-----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, BAQYPW3AdIIua2AU04WHbDtemIHUHz0ERjSN5lPBQiB7oeT1ImZ2uwQjvuVNKj/1 UegktM5OOMh2gFTskFsuJA== 0000939057-09-000204.txt : 20090814 0000939057-09-000204.hdr.sgml : 20090814 20090814155031 ACCESSION NUMBER: 0000939057-09-000204 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20090630 FILED AS OF DATE: 20090814 DATE AS OF CHANGE: 20090814 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: 091015531 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 sfq063009.htm SECURITY FEDERAL CORPORATION FORM 10-Q sfq063009.htm
 
SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, DC  20549
 
FORM 10 – Q
(Mark one)
 
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009
 
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
FOR THE TRANSITION PERIOD:
 
 
FROM:
    
TO:
  
 
COMMISSION FILE NUMBER:  0-16120
 
SECURITY FEDERAL CORPORATION
(Exact name of registrant as specified in its charter)

 
South Carolina
  
57-0858504
  
 
(State or other jurisdiction
of incorporation or organization)
  
(IRS Employer
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 has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes [  ] No [X ] (Not yet applicable to Registrant)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
  Large accelerated filed      [  ]   Accelerated filer   [  ]   
  Non-accelerated filer     [  ]  Smaller reporting company   [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
value $0.01 per share
  
July 31, 2009
      
2,461,090
  

 
 
 


 
INDEX
 
       
 
PART I.
 
FINANCIAL INFORMATION (UNAUDITED)
  
 
PAGE NO.
       
Item 1.
Financial Statements (Unaudited):
    
 
Consolidated Balance Sheets at June 30, 2009 and March 31, 2009
  
1
       
 
Consolidated Statements of Income for the Three Months Ended June 30, 2009 and 2008
  
2
       
 
Consolidated Statements of Shareholders’ Equity and Comprehensive Income at June 30, 2009 and 2008
  
3
       
 
Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2009 and 2008
  
4
       
 
Notes to Consolidated Financial Statements
  
6
       
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
19
       
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
  
30
       
Item 4T.
Controls and Procedures
  
30
       
 
PART II.
 
OTHER INFORMATION
    
       
Item 1.
Legal Proceedings
  
31
       
Item 1A.
Risk Factors
  
31
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
  
31
       
Item 3.
Defaults Upon Senior Securities
  
31
       
Item 4.
Submission of Matters to a Vote of Security Holders
  
31
       
Item 5
Other Information
  
31
       
Item 6.
Exhibits
  
32
       
 
Signatures
  
33
       
 
 
SCHEDULES OMITTED
 
 
All schedules other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information is included in the consolidated financial statements and related notes.
 

 
 
 

Part I.   Financial Information
Item 1.  Financial Statements
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets
   
June 30, 2009
    
March 31, 2009
  
Assets:
  
(Unaudited)
    
(Audited)
  
Cash And Cash Equivalents
   $ 9,339,816     $ 6,562,394  
Investment And Mortgage-Backed Securities:
                
Available For Sale:    (Amortized cost of $272,935,437 at June 30, 2009 and $276,687,428 
           at March 31, 2009)
     279,077,087       282,832,735  
Held To Maturity:    (Fair value of $27,735,595 at June 30, 2009 and  $32,492,407 at
                      March 31, 2009)
     26,700,599       31,265,866  
Total Investment And Mortgage-Backed Securities
     305,777,686       314,098,601  
Loans Receivable, Net:
                
Held For Sale
     7,157,299       5,711,807  
Held For Investment:  (Net of allowance of $11,420,326 at June 30, 2009 and $10,181,599
                     at March 31, 2009)
     600,211,095       605,378,066  
Total Loans Receivable, Net
     607,368,394       611,089,873  
Accrued Interest Receivable:
                
Loans
     2,046,289       2,011,967  
Mortgage-Backed Securities
     1,016,575       1,138,911  
Investments
     583,826       363,707  
Premises And Equipment, Net
     21,392,627       21,675,434  
Federal Home Loan Bank Stock (“FHLB”), At Cost
     12,624,400       12,662,700  
Bank Owned Life Insurance
     9,731,305       9,641,305  
Repossessed Assets Acquired In Settlement Of Loans
     1,882,432       1,985,172  
Intangible Assets, Net
     317,000       352,500  
Goodwill
     1,199,754       1,421,754  
Other Assets
     2,339,211       1,657,189  
Total Assets
   $ 975,619,315     $ 984,661,507  
                 
Liabilities And Shareholders’ Equity
                
Liabilities:
                
Deposit Accounts
   $ 665,349,100     $ 661,713,575  
Advances From FHLB
     193,794,491       218,998,434  
Term Auction Facility Advances
     22,000,000       10,000,000  
Other Borrowed Money
     15,933,942       16,055,966  
Advance Payments By Borrowers For Taxes And Insurance
     448,791       421,461  
Mandatorily Redeemable Financial Instrument
     1,522,312       1,600,312  
Junior Subordinated Debentures
     5,155,000       5,155,000  
Other Liabilities
     4,346,802       3,624,461  
Total Liabilities
   $ 908,550,438     $ 917,569,209  
                 
Shareholders' Equity:
                
Serial Preferred Stock, $.01 Par Value; Authorized 200,000 Shares; Issued And
     Outstanding, 18,000 At June 30, 2009 And At March 31, 2009
   $ 17,638,144     $ 17,620,065  
Common Stock, $.01 Par Value; Authorized Shares – 5,000,000; Issued -
     2,662,023 And Outstanding Shares – 2,461,090 At June 30, 2009 And
       2,660,528 And 2,459,595 At March 31, 2009
       26,055         26,040  
Warrants Issued In Conjunction With Serial Preferred Stock
     400,000       400,000  
Additional Paid-In Capital
     5,327,205       5,299,235  
Treasury Stock, (At Cost, 200,933 Shares At June 30, 2009 And March 31,
          2009, Respectively)
     (4,330,712 )     (4,330,712 )
Accumulated Other Comprehensive Income
     3,808,248       3,809,934  
Retained Earnings, Substantially Restricted
     44,199,937       44,267,736  
Total Shareholders' Equity
   $ 67,068,877     $ 67,092,298  
Total Liabilities And Shareholders' Equity
   $ 975,619,315     $ 984,661,507  
See accompanying notes to consolidated financial statements.

 
 
 

Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
   
Three Months Ended June 30,
  
   
2009
    
2008
  
Interest Income:
            
Loans
   $ 8,700,137     $ 8,541,735  
Mortgage-Backed Securities
     2,847,270       2,395,382  
Investment Securities
     516,997       888,901  
Other
     214       5,179  
Total Interest Income
     12,064,618       11,831,197  
                 
Interest Expense:
                
NOW And Money Market Accounts
     684,596       924,090  
Passbook Accounts
     20,118       33,503  
Certificate Accounts
     3,274,705       3,662,926  
Advances And Other Borrowed Money
     1,692,614       2,011,765  
Junior Subordinated Debentures
     63,760       74,119  
Total Interest Expense
     5,735,793       6,706,403  
                 
Net Interest Income
     6,328,825       5,124,794  
Provision For Loan Losses
     1,400,000       225,000  
Net Interest Income After Provision For Loan Losses
     4,928,825       4,899,794  
Non-Interest Income:
                
Gain On Sale of Investments
     50,891       101,405  
Gain On Sale Of Loans
     433,607       118,683  
Service Fees On Deposit Accounts
     276,382       281,153  
Income From Cash Value Of Life Insurance
     90,000       85,746  
Commissions On Insurance
     139,254       168,992  
Other Agency Income
     122,467       46,937  
Trust Income
     141,678       105,000  
Mandatorily Redeemable Financial Instrument Valuation Adjustment
     78,000       -  
Other
     171,908       213,291  
Total Non-Interest Income
     1,504,187       1,121,207  
                 
General And Administrative Expenses:
                
Salaries And Employee Benefits
     2,944,435       2,784,235  
Occupancy
     493,345       497,320  
Advertising
     134,554       140,821  
Depreciation And Maintenance Of Equipment
     442,027       426,924  
Federal Deposit Insurance Corporation Special Assessment
     425,000       -  
Federal Deposit Insurance Corporation Insurance Premiums
     331,000       155,810  
Amortization of Intangibles
     22,500       22,500  
Other
     1,045,053       794,380  
Total General And Administrative Expenses
     5,837,914       4,821,990  
                 
Income Before Income Taxes
     595,098       1,199,011  
Provision For Income Taxes
     222,931       397,106  
Net Income
     372,167       801,905  
Preferred Stock Dividends
     225,000       -  
Accretion Of Preferred Stock To Redemption Value
     18,079       -  
Net Income Available To Common Shareholders
   $ 129,088     $ 801,905  
                 
Basic Net Income Per Common Share
   $ 0.05     $ 0.32  
Diluted Net Income Per Common Share
   $ 0.05     $ 0.32  
Cash Dividend Per Share On Common Stock
   $ 0.08     $ 0.08  
Basic Weighted Average Shares Outstanding
     2,460,137       2,531,679  
Diluted Weighted Average Shares Outstanding
     2,503,777       2,532,377  
See accompanying notes to consolidated financial statements.

 
2
 

Security Federal Corporation and Subsidiaries
Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Unaudited)

   
Common
Stock
    
Additional
Paid – In
 Capital
    
Treasury
 Stock
    
Accumulated
Other
Comprehensive
Income (Loss)
    
Retained
  Earnings
    
Total
  
Balance At March 31, 2008 
   $ 25,925     $ 5,072,086     $ (2,769,446 )   $ 2,395,537     $ 42,772,311     $ 47,496,413  
Net Income 
     -       -       -       -       801,905       801,905  
Other Comprehensive Income,
   Net Of Tax:
                                                
Unrealized Holding Losses
   On Securities Available
   For Sale, Net Of Taxes
       -         -         -       (3,579,553
)
       -       (3,579,553
)
Reclassification Adjustment
   For Gains Included In Net
   Income, Net Of Taxes
       -         -         -       (62,871
)
       -       (62,871
)
   Comprehensive Loss
     -       -       -       -       -       (2,840,519
)
Purchase Of Treasury Stock
   At Cost, 3,900 shares
     -       -       (89,872
)
     -       -       (89,872
)
    Employee Stock Purchase Plan
       Purchases
     14       27,629        -       -       -       27,643  
Stock Compensation Expense
     -       7,848       -       -       -       7,848  
Cash Dividends
     -       -       -       -       (202,553
)
     (202,553
)
Balance At June 30, 2008
   $ 25,939     $ 5,107,563     $ (2,859,318
)
   $ (1,246,887
)
   $ 43,371,663     $ 44,398,960  


   
 
Preferred Stock
    
 
 
Warrants
    
 
Common Stock
    
Additional
Paid – In
 Capital
  
 
Treasury
Stock
    
Accumulated Other Comprehensive Income
    
 
Retained Earnings
    
 
 
Total
  
Balance At March 31, 2009
   $ 17,620,065     $ 400,000     $ 26,040     $ 5,299,235     $ (4,330,712 )   $ 3,809,934     $ 44,267,736     $ 67,092,298  
Net Income
     -       -       -       -       -       -       372,167       372,167  
Other Comprehensive Income,
   Net Of Tax:
                                                                
Unrealized Holding Gains
   On Securities Available
   For Sale, Net Of Taxes
       -         -         -         -          -         29,866         -         29,866  
Reclassification Adjustment
   For Gains Included In Net
   Income, Net Of Taxes
       -         -         -         -          -       (31,552 )       -       (31,552 )
Comprehensive Income
     -       -       -       -       -       -       -       370,481  
Accretion Of Preferred Stock To Redemption Value
     18,079        -       -       -        -       -       (18,079 )     -  
Employee Stock Purchase Plan Purchases
     -       -       15       19,689        -       -       -       19,704  
Stock Compensation Expense
     -       -       -       8,281       -       -       -       8,281  
Cash Dividends On Preferred
     -       -       -       -       -       -       (225,000 )     (225,000 )
Cash Dividends On Common
     -       -       -       -       -       -       (196,887 )     (196,887 )
Balance At June 30, 2009
   $ 17,638,144     $ 400,000     $ 26,055     $ 5,327,205     $ (4,330,712 )   $ 3,808,248     $ 44,199,937     $ 67,068,877  
 
See accompanying notes to consolidated financial statements.



3

Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)

   
Three Months Ended June 30,
  
   
2009
    
2008
  
      Cash Flows From Operating Activities:
            
      Net Income
   $ 372,167     $ 801,905  
                 
      Adjustments To Reconcile Net Income To Net Cash Provided (Used) By Operating Activities:
                
  Depreciation And Amortization Expense
     385,374       368,771  
  Amortization Of Intangible Assets
     22,500       22,500  
  Stock Option Compensation Expense
     8,281       7,848  
  Discount Accretion And Premium Amortization
     443,610       106,619  
  Provisions For Losses On Loans And Real Estate
     1,400,000       225,000  
  Write Down Of Goodwill
     222,000       -  
  Gain On Sale of Investments Available For Sale
     -       (120,491 )
  (Gain) Loss On Sale of Mortgage-Backed Securities Available For Sale
     (50,891 )     19,087  
  Gain On Sale Of Loans
     (433,607 )     (118,683 )
  (Gain) Loss On Sale Of Real Estate
     23,183       (13,694 )
  Capital Improvements Repossessed Assets
     -       (20,000 )
  Amortization Of Deferred Fees On Loans
     (36,453 )     (27,043 )
  Mandatorily Redeemable Financial Instrument Valuation
     (78,000 )     -  
      Income From Bank Owned Life Insurance
     (90,000 )     (85,746 )
  Proceeds From Sale Of Loans Held For Sale
     26,878,606       8,542,717  
  Origination Of Loans For Sale
     (27,890,491 )     (9,679,094 )
  (Increase) Decrease In Accrued Interest Receivable:
                
       Loans
     (34,322 )     129,420  
       Mortgage-Backed Securities
     122,336       (74,644 )
       Investments
     (220,119 )     178,266  
       Increase In Advance Payments By Borrowers
     27,330       114,555  
       Other, Net
     55,264       (528,787 )
       Net Cash Provided (Used) By Operating Activities
     1,126,768       (151,494 )
                 
       Cash Flows From Investing Activities:
                
    Principal Repayments On Mortgage-Backed Securities Available For Sale
     18,421,913       13,840,922  
    Principal Repayments On Mortgage-Backed Securities Held To Maturity
     2,511,493       -  
    Purchase Of Investment Securities Available For Sale
     (15,113,956 )     (5,635,679 )
Purchase Of Mortgage-Backed Securities Available For Sale
     (10,253,625 )     (36,375,912 )
Maturities Of Investment Securities Available For Sale
     6,549,685       8,075,718  
Maturities of Investment Securities Held To Maturity
     2,000,000       5,000,000  
Proceeds From Sale of Investment Securities Available For Sale
     -       6,108,615  
Proceeds From Sale of Mortgage-Backed Securities Available For Sale
     3,809,030       1,277,417  
Purchase Of FHLB Stock
     -       (3,837,500 )
Redemption Of FHLB Stock
     38,300       2,110,600  
(Increase) Decrease In Loans To Customers
     3,686,274       (15,873,082 )
Proceeds From Sale Of Repossessed Assets
     196,707       346,000  
Purchase And Improvement Of Premises And Equipment
     (102,542 )     (799,948 )
        Net Cash Provided (Used) By Investing Activities
     11,743,279       (25,762,849 )
                 
           
(Continued)
  
                 
See accompanying notes to consolidated financial statements.

 
4
 


Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)- Continued

   
Three Months Ended June 30,
  
   
2009
    
2008
  
Cash Flows From Financing Activities:
            
Increase (Decrease) In Deposit Accounts
   $ 3,635,525     $ (13,522,258 )
Proceeds From FHLB Advances
     64,100,000       104,880,000  
Repayment Of FHLB Advances
     (89,303,943 )     (66,503,864 )
Proceeds From Term Auction Facility Borrowings
     22,000,000       -  
Repayment Of Term Auction Facility Borrowings
     (10,000,000 )     -  
Net Proceeds (Repayments) Of Other Borrowings
     (122,024 )     1,798,430  
Dividends To Preferred Shareholders
     (225,000 )     -  
Dividends To Common Shareholders
     (196,887 )     (202,553 )
Purchase Of Treasury Stock
     -       (89,872 )
Proceeds From Employee Stock Purchases
     19,704       27,643  
Net Cash Provided (Used)  By Financing Activities
     (10,092,625 )     26,387,526  
                 
Increase In Cash And Cash Equivalents
     2,777,422       473,183  
Cash And Cash Equivalents At Beginning Of Period
     6,562,394       10,539,054  
Cash And Cash Equivalents At End Of Period
   $ 9,339,816     $ 11,012,237  
                 
Supplemental Disclosure Of Cash Flows Information:
                
Cash Paid During The Period For Interest
   $ 5,804,625     $ 6,960,918  
Cash Paid During The Period For Income Taxes
   $ 595,111,     $ 305,822  
Additions To Repossessed Acquired Through Foreclosure
   $ 117,150     $ 20,000  
Change In Unrealized Gain or Loss On Securities Available For Sale,
     Net Of Taxes
   $ (1,686 )   $ (3,642,424 )

See accompanying notes to consolidated financial statements.

 
5
 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

1.  
Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and accounting principles generally accepted in the United States of America; therefore, they do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows.  Such statements are unaudited but, in the opinion of management, reflect all adjustments, which are of a normal recurring nature and necessary for a fair presentation of results for the selected interim periods.  Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the audited financial statements appearing in Security Federal Corporation’s 2009 Annual Report to Shareholders when reviewing interim financial statements.  The results of operations for the three month period ended June 30, 2009 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 consolidated financial statements include the accounts of Security Federal Corporation (the “Company”) and its wholly owned subsidiary, Security Federal Bank (the “Bank”) and the Bank’s wholly owned subsidiaries, Security Federal Insurance, Inc. (“SFINS”) and Security Financial Services Corporation (“SFSC”). SFINS was formed during fiscal 2002 and began operating during the December 2001 quarter and is an insurance agency offering auto, business, health, and home insurance.  SFINS has a wholly owned subsidiary, Collier Jennings Financial Corporation which has as subsidiaries Collier Jennings Inc., The Auto Insurance Store Inc., and Security Federal Premium Pay Plans Inc. SFSC is currently an inactive subsidiary.

Prior to April 1, 2009, the Bank had two additional subsidiaries: Security Federal Investments, Inc. (“SFINV”) and Security Federal Trust Inc. (“SFT”). SFINV provided primarily investment brokerage services.  SFT offered trust, financial planning and financial management services. On April 1, 2009, the assets and operations of SFINV and SFT were dissolved into the Bank. The services of these two entities are now offered through the trust and investment divisions of the Bank.

Security Federal Corporation has a wholly owned subsidiary, Security Federal Statutory Trust (the “Trust”), which issued and sold fixed and floating rate capital securities of the Trust.  However, under current accounting guidance, the Trust is not consolidated in the Company’s financial statements.  The Bank is primarily engaged in the business of accepting savings and demand deposits and originating mortgage loans and other loans to individuals and small businesses for various personal and commercial purposes.

3. 
Critical Accounting Policies
 
The Company has adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements.  Our significant accounting policies are described in the footnotes to the audited consolidated financial statements at March 31, 2009 included in our 2009 Annual Report to Stockholders, which was filed as an exhibit to our Annual Report on Form 10-K for the year ended March 31, 2009.  Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities.  We consider these accounting policies to be critical accounting policies.  The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances.  Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

The Company believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of the consolidated financial statements.  The Company provides for loan losses using the allowance method.  Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to the allowance for loan losses.  Additions to the allowance for loan losses are provided by charges to operations based on various factors, which, in management’s judgment, deserve current recognition in estimating possible losses.  Such factors considered by management include the fair value of the underlying collateral, stated guarantees by the borrower (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.
 
 
6
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

3.  
Critical Accounting Policies, Continued

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.  The allowance for loan losses is subject to periodic evaluations by various authorities and may be subject to adjustments based upon the information that is available at the time of their examination.

The Company values impaired loans at the loan’s fair value if it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement at the present value of expected cash flows, the market price of the loan, if available, or the value of the underlying collateral.  Expected cash flows are required to be discounted at the loan’s effective interest rate.  When the ultimate collectibility of an impaired loan’s principal is in doubt, wholly or partially, all cash receipts are applied to principal.  When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first to interest 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. 
Earnings Per Common Share

The Company calculates earnings per common 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.

Net income available to common shareholders represents consolidated net income adjusted for preferred dividends declared, accretions of discounts and amortization of premiums on preferred stock issuances and cumulative dividends related to the current dividend period that have not been declared as of period end. The following table provides a reconciliation of net income to net income available to common shareholders for the periods presented:

   
June 30,
  
   
2009
    
2008
  
Earnings Available to Common Shareholders:
            
   Net Income
   $ 372,167     $ 801,905  
Preferred Stock Dividends
     225,000       -  
Deemed Dividends On Preferred Stock From Net
   Accretion of Preferred Stock
      18,079       -  
Net Income Available To Common Shareholders
   $ 129,088     $ 801,905  


 
7
 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

4.   Earnings Per Common Share, Continued

The following table shows the effect of dilutive options and warrants on the Company’s earnings per common share for the periods indicated:

   
For the Quarter Ended
  
   
June 30, 2009
  
   
Income (Numerator) Amount
    
Shares (Denominator)
    
Per Share
  
               
 
  
Basic EPS
   $ 129,088       2,460,137     $ 0.05  
Effect of Diluted Securities:
                        
     Stock Options & Warrants
     -       -       -  
     Mandatorily Redeemable
        Shares
     -       43,640       -  
                         
Diluted EPS
   $ 129,088       2,503,777     $ 0.05  

   
For the Quarter Ended
  
   
June 30, 2008
  
   
Income (Numerator) Amount
    
Shares (Denominator)
    
Per Share
  
                   
Basic EPS
   $ 801,905       2,531,679     $ 0.32  
Effect of Diluted Securities:
                        
Stock Options
     -       698       -  
                         
Diluted EPS
   $ 801,905       2,532,377     $ 0.32  

5.      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 plans for the periods presented:

   
June 30, 2009
    
June 30, 2008
  
   
 
Shares
    
Weighted Average Exercise Price
    
 
Shares
    
Weighted Average Exercise Price
  
Balance, Beginning of Period
     100,500     $ 22.01       111,100     $ 21.55  
Options granted
     -       -       2,500       22.91  
Options exercised
     -       -       -       -  
Options forfeited
     -       -       -       -  
Balance, End of Period
     100,500     $ 22.01       113,600     $ 21.58  
                                 
Options Exercisable
     60,000     $ 21.09       74,100     $ 20.60  
                                 
Options Available For Grant
     50,000               124,801          



8
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

5.      Stock-Based Compensation, Continued

At June 30, 2009, the Company had the following options outstanding:

 
Grant Date
  
Outstanding Options
    
Option Price
  
 
        Expiration Date
               
10/19/99
     9,600       $16.67  
09/30/05 to 09/30/09
                   
09/01/03
     2,400       $24.00  
08/31/13                   
                   
12/01/03
     3,000       $23.65  
11/30/13                   
                   
01/01/04
     5,500       $24.22  
12/31/13                 
                   
03/08/04
     13,000       $21.43  
03/08/14                
                   
06/07/04
     2,000       $24.00  
06/07/14               
                   
01/01/05
     20,500       $20.55  
12/31/14              
                   
01/01/06
     4,000       $23.91  
01/01/16             
                   
08/24/06
     14,000       $23.03  
08/24/16           
                   
05/24/07
     2,000       $24.34  
05/24/17          
                   
07/09/07
     1,000       $24.61  
07/09/17       
                   
10/01/07
     2,000       $24.28  
10/01/17
                   
01/01/08
     17,000       $23.49  
01/01/18
                   
05/19/08
     2,500       $22.91  
05/19/18
                   
07/01/08
     2,000       $22.91  
07/01/18
                   

None of the options outstanding at June 30, 2009 have an exercise price below the average market price during the three month period ended June 30, 2009. Therefore these options are not deemed to be dilutive.

6.     Stock Warrants

In conjunction with its participation in the U.S. Treasury’s Capital Purchase Program, the Company sold warrants to the U.S. Treasury to purchase 137,966 shares of the Company’s common stock at $19.57 per share. These warrants have a 10-year term and were immediately exercisable upon issuance. At June 30, 2009, these warrants were anti-dilutive.  A summary of the status of the Company’s stock warrants and changes during the period is presented below.

   
June 30, 2009
  
   
Shares
    
Weighted- Average Exercise Price
  
Balance, Beginning of the Period
     137,966     $ 19.57  
Granted
     -       -  
Exercised
     -       -  
Forfeited
     -       -  
Balance, End of Year
     137,966     $ 19.57  
                 

There were no stock warrants outstanding at June 30, 2008.
 
 
9
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

7.    Carrying Amounts and Fair Value of Financial Instruments

Effective April 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. SFAS 157 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans).

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The standard describes three levels of inputs that may be used to measure fair value:

Level 1
Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries and money market funds.
 
Level 2
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bonds, corporate debt securities and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts and impaired loans.
 
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.

        Assets and liabilities measured at fair value on a recurring basis are as follows as of June 30, 2009:

 
 
 
Assets:
  
Quoted Market Price
In Active Markets
(Level 1)
    
Significant Other
Observable Inputs
(Level 2)
    
Significant
Unobservable Inputs
(Level 3)
  
Available-For-Sale
  Investment And
  Mortgage- Backed
  Securities
   $    -     $    279,077,087     $    -  
Mortgage Loans Held
  For Sale
      -        7,157,299        -  
Total
   $ -     $ 286,234,386     $ -  
Liabilities:
                        
Mandatorily
  Redeemable Financial
  Instrument
   $  -     $  1,522,312     $  -  
Total
   $ -     $ 1,522,312     $ -  

 
10
 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

7.     Carrying Amounts and Fair Value of Financial Instruments, Continued

The Company is predominantly an asset based lender with real estate serving as collateral on a substantial majority of loans. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be level 2 inputs. As of June 30, 2009, the recorded investment in impaired loans was $33.8 million. The average recorded investment in impaired loans was $31.1 million for the quarter ended June 30, 2009.

Repossessed assets acquired in settlement of loans are carried at the lower of carrying value or fair value on a non-recurring basis. The fair value is dependent primarily upon independent appraisals, which the Company considers level 2 inputs. At June 30, 2009, the recorded investment in repossessed assets acquired in the settlement of loans was $1.9 million.

Goodwill and other intangible assets are measured for impairment on an annual basis, as of September 30th, or more frequently if there is a change in circumstances. If the goodwill or other intangibles exceed the fair value, an impairment charge is recorded in an amount equal to the excess. Impairment is tested using accepted valuation techniques that utilize implied fair value based on a multiple of revenue. The measurement of these fair values is considered a level 3 measurement.

The following table is a summary of the carrying value and estimated fair value of the Company’s financial instruments as of June 30, 2009 and March 31, 2009 as defined by SFAS No. 107, Disclosures about Fair Value of Financial Instruments:

       
     
June 30, 2009
  
March 31, 2009
     
Carrying
Amount
  
Estimated
Fair Value
  
Carrying
Amount
  
Estimated
Fair Value
     
(In Thousands)
 
Financial Assets:
                
 
Cash And Cash Equivalents
$
9,340
$
9,340
$
6,562
$
6,562
 
Investment And Mortgage-Back Securities
  
305,778
  
306,813
  
314,099
  
315,325
 
Loans Receivable, Net
  
607,368
  
607,777
  
611,090
  
623,362
 
FHLB Stock
  
12,624
  
12,624
  
12,663
  
12,663
                   
 
Financial Liabilities:
                
 
Deposits:
                
 
Checking, Savings, And Money Market Accounts
$
285,402
$
285,402
$
272,363
$
272,363
 
Certificate Accounts
  
379,947
  
387,070
  
389,351
  
395,647
 
Advances From FHLB
  
193,794
  
202,228
  
218,998
  
225,852
 
Term Auction Facility Borrowings
  
22,000
  
22,000
  
10,000
  
10,000
 
Other Borrowed Money
  
15,934
  
15,934
  
16,056
  
16,056
 
Junior Subordinated Debentures
  
5,155
  
5,155
  
5,155
  
5,155
 
Mandatorily Redeemable Financial Instrument
  
1,522
  
1,522
  
1,600
  
1,600

At June 30, 2009, the Bank had $64.9 million of off-balance sheet financial commitments.  These commitments are to originate loans and unused consumer lines of credit and credit card lines.  Because these obligations are based on current market rates, if funded, the original principal is considered to be a reasonable estimate of fair value.

Fair value methods and assumptions are set forth below:
 
Cash and cash equivalents—The carrying amount of these financial instruments approximates fair value. All mature within 90 days and do not present unanticipated credit concerns.
 
Investment Securities—Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
 
Loans—The fair value of loans are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. As discount rates are based on current loan rates as well as management estimates, the fair values presented may not be indicative of the value negotiated in an actual sale.
 
 

11
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

7.     Carrying Amounts and Fair Value of Financial Instruments, Continued
 
FHLB Stock—The fair value approximates the carrying value.
 
Deposits—The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.
 
 Federal Home Loan Bank Advances—Fair value is estimated based on discounted cash flows using current market rates for borrowings with similar terms.
 
Term Auction Facility Borrowings—The carrying value of these short term borrowings approximates fair value.
 
Other Borrowed Money—The carrying value of these short term borrowings approximates fair value.
 
Junior Subordinated Debentures—The carrying value of junior subordinated debentures approximates fair value.
 
Mandatorily Redeemable Financial Instrument—Fair value is determined as the greater of $26 per share or 1.5 times the book value of the Company in accordance with the underlying agreement.
 
Fair value estimates are made on a specific date, based on relevant market data and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale the Bank’s entire holdings of a particular financial instrument.  Because no active market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, current interest rates and prepayment trends, risk characteristics of various financial instruments, and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in any of these assumptions used in calculating fair value would also significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  For example, the Bank has significant assets and liabilities that are not considered financial assets or liabilities including deposit franchise values, loan servicing portfolios, deferred tax liabilities, and premises and equipment.

In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. The Company has used management’s best estimate of fair value on the above assumptions.  Thus, the fair values presented may not be the amounts, which could be realized, in an immediate sale or settlement of the instrument.  In addition, any income taxes or other expenses that would be incurred in an actual sale or settlement are not taken into consideration in the fair value presented.

 
12
 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

8.      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 June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS 168”).  SFAS 168 establishes the FASB Accounting Standards Codification TM (“Codification”) as the source of authoritative generally accepted accounting principles (“GAAP”) for nongovernmental entities.  The Codification does not change GAAP. Instead, it takes the thousands of individual pronouncements that currently comprise GAAP and reorganizes them into approximately 90 accounting Topics, and displays all Topics using a consistent structure.  Contents in each Topic are further organized first by Subtopic, then Section and finally Paragraph. The Paragraph level is the only level that contains substantive content. Citing particular content in the Codification involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure. FASB suggests that all citations begin with “FASB ASC,” where ASC stands for Accounting Standards Codification. SFAS 168, (FASB ASC 105-10-05, 10, 15, 65, 70) is effective for interim and annual periods ending after September 15, 2009 and will not have an impact on the Company’s financial position but will change the referencing system for accounting standards.  The following pronouncements provide citations to the applicable Codification by Topic, Subtopic and Section in addition to the original standard type and number.

FSP Emerging Issues Task Force (“EITF”) 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20,” (FASB ASC 325-40-65) (“FSP EITF 99-20-1”) was issued in January 2009.  Prior to the FSP, other-than-temporary impairment was determined by using either EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transferor in Securitized Financial Assets,” (“EITF 99-20”) or SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” (“SFAS 115”) depending on the type of security.  EITF 99-20 required the use of market participant assumptions regarding future cash flows regarding the probability of collecting all cash flows previously projected.  SFAS 115 determined impairment to be other than temporary if it was probable that the holder would be unable to collect all amounts due according to the contractual terms. To achieve a more consistent determination of other-than-temporary impairment, the FSP amends EITF 99-20 to determine any other-than-temporary impairment (“OTTI”) based on the guidance in SFAS 115, allowing management to use more judgment in determining any OTTI.  The FSP was effective for reporting periods ending after December 15, 2008.  Management has reviewed the Company’s security portfolio and evaluated the portfolio for any OTTIs.

On April 9, 2009, the FASB issued three staff positions related to fair value which are discussed below.

FSP SFAS 115-2 and SFAS 124-2 (FASB ASC 320-10-65), “Recognition and Presentation of Other-Than-Temporary Impairments,” (“FSP SFAS 115-2 and SFAS 124-2”) categorizes losses on debt securities available-for-sale or held-to-maturity determined by management to be OTTI into losses as a result of credit issues and losses related to all other factors.  OTTI exists when it is more likely than not that the security will mature or be sold before its amortized cost basis can be recovered.  An OTTI related to credit losses should be recognized through earnings.  An OTTI related to other factors should be recognized in other comprehensive income.  The FSP does not amend existing recognition and measurement guidance related to OTTIs of equity securities.  Annual disclosures required in SFAS 115 and FSP SFAS 115-1 and SFAS 124-1 are also required for interim periods (including the aging of securities with unrealized losses).

FSP SFAS 157-4 (FASB ASC 820-10-65), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That are Not Orderly” recognizes that quoted prices may not be determinative of fair value when the volume and level of trading activity has significantly decreased.

 
13
 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

8.      Accounting and Reporting Changes, Continued

The evaluation of certain factors may necessitate that fair value be determined using a different valuation technique.  Fair value should be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, not a forced liquidation or distressed sale.  If a transaction is considered to not be orderly, little, if any, weight should be placed on the transaction price.  If there is not sufficient information to conclude as to whether or not the transaction is orderly, the transaction price should be considered when estimating fair value.  An entity’s intention to hold an asset or liability is not relevant in determining fair value.  Quoted prices provided by pricing services may still be used when estimating fair value in accordance with SFAS 157; however, the entity should evaluate whether the quoted prices are based on current information and orderly transactions.  Inputs and valuation techniques are required to be disclosed in addition to any changes in valuation techniques.

FSP SFAS 107-1 and APB 28-1 (FASB ASC 825-10-65), “Interim Disclosures about Fair Value of Financial Instruments” requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements and also requires those disclosures in summarized financial information at interim reporting periods  A publicly traded company includes any company whose securities trade in a public market on either a stock exchange or in the over-the-counter market, or any company that is a conduit bond obligor.  Additionally, when a company makes a filing with a regulatory agency in preparation for sale of its securities in a public market it is considered a publicly traded company for this purpose.

The three staff positions are effective for periods ending after June 15, 2009, with early adoption of all three permitted for periods ending after March 15, 2009.  The Company adopted the staff positions for its Form 10-Q for the first quarter of fiscal 2010.  The adoption of these staff positions had no material impact on the Company’s financial statements.  Additional disclosures as a result of these staff positions have been provided in this 10-Q where applicable.

Also on April 1, 2009, the FASB issued FSP SFAS 141(R)-1 (FASB ASC 805-20-25, 30, 35, 50), “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.”  The FSP requires that assets acquired and liabilities assumed in a business combination that arise from a contingency be recognized at fair value.

If fair value cannot be determined during the measurement period as determined in SFAS 141 (R), the asset or liability can still be recognized if it can be determined that it is probable that the asset existed or the liability had been incurred as of the measurement date and if the amount of the asset or liability can be reasonably estimated.  If it is not determined to be probable that the asset/liability existed/was incurred or no reasonable amount can be determined, no asset or liability is recognized. The entity should determine a rational basis for subsequently measuring the acquired assets and assumed liabilities.  Contingent consideration agreements should be recognized initially at fair value and subsequently reevaluated in accordance with guidance found in paragraph 65 of SFAS 141 (R).  The FSP is effective for business combinations with an acquisition date on or after the beginning of the Company’s first annual reporting period beginning on or after December 15, 2008.  The Company will assess the impact of the FSP if and when a future acquisition occurs.

The Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 111 (FASB ASC 320-10-S99-1) on April 9, 2009 to amend Topic 5.M., “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities” and to supplement FSP SFAS 115-2 and SFAS 124-2.  SAB 111 maintains the staff’s previous views related to equity securities; however debt securities are excluded from its scope.  The SAB provides that “other-than-temporary” impairment is not necessarily the same as “permanent” impairment and unless evidence exists to support a value equal to or greater than the carrying value of the equity security investment, a write-down to fair value should be recorded and accounted for as a realized loss.  The SAB was effective upon issuance and had no impact on the Company’s financial position.

SFAS 165 (FASB ASC 855-10-05, 15, 25, 45, 50, 55), “Subsequent Events,” (“SFAS 165”) was issued in May 2009 and provides guidance on when a subsequent event should be recognized in the financial statements.  Subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet should be recognized at the balance sheet date. Subsequent events that provide evidence about conditions that arose after the balance sheet date but before financial statements are issued, or are available to be issued, are not required to be recognized. The date through which subsequent events have been evaluated must be disclosed as well as whether it is the date the financial statements were issued or the date the financial statements were available to be issued.  For non-recognized subsequent events which should be disclosed to keep the financial statements from being misleading, the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made, should be disclosed.  The standard is effective for interim or annual periods ending after June 15, 2009.  See Note 11 for Management’s evaluation of subsequent events.
 
 
14

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

8.      Accounting and Reporting Changes, Continued

The FASB issued SFAS No. 166 (not yet reflected in FASB ASC), “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140,” (“SFAS 166”) in June 2009.  SFAS 166 limits the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking into consideration the transferor’s continuing involvement.  The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale.  The concept of a qualifying special-purpose entity is removed from SFAS No. 140 along with the exception from applying FIN 46(R).  The standard is effective for the first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter.  Earlier application is prohibited.  The Company does not expect the standard to have any impact on the Company’s financial position.

SFAS No. 167 (not yet reflected in FASB ASC), “Amendments to FASB Interpretation No. 46(R),” (“SFAS 167”) was also issued in June 2009.  The standard amends FIN 46(R) to require a company to analyze whether its interest in a variable interest entity (“VIE”) gives it a controlling financial interest.  A company must assess whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to direct the activities of the VIE that significantly impact its economic performance.  Ongoing reassessments of whether a company is the primary beneficiary is also required by the standard.  SFAS 167 amends the criteria to qualify as a primary beneficiary as well as how to determine the existence of a VIE.  The standard also eliminates certain exceptions that were available under FIN 46(R).  SFAS 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter.  Earlier application is prohibited.  Comparative disclosures will be required for periods after the effective date.  The Company does not expect the standard to have a material impact on the Company’s financial position.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

9.      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:
 
   
June 30, 2009
  
   
Amortized Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
Fair value
  
                         
FHLB Securities
   $ 21,930,032     $ 448,815     $ 60,478     $ 22,318,369  
Federal Farm Credit Securities
     11,446,040       41,767       152,930       11,334,877  
Federal National Mortgage
      Association (“FNMA”) Bonds
     2,000,000       4,690       -       2,004,690  
Small Business Administration
   (“SBA”) Bonds
     8,427,818       10,789       27,203       8,411,404  
Taxable Municipal Bond
     1,019,114       -       1,990       1,017,124  
Mortgage-Backed Securities
     228,009,495       5,946,906       17,978       233,938,423  
Equity Securities
     102,938       -       50,738       52,200  
    $ 272,935,437     $ 6,452,967     $ 311,317     $ 279,077,087  
                                 


 
15
 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
9.      Securities, Continued

   
March 31, 2009
  
   
 
Amortized Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
 Losses
    
 
Fair value
  
                         
FHLB Securities
   $ 15,401,116     $ 428,886     $ 18,450     $ 15,811,552  
Federal Farm Credit Securities
     14,521,626       121,699       8,855       14,634,470  
   FNMA Bonds
     2,000,000       7,810       -       2,007,810  
SBA Bonds
     3,319,651       65,119       18,201       3,366,569  
Taxable Municipal Bond
     1,019,781       26,818       -       1,046,599  
Mortgage-Backed Securities
     240,322,316       5,718,587       112,668       245,928,235  
Equity Securities
     102,938       -       65,438       37,500  
    $ 276,687,428     $ 6,368,919     $ 223,612     $ 282,832,735  
                                 

FHLB securities, Federal Farm Credit securities, FNMA 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.  SBA bonds are 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 also backed by the full faith and credit of the United States government.  At June 30, 2009 and March 31, 2009, the Company held an amortized cost and fair value of $103.3 million and $106.1 million and $107.3 million and $110.2 million, respectively in GNMA mortgage-backed securities included in mortgage-backed securities listed above. All mortgage-backed securities in the Company’s portfolio are either GSEs or GNMA mortgage-backed securities. The balance does not include any private label mortgage-backed securities.

The Bank received approximately $3.8 million and $7.4 million, respectively in proceeds from sales of available for sale securities during the quarters ended June 30, 2009 and 2008 and recognized approximately $51,000 in gross gains during the June quarter of 2009 and $121,000 in gross gains and $20,000 in gross losses for the June quarter of 2008.

The amortized cost and fair value of investment and mortgage-backed securities available for sale at June 30, 2009 are shown below by contractual maturity.  Expected maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without call or prepayment penalties.

   
Amortized Cost
    
Fair Value
  
             
Less Than One Year
   $ 444,827     $ 450,447  
One – Five Years
     7,257,886       7,385,152  
Over Five – Ten Years
     21,344,677       21,515,456  
After Ten Years
     15,878,552       15,787,609  
Mortgage-Backed Securities
     228,009,495       233,938,423  
    $ 272,935,437     $ 279,077,087  

The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual available for sale securities have been in a continuous unrealized loss position, at June 30, 2009.

   
Less than 12 Months
    
12 Months or More
    
Total
  
   
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
    
Fair
Value
    
Unrealized
Losses
  
    FHLB Securities   $   4,501,839     $   60,478     $   -     $   -     $   4,501,839     $   60,478  
Federal Farm Credit
   Securities
     6,921,870       152,930       -       -       6,921,870       152,930  
Mortgage-Backed Securities
     5,718,652       10,806       1,058,666       7,172       6,777,318       17,978  
SBA Bonds
     5,011,398       27,203       -       -       5,011,398       27,203  
Taxable Municipal Bond
     1,017,124       1,990       -       -       1,017,124       1,990  
Equity Securities
     -       -       52,200       50,738       52,200       50,738  
    $ 23,170,883     $ 253,407     $ 1,110,866     $ 57,910     $ 24,281,749     $ 311,317  
 
 
16
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

9.      Securities, Continued

Securities classified as available for sale are recorded at fair market value. Approximately 18.6% of the unrealized losses, or four individual securities, consisted of securities in a continuous loss position for 12 months or more.  The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature.  The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.

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:
 
 
June 30, 2009
  
Amortized
Cost
    
Gross
Unrealized
Gains
    
Gross
Unrealized
Losses
    
 
Fair Value
  
                                 
FHLB Securities
   $ 5,000,000     $ 327,200     $ 6,870     $ 5,320,330  
Federal Farm Credit Securities
     1,000,000       15,940       -       1,015,940  
SBA Bonds
     5,355,957       176,841       -       5,532,798  
Mortgage-Backed Securities
     15,189,642       521,885       -       15,711,527  
Equity Securities
     155,000       -       -       155,000  
Total
   $ 26,700,599     $ 1,041,866     $ 6,870     $ 27,735,595  
                                 
 
March 31, 2009
  
Amortized
Cost
    
Gross
Unrealized
 Gains
    
Gross
Unrealized
Losses
    
 
Fair Value
  
                                 
FHLB Securities
   $ 7,000,000     $ 371,260     $ 8,750     $ 7,362,510  
Federal Farm Credit Securities
     1,000,000       19,060       -       1,019,060  
SBA Bonds
     5,355,028       336,242       -       5,691,270  
Mortgage-Backed Securities
     17,755,838       508,729       -       18,264,567  
Equity Securities
     155,000       -       -       155,000  
Total
   $ 31,265,866     $ 1,235,291     $ 8,750     $ 32,492,407  

FHLB securities, Federal Farm Credit securities, and FNMA and FHLMC mortgage-backed securities are issued by GSEs.  GSEs are not backed by the full faith and credit of the United States government.  SBA bonds are 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 also backed by the full faith and credit of the United States government.  At June 30, 2009, the Company held an amortized cost and fair value of $8.9 million and $9.2 million, respectively in GNMA mortgage-backed securities included in mortgage-backed securities listed above. At March 31, 2009, the Company held an amortized cost and fair value of $10.8 million and $11.1 million, respectively in GNMA mortgage-backed securities included in mortgage-backed securities listed above. All mortgage-backed securities in the Company’s portfolio above are either GSEs or GNMA mortgage-backed securities. The balance does not include any private label mortgage-backed securities.

The amortized cost and fair value of investment and mortgage-backed securities held to maturity at June 30, 2009, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities resulting from call features on certain investments.

   
Amortized Cost
    
Fair Value
  
             
Less Than One Year
   $ 1,000,000     $ 1,015,940  
One – Five Years
     2,155,000       2,292,510  
Over Five – Ten Years
     3,448,132       3,685,834  
More Than Ten Years
     4,907,825       5,029,784  
Mortgage-Backed Securities
     15,189,642       15,711,527  
    $ 26,700,599     $ 27,735,595  
                 

 
17
 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

9.      Securities, Continued

The Company only had one held to maturity security that was in an unrealized loss position at June 30, 2009. The fair value of this FHLB security was $993,130 and the unrealized loss was $6,870. The security had been in an unrealized loss position for less than 12 months. The Company did not have any held to maturity securities that had been in an unrealized loss position for over 12 months as of June 30, 2009. The Company’s held to maturity portfolio is recorded at amortized cost.  The Company has the ability and intends to hold these securities to maturity. There were no sales of securities held to maturity during the quarters ended June 30, 2009 or 2008, or during the year ended March 31, 2009.

10.    Loans Receivable, Net

Loans receivable, net, at June 30, 2009 and March 31, 2009 consisted of the following:

   
June 30, 2009
    
March 31, 2009
  
Residential Real Estate
   $ 118,774,125     $ 126,980,894  
Consumer
     70,425,688       69,025,082  
Commercial Business
     22,078,473       21,032,000  
Commercial Real Estate
     404,071,667       404,403,186  
 Loans Held For Sale
     7,157,299       5,711,807  
      622,507,252       627,152,969  
                 
Less:
                
Allowance For Possible Loan Loss
     11,420,326       10,181,599  
Loans In Process
     3,514,109       5,602,248  
Deferred Loan Fees
     204,423       279,249  
      15,138,858       16,063,096  
    $ 607,368,394     $ 611,089,873  

11.    Subsequent Events

On July 13, 2009, the Company filed a preliminary prospectus in the form of a registration statement on Form S-1 with the SEC to propose an offering to sell a maximum of $15.0 million, minimum of $5.0 million in 8.0% convertible senior debentures to be due December 1, 2029. The debentures are convertible into the Company’s common stock at a conversion price of $20 per share at the option of the holder at any time prior to maturity. The debentures are redeemable at the option of the Company, whole or in part, at any time on or after December 1, 2019 at the redemption price equal to 100% of the principal amount of the debentures to be redeemed, plus accrued and unpaid interest, if any. The Company anticipates, subject to the SEC declaring the Form S-1 effective, that the offering will be completed by December 31, 2009.

Management has evaluated all other subsequent events through August 13, 2009 and determined there are no other events that require disclosure.


 
18
 

Security Federal Corporation and Subsidiaries
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Safe Harbor Statement

Certain matters in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 variety or range of factors including, but not limited to, interest rate fluctuations; changes in the level and trend of loan delinquencies and write-offs; economic conditions in the Company’s primary market area; ; results of examinations of us by the Office of Thrift Supervision or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses or to write-down assets; demand for residential, commercial business and commercial real estate, consumer, and other types of loans; success of new products; competitive conditions between banks and non-bank financial service providers; regulatory and accounting changes; technology factors affecting operations; pricing of products and services; and other risks detailed in the Company’s reports filed with the SEC, including the Annual Report on Form 10-K for the year ended March 31, 2009.  Forward-looking statements are effective only as of the date that they are made and the Company assumes no obligation to update this information

Comparison Of Financial Condition At June 30, 2009 and March 31, 2009

General – Total assets decreased $9.0 million or 0.9% to $975.6 million at June 30, 2009 from $984.7 million at March 31, 2009.  The primary reason for the decrease in total assets was a decrease in net loans receivable combined with a decrease in investment and mortgage-backed securities, held as available for sale and -held to maturity. For the quarter ended June 30, 2009, the Company applied any excess funds resulting from these decreases to the repayment of advances from the FHLB to increase and enhance liquidity. Advances from the FHLB decreased $25.2 million or 11.5% during the quarter to $193.8 million at June 30, 2009.

Assets – The increases and decreases in total assets were primarily concentrated in the following asset categories:

               
Increase (Decrease)
  
   
June 30,
2009
    
March 31,
2009
    
Amount
    
Percent
  
Cash And Cash Equivalents
   $ 9,339,816     $ 6,562,394     $ 2,777,422       42.3 %
Investment And Mortgage-
   Backed Securities –
   Available For Sale
       279,077,087         282,832,735       (3,755,648 )     (1.3 )
Investment And Mortgage-
   Backed Securities – Held
   To Maturity
       26,700,599         31,265,866       (4,565,267 )     (14.6 )
Loan Receivable, Net
     607,368,394       611,089,873       (3,721,479 )     (0.6 )
Premises And Equipment,
   Net
     21,392,627       21,675,434       (282,807 )     (1.3 )
Goodwill
     1,199,754       1,421,754       (222,000 )     (15.6 )
Repossessed Assets
   Acquired In
   Settlement of Loans
       1,882,432         1,985,172       (102,740 )     (5.2 )
Other Assets
     2,339,211       1,657,189       682,022       41.2  

Cash and cash equivalents increased $2.8 million or 42.3% to 9.3 million at June 30, 2009 compared to $6.6 million at March 31, 2009. Loans receivable, net decreased $3.7 million or 0.6% to $607.4 million at June 30, 2009 from $611.1 million at March 31, 2009 as a result of decreased loan demand, specifically in the residential real estate loan category. Residential real estate loans decreased $8.2 million to $118.8 million at June 30, 2009 from $127.0 million at March 31, 2009, primarily attributable to the slowing of the local and national economy.

The decrease in residential real estate loans was offset partially by increases in consumer and commercial business and real estate loans and in loans held for sale. Consumer loans increased $1.4 million to $70.4 million at June 30, 2009 compared to $69.0 million at March 31, 2009. Commercial real estate loans and commercial business loans increased $332,000 and $1.0 million, respectively, to $404.1 million and $22.1 million, respectively at June 30, 2009 when compared to the balance at March 31, 2009. Loans held for sale increased $1.4 million to $7.2 million at June 30, 2009 from $5.7 million at March 31, 2009.
 
19
Security Federal Corporation and Subsidiaries
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Investment and mortgage-backed securities available for sale decreased $3.8 million or 1.3% to $279.1 million at June 30, 2009 from $283.0 million at March 31, 2009. This decrease was the result of principal repayments on mortgage-backed securities coupled with the sale of three securities during the quarter, offset slightly by security purchases. Investment and mortgage-backed securities held to maturity decreased $4.6 million or 14.6% to $26.7 million at June 30, 2009 as a result of calls and maturities of securities during the quarter as well as principal repayments on mortgage-backed securities. The Company did not purchase or sell any held to maturity securities during the period.

Premises and equipment, net, decreased $283,000 to $21.4 million at June 30, 2009 from $21.7 million at March 31, 2009 primarily attributable to depreciation expense during the period of approximately $385,000.

Goodwill decreased $222,000 to $1.2 million at June 30, 2009 from $1.4 million at March 31, 2009. The Company sold the South Augusta office of its insurance subsidiary as it was not within the Company’s branch footprint. The sale resulted in a reduction in the goodwill associated with the South Augusta portion of the original purchase of the insurance subsidiary in 2006.

FHLB stock, at cost, decreased $38,000 to $12.6 million at June 30, 2009 from $12.7 million at March 31, 2009.  The decrease is attributable to a decrease in total assets combined with a decrease in FHLB advances. The amount of FHLB stock is determined by a FHLB requirement that the Company maintain stock equal to 0.20% of total assets at June 30, 2009 plus a transaction component, which equals 4.5% of outstanding advances (borrowings) from the FHLB of Atlanta.

Repossessed assets acquired in settlement of loans decreased $103,000 to $1.9 million at June 30, 2009 from $2.0 million at March 31, 2009.  The Company sold one real estate property and two vehicles and repossessed one additional property during the period for a net decrease during the quarter. At June 30, 2009, the balance of repossessed assets consisted of the following 14 real estate properties: two lots within one subdivision of Aiken, South Carolina; approximately 17 acres of land in Aiken, South Carolina; a commercial building and two single-family residences in Augusta, Georgia; one single-family residence under construction in Columbia, South Carolina; and seven single-family residences in South Carolina.

Other assets increased $682,000 to $2.3 million at June 30, 2009 from $1.7 million at March 31, 2009.

Liabilities
Deposit Accounts
                 
Balance
  
     
June 30, 2009
    
March 31, 2009
    
Increase (Decrease)
  
     
Balance
    
Weighted
Rate
    
Balance
    
Weighted
Rate
    
Amount
    
Percent
  
Demand Accounts:
                                      
Checking
     $ 111,185,006       0.18 %   $ 104,662,377       0.21 %   $ 6,522,629       6.2 %
Money Market
       156,999,331       1.51       150,513,010       1.88       6,486,321       4.3  
Statement Savings
 Accounts
       17,217,922        0.44       17,187,295        0.54       30,627       0.2  
Total
       285,402,259       0.93       272,362,682       1.15       13,039,577       4.8  
                                                   
Certificate Accounts
                                                  
0.00 – 1.99%
       61,503,463               21,143,194               40,360,269       190.9  
2.00 – 2.99%
       121,848,647               112,373,285               9,475,362       8.4  
3.00 – 3.99%
       65,714,020               76,088,180               (10,374,160 )     (13.6 )
4.00 – 4.99%
       124,998,983               173,467,216               (48,468,233 )     (27.9 )
5.00 – 5.99%
       5,881,728               6,279,018               (397,290 )     (6.3 )
Total
       379,946,841       3.18       389,350,893       3.51       (9,404,052 )     (2.4 )
Total Deposits
     $ 665,349,100       2.21 %   $ 661,713,575       2.54 %   $ 3,635,525       0.5 %

Included in the certificates above were $20.0 million and $25.4 million in brokered deposits at June 30, 2009 and March 31, 2009, respectively with a weighted average interest rate of 1.81% and 2.04%, respectively.

 
20
 

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
  
   
June 30, 2009
    
March 31, 2009
    
Decrease
  
Fiscal Year Due:
  
Balance
    
Rate
    
Balance
    
Rate
    
Balance
    
Percent
  
2010
   $ 65,880,000      
1.10%
     $ 91,080,000      
0.94%
     $ (25,200,000 )     (27.7 )%
2011
     15,000,000      
4.87%
       15,000,000      
4.87%
       -       -  
2012
     24,700,000      
4.56%
       24,700,000      
4.56%
       -       -  
2013
     10,000,000      
4.76%
       10,000,000      
4.76%
       -       -  
2014
     20,000,000      
3.84%
       20,000,000      
3.84%
       -       -  
Thereafter
     58,214,491      
4.30%
       58,218,434      
4.30%
       (3,943 )     (0.0 )%
Total Advances
   $ 193,794,491      
3.27%
     $ 218,998,434      
2.95%
     $ (25,203,943 )     (11.5 )%

The following table shows callable FHLB advances as of the dates indicated.  These advances are also included in the above table.  All callable advances are callable at the option of the FHLB.  If an advance is called, the Bank has the option to payoff the advance without penalty, re-borrow funds on different terms, or convert the advance to a three-month floating rate advance tied to LIBOR.

As of June 30, 2009
Borrow Date
  
Maturity Date
  
Amount
  
Int. Rate
  
Type
  
Call Dates
                     
06/24/05
  
06/24/15
  
  5,000,000
 
3.710%
  
1 Time Call
  
06/24/10
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
  
05/25/08 and quarterly thereafter
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
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
11/29/06
  
11/29/16
  
  5,000,000
  
4.025%
  
Multi-Call
  
05/29/08 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
  
06/09/08 and quarterly thereafter
05/24/07
  
05/24/17
  
  7,900,000
  
4.375%
  
Multi-Call
  
05/27/08 and quarterly thereafter
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
  
3.745%
  
Multi-Call
  
11/17/08 and quarterly thereafter
08/28/08
  
08/28/13
  
  5,000,000
  
3.113%
  
Multi-Call
  
08/30/10 and quarterly thereafter
08/28/08
  
08/28/18
  
  5,000,000
  
3.385%
  
1 Time Call
  
08/29/11
                     




 
21
 

Security Federal Corporation and Subsidiaries
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

As of March 31, 2009
Borrow Date
  
Maturity Date
  
Amount
  
Int. Rate
  
Type
  
Call Dates
                     
06/24/05
  
06/24/15
  
  5,000,000
 
3.710%
  
1 Time Call
  
06/24/10
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
  
05/25/08 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
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
11/29/06
  
11/29/16
  
  5,000,000
  
4.025%
  
Multi-Call
  
05/29/08 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
  
06/09/08 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
  
3.745%
  
Multi-Call
  
11/17/08 and quarterly thereafter
08/28/08
  
08/28/13
  
  5,000,000
  
3.113%
  
Multi-Call
  
08/30/10 and quarterly thereafter
08/28/08
  
08/28/18
  
  5,000,000
  
3.385%
  
1 Time Call
  
08/29/11
                     

Other Borrowings- The Bank had $15.9 million and $16.1 million in other borrowings (non-FHLB advances) at June 30, 2009 and March 31, 2009, respectively.  These borrowings consist of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts and the current balance on a revolving line of credit with another financial institution.  At June 30, 2009 and March 31, 2009, short-term repurchase agreements were $11.1 million and $11.3 million, respectively. The repurchase agreements typically mature within one to three days and the interest rate paid on these borrowings floats monthly with money market type rates. At June 30, 2009 and March 31, 2009, the interest rate paid on the repurchase agreements was 1.09% and 1.24%, respectively.  The Bank had pledged as collateral for these repurchase agreements investment and mortgage-backed securities with amortized costs and fair values of $22.8 million and $23.4 million at June 30, 2009 and $25.5 million and $26.0 million at March 31, 2009, respectively.

At June 30, 2009 and March 31, 2009, the balance on the revolving line of credit was $4.8 million.  The unsecured line of credit has an interest rate equal to one month LIBOR plus 2.0% and matures on October 1, 2009.

Term Auction Facility Borrowings- During the year ended March 31, 2009, the Company began participating in the Federal Reserve’s Term Auction Facility (“TAF”) program, an auction program designed to provide liquidity for qualifying depository institutions. Under the program, institutions place a bid for an advance from their local Federal Reserve Bank at an interest rate that is determined as the result of the auction. Borrowings under the program typically have a 28-day or 84-day maturity. At June 30, 2009, the Company had $22.0 million outstanding in advances obtained through the TAF program, an increase of $12.0 million from $10.0 million at March 31, 2009. The interest rate on these advances was 0.25% at June 30, 2009 and March 31, 2009.  The balance at June 30, 2009 matures within three months. The Company had pledged as collateral for these borrowings investment and mortgage-backed securities with amortized costs and fair values of $32.6 million and $32.9 million, respectively, at June 30, 2009 and $17.8 million and $17.9 million, respectively, at March 31, 2009.

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.  The shareholder of the 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 the Collier-Jennings Companies over a three-year period.  The stock is mandatorily redeemable by the shareholder of the 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. At June 30, 2009, the shareholder had not elected to redeem any of the shares.


22

Security Federal Corporation and Subsidiaries
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

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 debentures qualify as Tier 1 capital under Federal Reserve Board guidelines.

The Capital Securities accrue and pay distributions quarterly at a rate per annum equal to a blended rate of 4.61% at June 30, 2009.  One-half of the Capital Securities issued in the transaction has a fixed rate of 6.88% and the remaining half has a floating rate of three-month LIBOR plus 170 basis points, which was 2.33% at June 30, 2009. The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears.

The Company has the right, subject to events of default, to defer payments of interest on the Capital Securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity date of December 15, 2036. The Company has no current intention to exercise its right to defer payments of interest on the Capital Securities.

The Capital Securities mature or are mandatorily redeemable upon maturity on December 15, 2036, and or upon earlier optional redemption as provided in the indenture. The Company has the right to redeem the Capital Securities in whole or in part, on or after September 15, 2011. The Company may also redeem the capital securities prior to such dates upon occurrence of specified conditions and the payment of a redemption premium.

Equity – Shareholders’ equity remained fairly constant at $67.1 million at June 30, 2009, decreasing $23,000 or less than 0.1%  from $67.1 million at March 31, 2009. Accumulated other comprehensive income, net of tax decreased $2,000 to $3.8 million at June 30, 2009.  The Company’s net income available for common shareholders was $129,000 for the three month period ended June 30, 2009, after preferred stock dividends of $225,000 and accretion of preferred stock of $18,000.  The Board of Directors of the Company declared the 74th consecutive quarterly common stock dividend, which was $0.08 per share, in May 2009, and totaled $197,000.  Book value per common share was $19.92 at June 30, 2009 and $19.95 at March 31, 2009.

Non-performing Assets.  The following table sets forth detailed information concerning our non-performing assets for the periods indicated:

   
At June 30, 2009
    
At March 31, 2009
    
$ Increase
    
% Increase
  
   
Amount
    
Percent (1)
    
Amount
    
Percent (1)
    
(Decrease)
    
(Decrease)
  
Loans 90 days or more past due or non-accrual loans:
                                    
Residential real estate
   $ 2,758,553       0.5 %   $ 1,112,023       0.2 %   $ 1,646,530       148.1 %
     Commercial business
     2,626,645       0.4       2,808,080       0.5       (181,435 )     (6.5 )
Commercial real estate
     13,199,367       2.2       8,044,372       1.3       5,154,995       64.1  
Consumer
     888,019       0.1       955,683       0.1       (67,664 )     (7.1 )
Total non-performing loans
     19,472,584       3.2       12,920,158       2.1       6,552,426       50.7  
                                                 
Other non-performing assets
                                                
Repossessed assets
     30,076       0.0       61,126       0.0       (31,050 )     (50.8 )
Real estate owned
     1,852,356       0.3       1,924,046       0.3       (71,690 )     (3.7 )
Total other non-performing assets
     1,882,432       0.3       1,985,172       0.3       (102,740 )     (5.2 )
                                                 
Total non-performing assets
   $ 21,355,016       3.5 %   $ 14,905,330       2.4 %   $ 6,449,686       43.3 %
                                                 
Total non-performing assets as a percentage of total assets
     2.2 %             1.5 %                        

(1) Percent of gross loans receivable, net of deferred fees and loans in process and loans held for sale

 
23
 

Security Federal Corporation and Subsidiaries
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

The Company’s non-performing assets increased $6.4 million to $21.4 million at June 30, 2009 from $14.9 million at March 31, 2009. The increase was primarily concentrated in commercial real estate loans. The Company placed $3.9 million in loans on non- accrual during the period as a result of cash flow problems experienced by three local residential builders and one developer resulting in their inability to meet the debt service requirements of their loans.  In addition, the Company classified $4.1 million related to one commercial real estate participation loan.  The Company also experienced a slight increase in non-performing one- to four- family real estate loans as a result of the general deteriorating conditions in the local economy including rising unemployment rates and declining housing markets.

The cumulative interest not accrued during the quarter ended June 30, 2009 relating to all non-performing loans totaled $200,000. We intend to work with our builders and other borrowers to reach acceptable payment plans while protecting our interests in the existing collateral.  In the event an acceptable arrangement cannot be reached, we may have to acquire these properties through foreclosure or other means and subsequently sell, develop, or liquidate them.

COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008

Net Income Available to Common Shareholders - Net income available to common shareholders decreased $673,000 or 83.9% to $129,000 for the three months ended June 30, 2009 compared to $802,000 for the three months ended June 30, 2008. The decrease in net income was primarily the result of the Company’s decision to increase the provision for loan losses in conjunction with the effects of two non-operating items incurred during the period: an increase in FDIC insurance premiums accrued as a result of a one-time special assessment charged to all deposit institutions and a loss on the sale of the South Augusta office of Security Federal Insurance, a location that was not within the Company’s branch footprint.  These factors were offset slightly by an increase in the Company’s net interest margin and an increase in non-interest income.

Net Interest Income - Despite the negative impact of rising credit costs, the Company’s core performance improved during the quarter. The net interest margin increased 14 basis points to 2.71% for the quarter ended June 30, 2009 from 2.57% for the comparable quarter in the previous year. Net interest income increased $1.2 million or 23.5% to $6.3 million during the three months ended June 30, 2009, compared to $5.1 million for the same period in 2008, as a result of an increase in interest income combined with a decrease in interest expense.  During the three months ended June 30, 2009, average interest earning assets increased $137.4 million to $935.0 million while average interest-bearing liabilities increased $121.9 million to $874.1 million.  The interest rate spread increased 18 basis points to 2.54% during the three months ended June 30, 2009 compared to the same period in 2008.

Interest Income - Total interest income increased $233,000 or 2.0% to $12.1 million during the three months ended June 30, 2009 from $11.8 million for the same period in 2008. This increase is primarily the result of the increase in interest earning assets. Total interest income on loans increased $158,000 or 1.9% to $8.7 million during the three months ended June 30, 2009 as a result of the average loan portfolio balance increasing $86.0 million, offset slightly by the yield in the loan portfolio decreasing 80 basis points. Interest income from mortgage-backed securities increased $452,000 or 18.9% as a result of a $54.9 million increase in the average balance of the portfolio offset by a 32 basis point decrease in yield. Interest income from investment securities decreased $372,000 or 41.8% as a result of a decrease of $3.1 million in the average balance of the investment securities portfolio combined with a 200 basis point decrease in the yield.

 
24
 

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, associated yields, and the resulting changes in interest income for the three months ended June 30, 2009 and 2008:

   
Three Months Ended June 30,
  
   
2009
    
2008
        
   
Average
Balance
    
 
Yield
    
Average
Balance
    
 
Yield
    
Increase (Decrease) In Interest And Dividend Income From 2008
  
Loans Receivable, Net
   $ 613,143,758       5.68 %   $ 527,101,104       6.48 %   $ 158,402  
Mortgage-Backed Securities
     254,792,860       4.47       199,929,297       4.79       451,888  
Investment Securities
     66,444,277       3.11       69,564,979       5.11       (371,904 )
Other
     607,766       0.14       987,149       2.10       (4,965 )
Total Interest-Earning Assets
   $ 934,988,661       5.16 %   $ 797,582,529       5.93 %   $ 233,421  
                                         
                                         

Interest Expense - Total interest expense decreased $971,000 or 14.5% to $5.7 million during the three months ended June 30, 2009 compared to $6.7 million for the same period one-year earlier. The decrease in total interest expense is attributable to a 95 basis point decrease in interest rates paid during the quarter, offset by an increase in the average balance of interest-bearing liabilities outstanding of $121.9 million when compared to the prior year.

Interest expense on deposits decreased $641,000 or 13.9% to $4.0 million during the period as a result of an 83 basis point decrease in the cost of deposits from 3.39% for the quarter ended June 30, 2008 to 2.56% for the same quarter in 2009. The decrease in the cost of deposits was offset by an increase in the average balance during the quarter. Average interest bearing deposits grew $77.6 million to $623.0 million compared to $545.4 million for the three months ended June 30, 2008.  Interest expense on advances and other borrowings decreased $319,000 or 15.9% during the 2009 period compared to 2008 as a result of a 124 basis point decrease in the average cost of debt outstanding combined with a $44.3 million increase in the average total borrowings outstanding. Interest expense on junior subordinated debentures decreased $10,000 to $63.8 million for the three months ended June 30, 2009 compared to $74.1 million for the same period one year ago while the average balance remained constant at $5.2 million for the three months ended June 30, 2009 and 2008, respectively, as a result of an 80 basis point decrease in the rate paid.

The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the three months ended June 30, 2009 and 2008:

   
Three Months Ended June 30,
  
   
2009
    
2008
        
   
 
Average
Balance
    
 
 
Yield
    
 
Average
Balance
    
 
 
Yield
    
Decrease In Interest Expense From 2008
  
Now And Money Market
   Accounts
   $ 216,448,975       1.27 %   $ 206,443,306       1.79 %   $ (239,494 )
Statement Savings Accounts
     17,321,483       0.46       16,414,938       0.82       (13,385 )
Certificate Accounts
     389,222,011       3.37       322,502,428       4.54       (388,221 )
FHLB Advances And Other
   Borrowed Money
     245,948,850        2.75       201,686,231        3.99       (319,151 )
Junior Subordinated
   Debentures
     5,155,000        4.95       5,155,000        5.75       (10,359 )
Total Interest-Bearing
   Liabilities
   $ 874,096,319       2.62 %   $ 752,201,903       3.57 %   $ (970,610 )



25
Security Federal Corporation and Subsidiaries
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

Provision for Loan Losses - The amount of the provision is determined by management’s on-going monthly analysis of the loan portfolio.  Management uses multiple methods to measure the estimate of the adequacy of the allowance for loan losses.  These methods incorporate percentage of classified loans, five-year and two-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.  The Company considers subjective factors such as changes in local and national economic conditions, industry trends, the composition and volume of the loan portfolio, credit concentrations, lending policies, and the experience and ability of the staff and Board of Directors.

Conditions in the local and national economy continued to impact the Company’s loan portfolio during the quarter ended June 30, 2009. Rising unemployment rates and the decline in the housing market negatively impacted borrowers’ ability to repay their loan obligations.  The provision for loan losses was $1.4 million for the quarter ended June 30, 2009 compared to $225,000 for the same quarter in the prior year. This increase reflects the Company’s concern for deteriorating economic conditions in the local economy coupled with an increase in non-performing assets within its loan portfolio.

The following table details selected activity associated with the allowance for loan losses for the three months ended June 30, 2009 and 2008:
             
   
June 30, 2009
    
June 30, 2008
  
Beginning Balance
   $ 10,181,599     $ 8,066,762  
Provision
     1,400,000       225,000  
Charge-offs
     (171,779 )     (50,186 )
Recoveries
     10,506       4,920  
Ending Balance
   $ 11,420,326     $ 8,246,496  
                 
Allowance For Loan Losses As A Percentage Of Gross Loans Receivable
   Held For Investment At The End Of The Period
     1.87 %     1.53 %
Allowance For Loan Losses As A Percentage Of Impaired Loans At The
   End Of The Period
     33.78 %     241.87 %
Impaired Loans
     33,803,496       3,409,465  
Nonaccrual Loans And 90 Days Or More Past Due Loans As A
   Percentage Of Gross Loans Receivable Held For Investment At The
   End Of The Period
     3.18 %     1.25 %
Loans Receivable, Net
   $ 607,368,394     $ 534,861,890  

Non-performing assets, which consisted of 73 non-accrual loans and 13 repossessed properties, increased $6.4 million to $21.4 million at June 30, 2009 from $14.9 million at March 31, 2009. Despite the increase in non-performing assets, the Company maintained relatively low and stable trends related to net charge-offs. Annualized net charge-offs as a percent of gross loans were 0.11% for the quarter ended June 30, 2009 compared to 0.12% for the year March 31, 2009 and 0.03% for the quarter ended June 30, 2008. Management of the Company continues to be concerned about current market conditions and closely monitors the loan portfolio on an ongoing basis to proactively identify any potential issues.

Non-accrual loans and loans 90 days or more past due increased $6.6 million to $19.5 million at June 30, 2009 when compared to $12.9 million at March 31, 2009. The increase was primarily attributable to a slowing down of the residential real estate market and the overall deterioration of economic conditions in the Company’s market area. At June 30, 2009, the Company did not have any loans that were 90 days or more past due and still accruing interest.



26
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 $383,000 to $1.5 million for the three months ended June 30, 2009 from $1.1 million for the three months ended June 30, 2008. The following table provides a detailed analysis of the changes in the components of non-interest income:

   
Three Months Ended June 30,
    
Increase (Decrease)
  
   
2009
    
2008
    
Amounts
    
Percent
  
Gain On Sale Of Investments
   $ 50,891     $ 101,405     $ (50,514 )     (49.8 )%
Gain On Sale Of Loans
     433,607       118,683       314,924       265.4  
Service Fees On Deposit Accounts
     276,382       281,153       (4,771 )     (1.7 )
Income From Cash Value Of
   Life Insurance
     90,000       85,746       4,254        5.0  
Commissions On Insurance
     139,254       168,992       (29,738 )     (17.6 )
Other Agency Income
     122,467       46,937       75,530       160.9  
Trust Income
     141,678       105,000       36,678       34.9  
Mandatorily Redeemable Financial
    Instrument Valuation Adjusted
     78,000       -       78,000       100.0  
Other
     171,908       213,291       (41,383 )     (19.4 )
Total Non-Interest Income
   $ 1,504,187     $ 1,121,207     $ 382,980       34.2 %

Gain on sale of investments was $51,000 for the three months ended June 30, 2009, compared to $101,000 in the same period one year earlier. The gain resulted from the sale of three investments during the three month period. Seven securities were sold during the same quarter of the previous year. Gain on sale of loans increased $315,000 to $434,000 during the three months ended June 30, 2009 compared to the same period one year ago as a result of an increase in the volume of fixed rate residential mortgage loans originated and sold. The increase in volume is primarily attributable to an increase in refinancing activity as a result of the current low interest rate environment. Service fees on deposit accounts decreased $5,000 to $276,000 for the quarter ended June 30, 2009 compared to the same quarter in 2008.

Commissions on insurance and other agency income increased $46,000 to $262,000 for the quarter ended June 30, 2009 compared to the same quarter in 2008 as a result of the growth and expansion of the insurance subsidiary, specifically the premium finance business.  Trust income was $142,000 for the three months ended June 30, 2009 compared to $105,000 for the comparable quarter in the previous year.

The Company recorded $78,000 in valuation income related to the mandatorily redeemable financial instrument during the quarter ended June 30, 2009. The mandatorily redeemable financial instrument is reported at fair value on the balance sheet with any resulting valuation adjustments included in earnings.

Other miscellaneous income including credit life insurance commissions, safe deposit rental income, annuity and stock brokerage commissions, and other miscellaneous fees, decreased $41,000 to $172,000 during the three months ended June 30, 2009 compared to the same period one year ago.


 
27
 

Security Federal Corporation and Subsidiaries
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

General And Administrative Expenses – General and administrative expenses increased $1.0 million or 21.1% to $5.8 million for the three months ended June 30, 2009 from $4.8 million for the same period one year ago.  The following table provides a detailed analysis of the changes in the components of general and administrative expenses:

   
Three Months Ended June 30,
    
Increase (Decrease)
  
   
2009
    
2008
    
Amounts
    
Percent
  
Salaries And Employee Benefits
   $ 2,944,435     $ 2,784,235     $ 160,200       5.6 %
Occupancy
     493,345       497,320       (3,975 )     (0.8 )
Advertising
     134,554       140,821       (6,267 )     (4.5 )
Depreciation And Maintenance
   Of Equipment
      442,027       426,924        15,103        3.5  
FDIC Insurance Premiums
     756,000       155,810       600,190       385.2  
Amortization of Intangibles
     22,500       22,500       -       -  
Other
     1,045,053       794,380       250,673       31.6  
Total General And Administrative Expenses
   $ 5,837,914     $ 4,821,990     $ 1,015,924       21.1 %

Salary and employee benefits increased $160,000 or 5.6% to $2.9 million for the three months ended June 30, 2009 from $2.8 million for the same period one year ago. This increase was primarily the result of standard annual cost of living increases combined with an increase in the number of employees employed by the Company. At June 30, 2009, the Company had 235 full time equivalent employees compared to 228 full time equivalents at June 30, 2008.

Occupancy decreased $4,000 or 0.8% to 493,000 for the three months ended June 30, 2009 from $497,000 for the same period one year ago. Advertising expense decreased $6,000 or 4.5% to $135,000 for the three months ended June 30, 2009 from $141,000 for the same period one year ago.  The decreases in both occupancy and advertising can be attributed to the Company’s effort to reduce expenses during the quarter.

FDIC insurance premiums increased $600,000 or 385.2% to $756,000 for the three month period ended June 30, 2009 compared to $156,000 for the same period a year ago. The Company accrued $425,000 in additional FDIC insurance premiums as a result of a one-time special assessment mandated by the FDIC to help replenish the government’s deposit insurance fund. This amount was in addition to the regular quarterly assessment amount of approximately $225,000. The assessment applies to all federally insured depository institutions and is calculated based on 5% of an assessment base determined relative to asset size.

Other expenses increased $251,000 to $1.0 million for the three month period ended June 30, 2009, an increase of 31.6% when compared to the same period in the prior year. Other expenses include legal fees which increased $71,000 for the three month period ended June 30, 2009 when compared to the same period in the prior year. This increase is a result of fees associated with the Company’s anticipated senior convertible debt offering discussed in Note 11 combined with costs required to insure compliance with increased regulation and legislation that is present in the current environment. Consultant fees, which are also included in other expenses, increased $44,000 during the three month period ended June 30, 2009 when compared to the same period in 2008 as a result of costs associated with an independent credit quality review performed on the loan portfolio during the quarter. The Company hired an independent party to perform a credit quality review of all existing loans exceeding a certain threshold within the Company’s loan portfolio in an effort to proactively identify any potential problems that might arise as a result of current economic conditions. Other expenses also include increased real estate owned expenses and increased expenses associated with loan collection and workout efforts.

Provision For Income Taxes – Provision for income taxes decreased $174,000 or 43.9% to $223,000 for the three months ended June 30, 2009 from $397,000 for the same period one year ago.  Income before income taxes was $595,000 and $1.2 million for the three months ended June 30, 2009 and 2008, respectively.  The Company’s combined federal and state effective income tax rate for the current quarter was 37.5% for the current quarter compared to 33.1% for the same quarter one year ago.

 
28
 

Security Federal Corporation and Subsidiaries
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Continued

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 and from the Federal Reserve’s TAF program.  The sources of funds, together with retained earnings and equity, are used to make loans, acquire investment securities and other assets, and fund continuing operations.  While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage repayments are greatly influenced by the level of interest rates, economic conditions, and competition.  Management believes that the Company’s current liquidity position and its forecasted operating results are sufficient to fund all of its existing commitments.

During the three months ended June 30, 2009 loan repayments exceeded loan disbursements resulting in a $3.7 million or 0.6% decrease in total net loans receivable.  During the three months ended June 30, 2009, deposits increased $3.6 million and FHLB advances decreased $25.2 million.  The Bank had $93.4 million in additional borrowing capacity at the FHLB at the end of the period.  At June 30, 2009, the Bank had $338.6 million of certificates of deposit maturing within one year.  Based on previous experience, the Bank anticipates a significant portion of these certificates will be renewed.

Off-Balance Sheet Commitments – The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.  The Company’s maximum exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments.  Since some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments.  Collateral is not required to support commitments.

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at June 30, 2009.

 
 
 
 
(Dollars in thousands)
  
 
Within
One
Month
    
After
One
Through
Three
Months
    
After
Three
Through
Twelve
Months
    
 
 Within
One
Year
    
Greater
Than
One
Year
    
 
 
 
Total
  
Unused lines of credit
   $ 2,480     $ 4,075     $ 23,014     $ 29,569     $ 34,526     $ 64,095  
Standby letters of credit
     22       266       461       749       100       849  
Total
   $ 2,502     $ 4,341     $ 23,475     $ 30,318     $ 34,626     $ 64,944  


 
29
 

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 improved slightly over the past year.  The Bank has rated favorably compared to thrift peers concerning interest rate sensitivity. However, these reports are based on estimates and may vary from actual circumstances.

For the three months ended June 30, 2009, 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 2.54%.  For the year ended March 31, 2009, the interest rate spread was 2.45%.

Item 4T. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures:  An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a - 15(e) of the Securities Exchange Act of 1934 (“Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management as of the end of the period covered by this quarterly report.  The Company’s Chief Executive Officer and Chief Financial Officer concluded that at June 30, 2009 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.

The Company does not expect that its disclosure controls and procedures will prevent all error and or fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
 
Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and annually report on their systems of internal control over financial reporting. Under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, the Company conducted an assessment of the effectiveness of the Company's internal control over financial reporting based on the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As reported in the 10-K, based on this assessment, management determined that the Company's internal control over financial reporting as of March 31, 2009 is effective.


30
Security Federal Corporation and Subsidiaries

Item 4T. Controls and Procedures, Continued

(b) Changes in Internal Controls: In the quarter ended June 30, 2009, 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.

 
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, 2009 except that the following risk factors are added to those previously contained in the Form 10-K:

Our federal thrift charter may be eliminated under the Obama Administration’s Financial Regulatory Reform Plan.
 
The Obama administration has proposed the creation of a new federal government agency, the National Bank Supervisor (“NBS”) that would charter and supervise all federally chartered depository institutions, and all federal branches and agencies of foreign banks.  It is proposed that the NBS take over the responsibilities of the Office of the Comptroller of the Currency, which currently charters and supervises nationally chartered banks, and responsibility for the institutions currently supervised by the Office of Thrift Supervision, which supervises federally chartered thrift and thrift holding companies, such as Security Federal Corporation and Security Federal Bank.  In addition, under the administration’s proposal, the thrift charter, under which Security Federal Bank is organized, would be eliminated.  If the administration’s proposal is finalized, Security Federal Bank may be subject to a new charter mandated by the NBS.  It is uncertain as to how this new charter, or the supervision by the NBS, will affect our operations going forward.

Item 2     Unregistered sales of Equity Securities and Use Of Proceeds

Period
  
(a) Total
Number of
Shares
Purchased
    
(b) Average
Price Paid
per Share
    
(c) Total Number of Shares Purchased as Part of Publicly Announced Program
    
(d) Maximum Number
of Shares that May
Yet Be Purchased
Under the Program
  
April 1 – April 30, 2009
     -       -       -       50,067  
May 1 – May 31, 2009
     -       -       -       50,067  
June 1 – June 30, 2009
     -       -       -       50,067  
Total
     -       -       -       50,067  

In August 2008, the Company’s Board of Directors authorized a plan to continue repurchasing shares of the Company’s outstanding common stock. This plan authorized the repurchase of 125,000 shares or 5% of the Company’s outstanding common stock. As of June 30, 2009, 74,933 shares have been repurchased under this program. The Company did not repurchase any shares during the three months ended June 30, 2009. As a part of the Company’s participation in the Treasury’s Capital Purchase Program this share repurchase program was suspended indefinitely.

Item 3     Defaults Upon Senior Securities
None

Item 4     Submission Of Matters To A Vote Of Security Holders
None

Item 5     Other Information
None
 
 


31
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) 
  10.11  2008 Equity Incentive Plan (10) 
 
14 
Code of Ethics (11) 
  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 20, 2008, as an exhibit to the Company’s Proxy Statement and incorporated herein by reference. 
(11) 
Filed on June 27, 2008 as an exhibit to the Company’s Annual Report on Form 10-K and incorporated herein by reference. 



 
32 
 

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:
August  14, 2009
  
By:
     /s/Timothy W. Simmons
 
Timothy W. Simmons
 
President
 
Duly Authorized Representative
 

 
Date:
August 14, 2009
  
By:
     /s/Roy G. Lindburg
 
Roy G. Lindburg
 
CFO
 
Duly Authorized Representative




 
33 
 

 EX-31.1 2 sfex3110630.htm EXHIBIT 31.1 sfex3110630.htm

EXHIBIT 31.1

Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act










 
 
 

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
c)  
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

 
d)  
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: August 14, 2009
 

  /s/Timothy W. Simmons                                              
 
Timothy W. Simmons 
 
President and Chief Executive Officer 






EX-31.2 3 sfex3120630.htm EXHIBIT 31.2 sfex3120630.htm

EXHIBIT 31.2

Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act

 
 
 

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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 
c)
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
     
  d)  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: August 14, 2009



  /s/ Roy G. Lindburg                                 
 
Roy G. Lindburg
 
Chief Financial Officer 

 

 EX-32 4 sfex320630.htm EXHIBIT 32 sfex320630.htm

EXHIBIT 32

Certification Pursuant to Section 906 of the Sarbanes Oxley Act


 
 
 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF SECURITY FEDERAL CORPORATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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 June 30, 2009 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: August 14, 2009






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