $ 1,304,290 $ 1,117,000 Additions To Repossessed Acquired Through Foreclosure $ 720,873 $ - Decrease In Unrealized Net Loss On Securities Available For Sale, Net Of Taxes $ 1,585,599 $ 991,431 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") 2007 Annual Report to Shareholders when reviewing interim financial statements. The results of operations for the nine month period ended December 31, 2007 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. The Company's significant accounting policies are described in the footnotes to the audited consolidated financial statements at March 31, 2007 included in its 2007 Annual Report to Stockholders, which was filed as an exhibit to the Annual Report on Form 10-K for the year ended March 31, 2007. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities. The Company considers these accounting policies to be critical accounting policies. The judgments and assumptions the Company uses are based on historical experience and other factors, which the Company believes 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 the carrying values of assets and liabilities and the 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), Continued 3. Critical Accounting Policies, Continued The Company values impaired loans at the loan's fair value if it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement at the present value of expected cash flows, the market price of the loan, if available, or the value of the underlying collateral. Expected cash flows are required to be discounted at the loan's effective interest rate. When the ultimate collectibility of an impaired loan's principal is in doubt, wholly or partially, all cash receipts are applied to principal. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first to interest and then to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off. 4. Acquisition On June 30, 2006, the Company completed the acquisition of the insurance and premium finance businesses of Collier-Jennings Financial Corporation and its subsidiaries Collier-Jennings, Inc., The Auto Insurance Store, Inc., and Collier-Jennings Premium Pay Plans, Inc (the "Collier-Jennings Companies"). 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 $1.6 million. 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. 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 -------------------------------------------------------- December 31, 2007 -------------------------------------------------------- Income (Numerator) Amount Shares (Denominator) Per Share ------------------------- -------------------- --------- Basic EPS $ 1,040,611 2,585,234 $ 0.40 Effect of Diluted Securities: Stock Options - 3,084 - ------------------------- -------------------- --------- Diluted EPS $ 1,040,611 2,588,318 $ 0.40 ========================= ==================== ========= For the Quarter Ended -------------------------------------------------------- December 31, 2006 -------------------------------------------------------- Income (Numerator) Amount Shares (Denominator) Per Share ------------------------- -------------------- --------- Basic EPS $ 976,785 2,617,037 $ 0.37 Effect of Diluted Securities: Stock Options - 8,908 - ------------------------- -------------------- --------- Diluted EPS $ 976,785 2,625,945 $ 0.37 ========================= ==================== ========= For the Nine Months Ended -------------------------------------------------------- December 31, 2007 -------------------------------------------------------- Income (Numerator) Amount Shares (Denominator) Per Share ------------------------- -------------------- --------- Basic EPS $ 3,264,217 2,599,352 $ 1.26 Effect of Diluted Securities: Stock Options - 6,334 (.01) ------------------------- -------------------- --------- Diluted EPS $ 3,264,217 2,605,686 $ 1.25 ========================= ==================== ========= For the Nine Months Ended -------------------------------------------------------- December 31, 2006 -------------------------------------------------------- Income (Numerator) Amount Shares (Denominator) Per Share ------------------------- -------------------- --------- Basic EPS $ 3,026,156 2,588,864 $ 1.17 Effect of Diluted Securities: Stock Options - 12,102 (.01) ------------------------- -------------------- --------- Diluted EPS $ 3,026,156 2,600,966 $ 1.16 ========================= ==================== ========= 9 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 6. Stock-Based Compensation Certain officers and directors of the Company participate in an incentive and non- qualified stock option plan. Options are granted at exercise prices not less than the fair value of the Company's common stock on the date of the grant. The following is a summary of the activity under the Company's stock option plan for the three and nine months ended December 31, 2007: Three Months Ended Six Months Ended December 31, 2007 December 31, 2007 --------------------- --------------------- Weighted Weighted Average Average Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- Balance, Beginning of Period/Year 91,100 $21.09 99,600 $20.55 Options granted 2,000 24.28 5,000 24.37 Options exercised - - 6,300 16.67 Options forfeited - - 5,200 17.40 ------- ------- Balance, December 31, 2007 93,100 $21.17 93,100 $21.17 ======= ======= Options Exercisable 74,100 $20.60 ======= Range of Exercise Prices For Exercisable Options $16.67-$24.22 Options Available For Grant 145,216 ======= The weighted average remaining contractual life of all outstanding options at December 31, 2007 was 6.06 years and the aggregate intrinsic value of these options was $214,000. All non-vested awards are expected to be recognized over a weighted average period of 6.63 years. 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 Nine Month Period Ended December 31, December 31, -------------------------- -------------------------- 2007 2006 2007 2006 ----------- ----------- ------------ ----------- Awards granted 2,000 - 5,000 13,500 Dividend Yield 1.60% - 1.52%-1.60% 1.03% Weighted Average Expected Volatility 20.92% - 22.71% 30.21% Risk-free interest rate 4.50% - 4.76% 4.36% Expected life 9.00 - 9.00 9.01 10 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 6. Stock-Based Compensation, Continued At December 31, 2007, the Company had the following options outstanding: Outstanding Grant Date Options Option Price Expiration Date ------------ ----------- ------------ --------------------- 10/19/99 20,100 $16.67 9/30/05 to 9/30/09 9/1/03 3,000 $24.00 8/31/13 12/1/03 3,000 $23.65 11/30/13 1/01/04 6,500 $24.22 12/31/13 3/8/04 13,000 $21.43 2/28/14 6/7/04 2,000 $24.00 5/31/14 1/1/05 20,500 $20.55 12/31/14 1/1/06 6,000 $23.91 12/31/16 8/24/06 14,000 $23.03 8/24/16 5/24/07 2,000 $24.34 5/24/17 7/9/07 1,000 $24.61 7/9/17 10/1/07 2,000 $24.28 10/1/17 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 September 2006, the Financial Accounting Standards Board ("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. This standard eliminates inconsistencies found in various prior pronouncements but does not require any new fair value measurements. SFAS 157 is effective for the Company on April 1, 2008 and will not impact the Company's accounting measurements but it is expected to result in additional disclosures. 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"). Entities purchase life insurance for various reasons including protection against loss of key employees and to fund postretirement benefits. The two most common types of life insurance arrangements are endorsement split dollar life and collateral assignment split dollar life. EITF 06-4 covers the former and EITF 06-10 (discussed below) covers the latter. EITF 06-4 states that entities with 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 SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board ("APB") Opinion No. 12, "Omnibus Opinion 1967" (if the arrangement is, in substance, an individual deferred compensation contract). 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. EITF 06-4 is effective for the Company on April 1, 2008. The Company does not believe the adoption of EITF 06-4 will have a material impact on its financial position, results of operations or cash flows. 11 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 7. Accounting and Reporting Changes, Continued In September 2006, the FASB ratified the consensus reached on EITF 06-5, "Accounting for Purchases of Life Insurance Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance" ("EITF 06-5"). EITF 06-5 states that a policyholder should consider any additional amounts included in the contractual terms of the insurance policy other than the cash surrender value in determining the amount that could be realized under the insurance contract. EITF 06-5 also states that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). EITF 06-5 is effective for the Company on April 1, 2008. The Company does not believe the adoption of EITF 06-5 will have a material impact on its financial position, results of operations or cash flows. In March 2007, the FASB ratified the consensus reached on EITF 06-10, "Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements" ("EITF 06-10"). The postretirement aspect of this EITF is substantially similar to EITF 06-4 discussed above and requires that an employer recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance with either FASB Statement No. 106 or APB Opinion No. 12, as appropriate, if the employer has agreed to maintain a life insurance policy during the employee's retirement or provide the employee with a death benefit based on the substantive agreement with the employee. In addition, a consensus was reached that an employer should recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement. EITF 06-10 is effective for the Company on April 1, 2008. The Company does not believe the adoption of EITF 06-10 will have a material impact on its financial position, results of operations or cash flows. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115" ("SFAS 159"). This statement permits, but does not require, entities to measure many financial instruments at fair value. The objective is to provide entities with an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Entities electing this option will apply it when the entity first recognizes an eligible instrument and will report unrealized gains and losses on such instruments in current earnings. This statement 1) applies to all entities, 2) specifies certain election dates, 3) can be applied on an instrument-by-instrument basis with some exceptions, 4) is irrevocable and 5) applies only to entire instruments. One exception is demand deposit liabilities which are explicitly excluded as qualifying for fair value. With respect to SFAS 115, available-for-sale and held-to-maturity securities at the effective date are eligible for the fair value option at that date. If the fair value option is elected for those securities at the effective date, cumulative unrealized gains and losses at that date shall be included in the cumulative-effect adjustment and thereafter, such securities will be accounted for as trading securities. SFAS 159 is effective for the Company on April 1, 2008. The Company is currently analyzing the fair value option that is permitted, but not required, under SFAS 159. In June 2007, the FASB ratified the consensus reached by the EITF with respect to EITF 06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards" ("EITF 06-11"). Under EITF 06-11, a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity-classified nonvested equity shares, nonvested equity share units and outstanding equity share options should be recognized as an increase in additional paid-in capital. This EITF is to be applied prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared beginning in 2008, and interim periods within those fiscal years. Early application is permitted. The Company does not believe the adoption of EITF 06-11 will have a material impact on its financial position, results of operations or cash flows. In November 2007, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 109, "Written Loan Commitments Recorded at Fair Value Through Earnings" ("SAB 109"). SAB 109 expresses the current view of the SEC staff that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SEC registrants are expected to apply this guidance on a prospective basis to derivative loan commitments issued or modified in the first quarter of 2008 and thereafter. The Company is currently analyzing the impact of this guidance, which relates to the Company's mortgage loans held for sale. 12 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 7. Accounting and Reporting Changes, Continued In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations," ("SFAS 141(R)") which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141(R) is effective for acquisitions by the Company taking place on or after January 1, 2009. Early adoption is prohibited. Accordingly, the Company is required to record and disclose business combinations following existing accounting guidance until April 1, 2009. The Company will assess the impact of SFAS 141(R) if and when a future acquisition occurs. In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51" ("SFAS 160"). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Before this statement, limited guidance existed for reporting noncontrolling interests (minority interest). As a result, diversity in practice exists. In some cases minority interest is reported as a liability and in others it is reported in the mezzanine section between liabilities and equity. Specifically, SFAS 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financials statements and separate from the parent's equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent's ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests. SFAS 160 is effective for the Company on April 1, 2009. Earlier adoption is prohibited. The Company is currently evaluating the impact, if any, the adoption of SFAS 160 will have on its consolidated financial statements. 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 or 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 December 31, 2007 Amortized Unrealized Unrealized - ------------------ Cost Gains Losses Fair Value ------------ ---------- ---------- ------------ FHLB Securities $ 42,017,906 $ 526,775 $ 7,375 $ 42,537,306 Federal Farm Credit Securities 12,977,252 167,445 10,898 13,133,799 FNMA Bonds 1,997,248 4,322 - 2,001,570 Mortgage-Backed Securities 156,941,504 1,183,161 508,009 157,616,656 Equity Securities 102,938 - 3,938 99,000 ------------ ---------- ---------- ------------ Total $214,036,848 $1,881,703 $ 530,220 $215,388,331 ============ ========== ========== ============ Gross Gross March 31, 2007 Amortized Unrealized Unrealized - ------------------ Cost Gains Losses Fair Value ------------ ---------- ---------- ------------ FHLB Securities $ 38,487,381 $ 17,627 $ 131,886 $ 38,373,122 Federal Farm Credit Securities 9,217,205 8,580 11,504 9,214,281 FNMA Bonds 1,997,187 - 9,367 1,987,820 FHLMC Bonds 64,071 - 94 63,977 Mortgage-Backed Securities 137,102,085 276,292 1,354,781 136,023,596 Equity Securities 102,938 562 - 103,500 ------------ ---------- ---------- ------------ Total $186,970,867 $ 303,061 $1,507,632 $185,766,296 ============ ========== ========== ============ 13 Security Federal Corporation and Subsidiaries Notes to Consolidated Financial Statements (Unaudited), Continued 8. Securities, Continued FHLB securities, Federal Farm Credit securities, FNMA bonds, FHLMC bonds and FNMA and FHLMC mortgage- backed securities are issued by government-sponsored enterprises ("GSEs"). GSEs are not backed by the full faith and credit of the United States government. Included in the tables above in mortgage-backed securities are GNMA mortgage-backed securities, which are backed by the full faith and credit of the United States government. At December 31, 2007, the Bank held an amortized cost and fair value of $63.9 million and $64.5 million, respectively in GNMA mortgage-backed securities included in mortgage-backed securities listed above. 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 December 31, 2007 Amortized Unrealized Unrealized - ------------------ Cost Gains Losses Fair Value ----------- ---------- ---------- ------------ FHLB Securities $37,998,576 $ 153,478 $ 12,964 $ 38,139,090 Federal Farm Credit Securities 6,991,253 8,437 9,060 6,990,630 Equity Securities 155,000 - - 155,000 ----------- --------- ---------- ------------ Total $45,144,829 $ 161,915 $ 22,024 $ 45,284,720 =========== ========= ========== ============ Gross Gross March 31, 2007 Amortized Unrealized Unrealized - ------------------ Cost Gains Losses Fair Value ----------- ---------- ---------- ------------ FHLB Securities 55,994,852 $ 21,560 $ 573,841 $ 55,442,571 Federal Farm Credit Securities 7,988,737 - 144,667 7,844,070 Equity Securities 155,000 - - 155,000 ----------- --------- ---------- ------------ Total $64,138,589 $ 21,560 $ 718,508 $ 63,441,641 =========== ========= ========== ============ FHLB securities and Federal Farm Credit securities are issued by GSEs. These enterprises are not backed by the full faith and credit of the United States government. 9. Loans Receivable, Net Loans receivable, net, at December 31, 2007 and March 31, 2007 consisted of the following: December 31, 2007 March 31, 2007 ------------------- ---------------- Residential Real Estate $ 129,617,563 $ 125,512,411 Consumer 66,958,427 63,809,478 Commercial Business & Real Estate 314,522,220 259,207,877 Loans Held For Sale 2,770,678 1,529,748 ------------------- ---------------- 513,868,888 450,059,514 ------------------- ---------------- Less: Allowance For Possible Loan Loss 7,648,376 7,296,791 Loans In Process 5,814,744 6,443,372 Deferred Loan Fees 314,339 280,991 ------------------- ---------------- 13,777,459 14,021,154 ------------------- ---------------- $ 500,091,429 $ 436,038,360 =================== ================ 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 December 31, 2007 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, 2007. 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 December 31, 2007 and March 31, 2007 General - Total assets increased $82.1 million or 11.1% to $820.2 million at December 31, 2007 from $738.1 million at March 31, 2007. The primary reason for the growth in total assets was a $64.1 million or 14.7% increase in net loans receivable to $500.1 million. For the nine months ended December 31, 2007, the demand for loans was funded primarily with increased deposits of $50.2 million or 9.6%, increased advances from the Federal Home Loan Bank of Atlanta ("FHLB") of $24.7 million or 16.1% and increased other borrowed money of $4.6 million or 57.0%. Assets - The increases and decreases in total assets were primarily concentrated in the following asset categories: Increase (Decrease) ------------------- December 31, March 31, 2007 2007 Amount Percent ------ ------ ------ ------- Cash And Cash Equivalents $ 12,799,687 $ 13,438,129 $ (638,442) (4.8)% Investment And Mortgage- Backed Securities Available For Sale 215,388,331 185,766,296 29,622,035 15.9 Investment And Mortgage- Backed Securities - Held To Maturity 45,144,829 64,138,589 (18,993,760) (29.6) Loan Receivable, Net 500,091,429 436,038,360 64,053,069 14.7 Premises And Equipment, Net 20,501,003 15,895,192 4,605,811 29.0 FHLB Stock, At Cost 9,284,200 8,209,200 1,075,000 13.1 Bank Owned Life Insurance 8,225,067 5,783,620 2,441,447 42.2 Repossessed Assets Acquired in Settlement of Loans 477,796 24,909 452,887 1,818.2% Cash and cash equivalents decreased $638,000 to $12.8 million at December 31, 2007 from $13.4 million at March 31, 2007. The reason for the decrease is the Company used cash and cash equivalents to fund loans and purchase investment and mortgage- backed securities. Investment and mortgage-backed securities available for sale increased $29.6 million or 15.9% to $215.4 million at December 31, 2007 from $185.8 million at March 31, 2007. The increase in investments and mortgage-backed securities available for sale can be attributed to additional purchases of securities and increases in market value offset slightly by principal paydowns and investment calls. Investment and mortgage-backed securities held to maturity decreased $19.0 million to $45.1 million at December 31, 2007 from $64.1 million at March 31, 2007. This decrease was the result of maturities and calls that occurred during the period. 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 $64.1 million or 14.7% to $500.1 million at December 31, 2007 from $436.0 million at March 31, 2007. Residential real estate loans increased $4.1 million to $129.6 million at December 31, 2007 from $125.5 million at March 31, 2007. Consumer loans increased $3.1 million to $67.0 million at December 31, 2007 from $63.8 million at March 31, 2007. The increase in residential real estate and consumer loans can be attributed to normal growth of the Company. Commercial business and real estate loans increased $55.3 million to $314.5 million at December 31, 2007 from $259.2 million at March 31, 2007. The increase in commercial loans was attributable to the Company's continued focus on originating this type of loan. Loans held for sale increased $1.2 million to $2.8 million at December 31, 2007 from $1.5 million at March 31, 2007. The increase is attributable to the lag between the time a mortgage loan is originated and sold to an investor and an overall increase in the number of mortgage loans originated to be sold. Premises and equipment, net increased $4.6 million to $20.5 million at December 31, 2007 from $15.9 million at March 31, 2007. The majority of the increase is attributable to the construction and establishment of new branch locations in Evans, Georgia and in Columbia, South Carolina. FHLB stock, at cost, increased $1.1 million to $9.3 million at December 31, 2007 from $8.2 million at March 31, 2007. The increase is attributable to a FHLB requirement that the Company maintain stock equal to 0.20% of total assets at December 31, 2007 plus a transaction component, which equals 4.5% of outstanding advances (borrowings) from the FHLB of Atlanta. Bank owned life insurance increased $2.4 million to $8.2 million at December 31, 2007 from $5.8 million at March 31, 2007. The Company purchased additional life insurance to provide key man life insurance for additional officers and the cash surrender value continued to increase. Repossessed assets acquired in the settlement of loans increased $453,000 to $478,000 at December 31, 2007 from $25,000 at March 31, 2007 as the result of three properties that were foreclosed on during the nine month period. All three properties were residential lots and secured two loans to the same contractor. At March 31, 2007 the balance in repossessed assets consisted of only one property. Other assets decreased $894,000 to $3.0 million at December 31, 2007 from $3.9 million at March 31, 2007. The majority of the decrease resulted from a decrease in the deferred tax asset related to increases in the market values of available for sale investment and mortgage-backed securities. Liabilities Deposit Accounts Balance -------------------- December 31, 2007 March 31, 2007 Increase (Decrease) ------------------ ------------------ -------------------- Weighted Weighted Balance Rate Balance Rate Amount Percent ------- ---- ------------ ---- ----------- ------- Demand Accounts: Checking $ 99,175,456 0.65% $105,515,095 0.63% $(6,339,639) (6.0)% Money Market 143,713,354 3.88 145,491,774 4.14 (1,778,420) (1.2) Regular Savings 15,138,221 0.97 17,458,680 0.98 (2,320,459) (13.3) ------------ ---- ------------ ----- ----------- ------ Total 258,027,031 2.47 268,465,549 2.55 (10,438,518) (3.9) ------------ ---- ------------ ----- ----------- ------ Certificate Accounts 2.00 - 2.99% 3,511,939 2,971,616 540,323 1.82 3.00 - 3.99% 30,089,389 36,044,826 (5,955,437) (16.5) 4.00 - 4.99% 43,054,567 35,617,605 7,436,962 20.9 5.00 - 5.99% 239,232,353 180,637,996 58,594,357 32.4 ------------ ---- ------------ ----- ----------- ------ Total 315,888,248 5.04 255,272,043 4.99 60,616,205 23.7 ------------ ---- ------------ ----- ----------- ------ Total Deposits $573,915,279 3.88% $523,737,592 3.74% $50,177,687 9.6% ============ ==== ============ ===== =========== ====== 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 ------------------ December 31, 2007 March 31, 2007 Increase -------------------- ----------------- ------------------ Fiscal Year Due: Balance Rate Balance Rate Balance Percent -------------------- ----------------- ------------------ 2008 $16,800,000 4.14% $10,000,000 4.25% $ 6,800,000 68.0% 2009 25,000,000 4.58 25,000,000 4.75 - - 2010 10,000,000 4.88 5,000,000 3.09 5,000,000 100.0 2011 15,000,000 4.87 10,000,000 4.76 5,000,000 50.0 2012 24,700,000 4.56 19,700,000 4.47 5,000,000 25.3 Thereafter 86,237,852 4.31 83,349,272 4.20 2,888,580 3.4 ------------ ------------ ----------- ------ Total Advances $177,737,852 4.44% $153,049,272 4.36% $24,688,580 16.1% ============ ============ =========== ====== 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 $104.0 million and $105.3 million, respectively, at December 31, 2007. 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 December 31, 2007 - ------------------------------------------------------------------------------ Borrow Date Maturity Date Amount Int. Rate Type Call Dates - ----------- ------------- --------- --------- ----------- ----------------- 02/20/04 02/20/14 $5,000,000 3.225% 1 Time Call 02/20/09 04/16/04 04/16/14 3,000,000 3.330 1 Time Call 04/16/08 06/24/05 06/24/15 5,000,000 3.710 1 Time Call 06/24/10 07/22/05 07/22/15 5,000,000 3.790 1 Time Call 07/22/08 11/10/05 11/10/15 5,000,000 4.400 1 Time Call 11/10/09 11/23/05 11/23/15 5,000,000 3.933 Multi-Call 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 03/25/13 5,000,000 4.580 1 Time Call 03/25/08 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 10/25/06 10/25/11 5,000,000 4.830 1 Time Call 10/27/08 11/29/06 11/29/16 5,000,000 4.025 Multi-Call 11/29/07 and quarterly thereafter 01/19/07 07/21/14 5,000,000 4.885 1 Time Call 07/21/11 03/09/07 03/09/12 4,700,000 4.286 Multi- Call 06/11/07 and quarterly thereafter 05/24/07 05/24/17 7,900,000 4.375 Multi- Call 05/27/08 and quarterly thereafter 06/29/07 06/29/12 5,000,000 4.945 1 Time Call 06/29/09 07/25/07 07/25/17 5,000,000 4.396 Multi- Call 07/25/08 and quarterly thereafter 11/16/07 11/16/11 5,000,000 3.750% Multi- Call 11/17/08 and quarterly thereafter 17 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued As of March 31, 2007 - ------------------------------------------------------------------------------ Borrow Date Maturity Date Amount Int. Rate Type Call Dates - ----------- ------------- --------- --------- ----------- ----------------- 11/07/02 11/07/12 $5,000,000 3.354% 1 Time Call 11/07/07 02/20/04 02/20/14 5,000,000 3.225 1 Time Call 02/20/09 04/16/04 04/16/14 3,000,000 3.330 1 Time Call 04/16/08 09/16/04 09/16/09 5,000,000 3.090 1 Time Call 09/17/07 06/24/05 06/24/15 5,000,000 3.710 1 Time Call 06/24/10 07/22/05 07/22/15 5,000,000 3.790 1 Time Call 07/22/08 11/10/05 11/10/15 5,000,000 4.400 1 Time Call 11/10/09 11/23/05 11/23/15 5,000,000 3.933 Multi-Call 11/23/07 and quarterly thereafter 11/29/05 11/29/13 5,000,000 4.320 1 Time Call 05/29/09 12/14/05 12/14/11 5,000,000 4.640 1 Time Call 09/14/09 01/12/06 01/12/16 5,000,000 4.450 1 Time Call 01/12/11 03/01/06 03/03/14 5,000,000 4.720 1 Time Call 03/03/10 03/24/06 03/24/16 5,000,000 4.120 Multi-Call 06/26/07 and quarterly thereafter 03/24/06 03/25/13 5,000,000 4.580 1 Time Call 03/25/08 04/21/06 04/22/13 5,000,000 4.530 Multi-Call 06/26/07 and quarterly thereafter 06/02/06 06/02/16 5,000,000 5.160 1 Time Call 06/02/11 07/11/06 07/11/16 5,000,000 4.800 Multi-Call 07/11/08 and quarterly thereafter 10/25/06 10/25/11 5,000,000 4.830 1 Time Call 10/27/08 11/29/06 11/29/16 5,000,000 4.025 Multi-Call 11/29/07 and quarterly thereafter 01/19/07 07/21/14 5,000,000 4.885 1 Time Call 07/21/11 03/09/07 03/09/12 4,700,000 4.286% Multi-Call 06/11/07 and quarterly thereafter Other Borrowed Money - Other borrowed money consists of short- term retail repurchase agreements and a revolving line of credit with another financial institution. The retail repurchase agreements typically mature within one to three days and have interest rates that float with market rates. The unsecured line of credit has an interest rate equal to LIBOR plus 2.5% and matures on December 1, 2008. Other borrowed money increased $4.6 million or 57.0% to $12.7 million at December 31, 2007 from $8.1 million at March 31, 2007. The weighted average interest rate of retail repurchase agreements was 4.12% at December 31, 2007. As of December 31, 2007, the line of credit had a balance of $3.0 million compared to no balance at March 31, 2007. The weighted average interest rate was 6.77% at December 31, 2007. The Company borrowed these funds to provide additional capital to fund loans. 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 in the Company 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 at the option of 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. As of December 31, 2007 the shareholder had not elected to redeem any of the shares. Junior Subordinated Debentures - On September 21, 2006, Security Federal Statutory Trust (the "Trust"), a wholly-owned subsidiary of the Company, issued and sold fixed and floating rate capital securities of the Trust (the "Capital Securities"), which are reported on the consolidated balance sheet as junior subordinated debentures, generating proceeds of $5.0 million. The Trust loaned these proceeds to the Company to use for general corporate purposes, primarily to provide capital to the Bank. The Capital Securities accrue and pay distributions annually at a rate per annum equal to a blended rate of 6.79% at December 31, 2007. One-half of the Capital Securities issued in the transaction have a fixed rate of 6.88% and the remaining half has a floating rate of three-month LIBOR plus 170 basis points, which was 6.69% at December 31, 2007. 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. 18 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued The Capital Securities mature or are mandatorily redeemable upon maturity on December 15, 2036, and or upon earlier optional redemption as provided in the indenture. The Company has the right to redeem the Capital Securities in whole or in part, on or after September 15, 2011. The Company may also redeem the capital securities prior to such dates upon occurrence of specified conditions and the payment of a redemption premium Equity - Shareholders' equity increased $2.5 million or 5.9% to $45.2 million at December 31, 2007 from $42.7 million at March 31, 2007. Accumulated other comprehensive income, net of tax, increased $1.6 million to $838,000 at December 31, 2007 from a loss of $747,000 at March 31, 2007. The Company's net income for the nine-month period was $3.3 million. The Board of Directors of the Company declared the 66th, 67th, and 68th consecutive quarterly dividend, which was $.07 per share, in May, August, and November 2007, which totaled $546,000. Book value per share was $17.82 at December 31, 2007 compared to $16.36 at March 31, 2007. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 AND 2006 - ---------------------------------------------------------------------------- Net Income - Net income increased $64,000 or 6.5% to $1.0 million for the three months ended December 31, 2007 compared to $977,000 for the three months ended December 31, 2006. 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 $544,000 or 12.3% to $5.0 million during the three months ended December 31, 2007, compared to $4.4 million for the same period in 2006, as a result of an increase in interest income offset in part by an increase in interest expense. During the three months ended December 31, 2007, average interest earning assets increased $91.5 million to $762.8 million while average interest-bearing liabilities increased $96.3 million to $717.8 million. The interest rate spread increased three basis points to 2.36% during the three months ended December 31, 2007 compared to the same period in 2006. The Company's net interest margin was 2.61% and 2.64% for the quarters ended December 31, 2007 and 2006, respectively. Interest Income - Total interest income increased $1.9 million or 17.8% to $12.7 million during the three months ended December 31, 2007 from $10.8 million for the same period in 2006. Total interest income on loans increased $1.4 million or 17.5% to $9.4 million during the three months ended December 31, 2007 compared to $8.0 million for the same period in 2006. The increase is a result of the average loan portfolio balance increasing $75.2 million slightly offset by the yield in the loan portfolio decreasing three basis points. Interest income from mortgage-backed securities increased $481,000 or 33.0% to $1.9 million as a result of an increase in yield and an increase in the average balance of the portfolio. Interest income from investment securities increased $51,000 or 3.9% to $1.4 million as a result of an increase in the average balance of the investments portfolio slightly offset by a decrease in yield. The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the three months ended December 31, 2007 and 2006: Three Months Ended December 31, ------------------------------------------------------ 2007 2006 ------------------ ------------------ Increase (Decrease) In Interest And Dividend Average Average Income Balance Yield Balance Yield From 2006 ------------ ----- ------------ ----- ------------ Loans Receivable, Net $495,376,936 7.60% $420,191,159 7.63% $ 1,404,260 Mortgage-Backed Securities 140,981,296 5.50 132,975,594 4.38 480,700 Investments 124,623,250 4.38 116,074,130 4.54 50,792 Overnight Time 1,845,087 3.75 2,080,466 5.15 (12,274) ------------ ----- ------------ ----- ----------- Total Interest-Earning Assets $762,826,569 6.68% $671,321,349 6.44% $ 1,923,478 ============ ===== ============ ===== =========== 19 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 $1.4 million or 21.6% to $7.8 million during the three months ended December 31, 2007 compared to $6.4 million for the same period one-year earlier. The increase in total interest expense can be primarily attributed to increases in interest rates paid for certificate accounts and FHLB advances during the period coupled with increases in the amount of total interest-bearing deposits and other borrowings. The Company offered higher interest rates on certificates accounts during the period to remain competitive with new and existing financial institutions entering the market place. Interest expense on deposits increased $997,000 or 21.8% during the period as average interest bearing deposits grew $67.3 million compared to the average balance in the three months ended December 31, 2006. In addition, the cost of deposits increased 25 basis points compared to the same period in the prior year. Interest expense on advances and other borrowings increased $381,000 or 22.2% as a result of the cost of borrowings increasing 14 basis points and average total borrowings outstanding increasing approximately $29.0 million to $184.8 million during the 2007 period compared to $155.8 million during 2006. Interest expense on junior subordinated debentures was $93,000 for the three months ended December 31, 2007 compared to $92,000 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 in 2006. The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the three months ended December 31, 2007 and 2006: Three Months Ended December 31, ------------------------------------------------------ 2007 2006 ------------------ ---------------- Increase (Decrease) In Interest Average Average Expense Balance Yield Balance Yield From 2006 ------------ ----- ------------ ----- ------------ Now And Money Market Accounts $203,523,577 3.15% $207,023,453 3.26% $ (81,393) Passbook Accounts 15,671,523 0.98 16,683,742 0.99 (2,603) Certificate Accounts 308,615,496 5.09 236,810,841 4.81 1,081,114 FHLB Advances And Other Borrowed Money 184,848,789 4.54 155,837,665 4.40 380,615 Junior Subordinated Debentures 5,155,000 7.24 5,155,000 7.14 1,284 ------------ ----- ------------ ----- ---------- Total Interest-Bearing Liabilities $717,814,385 4.32% $621,510,701 4.11% $1,379,017 ============ ===== ============ ===== ========== 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. 20 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued The Company's provision for loan losses was $150,000 during the three months ended December 31, 2007 and 2006, respectively. The following table details selected activity associated with the allowance for loan losses for the three months ended December 31, 2007 and 2006: December 31, 2007 December 31, 2006 ------------------- ------------------ Beginning Balance $ 7,564,211 $ 6,994,623 Provision 150,000 150,000 Charge-offs (144,482) (35,912) Recoveries 78,647 24,604 ------------------ ----------------- Ending Balance $ 7,648,376 $ 7,133,315 ================== ================= Allowance For Loan Losses As A Percentage Of Gross Loans Receivable And Loans Held For Sale At The End Of The Period 1.51% 1.66% Allowance For Loan Losses As A Percentage Of Impaired Loans At The End Of The Period 557.82% 451.86% Impaired Loans 1,371,125 1,578,672 Non-accrual Loans And 90 Days Or More Past Due Loans As A Percentage Of Gross Loans Receivable And Loans Held For Sale At The End Of The Period 0.73% 0.25% Loans Receivable, Net $ 500,091,429 $ 421,483,354 Non-accrual loans and loans 90 days or more past due increased $2.6 million to $3.7 million for the three months ended December 31, 2007 when compared to the same period in 2006. The increase is primarily attributable to a slowing down of the real estate market in the Company's market area. The Company does not have a sub-prime lending program therefore this increase is not a direct result of the sub-prime lending crisis. Non-Interest Income - Non-interest income increased $40,000 or 4.0% to $1.0 million for the three months ended December 31, 2007 from $988,000 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 Ended December 31, Increase (Decrease) ------------------------------- ------------------ 2007 2006 Amounts Percent ---------- -------- -------- ------- Gain On Sale Of Loans $ 134,732 $ 88,137 $ 46,595 52.9% Service Fees On Deposit Accounts 307,045 296,135 10,910 3.7 Income From Cash Value Of Life Insurance 92,246 62,037 30,209 48.7 Commissions On Insurance 145,148 198,772 (53,624) (27.0) Other Agency Income 19,670 20,248 (578) (2.9) Trust Income 102,000 110,211 (8,211) (7.5) Other 227,250 212,558 14,692 6.9 ---------- -------- -------- ------- Total Non-Interest Income $1,028,091 $988,098 $ 39,993 4.0% ========== ======== ======== ======= Gain on sale of loans increased $47,000 or 52.9% to $135,000 for the three months ended December 31, 2007 compared to the same period one year ago. This increase is attributable to an increase in the origination and sale of fixed rate residential mortgage loans. Income from the cash value of life insurance was $92,000 for the three months ended December 31, 2007 compared to $62,000 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 and the continued increase of the cash surrender value. Commissions on insurance decreased $54,000 to $145,000 during the quarter ended December 31, 2007 when compared to 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 The decrease can be attributed primarily to changes in South Carolina insurance laws enacted during the year that negatively impacted revenue, in addition to a decrease in the commissions percentages earned from the insurance companies. The Company anticipated these changes and is in the process of integrating and expanding its product lines and network to attempt to increase the revenues from this activity. Trust income decreased $8,000 to $102,000 during the period compared to $110,000 for the same period one year ago as a result of a decrease in the market value of the underlying trust accounts offset slightly by an increase in the number of trust accounts. The Bank earns trust fees as a percentage of the market value of each trust account. The market value of these accounts decreased approximately $1.0 million during the quarter ended December 31, 2007 when compared to the same quarter in the prior year due to a general decline in economic conditions in the market place. Other miscellaneous income including credit life insurance commissions, safe deposit rental income, annuity and stock brokerage commissions, and other miscellaneous fees, increased $15,000 to $227,000 during the three months ended December 31, 2007 compared to $213,000 during the same period one year ago. Non-Interest Expense - Non-interest expense increased $511,000 or 13.4% to $4.3 million for the three months ended December 31, 2007 from $3.8 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 Ended December 31, Increase (Decrease) ------------------------------- ------------------ 2007 2006 Amounts Percent ---------- -------- ------- ------- Salaries And Employee Benefits $ 2,660,655 $2,361,104 $ 299,551 12.7% Occupancy 425,489 359,530 65,959 18.3 Advertising 80,857 98,672 (17,815) (18.1) Depreciation And Maintenance Of Equipment 333,985 300,211 33,774 11.3 FDIC Insurance Premiums 15,402 4,624 10,778 233.1 Amortization of Intangibles 22,500 22,500 - - Other 789,044 670,071 118,973 17.8 ----------- ---------- --------- ----- Total Non-Interest Expenses $ 4,327,932 $3,816,712 $ 511,220 13.4% =========== ========== ========= ===== Salary and employee benefits increased $300,000 to $2.7 million for the three months ended December 31, 2007 from $2.4 million for the same period one year ago. The majority of the increase is the result of hiring additional staff in connection with the Company's growth. Occupancy increased $66,000 or 18.3% to $425,000 for the three months ended December 31, 2007 when compared to $359,000 for the same period a year ago as a result of an increased number of facilities. Advertising expense decreased $18,000 to $81,000 for the three months ended December 31, 2007 from $99,000 for the same period one year ago. Other non- interest expenses increased $119,000 or 17.8% to $789,000 when compared to $670,000 for the same period one year ago. Provision For Income Taxes - Provision for income taxes increased $9,000 or 2.0% to $488,000 for the three months ended December 31, 2007 from $479,000 for the same period one year ago. Income before income taxes was $1.5 million for the three months ended December 31, 2007 and 2006, respectively. The Company's combined federal and state effective income tax rate for the current quarter was 31.9% compared to 32.9% for the same quarter one year ago. COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 2007 AND 2006 - ------------------------------------------------------------------------------ Net Income - Net income increased $238,000 or 7.9% to $3.3 million for the nine months ended December 31, 2007 compared to $3.0 million for the nine months ended December 31, 2006. 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. 22 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued Net Interest Income - Net interest income increased $1.7 million or 12.9% to $15.1 million during the nine months ended December 31, 2007, compared to $13.4 million for the same period in 2006, as a result of an increase in interest income offset in part by an increase in interest expense. Average interest earning assets increased $87.2 million to $737.4 million while average interest-bearing liabilities increased $90.0 million to $691.5 million. The interest rate spread remained constant at 2.46% during the nine months ended December 31, 2007 and 2006. The Company's net interest margin decreased one basis point to 2.73% for the nine months ended December 31, 2007 from 2.74% for the same period last year. Interest Income - Total interest income increased $6.6 million or 21.4% to $37.3 million during the nine months ended December 31, 2007 from $30.7 million for the same period in 2006. Total interest income on loans increased $4.8 million or 21.2% to $27.6 million during the nine months ended December 31, 2007, compared to $22.8 million for the same period in 2006. The increase is a result of the average loan portfolio balance increasing $69.8 million and the yield in the loan portfolio increasing 25 basis points. Interest income from mortgage-backed securities increased $813,000 or 19.2% to $5.0 million as a result of an increase in the yield in the mortgage-backed portfolio and an increase in the average balance of the portfolio of $2.6 million. Interest income from investment securities increased $937,000 or 25.7% to $4.6 million 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 nine months ended December 31, 2007 and 2006: Nine Months Ended December 31, ------------------------------------------------------ 2007 2006 ------------------ ---------------- Increase (Decrease) In Interest And Dividend Average Average Income Balance Yield Balance Yield From 2006 ------------ ----- ------------ ----- ------------ Loans Receivable, Net $472,350,077 7.80% $402,524,591 7.55% $ 4,835,432 Mortgage-Backed Securities 136,239,152 4.93 133,593,423 4.22 812,691 Investments 127,408,732 4.80 112,603,515 4.32 937,059 Overnight Time 1,435,612 4.20 1,561,374 5.30 (16,844) ------------ ----- ------------ ----- ----------- Total Interest-Earning Assets $737,433,573 6.74% $650,282,903 6.30% $ 6,568,338 ============ ===== ============ ===== =========== Interest Expense - Total interest expense increased $4.8 million or 27.9% to $22.2 million during the nine months ended December 31, 2007 compared to $17.3 million for the same period one year earlier. The increase in total interest expense is attributable to the increases in interest rates paid and the increase in the total amount of interest-bearing deposits and borrowings. The Company offered higher interest rates on certificate accounts during the period to remain competitive with new and existing financial institutions entering the market place during the period. Interest expense on deposits increased $3.3 million or 26.3% during the period as average interest bearing deposits grew $56.9 million compared to the average balance in the nine months ended December 31, 2006 while the cost of interest bearing deposits increased 45 basis points. Interest expense on advances and other borrowings increased $1.4 million or 28.9% as the cost of borrowings increased 30 basis points and average total borrowings outstanding increased approximately $30.0 million to $179.4 million during the nine months ended December 31, 2007 compared to the same period in 2006 while average total borrowings outstanding increased approximately $30.0 million. Interest expense on junior subordinated debentures was $276,000 for the nine months ended December 31, 2007 compared to $102,000 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 in 2006. 23 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 nine months ended December 31, 2007 and 2006: Nine Months Ended December 31, ------------------------------------------------------ 2007 2006 ------------------ ------------------- Increase (Decrease) In Interest Average Average Expense Balance Yield Balance Yield From 2006 ------------ ----- ------------ ----- ------------ Now And Money Market Accounts $205,550,000 3.20% $210,937,813 3.15% $ (51,123) Passbook Accounts 16,479,117 0.98 16,926,574 0.99 (3,560) Certificate Accounts 284,859,916 5.05 222,170,422 4.46 3,359,456 FHLB Advances And Other Borrowed Money 179,454,602 4.49 149,495,522 4.19 1,356,921 Junior Subordinated Debentures 5,155,000 7.15 1,947,000 6.98 174,360 ------------ ---- ------------ ----- ---------- Total Interest-Bearing Liabilities $691,498,635 4.28% $601,477,331 3.84% $4,836,054 ============ ===== ============ ===== ========== 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 Company's provision for loan losses was $450,000 during the nine months ended December 31, 2007 and 2006, respectively. The following table details selected activity associated with the allowance for loan losses for the nine months ended December 31, 2007 and 2006. December 31, 2007 December 31, 2006 ------------------- ----------------- Beginning Balance $ 7,296,791 $ 6,704,734 Provision 450,000 450,000 Charge-offs (212,893) (111,191) Recoveries 114,478 89,772 ------------------- ---------------- Ending Balance $ 7,648,376 $ 7,133,315 =================== ================= Allowance For Loan Losses As A Percentage Of Gross Loans Receivable And Loans Held For Sale At The End Of The Period 1.51% 1.66% Allowance For Loan Losses As A Percentage Of Impaired Loans At The End Of The Period 557.82% 451.86% Impaired Loans 1,371,125 1,578,672 Nonaccrual Loans And 90 Days Or More Past Due Loans As A Percentage Of Gross Loans Receivable And Loans Held For Sale At The End Of The Period 0.73% 0.51% Loans Receivable, Net $ 500,091,429 $ 421,483,354 Non-accrual loans and loans 90 days or more past due increased slightly during the nine months ended December 31, 2007 when compared to the prior period. The increase is primarily attributable to a slowing down of the real estate market in the Company's market area. The Company does not have a sub-prime lending program therefore this increase is not a direct result of the sub- prime lending crisis. 24 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 $485,000 or 18.3% to $3.1 million for the nine months ended December 31, 2007 from $2.7 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: Nine Months Ended December 31, Increase ------------------------------- ------------------ 2007 2006 Amounts Percent ---------- -------- ------- ------- Gain On Sale Of Loans $ 416,303 $ 295,390 $ 120,913 40.9% Service Fees On Deposit Accounts 957,790 865,638 92,152 10.6 Income From Cash Value Of Life Insurance 241,447 180,582 60,865 33.7 Commissions On Insurance 464,309 413,407 50,902 12.3 Other Agency Income 75,838 30,674 45,164 147.2 Trust Income 340,625 327,767 12,858 3.9 Other 641,747 539,354 102,393 19.0 ---------- ---------- --------- ----- Total Non-Interest Income $3,138,059 $2,652,812 $ 485,247 18.3% ========== ========== ========= ===== Gain on sale of loans increased $121,000 or 40.9% to $416,000 for the nine month period ended December 31, 2007 compared to $295,000 for the same period one year ago. Income from cash value of life insurance was $241,000 for the nine months ended December 31, 2007 compared to $181,000 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 and increases in the cash surrender value. Commissions on insurance and other agency income increased $96,000 to $540,000 during the nine months ended December 31, 2007 compared to $444,000 during the same period one year ago. This increase is attributable to the acquisition of the Collier Jennings' Companies which took place at the end of the first quarter in 2006, offset partially by decreases in second and third quarter earnings when compared to the same quarters in the prior year. The decreases in second and third quarter earnings were the result of changes in South Carolina insurance laws that negatively impacted revenue and decreases in commission percentages earned from the insurance companies. Other miscellaneous income including credit life insurance commissions, safe deposit rental income, annuity and stock brokerage commissions, and other miscellaneous fees, increased $102,000 to $642,000 during the nine months ended December 31, 2007 compared to $539,000 during the same period one year ago. Non-Interest Expense - Non-interest expense increased $2.0 million or 17.9% to $13.0 million for the nine months ended December 31, 2007 from $11.0 million for the same period one year ago. The following table provides a detailed analysis of the changes in the components of non-interest expense: Nine Months Ended December 31, Increase ------------------------------- ------------------ 2007 2006 Amounts Percent ---------- -------- ------- ------- Salaries And Employee Benefits $ 7,858,206 $ 6,789,633 $ 1,068,573 15.7% Occupancy 1,293,602 1,027,793 265,809 25.9 Advertising 270,278 234,622 35,656 15.2 Depreciation And Maintenance Of Equipment 990,601 908,006 82,595 9.1 FDIC Insurance Premiums 45,599 33,586 12,013 35.8 Amortization of Intangibles 67,500 45,000 22,500 50.0 Other 2,434,592 1,950,577 484,015 24.8 ----------- ----------- ---------- ----- Total Non-Interest Expenses $12,960,378 $10,989,217 $1,971,161 17.9% =========== =========== ========== ===== Salary and employee benefits increased $1.1 million to $7.9 million for the nine months ended December 31, 2007 from $6.8 million for the same period one year ago. The majority of the increase is the result of hiring additional staff in connection with the Company's growth including absorbing the Collier-Jennings Companies' employees and increased regulatory reporting requirements. Occupancy costs increased $266,000 or 25.9% to $1.3 million for the nine months ended December 31, 2007 as compared to $1.0 million for the same period one year ago as a result of the acquisition and construction of additional facilities during the period. Advertising expense increased $36,000 to $270,000 for the nine months ended December 31, 2007 from $235,000 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. 25 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued Provision For Income Taxes - Provision for income taxes increased $8,000 or 0.5% to $1.6 million for the nine months ended December 31, 2007 and 2006. Income before income taxes was $4.8 million for the nine months ended December 31, 2007 compared to $4.6 million for the nine months ended December 31, 2006. The Company's combined federal and state effective income tax rate for the nine months ended December 31, 2007 was 32.6% compared to 34.2% 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 nine months ended December 31, 2007 loan disbursements exceeded loan repayments resulting in a $64.1 million or 14.7% increase in total net loans receivable. During the nine months ended December 31, 2007, deposits increased $50.2 million, the Company drew $3.0 million on a line of credit with another financial institution and FHLB advances increased $24.7 million. The Bank had $57.2 million in additional borrowing capacity at the FHLB and $7.0 million remaining on the line of credit at the end of the period. At December 31, 2007, the Bank had $298.0 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 opened two new branches during the quarter ended December 31, 2007 and intends to continue expanding 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 to the lag that exists from the time a branch is built to when it becomes profitable. In the next 12 months, the Company anticipates investing $3.0 to $4.0 million in land, buildings, and equipment. In the next 24 months, we anticipate investing $6.0 to $9.0 million in land, buildings, and equipment. The anticipated costs could be affected by increased construction costs, weather delays, and/or other uncertainties. 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. 26 Security Federal Corporation and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at December 31, 2007. 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 $ 1,691 $ 7,268 $32,584 $41,543 $44,098 $85,641 Standby letters of credit 11 30 331 372 137 509 ------- -------- ------- ------- ------- ------- Total $ 1,702 $ 7,298 $32,915 $41,915 $44,235 $86,150 ======= ======== ======= ======= ======== ======= 27 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 nine months ended December 31, 2007, 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 2.46%. For the year ended March 31, 2007, the interest rate spread was 2.51%. The interest rate spread decreased as a result of the rates paid on deposits outpacing the rates received on loans. The rate differential was offset partially by 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 December 31, 2007 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 December 31, 2007, 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. 28 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, 2007. Item 2 Unregistered sales of Equity Securities and Use Of Proceeds ----------------------------------------------------------- (c)Total Number (d)Maximum of Shares Number of Purchased Shares that (a) Total as Part of May Yet Be Number of (b)Average Publicly Purchased Shares Price Paid Announced Under Period Purchased per Share Program the Program -------- --------- --------- --------- ----------- October 1 - October 31, 2007 6,250 $24.16 6,250 68,725 November 1 - November 30, 2007 7,201 24.04 7,201 61,524 December 1 - December 31, 2007 46,663 23.99 46,663 14,861 -------------------------------------------------- Total 60,114 $24.01 60,114 14,861 ================================================== 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 December 31, 2007, 111,139 shares have been repurchased under this program. The Company repurchased 60,114 shares of its outstanding Common Stock during the three months ended December 31, 2007. Item 3 Defaults Upon Senior Securities ------------------------------- None Item 4 Submission Of Matters To A Vote Of Security Holders --------------------------------------------------- None. Item 5 Other Information ----------------- None 29 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 1993 Salary Continuation Agreements (4) 10.2 Amendment One to 1993 Salary Continuation Agreement (5) 10.3 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 27, 2007 as an exhibit to the Company's Annual Report on Form 10-K and incorporated herein by reference. 30 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: February 14, 2008 By:/s/Timothy W. Simmons ------------------------------- Timothy W. Simmons President Duly Authorized Representative Date: February 14, 2008 By:/s/Roy G. Lindburg ------------------------------- Roy G. Lindburg Chief Financial Officer Duly Authorized Representative 31 EXHIBIT 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 32 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: February 14, 2008 /s/Timothy W. Simmons ------------------------------------- Timothy W. Simmons President and Chief Executive Officer 33 EXHIBIT 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act 34 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: February 14, 2008 /s/Roy G. Lindburg -------------------------------- Roy G. Lindburg Chief Financial Officer 35 EXHIBIT 32 Certification Pursuant to Section 906 of the Sarbanes Oxley Act 36 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER OF SECURITY FEDERAL CORPORATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), each of the undersigned hereby certifies in his capacity as an officer of Security Federal Corporation (the "Company") and in connection with the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2007 that: 1. the Report fully complies with the requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, and 2. the information contained in the Report fairly presents, in all material respects, the Company's financial condition and results of operations as of the dates and for the periods presented in the financial statements included in the Report. /s/Timothy W. Simmons /s/Roy G. Lindburg - ----------------------------- ------------------------------- Timothy W. Simmons Roy G. Lindburg Chief Executive Officer Chief Financial Officer Dated: February 14, 2008 37 -----END PRIVACY-ENHANCED MESSAGE-----