Annual Statements Open main menu

SECURITY FEDERAL CORP - Quarter Report: 2011 September (Form 10-Q)

Unassociated Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, DC  20549
 
FORM 10 – Q
 
 
(Mark one)
 
[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011
 
[    ]   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.)
 
238 RICHLAND AVENUE, WEST, AIKEN, SOUTH CAROLINA 29801
(Address of Principal Executive Office And Zip code)
 
 
(803) 641-3000
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES
X
 
NO
 

Indicate by check mark whether the registrant 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 [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a smaller reporting company or a non-accelerated filer.  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 corporation (defined in Rule 12b-2 of the Exchange Act).

YES
   
NO
X
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
 
CLASS:
 
OUTSTANDING SHARES AT:
 
SHARES:
         
Common Stock, par
value $0.01 per share
 
November 10, 2011
 
2,944,001
 
 
 
 
1

 
 
Security Federal Corporation and Subsidiaries
INDEX
 
       
PART I.
FINANCIAL INFORMATION (UNAUDITED)
 
PAGE NO.
Item 1.
Financial Statements (Unaudited):
   
       
 
Consolidated Balance Sheets at September 30, 2011 and March 31, 2011
 
3
       
 
Consolidated Statements of Income for the Three and Six Months Ended September 30, 2011 and 2010
 
4
       
 
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income at September 30, 2011 and 2010
 
6
       
 
Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2011 and 2010
 
7
       
 
Notes to Consolidated Financial Statements
 
9
       
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
28
       
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
41
       
Item 4.
Controls and Procedures
 
41
       
PART II.
OTHER INFORMATION
   
       
Item 1.
Legal Proceedings
 
41
       
Item 1A.
Risk Factors
 
41
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
41
       
Item 3.
Defaults Upon Senior Securities
 
41
       
Item 4.
[Removed and Reserved]
 
41
       
Item 5.
Other Information
 
41
       
Item 6.
Exhibits
 
42
       
 
Signatures
 
44
       
 
 
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
 

 
2

 
Security Federal Corporation and Subsidiaries

Part I.  Financial Information
Item 1.  Financial Statements
Consolidated Balance Sheets
   
September 30, 2011
 
March 31, 2011
Assets:
 
(Unaudited)
 
(Audited)
Cash And Cash Equivalents
$
10,728,691
$
7,835,638
Certificates Of Deposits With Other Banks
 
101,317
 
100,432
Investment And Mortgage-Backed Securities:
       
Available For Sale:      (Amortized cost of $323,598,753 at September 30, 2011 and
                                       $333,387,779 at March 31, 2011)
 
 
335,737,817
 
 
339,252,790
Held To Maturity:        (Fair value of $51,088,293 at September 30, 2011 and
                                       $34,122,925 at March 31, 2011)
 
 
49,338,614
 
 
33,165,125
Total Investment And Mortgage-Backed Securities
 
385,076,431
 
372,417,915
Loans Receivable, Net:
       
Held For Sale
 
3,963,917
 
5,166,234
Held For Investment:   (Net of allowance of $13,779,432 at September 30, 2011 and
                                       $12,501,800 at March 31, 2011)
 
 
455,589,432
 
 
479,304,382
Total Loans Receivable, Net
 
459,553,349
 
484,470,616
Accrued Interest Receivable:
       
Loans
 
1,801,323
 
1,742,281
Mortgage-Backed Securities
 
942,175
 
944,667
Investments
 
844,326
 
889,297
Premises And Equipment, Net
 
19,196,702
 
19,800,616
Federal Home Loan Bank Stock (“FHLB”), At Cost
 
9,392,300
 
11,267,485
Bank Owned Life Insurance
 
10,626,305
 
10,416,305
Repossessed Assets Acquired In Settlement Of Loans
 
13,859,915
 
14,433,853
Intangible Assets, Net
 
124,479
 
159,500
Goodwill
 
1,199,754
 
1,199,754
Prepaid Federal Deposit Insurance Corporation (“FDIC”) Premium
 
2,518,541
 
2,815,328
Other Assets
 
3,265,924
 
5,050,362
Total Assets
$
919,231,532
$
933,544,049
         
Liabilities And Shareholders’ Equity
       
Liabilities:
       
Deposit Accounts
$
682,679,208
$
690,357,114
Advances From FHLB
 
127,378,111
 
138,136,338
Other Borrowed Money
 
10,989,940
 
11,195,474
Advance Payments By Borrowers For Taxes And Insurance
 
595,187
 
381,488
Mandatorily Redeemable Financial Instrument
 
-
 
1,467,312
Junior Subordinated Debentures
 
5,155,000
 
5,155,000
Senior Convertible Debentures
 
6,084,000
 
6,084,000
Other Liabilities
 
4,823,644
 
4,755,118
Total Liabilities
 
837,705,090
 
857,531,844
         
Shareholders' Equity:
       
Serial Preferred Stock, $.01 Par Value; Authorized Shares 200,000; Issued And Outstanding  
       Series B 22,000 At September 30, 2011 And March 31, 2011
 
 
22,000,000
 
 
22,000,000
Common Stock, $.01 Par Value; Authorized Shares – 5,000,000; Issued And Outstanding
       Shares -3,144,934 And 2,944,001, Respectively, At September 30, 2011, And At March
       31, 2011
 
 
 
31,449
 
 
 
30,884
Warrant Issued In Conjunction With Serial Preferred Stock
 
400,000
 
400,000
Additional Paid-In Capital
 
11,593,122
 
10,176,375
Treasury Stock (At Cost, 200,933 Shares, At September 30, 2011 And At March 31, 2011)
 
(4,330,712)
 
(4,330,712)
Accumulated Other Comprehensive Income
 
7,529,526
 
3,637,675
Retained Earnings, Substantially Restricted
 
44,303,057
 
44,097,983
Total Shareholders' Equity
 
81,526,442
 
76,012,205
Total Liabilities And Shareholders' Equity
$
919,231,532
$
933,544,049
See accompanying notes to consolidated financial statements.

 
3

 
 

Security Federal Corporation and Subsidiaries
 Consolidated Statements of Income (Unaudited)
   
Three Months Ended September 30,
   
2011
 
2010
Interest Income:
       
Loans
$
7,187,593
$
8,269,202
Mortgage-Backed Securities
 
1,949,193
 
2,092,227
Investment Securities
 
742,887
 
668,183
Other
 
620
 
1,303
Total Interest Income
 
9,880,293
 
11,030,915
         
Interest Expense:
       
NOW And Money Market Accounts
 
462,249
 
600,465
Statement Savings Accounts
 
11,672
 
15,550
Certificate Accounts
 
1,299,700
 
2,027,971
Advances And Other Borrowed Money
 
1,306,670
 
1,496,323
Junior Subordinated Debentures
 
58,259
 
59,773
   Senior Convertible Debentures
 
121,680
 
121,680
Total Interest Expense
 
3,260,230
 
4,321,762
         
Net Interest Income
 
6,620,063
 
6,709,153
Provision For Loan Losses
 
2,300,000
 
2,150,000
Net Interest Income After Provision For Loan Losses
 
4,320,063
 
4,559,153
Non-Interest Income:
       
Gain On Sale Of Investments
 
385,029
 
495,895
Gain On Sale Of Loans
 
122,414
 
577,480
Service Fees On Deposit Accounts
 
303,787
 
295,932
Income From Cash Value Of Life Insurance
 
105,000
 
105,000
Commissions From Insurance Agency
 
119,156
 
118,139
Mandatorily Redeemable Financial Instrument Valuation
 
-
 
(45,000)
Trust Income
 
116,000
 
109,500
Check Card Fee Income
 
190,401
 
164,884
Other
 
150,680
 
225,580
Total Non-Interest Income
 
1,492,467
 
2,047,410
         
General And Administrative Expenses:
       
Salaries And Employee Benefits
 
2,736,234
 
3,000,691
Occupancy
 
472,416
 
489,774
Advertising
 
115,613
 
80,554
Depreciation And Maintenance Of Equipment
 
442,648
 
468,533
FDIC Insurance Premiums
 
264,707
 
316,000
Amortization of Intangibles
 
12,501
 
22,500
Net Cost Of Operation Of Other Real Estate Owned
 
261,230
 
631,601
Other
 
891,312
 
842,152
Total General And Administrative Expenses
 
5,196,661
 
5,851,805
         
Income Before Income Taxes
 
615,869
 
754,758
Provision For Income Taxes
 
197,416
 
297,399
Net Income
 
418,453
 
457,359
Preferred Stock Dividends
 
110,000
 
221,451
Net Income Available To Common Shareholders
$
308,453
$
235,908
         
Basic Net Income Per Common Share
$
0.11
$
0.10
Diluted Net Income Per Common Share
$
0.11
$
0.09
Cash Dividend Per Share On Common Stock
$
0.08
$
0.08
Basic Weighted Average Shares Outstanding
 
2,944,001
 
2,469,791
Diluted Weighted Average Shares Outstanding
 
2,944,001
 
2,550,097
 
See accompanying notes to consolidated financial statements.
 

 
4

 
 
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
 
   
Six Months Ended September 30,
   
2011
 
2010
Interest Income:
       
Loans
$
14,528,290
$
16,638,040
Mortgage-Backed Securities
 
4,066,724
 
4,392,645
Investment Securities
 
1,514,341
 
1,349,428
Other
 
1,089
 
1,477
Total Interest Income
 
20,110,444
 
22,381,590
         
Interest Expense:
       
NOW And Money Market Accounts
 
909,129
 
1,178,650
Statement Savings Accounts
 
24,346
 
33,057
Certificate Accounts
 
2,740,303
 
4,116,924
Advances And Other Borrowed Money
 
2,575,726
 
3,058,766
Junior Subordinated Debentures
 
116,106
 
117,670
Senior Convertible Debentures
 
243,360
 
243,360
Total Interest Expense
 
6,608,970
 
8,748,427
         
Net Interest Income
 
13,501,474
 
13,633,163
Provision For Loan Losses
 
4,600,000
 
4,050,000
Net Interest Income After Provision For Loan Losses
 
8,901,474
 
9,583,163
Non-Interest Income:
       
Gain On Sale Of Investments
 
556,253
 
695,406
Gain On Sale Of Loans
 
229,684
 
846,157
Service Fees On Deposit Accounts
 
574,480
 
589,817
Income From Cash Value Of Life Insurance
 
210,000
 
200,000
Commissions From Insurance Agency
 
211,258
 
208,966
Trust Income
 
230,000
 
219,000
Mandatorily Redeemable Financial Instrument Valuation
 
50,000
 
(85,000)
Check Card Fee Income
 
392,793
 
330,749
Other
 
309,293
 
434,357
Total Non-Interest Income
 
2,763,761
 
3,439,452
         
General And Administrative Expenses:
       
Salaries And Employee Benefits
 
5,579,212
 
6,007,175
Occupancy
 
951,168
 
1,003,966
Advertising
 
201,293
 
201,348
Depreciation And Maintenance Of Equipment
 
855,273
 
924,568
FDIC Insurance Premiums
 
556,912
 
628,048
Amortization of Intangibles
 
35,021
 
45,000
Net Cost Of Operation Of Real Estate Owned
 
297,840
 
805,672
Other
 
1,880,466
 
1,788,756
Total General And Administrative Expenses
 
10,357,185
 
11,404,533
         
Income Before Income Taxes
 
1,308,050
 
1,618,082
Provision For Income Taxes
 
428,550
 
620,144
Net Income
 
879,500
 
997,938
Preferred Stock Dividends
 
220,000
 
446,451
Accretion Of Preferred Stock To Redemption Value
 
-
 
18,816
Net Income Available To Common Shareholders
$
659,500
$
532,671
         
Basic Net Income Per Common Share
$
0.22
$
0.22
Diluted Net Income Per Common Share
$
0.22
$
0.21
Cash Dividend Per Share On Common Stock
$
0.16
$
0.16
Basic Weighted Average Shares Outstanding
 
2,944,001
 
2,465,467
Diluted Weighted Average Shares Outstanding
 
2,944,001
 
2,554,167
 
See accompanying notes to consolidated financial statements.
 
 

 
 
5

 
Security Federal Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Unaudited)
 
 
     
Preferred
Stock
     
Warrants
     
Common Stock
     
Additional
Paid – In
 Capital
     
Treasury
Stock
     
Accumulated
Other
Comprehensive Income
     
Retained
Earnings
     
Total
 
Balance At March 31, 2010
  $ 17,692,609     $ 400,000     $ 26,055     $ 5,352,144     $ (4,330,712 )   $ 4,608,080     $ 44,112,443     $ 67,860,619  
Net Income
    -       -       -       -       -       -       997,938       997,938  
Other Comprehensive Income,
   Net Of Tax:
                                                               
Unrealized Holding Gains
   On Securities Available
   For Sale, Net Of Taxes
      -         -         -         -          -         2,378,002         -         2,378,002  
Reclassification Adjustment
   For Gains Included In Net
   Income, Net Of Taxes
      -         -         -         -         -       (431,152 )       -       (431,152 )
Comprehensive Income
                                                            2,944,788  
                                                                 
    Preferred Stock Issuance
    22,000,000       -       -       -       -       -       -       22,000,000  
    Preferred Stock Redemption
    (17,711,425 )     -       -       -       -       -       (288,575 )     (18,000,000 )
    Common Stock Issuance
    -       -       4,000       3,996,000       -       -       -       4,000,000  
    Accretion Of Preferred Stock To Redemption Value
18,816        -       -       -        -       -       (18,816 )     -  
    Employee Stock Purchase Plan
        Purchases
    -       -       -       -        -       -       -       -  
    Stock Compensation Expense
    -       -       -       16,562       -       -       -       16,562  
           Cash Dividends On Preferred
    -       -       -       -       -       -       (560,000 )     (560,000 )
           Cash Dividends On Common
    -       -       -       -       -       -       (393,777 )     (393,777 )
    Balance At September 30, 2010
  $ 22,000,000     $ 400,000     $ 30,055     $ 9,364,706     $ (4,330,712 )   $ 6,554,930     $ 43,849,213     $ 77,868,192  
 
 
 
     
Preferred Stock
     
Warrants
     
Common Stock
     
Additional
Paid – In
 Capital
     
Treasury
Stock
     
Accumulated Other Comprehensive Income
     
Retained Earnings
     
Total
 
Balance At March 31, 2011
  $ 22,000,000     $ 400,000     $ 30,884     $ 10,176,375     $ (4,330,712 )   $ 3,637,675     $ 44,097,983     $ 76,012,205  
Net Income
    -       -       -       -       -       -       879,500       879,500  
Other Comprehensive Income,
   Net Of Tax:
                                                               
Unrealized Holding Gains
   On Securities Available
   For Sale, Net Of Taxes
      -         -         -         -          -         4,236,728         -         4,236,728  
Reclassification Adjustment
   For Gains Included In Net
   Income, Net Of Taxes
      -         -         -         -         -       (344,877 )       -       (344,877 )
Comprehensive Income
                                                            4,771,351  
                                                                 
    Redemption Of Mandatorily
          Redeemable Financial
          Instrument
      -         -         565         1,416,747        -         -         -         1,417,312  
        Stock Compensation Expense
    -       -       -       -       -       -       16,562       16,562  
        Cash Dividends On Preferred
    -       -       -       -       -       -       (220,000 )     (220,000 )
        Cash Dividends On Common
    -       -       -       -       -       -       (470,988 )     (470,988 )
        Balance At September 30, 2011
  $ 22,000,000     $ 400,000     $ 31,449     $ 11,593,122     $ (4,330,712 )   $ 7,529,526     $ 44,303,057     $ 81,526,442  
 
See accompanying notes to consolidated financial statements.
 
6

 
 

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

 
    Six Months Ended September 30,  
   
2011
   
2010
 
Cash Flows From Operating Activities:
           
Net Income
  $ 879,500     $ 997,938  
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
               
  Depreciation Expense
    742,501       775,741  
  Writedown On Repossessed Assets Acquired In Settlement Of Loans
    128,920       -  
  Amortization Of Intangible Assets
    22,520       45,000  
  Stock Option Compensation Expense
    16,562       16,562  
  Discount Accretion And Premium Amortization, Net
    2,392,322       1,516,835  
  Provisions For Losses On Loans
    4,600,000       4,050,000  
  Mandatorily Redeemable Financial Instrument Valuation
    (50,000 )     85,000  
  Income From Bank Owned Life Insurance
    (210,000 )     (200,000 )
  Gain On Sale Of Mortgage-Backed Securities Available For Sale
    (421,763 )     (629,974 )
  Gain On Sale Of Investment Securities Available For Sale
    (134,490 )     (65,432 )
  Gain On Sale Of Loans
    (229,684 )     (846,157 )
  (Gain) Loss On Sale Of Repossessed Assets Acquired In Settlement Of Loans
    (74,545 )     192,867  
  Amortization Of Deferred Fees On Loans
    (11,881 )     (21,170 )
  Proceeds From Sale Of Loans Held For Sale
    20,715,877       35,253,220  
  Origination Of Loans For Sale
    (19,283,876 )     (39,627,111 )
  (Increase) Decrease In Accrued Interest Receivable:
               
  Loans
    (59,042 )     (79,335 )
  Mortgage-Backed Securities
    2,492       80,840  
  Investments
    44,086       767  
   Increase In Advance Payments By Borrowers
    213,699       268,345  
   Other, Net
    (219,950 )     844,403  
Net Cash Provided By Operating Activities
    9,063,248       2,658,339  
                 
Cash Flows From Investing Activities:
               
    Principal Repayments On Mortgage-Backed Securities Held To Maturity
    619,241       2,121,289  
    Principal Repayments On Mortgage-Backed Securities Available For Sale
    23,419,609       29,493,553  
Purchase Of Investment Securities Available For Sale
    (28,038,478 )     (49,934,614 )
Purchase Of Mortgage-Backed Securities Available For Sale
    (36,526,360 )     (43,358,531 )
Purchase Of Investment Securities Held To Maturity
    (5,999,739 )     -  
Purchase Of Mortgage-Backed Securities Held To Maturity
    (15,261,891 )     -  
Maturities Of Investment Securities Available For Sale
    15,052,221       17,840,133  
Maturities Of Investment Securities Held To Maturity
    4,358,428       1,388,855  
Proceeds From Sale Of Mortgage-Backed Securities Available For Sale
    24,481,906       25,548,154  
Proceeds From Sale Of Investment Securities Available For Sale
    9,674,531       4,340,602  
Purchase Of FHLB Stock
    (34,343 )     -  
Redemption Of FHLB Stock
    1,909,528       904,400  
Decrease In Loans To Customers
    16,562,408       22,903,096  
Proceeds From Sale Of Repossessed Assets
    3,083,986       4,494,978  
Purchase And Improvement Of Premises And Equipment
    (138,587 )     (578,625 )
Net Cash Provided By Investing Activities
    13,162,460       15,163,290  
                 

(Continued)

 
7

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

 
     Six Months Ended September 30,  
   
2011
   
2010
 
Cash Flows From Financing Activities:
           
Increase (Decrease) In Deposit Accounts
    (7,677,906 )     3,487,053  
Proceeds From FHLB Advances
    63,000,000       73,920,000  
Repayment Of FHLB Advances
    (73,758,227 )     (95,026,714 )
Net Proceeds (Repayment) Of Other Borrowings
    (205,534 )     282,233  
Proceeds From Common Stock Issuance
    -       4,000,000  
Proceeds From Preferred Stock Issuance
    -       22,000,000  
Redemption Of Preferred Stock
    -       (18,000,000 )
Dividends To Preferred Shareholders
    (220,000 )     (560,000 )
Dividends To Common Shareholders
    (470,988 )     (393,777 )
Net Cash Used By Financing Activities
    (19,332,655 )     (10,291,205 )
                 
Net Increase In Cash And Cash Equivalents
    2,893,053       7,530,424  
Cash And Cash Equivalents At Beginning Of Period
    7,835,638       8,804,645  
Cash And Cash Equivalents At End Of Period
  $ 10,728,691     $ 16,335,069  
                 
Supplemental Disclosure Of Cash Flows Information:
               
Cash Paid During The Period For Interest
  $ 6,712,526     $ 8,809,748  
Cash Paid During The Period For Income Taxes
  $ 971,856     $ 19,432  
Additions To Repossessed Assets Acquired In Settlement of Loans
  $ 2,564,423     $ 9,512,521  
Increase In Unrealized Gain On Securities Available For Sale,
      Net Of Taxes
  $ 3,891,851     $ 1,946,850  
 
See accompanying notes to consolidated financial statements
 

 
8

 
 
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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 2011 Annual Report to Shareholders which was filed as an exhibit to our Annual Report on Form 10-K for the year ended March 31, 2011 (“2011 10-K”) when reviewing interim financial statements.  The results of operations for the three month and six month periods ended September 30, 2011 are not necessarily indicative of the results that may be expected for the entire fiscal year.

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. (the “Collier Jennings Companies”). Security Federal Premium Pay Plans Inc. has one wholly owned premium finance subsidiary and also has an ownership interest in four other premium finance subsidiaries. SFSC was formed in 1975 and was inactive for several years. During the quarter ended December 31, 2010, it was reactivated and utilized to hold and operate a repossessed hotel located in Hardeeville, South Carolina. Subsequently, in fiscal 2012 the hotel was sold and the subsidiary once again returned to inactive status.

The Company 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, 2011 included in our 2011 Annual Report to Stockholders.  Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, and, as such, have a greater possibility of producing results that could be materially different than originally reported..  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 impact of a sudden large loss could deplete the allowance and potentially require increased provisions to replenish the allowance, which would negatively affect earnings. 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 portfolio, 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.

 
9

 
 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements

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. For additional information see  Item 1A-Risk Factors: “Our provision for loan losses have remained at elevated levels and we may be required to make further increases in our provision for loan losses and to charge-off additional loans in the future, which could adversely affect our results of operations,” in our 2011 Form 10-K. 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.

The Company uses assumptions and estimates in determining income taxes payable or refundable for the current year, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. The Company exercises considerable judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments and estimates are reevaluated on a continual basis as regulatory and business factors change. No assurance can be given that either the tax returns submitted by us or the income tax reported on the Consolidated Financial Statements will not be adjusted by either adverse rulings by the United States Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service.

4.  
Earnings Per Common Share

Accounting guidance specifies the computation, presentation and disclosure requirements for earnings per share (“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. 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 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. The reverse treasury stock method was used to determine the dilutive effect of the mandatorily redeemable shares outstanding, which were issued by the Company in conjunction with the acquisition of the Collier-Jennings Companies.

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:

 
For the Quarter Ended:
  September 30,  
   
2011
   
2010
 
Earnings Available to Common Shareholders:
           
    Net Income
  $ 418,453     $ 457,359  
Preferred Stock Dividends
    110,000       221,451  
Net Income Available To Common Shareholders
  $ 308,453     $ 235,908  
         
    For the Six Months Ended:    
September 30,
 
      2011       2010  
Earnings Available to Common Shareholders:
               
    Net Income
  $ 879,500     $ 997,938  
Preferred Stock Dividends
    220,000       446,451  
Deemed Dividends On Preferred Stock From Net
   Accretion of Preferred Stock
    -        18,816  
Net Income Available To Common Shareholders
  $ 659,500     $ 532,671  


 
10

 
 
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements

4.   Earnings Per Common Share, Continued

The following tables provide a reconciliation of the numerators and denominators of the basic and diluted EPS computations for the periods indicated. There were no dilutive securities or options at  September 30, 2011 therefore a reconciliation is not provided.

   
For the Quarter Ended
 
   
September 30, 2010
 
   
Income (Numerator) Amount
   
Shares (Denominator)
   
Per Share
 
                   
Basic EPS
  $ 235,908       2,469,791     $ 0.10  
Effect of Diluted Securities:
                       
    Mandatorily Redeemable
    Shares
    -       80,306       (0.01 )
Diluted EPS
  $ 235,908       2,550,097     $ 0.09  


   
For the Six Months Ended
 
   
September 30, 2010
 
   
Income (Numerator) Amount
   
Shares (Denominator)
   
Per Share
 
                   
Basic EPS
  $ 532,671       2,465,467     $ 0.22  
Effect of Diluted Securities:
                       
    Mandatorily Redeemable
    Shares
    -       88,700       (0.01 )
Diluted EPS
  $ 532,671       2,554,167     $ 0.21  

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:

   
Three Months Ended
September 30, 2011
   
Six Months Ended
September 30, 2011
 
   
 
Shares
   
Weighted
Average
Exercise Price
   
 
Shares
   
Weighted
Average
Exercise Price
 
Balance, Beginning of Period
    82,400     $ 22.52       82,400     $ 22.52  
Options granted
    -       -       -       -  
Options exercised
    -       -       -       -  
Options forfeited
    7,000       21.72       7,000       21.72  
Balance, End of  Period
    75,400     $ 22.59       75,400     $ 22.59  
Options Exercisable
    45,100     $ 21.97       45,100     $ 21.97  
                                 
Options Available For Grant
    50,000               50,000          


 
11

 
 
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements

5.    Stock-Based Compensation, Continued

   
Three Months Ended
September 30, 2010
   
Six Months Ended
September 30, 2010
 
   
 
Shares
   
Weighted Average
Exercise Price
   
 
Shares
   
Weighted Average
Exercise Price
 
Balance, Beginning of Period
    90,900     $ 22.57       90,900     $ 22.57  
Options granted
    -       -       -       -  
Options exercised
    -       -       -       -  
Options forfeited
    -       -       -       -  
Balance, End of  Period
    90,900     $ 22.57       90,900     $ 22.57  
Options Exercisable
    50,400     $ 21.93       50,400     $ 21.93  
                                 
Options Available For Grant
    50,000               50,000          

At September 30, 2011, the Company had the following options outstanding:

 
Grant Date
 
 
Outstanding Options
 
 
Option Price
 
 
Expiration Date
             
09/01/03
 
2,400
 
$24.00
 
08/31/13
             
12/01/03
 
3,000
 
$23.65
 
11/30/13
             
01/01/04
 
5,000
 
$24.22
 
12/31/13
             
03/08/04
 
7,000
 
$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
 
6,000
 
$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
 
16,000
 
$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 September 30, 2011 or 2010 had an exercise price below the average market price during the three and six month periods ended September 30, 2011 or 2010, respectively. Therefore these options were not deemed to be dilutive to earnings per share in those periods.

6.  
Stock Warrants

In conjunction with its participation in the U.S. Treasury’s Capital Purchase Program, the Company sold a warrant to the U.S. Treasury to purchase 137,966 shares of the Company’s common stock at $19.57 per share. The warrant has a 10-year term and was immediately exercisable upon issuance. For the three and six month periods ended September 30, 2011 and 2010, the warrant was not deemed to be dilutive. There were no changes in the Company’s stock warrants during the three and six month periods ended September 30, 2011 and 2010.

 
12

 
 
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements

7.    Carrying Amounts and Fair Value of Financial Instruments

Effective April 1, 2008, the Company adopted accounting guidance which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value under generally accepted accounting principles. This guidance applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

Accounting guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1
Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. 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
Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. 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
Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. At September 30, 2011, the Company’s investment portfolio was comprised of government and agency bonds, mortgage-backed securities issued by government agencies or government sponsored enterprises, municipal securities and one equity investment. The portfolio did not contain any private label mortgage-backed securities. Fair value measurement is based upon prices obtained from third party pricing services who use independent pricing models which rely on a variety of factors including reported trades, broker/dealer quotes, benchmark yields, economic and industry events and other relevant market information. As such, these securities are classified as Level 2.

Mortgage Loans Held for Sale

The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with Freddie Mac or other investors, are carried in the Company’s loans held for sale portfolio.  These loans are fixed rate residential loans that have been originated in the Company’s name and have closed.  Virtually all of these loans have commitments to be purchased by investors and the majority of these loans were locked in by price with the investors on the same day or shortly thereafter that the loan was locked in with the Company’s customers.  Therefore, these loans present very little market risk for the Company.  The Company usually delivers to, and receives funding from, the investor within 30 days.  Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts" basis.


 
13

 
 
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements

7.    Carrying Amounts and Fair Value of Financial Instruments  (Continued)

The Company is not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. As a result of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is the same as the value of the loan amount at its origination. These loans are classified as Level 2.

Impaired Loans

The Company does not record loans held for investment at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established as necessary. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment.
 
Fair value is estimated using one of the following methods: fair value of the collateral less estimated costs to sell, discounted cash flows, or market value of the loan based on similar debt. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, the Company reviews the most recent appraisal and if it is over 24 months old will request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, management may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. Specifically as an example, in situations where the collateral on a nonperforming commercial real estate loan is out of the Company’s primary market area, management would typically order an independent appraisal immediately, at the earlier of the date the loan becomes nonperforming or immediately following the determination that the loan is impaired. However, as a second example, on a nonperforming commercial real estate loan where management is familiar with the property and surrounding areas and where the original appraisal value far exceeds the recorded investment in the loan, management may perform an internal analysis whereby the previous appraisal value would be reviewed and adjusted for current conditions including recent sales of similar properties in the area and any other relevant economic trends. These valuations are reviewed at a minimum on a quarterly basis.

Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2011, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The Company records impaired loans as nonrecurring Level 3.

As of September 30, 2011 and March 31, 2011, the recorded investment in impaired loans was $32.8 million and $33.3 million, respectively. The average recorded investment in impaired loans was $32.9 million for the six months ended September 30, 2011 and $37.2 million for the year ended March 31, 2011.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 3.

When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the asset as nonrecurring Level 3.

Goodwill and Other Intangible Assets

Goodwill and identified intangible assets are subject to impairment testing. The Company’s approach to testing for impairment is to compare the business unit’s carrying value to the implied fair value based on a multiple of revenue approaches. Impairment testing is performed annually as of September 30th or when events or circumstances occur indicating that goodwill of the reporting unit might be impaired.  In the event the fair value is determined to be less than the carrying value, the asset is recorded at fair value as determined by the valuation model. As such, goodwill and other intangible assets subjected to nonrecurring fair value adjustments are classified as Level 3.


 
14

 
 
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements

7.    Carrying Amounts and Fair Value of Financial Instruments  (Continued)

Mandatorily Redeemable Financial Instrument

The fair value is determined, in accordance with the underlying agreement at the instrument’s redemption value, as the number of shares issuable pursuant to the agreement at a price per share determined as the greater of a) $26 per share or b) 1.5 times the book value per share of the Company. This instrument is classified as Level 2. The mandatorily redeemable financial instrument was redeemed during the quarter ended June 30, 2011.

Assets and liabilities measured at fair value on a recurring basis are as follows as of September 30, 2011:

 
 
 
Assets:
 
Quoted Market
Price In Active
Markets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
FHLB Securities
   -      9,094,239      -  
Federal National Mortgage
      Association (“FNMA”) and
      Federal Home Loan Mortgage
      Corporation (“FHLMC”) Bonds
         -           5,006,680            -  
Small Business Administration
   (“SBA”) Bonds
    -       75,635,920        -  
Tax Exempt Municipal Securities
    -       14,999,933       -  
Mortgage-Backed Securities
    -       230,936,695       -  
Equity Securities
    -       64,350       -  
Total
   -      335,737,817     $  -  
 
 
There were no liabilities measured at fair value on a recurring basis as of September 30, 2011. Assets and liabilities measured at fair value on a recurring basis are as follows as of March 31, 2011:

 
 
 
Assets:
 
Quoted Market
Price In Active
Markets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
 
FHLB Securities
   -      14,209,332      -  
Federal Farm Credit Securities
    -       2,006,600       -  
FNMA and FHLMC Bonds
    -       11,660,990       -  
SBA Bonds
    -       64,709,832       -  
Taxable Municipal Securities
    -       4,471,650       -  
Tax Exempt Municipal Securities
    -       2,034,943       -  
Mortgage-Backed Securities
    -       240,080,693       -  
Equity Securities
    -       78,750       -  
Total
  -      339,252,790     -  
Liabilities:
                       
Mandatorily Redeemable Financial
   Instrument
  -     1,467,312     $ -  
Total
  -     1,467,312     -  


 
15

 
 
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements

7.    Carrying Amounts and Fair Value of Financial Instruments  (Continued)

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. The tables below present assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2011 and March 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall. Other intangible assets are measured on a non-recurring basis at least annually.  Specifically, the valuation of goodwill is performed each year at September 30.

 
Assets:
 
Level 1
   
Level 2
   
Level 3
   
Balance At
September 30, 2011
 
Goodwill
  $ -     $ -     $ 1,199,754     $ 1,199,754  
Mortgage Loans Held For Sale
    -       3,963,917       -       3,963,917  
Impaired Loans (1)
    -       -       31,573,359       31,573,359  
Foreclosed Assets
    -       -       13,859,915       13,859,915  
Total
  $ -     $ 3,963,917     $ 46,633,028     $ 50,596,945  
                                 
(1) Impaired loans are reported net of specific reserves of $1.2 million.

 
Assets:
 
Level 1
   
Level 2
   
Level 3
   
Balance At
March 31, 2011
 
Goodwill
  $ -     $ -     $ 1,199,754     $ 1,199,754  
Mortgage Loans Held For Sale
    -       5,166,234       -       5,166,234  
Impaired Loans (1)
    -       -       32,525,192       32,525,192  
Foreclosed Assets
    -       -       14,433,853       14,433,853  
Total
  $ -     $ 5,166,234     $ 48,158,799     $ 53,325,033  
                                 
 (1) Impaired loans are reported net of specific reserves of $772,476.

There were no liabilites measured at fair value on a non- recurring basis as of September 30, 2011 or March 31, 2011.

For assets and liabilities that are not presented on the balance sheet at fair value, the following methods are used to determine the fair value:
 
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.
 
Certificates of deposits with other banks—Fair value is based on market prices for similar assets.
 
Investment securities held to maturity—Securities held to maturity are valued at quoted market prices or dealer quotes.
 
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.
 
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.
 
Other Borrowed Money—The carrying value of these short term borrowings approximates fair value.
 

 
16

 
 
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements

7.    Carrying Amounts and Fair Value of Financial Instruments  (Continued)
 
Senior Convertible Debentures— The fair value is estimated by discounting the future cash flows using the current rates at which similar debenture offerings with similar terms and maturities would be issued by similar institutions. As discount rates are based on current debenture rates as well as management estimates, the fair values presented may not be indicative of the value negotiated in an actual sale.
 
Junior Subordinated Debentures—The carrying value of junior subordinated debentures approximates fair value.
 
The following table is a summary of the carrying value and estimated fair value of the Company’s financial instruments as of September 30, 2011 and March 31, 2011 presented in accordance with the applicable accounting guidance.

       
   
September 30, 2011
   
March 31, 2011
 
   
Carrying Amount
   
Estimated Fair Value
   
Carrying Amount
   
Estimated Fair Value
 
   
(In Thousands)
 
Financial Assets:
                       
Cash And Cash Equivalents
  $ 10,729     $ 10,729     $ 7,836     $ 7,836  
Certificates of Deposits With Other Banks
    101       101       100       101  
Investment And Mortgage-Backed Securities
    385,076       386,826       372,418       373,376  
Loans Receivable, Net
    459,553       457,008       484,471       482,834  
FHLB Stock
    9,392       9,392       11,267       11,267  
                                 
Financial Liabilities:
                               
Deposits:
                               
   Checking, Savings, And Money Market Accounts
  $ 355,967     $ 355,967     $ 332,220     $ 332,220  
   Certificate Accounts
    326,712       328,817       358,137       361,110  
Advances From FHLB
    127,378       139,091       138,136       147,207  
Other Borrowed Money
    10,990       10,990       11,195       11,195  
Senior Convertible Debentures
    6,084       6,084       6,084       6,084  
Junior Subordinated Debentures
    5,155       5,155       5,155       5,155  
                                 

At September 30, 2011, the Bank had $34.4 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 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.
 
 

 
17

 
 
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements

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 July 2010, the Receivables topic of the Accounting Standards Codification (“ASC”) was amended by Accounting Standards Update (“ASU”) 2010-20 to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis.  The Company is required to include these disclosures in its interim and annual financial statements.  See Note 10.

Disclosures about Troubled Debt Restructurings (“TDRs”) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) in ASU 2011-01 issued in January 2011. In April 2011 the FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR.   The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present.

Disclosures related to TDRs under ASU 2010-20 have been presented in Note 10.

In December 2010, the Intangibles topic of the ASC was amended to modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings upon adoption.  Impairments occurring subsequent to adoption should be included in earnings.  The amendment was effective for the Company on January 1, 2011. In September 2011, the Intangibles topic was again amended to permit an entity to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  These amendments will be effective for the Company on January 1, 2012.

In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03.  The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control.  The other criteria to assess effective control were not changed.  The amendments are effective for the Company beginning January 1, 2012 but are not expected to have a material effect on the financial statements.

ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements.  The amendments will be effective for the Company beginning January 1, 2012 but are not expected to have a material effect on the financial statements.

The Comprehensive Income topic of the ASC was amended in June 2011.  The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity.  The amendment requires consecutive presentation of the statement of net income and other comprehensive income and requires an entity to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements.  The amendments will be applicable to the Company on January 1, 2012 and will be applied retrospectively.

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

 

 
18

 
 
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements

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:
 
September 30, 2011
     
   
Amortized Cost
   
Gross Unrealized
Gains
   
Gross Unrealized
Losses
   
Fair Value
 
FHLB Securities
  $ 8,920,437     $ 173,802    
$
-     $ 9,094,239  
FNMA and FHLMC Bonds
    4,968,895       37,785       -       5,006,680  
SBA Bonds
    73,902,116       1,828,519       94,715       75,635,920  
Tax  Exempt Municipal Bonds
    14,253,727       749,169       2,963       14,999,933  
Mortgage-Backed Securities
    221,450,640       9,593,960       107,905       230,936,695  
Equity Securities
    102,938       -       38,588       64,350  
    $ 323,598,753     $ 12,383,235     $      244,171     $ 335,737,817  

 
March 31, 2011
     
   
Amortized Cost
   
Gross Unrealized
Gains
   
Gross Unrealized
Losses
   
Fair value
 
                         
FHLB Securities
  $ 14,428,778     $ 125,259     $ 344,705     $ 14,209,332  
Federal Farm Credit Securities
    1,997,097       9,503       -       2,006,600  
    FNMA and FHLMC Bonds
    11,959,119       -       298,129       11,660,990  
SBA Bonds
    64,382,588       599,679       272,435       64,709,832  
Taxable Municipal Bond
    4,556,812       12,039       97,201       4,471,650  
Tax Exempt Municipal Bonds
    2,027,172       7,771       -       2,034,943  
Mortgage-Backed Securities
    233,933,275       6,681,694       534,276       240,080,693  
Equity Securities
    102,938       -       24,188       78,750  
    $ 333,387,779     $ 7,435,945     $ 1,570,934     $ 339,252,790  

FHLB securities, Federal Farm Credit securities, FNMA and FHLMC bonds, and FNMA and FHLMC mortgage-backed securities are issued by government-sponsored enterprises (“GSEs”).  GSEs are not backed by the full faith and credit of the United States government.  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 September 30, 2011 and March 31, 2011, the Company held an amortized cost and fair value of $138.5 million and $144.5 million, respectively and $145.1 million and $148.5 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 $25.9 million and $16.8 million, respectively, in proceeds from sales of available for sale securities during the quarters ended September 30, 2011 and 2010 and recognized approximately $385,000 in gross gains during the quarter ended September 30, 2011 and $496,000 in gross gains during the quarter ended September 30, 2010. The Bank received approximately $34.2 million and $29.9 million, respectively, in proceeds from sales of available for sale securities during the six months ended September 30, 2011 and 2010 and recognized approximately $556,000 in gross gains during the six months ended September 30, 2011 and $695,000 in gross gains during the six months ended September 30, 2010.


 
19

 
 
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements

9.       Securities, Continued

The amortized cost and fair value of investment and mortgage-backed securities available for sale at September 30, 2011 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. Mortgage-backed securities are presented as a separate line item since paydowns are expected to occur before the contractual maturity dates.

September 30, 2011
 
Amortized Cost
   
Fair Value
 
             
Less Than One Year
  $ 1,018,912     $ 1,047,168  
One – Five Years
    8,833,204       9,045,393  
Over Five – Ten Years
    36,103,529       36,575,715  
After Ten Years
    56,192,468       58,132,846  
Mortgage-Backed Securities
    221,450,640       230,936,695  
    $ 323,598,753     $ 335,737,817  

The following tables show 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, as of the table date;

September 30, 2011
 
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
Mortgage-Backed Securities
  $ 11,141,616     107,905    
$
-    
$
-     11,141,616     107,905  
Tax Exempt Municipal Bonds
    350,992       2,963       -       -       350,992       2,963  
SBA Bonds
    17,025,543       94,715       -       -       17,025,543       94,715  
Equity Securities
    -       -       64,350       38,588       64,350       38,588  
    $ 28,518,151     $ 205,583     $ 64,350     $ 38,588     $ 28,582,501     $ 244,171  

March 31, 2011
 
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
FHLB Securities
  $ 11,316,397     $ 344,705  
$
  -  
$
  -     $ 11,316,397     $ 344,705  
FNMA and FHLMC Bonds
    11,660,990       298,129       -       -       11,660,990       298,129  
SBA Bonds
    22,878,098       272,435       -       -       22,878,098       272,435  
Taxable Municipal Bond
    2,452,620       97,201                       2,452,620       97,201  
Mortgage-Backed Securities
    49,991,656       534,276       -       -       49,991,656       534,276  
Equity Securities
    -       -       78,750       24,188       78,750       24,188  
    $ 98,299,761     $ 1,546,746   $   78,750     24,188     $ 98,378,511     $ 1,570,934  

Securities classified as available for sale are recorded at fair market value. At September 30, 2011, approximately 15.8% of the unrealized losses, or one individual security, consisted of securities in a continuous loss position for 12 months or more.  At March 31, 2011, approximately 15% of unrealized losses, or one individual security, 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. The Company reviews its investment securities portfolio at least quarterly and more frequently when economic conditions warrant, assessing whether there is any indication of other-than-temporary impairment (“OTTI”). Factors considered in the review include estimated future cash flows, length of time and extent to which market value has been less than cost, the financial condition and near term prospects of the issuer, and our intent and ability to retain the security to allow for an anticipated recovery in market value.

If the review determines that there is OTTI, then an impairment loss is recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made, or a portion may be recognized in other comprehensive income. The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment.


 
20

 
 
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements

9.      Securities, Continued

Investment and Mortgage-Backed Securities, Held to Maturity
 
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment and mortgage-backed securities held to maturity are as follows:
 
                         
 
September 30, 2011
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
 
Fair Value
 
FHLB Securities
  $ 10,035,786     $ 311,314                              -     $ 10,347,100  
FNMA and FHLMC Bonds
    1,993,033       33,697       -       2,026,730  
SBA Bonds
    3,491,020       329,917       -       3,820,937  
Mortgage-Backed Securities
    33,663,775       1,076,561       1,810       34,738,526  
Equity Securities
    155,000       -       -       155,000  
Total
  $ 49,338,614     $ 1,751,489     $                 1,810     $ 51,088,293  
 
 
       
 
March 31, 2011
 
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
 
Fair Value
 
 
                       
FHLB Securities
  $ 10,040,055     $ 297,670     $ 694     $ 10,337,031  
SBA Bonds
    3,856,483       242,167       -       4,098,650  
Mortgage-Backed Securities
    19,113,587       418,657       -       19,532,244  
Equity Securities
    155,000       -       -       155,000  
    $ 33,165,125     $ 958,494     $ 694     $ 34,122,925  

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 September 30, 2011, the Company held an amortized cost and fair value of $31.6 million and $32.6 million, respectively, in GNMA mortgage-backed securities which are included in mortgage-backed securities in the table above. At March 31, 2011, the Company held an amortized cost and fair value of $16.5 million and $16.8 million, respectively, in GNMA mortgage-backed securities included in mortgage-backed securities in the table 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 September 30, 2011, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities resulting from call features on certain investments. Mortgage-backed securities are presented as a separate line item since paydowns are expected to occur before the contractual maturity dates.


September 30, 2011
 
Amortized Cost
   
Fair Value
 
             
 Less Than One Year   -     -  
 One – Five Years
    6,867,024       7,167,107  
Over Five – Ten Years
    5,035,080       5,077,510  
More Than Ten Years
    3,772,735       4,105,150  
Mortgage-Backed Securities
    33,663,775       34,738,526  
    $ 49,338,614     51,088,293  
                 


 
21

 
 
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements

9.      Securities, Continued

The Company had one security in an unrealized loss position at September 30, 2011. The fair value of this GNMA pool was $2.2 million and the unrealized loss was $2,000. The security had been in an unrealized loss position for less than 12 months. At March 31, 2011, the Company also had one security in an unrealized loss position. The fair value of the FHLB security was $1.0 million and the unrealized loss was $1,000. The security had been in an unrealized loss position for less than 12 months. 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 three or six months ended September 30, 2011 or 2010, or during the year ended March 31, 2011.

10.    Loans Receivable, Net

Loans receivable, net, at September 30, 2011 and March 31, 2011 consisted of the following:

   
September 30, 2011
   
March 31, 2011
 
Residential Real Estate
  $ 103,781,323     $ 111,028,021  
Consumer
    62,729,028       64,862,668  
Commercial Business
    10,858,439       13,529,957  
Commercial Real Estate
    294,561,038       306,955,623  
   Total Loans Held For Investment
    471,929,828       496,376,269  
                 
 Loans Held For Sale
    3,963,917       5,166,234  
      Total Loans Receivable, Gross
    475,893,745       501,542,503  
                 
Less:
               
Allowance For Possible Loan Loss
    13,779,432       12,501,800  
Loans In Process
    2,568,011       4,580,059  
Deferred Loan Fees
    (7,047 )     (9,972 )
      16,340,396       17,071,887  
      Total Loans Receivable, Net
  $ 459,553,349     $ 484,470,616  

The Company uses a risk based approach based on the following credit quality measures when analyzing the loan portfolio: pass, watch, special mention, and substandard. These indicators are used to rate the credit quality of loans for the purposes of determining the Company’s allowance for loan losses. Pass loans are loans that are performing and are deemed adequately protected by the net worth of the borrower or the underlying collateral value. These loans are considered the least risky in terms of determining the allowance for loan losses. Substandard loans are considered the most risky category. These loans typically have an identified weakness or weaknesses and are inadequately protected by the net worth of the borrower or collateral value. All loans 60 days or more past due are automatically classified in this category. The other two categories fall in between these two grades. The following tables list the loan grades used by the Company as credit quality indicators and the balance in each category, excluding loans held for sale for the periods indicated.

   
Credit Quality Measures
 
September 30, 2011
 
 
Pass
   
Watch
   
Special
Mention
   
Substandard
   
Total Loans
 
Residential Real Estate
  $ 94,103,289     -     $ 1,581,343     $ 8,096,691     $ 103,781,323  
Consumer
    59,213,955       212,967       53,456       3,248,650       62,729,028  
Commercial Business
    9,701,749       374,892       13,743       768,055       10,858,439  
Commercial Real Estate
    211,390,251       16,234,580       25,661,938       41,274,269       294,561,038  
Total
  $ 374,409,244     16,822,439     $ 27,310,480     $ 53,387,665     $ 471,929,828  

   
Credit Quality Measures
 
March 31, 2011
 
 
Pass
   
Watch
   
Special
Mention
   
Substandard
   
Total Loans
 
Residential Real Estate
  $ 104,826,411     $ 433,710     $ 379,036     $ 5,388,864     $ 111,028,021  
Consumer
    61,425,853       97,706       9,180       3,329,929       64,862,668  
Commercial Business
    12,059,761       6,285       -       1,463,911       13,529,957  
Commercial Real Estate
    230,031,130       10,786,846       30,462,062       35,675,585       306,955,623  
Total
  $ 408,343,155     $ 11,324,547     $ 30,850,278     $ 45,858,289     $ 496,376,269  
 
 
 
 
 
22

 
 
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements

10.   Loans Receivable, Net, Continued

The following tables present an age analysis of past due balances by category at the periods indicated.
 
 
 
September 30, 2011
 
30-59 Days
Past Due
   
60-89 Days
Past Due
   
90 Day or
More Past
Due
   
Total Past
Due
   
 
Current
   
Total Loans Receivable
 
Residential
   Real Estate
  $ -      2,813,696      2,968,938     5,782,634      97,998,689      103,781,323  
Consumer
    1,145,961       1,498,762       1,302,772       3,947,495       58,781,533       62,729,028  
Commercial
   Business
    135,298       121,771       6,911       263,980       10,594,459       10,858,439  
Commercial
   Real Estate
    7,778,026       10,293,920       10,908,778       28,980,724       265,580,314       294,561,038  
Total
  $ 9,059,285     $ 14,728,149     $ 15,187,399     $ 38,974,333     $ 432,954,995     $ 471,929,828  
                                                 


 
 
March 31, 2011
 
30-59 Days
Past Due
   
60-89 Days
Past Due
   
90 Day or
More Past
Due
   
Total Past
Due
   
 
Current
   
Total Loans Receivable
 
Residential
   Real Estate
   1,799,800      -      1,809,881     3,609,681      107,418,340      111,028,021  
Consumer
    2,673,973       196,958       1,194,171       4,065,102       60,797,566       64,862,668  
Commercial
   Business
    93,579       133,399       171,901       398,879       13,131,078       13,529,957  
Commercial
   Real Estate
    19,441,992       2,708,373       9,337,385       31,487,750       275,467,873       306,955,623  
Total
  $ 24,009,344     $ 3,038,730     $ 12,513,338     $ 39,561,412     $ 456,814,857     $ 496,376,269  
                                                 

At September 30, 2011, the Company did not have any loans that were 90 days or more past due and still accruing interest. Our strategy is to work with our 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. The following table shows non-accrual loans by category at September 30, 2011 compared to March 31, 2011.

   
At September 30, 2011
   
At March 31, 2011
     $     %  
   
Amount
   
Percent (1)
   
Amount
   
Percent (1)
   
Increase
(Decrease)
   
Increase
(Decrease)
 
Non-accrual loans:
 
 
                                 
    Residential real estate
  $ 2,968,938       0.6 %   $ 1,809,881       0.4 %   $ 1,159,057       64.0 %
    Commercial business
    6,911       -       171,901       -       (164,990 )     (96.0 )
    Commercial real estate
    10,908,778       2.3       9,337,385       1.9       1,571,393       16.8  
    Consumer
    1,302,772       0.3       1,194,171       0.2       108,601       9.1  
Total non-accural loans
  $ 15,187,399       3.2 %   $ 12,513,338       2.5 %   $ 2,674,061       21.4 %
                                                 
(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
Notes to Consolidated Financial Statements

10.    Loans Receivable, Net, Continued

The following tables show the activity in the allowance for loan losses by category for the periods indicated.

   
For the Three Months Ended September 30, 2011
 
Allowance For
Loan Losses
 
Residential
Real Estate
   
Consumer
   
Commercial
Business
   
Commercial
Real Estate
   
Total
 
Beginning Balance
  $ 1,763,457     $ 1,102,767     $ 651,426     9,984,923     $ 13,502,573  
Provision
    (40,280 )     9,979       526,919       1,803,382       2,300,000  
Charge-Offs
    (16,381 )     (83,678 )     (335,327 )     (1,628,968 )     (2,064,354 )
Recoveries
    -       4,771       1,744       34,699       41,214  
Ending Balance
  $ 1,706,796     $ 1,033,839     $ 844,762     $ 10,194,036     $ 13,779,433  


   
For the Six Months Ended September 30, 2011
 
Allowance For
Loan Losses
 
Residential
Real Estate
   
Consumer
   
Commercial
Business
   
Commercial
Real Estate
   
Total
 
Beginning Balance
  $ 1,702,864     $ 1,122,055     $ 924,149     8,752,732     $ 12,501,800  
Provision
    191,352       34,787       315,014       4,058,847       4,600,000  
Charge-Offs
    (187,420 )     (138,416 )     (408,138 )     (2,652,242 )     (3,386,216 )
Recoveries
    -       15,413       13,737       34,699       63,849  
Ending Balance
  $ 1,706,796     $ 1,033,839     $ 844,762     $ 10,194,036     $ 13,779,433  


   
For the Year Ended March 31, 2011
 
Allowance For
Loan Losses
 
Residential
Real Estate
   
Consumer
   
Commercial
 Business
   
Commercial
Real Estate
   
Total
 
Beginning Balance
  $ 1,944,257     $ 988,634     $ 678,728     8,695,775     $ 12,307,394  
Provision
    644,032       649,542       539,264       5,967,162       7,800,000  
Charge-Offs
    (1,009,937 )     (584,600 )     (320,960 )     (6,201,170 )     (8,116,667 )
Recoveries
    124,512       68,479       27,117       290,965       511,073  
Ending Balance
  $ 1,702,864     $ 1,122,055     $ 924,149     8,752,732     $ 12,501,800  

The following tables present information related to impaired loans evaluated individually for impairment and collectively evaluated for impairment in the allowance for loan losses for the periods indicated.

   
Allowance For Loan Losses
 
 
September 30, 2011
 
Individually Evaluated For
Impairment
   
Collectively Evaluated For
Impairment
   
Total
 
Residential Real Estate
  $ 67,500     $ 1,639,296     $ 1,706,796  
Consumer
    -       1,033,839       1,033,839  
Commercial Business
    148,610       696,152       844,762  
Commercial Real Estate
    1,022,894       9,171,142       10,194,036  
Total
  $ 1,239,004     $ 12,540,429     $ 13,779,433  

   
Allowance For Loan Losses
 
 
March 31, 2011
 
Individually Evaluated For
Impairment
   
Collectively Evaluated For
Impairment
   
Total
 
Residential Real Estate
  -     $ 1,702,864     $ 1,702,864  
Consumer
    41,100       1,080,955       1,122,055  
Commercial Business
    240,648       683,501       924,149  
Commercial Real Estate
    490,728       8,262,004       8,752,732  
Total
  772,476     $ 11,729,324     $ 12,501,800  


 
24

 
 
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements

10.    Loans Receivable, Net, Continued

The following tables present information related to impaired loans evaluated individually for impairment and collectively evaluated for impairment in loans receivable for the periods indicated.

   
Loans Receivable
 
 
September 30, 2011
 
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
Total
 
Residential Real Estate
  $ 2,449,273     $ 101,332,050     $ 103,781,323  
Consumer
    3,338,815       59,390,213       62,729,028  
Commercial Business
    355,044       4,137,200       4,492,244  
Commercial Real Estate
    26,669,232       274,258,001       300,927,233  
Total
  $ 32,812,364     $ 439,117,464     $ 471,929,828  



   
Loans Receivable
 
 
March 31, 2011
 
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
Total
 
Residential Real Estate
  $ 2,278,966     $ 108,749,055     $ 111,028,021  
Consumer
    1,436,829       63,425,839       64,862,668  
Commercial Business
    770,011       12,759,946       13,529,957  
Commercial Real Estate
    28,811,862       278,143,761       306,955,623  
Total
  $ 33,297,668     $ 463,078,601     $ 496,376,269  

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired management measures impairment and records the loan at fair value. Fair value is estimated using one of the following methods: fair value of the collateral less estimated costs to sale, discounted cash flows, or market value of the loan based on similar debt. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, the Company reviews the most recent appraisal and if it is over 24 months old will request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, management may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis.

The following table is a summary of information related to impaired loans as of September 30, 2011.

Impaired Loans
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
                     
With no related allowance
   recorded:
                   
Residential Real Estate
$
2,122,103
$
2,684,103
$
              -
$
2,154,605
$
24,640
Consumer Loans
 
3,338,815
 
3,564,915
 
              -
 
2,349,851
 
89,883
Commercial Business
 
      206,434
 
230,434
 
              -
 
417,380
 
5,445
Commercial Real Estate
 
 21,509,872
 
 23,986,972
 
              -
 
23,528,997
 
368,993
           
 
       
With an allowance recorded:
                   
Residential Real Estate
 
327,170
 
327,170
 
67,500
 
109,057
 
-
Consumer Loans
 
-
 
-
 
-
 
40,445
 
-
Commercial Business
 
148,610
 
148,610
 
148,610
 
246,152
 
3,256
Commercial Real Estate
 
5,159,360
 
6,054,210
 
1,022,894
 
4,028,557
 
51,765
                     
Total
                   
Residential Real Estate
 
2,449,273
 
3,011,273
 
67,500
 
2,263,662
 
24,640
Consumer Loans
 
3,338,815
 
3,564,915
 
-
 
2,390,296
 
89,883
Commercial Business
 
355,044
 
379,044
 
148,610
 
663,532
 
8,701
Commercial Real Estate
 
26,669,232
 
30,041,182
 
1,022,894
 
27,557,554
 
420,758


 
25

 
 
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements

10.    Loans Receivable, Net, Continued

The following table is a summary of information related to impaired loans as of March 31, 2011.

Impaired Loans
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
                     
With no related allowance
   recorded:
                   
Residential Real Estate
$
   2,278,966
$
   2,683,966
$
              -
$
1,458,882
$
51,267
Consumer Loans
 
1,376,161
 
1,583,160
 
              -
 
729,889
 
56,764
Commercial Business
 
      499,481
 
      499,481
 
              -
 
327,785
 
14,790
Commercial Real Estate
 
 26,387,167
 
 27,948,568
 
              -
 
30,244,873
 
1,361,177
           
 
       
With an allowance recorded:
                   
Residential Real Estate
 
              -
 
              -
 
              -
 
41,879
 
-
Consumer Loans
 
      60,668
 
      60,668
 
     41,100
 
124,089
 
-
Commercial Business
 
      270,530
 
      270,530
 
     240,648
 
207,073
 
4,833
Commercial Real Estate
 
   2,424,695
 
   2,614,695
 
     490,728
 
4,018,967
 
44,337
                     
Total
                   
Residential Real Estate
 
   2,278,966
 
   2,683,966
 
              -
 
1,500,761
 
51,267
Consumer Loans
 
   1,436,829
 
   1,643,828
 
     41,100
 
853,978
 
56,764
Commercial Business
 
      770,011
 
      770,011
 
     240,648
 
534,858
 
19,623
Commercial Real Estate
 
 28,811,862
 
 30,563,263
 
     490,728
 
34,263,840
 
1,405,514


TDRs included in impaired loans at September 30, 2011 and March 31, 2011 were $11.8 million and $12.2 million, respectively. Interest earned during the six months ended September 30, 2011 and fiscal 2011 on these loans amounted to $112,441 and $649,348, respectively. At September 30, 2011 and March 31, 2011, the Bank did not have any loans 90 days delinquent and still accruing interest.

As a result of adopting the amendments in ASU 2011-02, management reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (April 1, 2011) to determine whether they are considered TDRs under the amended guidance.  Management identified as TDRs certain loans for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying those loans as TDRs, management identified them as impaired under the guidance in ASC 310-10-35. The amendments in ASU 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those loans newly identified as impaired. At the end of the first interim period of adoption (September 30, 2011), the recorded investment in loans for which the allowance was previously measured under a general allowance methodology and are now impaired under ASC 310-10-35 was $11.8 million, and the allowance for loan losses associated with those loans, on the basis of a current evaluation of loss was $661,000.

 
For the Six Months Ended
 September 30, 2011
 
For the Three Months Ended
September 30, 2011
 
 
 
Troubled Debt
   Restructurings
 
 
Number
of
Contracts
 
Pre-
modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
 
 
Number
of
Contracts
 
 
Pre-modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
Residential Real Estate
-
$
-
$
-
 
-
$
-
$
-
Consumer Loans
-
 
-
 
-
 
-
 
-
 
-
Commercial Business
-
 
-
 
-
 
-
 
-
 
-
Commercial Real Estate
3
 
1,787,936
 
1,787,936
 
3
 
1,787,936
 
1,787,936
Total
3
$
1,787,936
$
1,787,936
 
3
$
1,787,936
$
1,787,936
                       

During the six months ended September 30, 2011, we modified three loans that were considered to be TDRs.   The interest rate was lowered for all three of these loans.


 
26

 
 
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements

10.     Loans Receivable, Net, Continued

 
For the Six Months Ended
September 30, 2011
 
For the Three Months Ended
September 30, 2011
Troubled Debt Restructurings That Subsequently
   Defaulted During the Period
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
Residential Real Estate
-
$
-
 
-
$
-
Consumer Loans
-
 
-
 
-
 
-
Commercial Business
1
 
48,785
 
-
 
-
Commercial Real Estate
8
 
4,627,880
 
2
 
2,612,713
Total
9
$
4,676,665
 
2
$
2,612,713
               

During the six months ended September 30, 2011, nine loans that had been previously restructured were in default, two of which went into default in the quarter ended September 30, 2011.

11.    Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were available to be issued and no subsequent events occurred requiring accrual or disclosure.

 
27

 
 
Security Federal Corporation and Subsidiaries


Forward-Looking Statements and “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995

This report contains forward-looking statements, which can be identified by the use of words such as “believes,” “intends,” “expects,” “anticipates,” “estimates” or similar expressions.  Forward-looking statements include, but are not limited to:

·  
statements of our goals, intentions and expectations;
·  
statements regarding our business plans, prospects, growth and operating strategies;
·  
statements regarding the quality of our loan and investment portfolios; and
·  
estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

·  
the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets;
·  
changes in general economic conditions, either nationally or in our market areas;
·  
changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;
·  
fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas;
·  
secondary market conditions for loans and our ability to sell loans in the secondary market;
·  
results of examinations of us by the Office of the Comptroller of the Currency (‘OCC”) and of the Company by the Federal Reserve Board,(as successors to 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, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;
·  
legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or  the interpretation of regulatory capital or other rules;
·  
our ability to attract and retain deposits;
·  
further increases in premiums for deposit insurance;
·  
our ability to control operating costs and expenses;
·  
the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
·  
difficulties in reducing risks associated with the loans on our balance sheet;
·  
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
·  
computer systems on which we depend could fail or experience a security breach;
·  
our ability to retain key members of our senior management team;
·  
costs and effects of litigation, including settlements and judgments;
·  
our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;
·  
increased competitive pressures among financial services companies;
·  
changes in consumer spending, borrowing and savings habits;
·  
the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations;
·  
the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
·  
our ability to pay dividends on our common stock;
·  
adverse changes in the securities markets;
·  
inability of key third-party providers to perform their obligations to us;
·  
changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;
·  
Future legislative changes and our ability to continue to comply with the requirements of the U.S. Treasury Community Development Capital Initiative (“CDCI”); and
 
 

 
 
28

 
 
Security Federal Corporation and Subsidiaries
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
·  
other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this prospectus and the incorporated documents
 
Some of these and other factors are discussed in the 2011 10-K under the caption “Risk Factors” Such developments could have an adverse impact on our financial position and our results of operations.
 
Any of the forward-looking statements that we make in this quarterly report and in other public statements we make may turn out to be inaccurate as a result of our beliefs and assumptions we make in connection with the factors set forth above or because of other unidentified and unpredictable factors. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. These risks could cause our actual results for fiscal year 2011 and beyond to differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect the Company’s financial condition, liquidity and operating and stock price performance.
 
Financial Condition At September 30, 2011 and March 31, 2011

General – Total assets decreased $14.3 million or 1.5% to $919.2 million at September 30, 2011 from $933.5 million at March 31, 2011.  The primary reason for the decrease in total assets was a decrease in net loans receivable, offset by increases in investments.

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

               
Increase (Decrease)
 
   
September 30,
2011
   
March 31,
2011
   
Amount
   
Percent
 
Cash And Cash Equivalents
  $ 10,728,691     $ 7,835,638     $ 2,893,053       36.9 %
Investment And Mortgage-Backed
   Securities
    385,076,431       372,417,915       12,658,516       3.4  
Loan Receivable, Net
    459,553,349       484,470,616       (24,917,267 )     (5.1 )
Premise and Equipment, Net
    19,196,702       19,800,616       (603,914 )     (3.0 )
Federal Home Loan Bank Stock
    9,392,300       11,267,485       (1,875,185 )     (16.6 )
Repossessed Assets Acquired In
   Settlement Of Loans
    13,859,915       14,433,853       (573,938 )     (4.0 )
Other Assets
    3,265,924       5,050,362       (1,784,438 )     (35.3 )

Cash and Cash Equivalents, increased $2.9 million or 36.9% to $10.7 million at September 30, 2011, from $7.8 million at March 31, 2011.

Investment and mortgage-backed securities increased $12.7 million or 3.4% to $385.1 million at September 30, 2011 from $372.4 million at March 31, 2011. This increase was the result of investment purchases offset slightly by principal repayments, calls and maturities on securities coupled with the sale of 22 securities consisting primarily of mortgage-backed securities during the six month period ended September 30, 2011.

Loans receivable, net, decreased $24.9 million or 5.1% to $459.6 million at September 30, 2011 from $484.5 million at March 31, 2011. This decrease was a result of Company’s efforts to implement more stringent underwriting standards and increase rates combined with lower loan demand.  Residential real estate loans decreased $7.2 million to $103.8 million at September 30, 2011 from $111.0 million at March 31, 2011.  Consumer loans decreased $2.1 million to $62.7 million at September 30, 2011 compared to $64.9 million at March 31, 2011. Commercial real estate loans and commercial business loans decreased $12.4 million and $2.7 million, respectively, to $294.6 million and $10.9 million, respectively, at September 30, 2011 compared to $307.0 million and $13.5 million, respectively, at March 31, 2011. Loans held for sale decreased $1.2 million to $4.0 million at September 30, 2011 from $5.2 million at March 31, 2011.

Repossessed assets acquired in settlement of loans decreased $574,000 or 4.0% to $13.9 million at September 30, 2011 from $14.4 million at March 31, 2011.  The Company sold 13 real estate properties and repossessed 16 additional properties during the six month period ended September 30, 2011 for a net dollar amount decrease during the period. At September 30, 2011, the balance of repossessed assets consisted of the following 43 real estate properties: 19 single-family residences and 11 lots within residential
 
 
 
29

 
Security Federal Corporation and Subsidiaries
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
subdivisions located throughout our market area in South Carolina and Georgia; three parcels of land in South Carolina; one mobile home including small acreage in Lexington County, South Carolina; five commercial buildings in the Midlands area of South Carolina and one commercial building in Augusta, Georgia; a 55 lot subdivision development and adjacent 17 acres of land in Columbia, South Carolina; a 229.24 acre subdivision in Blythewood, South Carolina; and 34.8 acres of land in Bluffton, South Carolina also originally acquired as a participation loan from another financial institution.
 

Liabilities
Deposit Accounts

     
September 30, 2011
   
March 31, 2011
   
Increase (Decrease)
 
     
Balance
   
Weighted
Rate
   
Balance
   
Weighted
Rate
   
Amount
   
Percent
 
Demand Accounts:
                                     
Checking
    $ 118,817,537       0.13 %   $ 117,077,343       0.09 %   $ 1,740,194       1.5 %
Money Market
      216,094,880       0.74 %     194,560,099       0.85 %     21,534,781       11.1 %
Statement Savings
      21,054,515       0.20 %     20,582,505       0.24 %     472,010       2.3 %
Total
      355,966,932       0.50 %     332,219,947       0.54 %     23,746,985       7.1 %
                                                   
Certificate Accounts
                                                 
0.00 – 1.99%       252,551,771               239,078,153               13,473,618       5.6 %
2.00 – 2.99%       63,543,316               107,386,573               (43,843,257 )     (40.8 )%
3.00 – 3.99%       3,233,404               3,307,422               (74,018 )     (2.2 )%
4.00 – 4.99%       4,986,264               5,272,507               (286,243 )     (5.4 )%
5.00 – 5.99%       2,397,521               3,092,512               (694,991 )     (22.5 )%
Total
      326,712,276       1.47 %     358,137,167       1.71 %     (31,424,891 )     (8.8 )%
Total Deposits
    $ 682,679,208       0.97 %   $ 690,357,114       1.15 %   $ (7,677,906 )     (1.1 )%

Included in the certificates above were $34.7 million and $39.7 million in brokered deposits at September 30, 2011 and March 31, 2011, respectively, with a weighted average interest rate 1.94% and 2.18%, respectively.

Advances From FHLB – FHLB advances are summarized by year of maturity and weighted average interest rate in the table below:

               
Balance
 
   
September 30, 2011
   
March 31, 2011
   
Decrease
 
Fiscal Year Due:
 
Balance
   
Rate
   
Balance
   
Rate
   
Balance
   
Percent
 
2012
  $ 14,200,000       2.85 %   $ 24,950,000       2.22 %   $ (10,750,000 )     (43.1 )%
2013
    10,000,000       4.76 %     10,000,000       4.76 %     -       -  
2014
    30,000,000       3.45 %     30,000,000       3.45 %     -       -  
2015
    20,278,111       3.01 %     20,286,338       3.01 %     (8,227 )     (0.0 )
2016
    20,000,000       4.12 %     20,000,000       4.12 %     -       -  
Thereafter
    32,900,000       4.36 %     32,900,000       4.36 %     -       -  
Total Advances
  $ 127,378,111       3.76 %   $ 138,136,338       3.57 %   $ (10,758,227 )     (7.8 )%


These advances are secured by a blanket collateral agreement with the FHLB by pledging the Bank’s portfolio of residential first mortgage loans and investment securities with an amortized cost and fair value of $173.3 million and $166.2 million at September 30, 2011 and $168.2 million and $172.9 million at March 31, 2011, respectively. Advances are subject to prepayment penalties.


 
30

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

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

As of September 30, 2011
Borrow Date
 
Maturity Date
 
Amount
 
Int. Rate
 
Type
 
Call Dates
                     
11/23/05
 
11/23/15
 
  5,000,000
 
3.933%
 
Multi-Call
 
05/25/08 and quarterly thereafter
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
03/09/07
 
03/09/12
 
  4,700,000
 
4.286%
 
Multi-Call
 
06/09/10 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
08/28/08
 
08/28/13
 
  5,000,000
 
3.113%
 
Multi-Call
 
08/30/10 and quarterly thereafter

Other Borrowings – The Bank had $11.0 million and $11.2 million in other borrowings (non-FHLB advances) at September 30, 2011 and March 31, 2011, respectively.  These borrowings consist of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts.  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 September 30, 2011 and March 31, 2011, the interest rate paid on the repurchase agreements was 0.35% and 0.40%, respectively.  The Bank had pledged as collateral for these repurchase agreements investment and mortgage-backed securities with amortized costs and fair values of $20.7 million and $22.1 million at September 30, 2011 and $22.7 million and $23.7 million at March 31, 2011, respectively.

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 released the shares to the shareholder of the Collier-Jennings Companies over a three-year period.  The stock had a mandatorily redeemable rate 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.

On April 11, 2011, the Company eliminated the mandatorily redeemable shares of the Company’s common stock as a result of an investor’s purchase of these shares in a private transaction. In connection with the purchase of these shares, the redemption feature was eliminated. As a result, the Company no longer has the liability related to these shares on its balance sheet and the Company’s capital increased by $1.5 million.

Junior Subordinated Debentures – On September 21, 2006, the Trust (Security Federal Statutory Trust), 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 4.46% at September 30, 2011.  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 2.05% at September 30, 2011. 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.


 
31

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

Convertible Debentures – Effective December 1, 2009, the Company issued $6.1 million in convertible senior debentures. The debentures will mature on December 1, 2029 and accrue interest at the rate of 8.0% per annum until maturity or earlier redemption or repayment. Interest on the debentures is payable on June 1 and December 1 of each year, commencing June 1, 2010. 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, in whole or in part, at the option of the Company at any time on or after December 1, 2019, at a price equal to 100% of the principal amount of the debentures to be purchased plus any accrued and unpaid interest to, but excluding, the date of redemption. The debentures will be unsecured general obligations of the Company ranking equal in right of payment to all of our present and future unsecured indebtedness that is not expressly subordinated.

Equity – Shareholders’ equity increased $5.5 million or 7.3% to $81.5 million at September 30, 2011 from $76.0 million at March 31, 2011. Accumulated other comprehensive income, net of tax increased $3.9 million to $7.5 million at September 30, 2011. The Company’s net income available for common shareholders was $660,000 for the six month period ended September 30, 2011, after preferred stock dividends of $220,000.

On April 11, 2011, the Company eliminated the mandatorily redeemable shares of the Company’s common stock as a result of an investor’s purchase of these shares in a private equity transaction. In connection with the purchase of these shares, the redemption feature was eliminated. As a result, the Company no longer has the liability related to these shares on its balance sheet. This transaction resulted in an increase to capital of $1.5 million during the six months ended September 30, 2011.

The Board of Directors of the Company declared common stock dividends totaling $471,000 during the period ended September 30, 2011.  Book value per common share was $20.08 at September 30, 2011 and $18.21 at March 31, 2011.

Results of Operations for the Three Month Periods Ended September 30, 2011 and 2010

Net Income Available to Common Shareholders - Net income available to common shareholders increased $73,000 or 30.8% to $308,000 for the three months ended September 30, 2011 compared to $236,000 for the three months ended September 30, 2010. The increase in net income was primarily the result of a decrease in general and administrative expense combined with a decrease in preferred stock dividends. These changes were offset slightly by a $555,000 decrease in non-interest income and a $150,000 increase in the provision for loan losses.

Net Interest Income - The net interest margin increased 3 basis points to 3.10% for the quarter ended September 30, 2011 from 3.07% for the comparable quarter in the previous year. Despite an increase in the margin, the significant decrease in the volume of interest earning assets, particularly loans, resulted in a decrease in net interest income. Net interest income decreased $89,000 or 1.3% to $6.6 million during the three months ended September 30, 2011, compared to $6.7 million for the same period in 2010.  During the three months ended September 30, 2011, average interest earning assets decreased $16.6 million to $857.3 million while average interest-bearing liabilities decreased $29.6 million to $799.4 million.
 
Interest Income - Total interest income decreased $1.2 million or 10.4% to $9.9 million during the three months ended September 30, 2011 from $11.0 million for the same period in 2010. This decrease is primarily the result of the decrease in interest earning assets. Total interest income on loans decreased $1.1 million or 13.1% to $7.2 million during the three months ended September 30, 2011 as a result of the average loan portfolio balance decreasing $78.9 million, offset slightly by the yield on the loan portfolio increasing 10 basis points. Interest income from mortgage-backed securities decreased $143,000 or 6.8% to $1.9 million as a result of a 60 basis point decrease in the portfolio yield offset by a $27.0 million increase in the average balance. Interest income from investment securities increased $75,000 or 11.2% to $743,000 as a result of an increase of $34.3 million in the average balance of the investment securities portfolio partially offset by a decrease of 40 basis points in the yield.
 

 
32

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

The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the three months ended September 30, 2011 and 2010:
 
   
Three Months Ended September 30,
 
   
2011
   
2010
       
   
 
 
Average
Balance
   
 
 
 
Yield(1)
   
 
 
Average
Balance
   
 
 
 
Yield(1)
   
Increase
(Decrease) In Interest And Dividend Income From 2010
 
Loans Receivable, Net
  $ 465,039,249       6.18 %   $ 543,930,014       6.08 %   $ (1,081,609 )
Mortgage-Backed Securities
    256,649,480       3.04       229,668,165       3.64       (143,034 )
Investment Securities(2)
    130,816,906       2.37       96,556,897       2.77       107,659  
Overnight Time And
   Certificates of Deposit
    4,754,474       0.05       3,690,431       0.14       (683 )
Total Interest-Earning Assets
  $ 857,260,109       4.63 %   $ 873,845,507       5.05 %   $ (1,117,667 )
(1) Annualized 
(2)
 Tax equivalent basis is calculated using an effective tax rate of 34% and amounted to $33,000 for the quarter ended September 30, 2011.
 
 
Interest Expense - Total interest expense decreased $1.1 million or 24.6% to $3.3 million during the three months ended September 30, 2011 compared to $4.3 million for the same period last year.  The decrease in total interest expense is attributable to decreases in interest rates paid and a $29.6 million decrease in the average balance of interest-bearing liabilities.  Interest expense on deposits decreased $870,000 or 32.9% during the period ended September 30, 2011. The decrease was attributable to a 46 basis point decrease in the cost of deposits combined with a decrease in average interest-bearing deposits of $16.0 million when compared to the three month period ended September 30, 2010.  The decrease in the cost of deposits primarily resulted from maturing certificate accounts re-pricing at lower interest rates. Interest expense on advances and other borrowings decreased $190,000 or 12.7%. The average balance of other borrowings decreased $13.7 million or 8.1% to $155.7 million from the same period last year, directly reflecting the decrease in interest earning assets.

The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the three months ended September 30, 2011 and 2010:

   
Three Months Ended September 30,
 
   
2011
   
2010
       
   
 
Average Balance
   
 
Yield
(1)
   
 
Average Balance
   
 
Yield
(1)
   
Decrease In
Interest
Expense From
2010
 
Now And Money Market
   Accounts
  $ 286,344,052       0.65 %   $ 247,813,218       0.97 %   $ (138,216 )
Statement Savings Accounts
    20,932,731       0.22       19,393,381       0.32       (3,878 )
Certificates Accounts
    336,411,845       1.55       392,462,945       2.07       (728,271 )
FHLB Advances And
   Other Borrowed Money
    144,436,325       3.62       158,094,069       3.79       (189,653 )
Junior Subordinated Debentures
    5,155,000       4.52       5,155,000       4.64       (1,514 )
Senior Convertible Debentures
    6,084,000       8.00       6,084,000       8.00       -  
Total Interest-Bearing Liabilities
  $ 799,363,953       1.63 %   $ 829,002,613       2.09 %   $ (1,061,532 )
 (1) Annualized

Provision for Loan Losses - The amount of the provision is determined by management’s on-going monthly analysis of the loan portfolio and the adequacy of the allowance for loan losses. The Company has policies and procedures in place for evaluating and monitoring the overall credit quality of the loan portfolio and for timely identification of potential problem loans including internal and external loan reviews. The adequacy of the allowance for loan losses is reviewed monthly by the Asset Classification Committee and quarterly by the Board of Directors.


 
33

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


Management’s monthly review of the adequacy of the allowance includes three main components. The first component is an analysis of loss potential in various homogenous segments of the portfolio based on historical trends and the risk inherent in each category. Previously, management applied a five year historical loss ratio to each loan category to estimate the inherent loss in these pooled loans. However as a result of the decline in economic conditions and the unprecedented increases in delinquencies and charge offs experienced by the industry in recent periods, the Company no longer considers five year historical losses relevant indicators of future losses. Management began applying 12 to 24 month historical loss ratios to each loan category in recent quarters to more accurately project losses in the near future.

The second component of management’s monthly analysis is the specific review and evaluation of significant problem credits identified through the Company’s internal monitoring system. These loans are evaluated for impairment and recorded in accordance with accounting guidance. For each loan deemed impaired, management calculates a specific reserve for the amount in which the recorded investment in the loan exceeds the fair value. This estimate is based on a thorough analysis of the most probable source of repayment, which is typically liquidation of the collateral.

The third component is an analysis of changes in qualitative factors that may affect the portfolio, including but not limited to: relevant economic trends that could impact borrowers’ ability to repay, industry trends, changes in the volume and composition of the portfolio, credit concentrations, or lending policies and the experience and ability of the staff and Board of Directors. Management also reviews and incorporates certain ratios such as percentage of classified loans, average historical loan losses by loan category, delinquency percentages, and the assignment of percentage targets of reserves in each loan category when evaluating the allowance.

Once the analysis is completed, the three components are combined and compared to the allowance amount. Based on this, charges are made to the provision as needed.

The provision for loan losses was $2.3 million for the quarter ended September 30, 2011 compared to $2.2 million for the same quarter in the prior year.

The following table details selected activity associated with the allowance for loan losses for the three months ended September 30, 2011 and 2010:

   
September 30, 2011
 
September 30, 2010
Beginning Balance
$
13,502,573
$
11,485,185
Provision
 
2,300,000
 
2,150,000
Charge-offs
 
(2,064,355)
 
(2,122,268)
Recoveries
 
41,214
 
15,303
Ending Balance
$
13,779,432
$
11,528,220
         
Allowance For Loan Losses As A Percentage Of Gross Loans
Receivable, Held For Investment At The End Of The Period
 
 
2.94%
 
 
2.13%
Allowance For Loan Losses As A Percentage Of Impaired Loans At
The End Of The Period
 
 
41.99%
 
 
26.4%
Impaired Loans
$
32,812,363
$
43,743,434
Non-accrual Loans And 90 Days Or More Past Due Loans As A
   Percentage Of Loans Receivable, Held For Investment At The
   End Of The Period
 
 
 
3.2%
 
 
 
3.7%
Gross Loans Receivable,  Held For Investment and Held For Sale
$
475,893,745
$
540,321,145
Total Loans Receivable, Net
$
459,553,349
$
537,174,436

The cumulative interest not accrued during the quarter ended September 30, 2011 relating to all non-performing loans totaled $193,000. At September 30, 2011, the Company did not have any loans that were 90 days or more past due and still accruing interest. Our strategy is to work with our 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.


 
34

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


Non-Interest Income - Non-interest income decreased $555,000 or 27.1% for the three months ended September 30, 2011, compared to the three months ended September 30, 2010. The following table provides a detailed analysis of the changes in the components of non-interest income:

   
Three Months Ended September 30,
   
Increase (Decrease)
 
   
2011
   
2010
   
Amounts
   
Percent
 
Gain On Sale Of Investments
  $ 385,029     $ 495,895     $ (110,866 )     (22.4 )%
Gain On Sale Of Loans
    122,414       577,480       (455,066 )     (78.8 )
Service Fees On Deposit Accounts
    303,787       295,932       7,855       2.7  
Income From Cash Value Of
   Life Insurance
    105,000       105,000       -       -  
Commissions From Insurance Agency
    119,156       118,139       1,017       0.9  
Trust Income
    116,000       109,500       6,500       5.9  
Mandatorily Redeemable Financial
   Instrument Valuation
    -       (45,000 )     45,000       100.0  
Check Card Fee Income
    190,401       164,884       25,517       15.5  
Other
    150,680       225,580       (74,900 )     (33.2 )
Total Non-Interest Income
  $ 1,492,467     $ 2,047,410     $ (554,943 )     (27.1 )%

Gain on sale of investments was $385,000 during the quarter ended September 30, 2011 compared to $496,000 in the same period last year. The gain resulted from the sale of 22 investments during the period. Based on an analysis of the portfolio, the Company was able to maximize return by selling securities with short average lives as a result of call features or securities with adjustable rates scheduled to re-price down in the near future. The Company sold 22 securities during the same quarter of last year.
Gain on sale of loans decreased $455,000 to $122,000 during the three months ended September 30, 2011 when compared to the same period last year.

The Company recorded $45,000 in valuation expense related to the mandatorily redeemable financial instrument during the quarter ended September 30, 2010 compared to zero for the quarter ended September 30, 2011. In connection with the acquisition of the Collier-Jennings Companies on June 30, 2006, the Company recorded a $1.4 million mandatorily redeemable financial instrument. On April 11, 2011, the Company eliminated the mandatorily redeemable shares of the Company’s common stock as a result of an investor’s purchase of these shares in a private transaction. In connection with the purchase of these shares, the redemption feature was eliminated. As a result, the Company no longer has the liability related to these shares on its Consolidated Balance Sheets, nor the related valuation adjustment on its Consolidated Statement of Income.

Other income decreased $75,000 or 33.2% to $151,000 during the three months ended September 30, 2011 compared to $226,000 during 2010.

General And Administrative Expenses – The Company made significant progress during the quarter to reduce its general and administrative expenses through the implementation of several cost savings strategies. As a result, general and administrative expenses decreased $655,000 or 11.2% to $5.2 million for the three months ended September 30, 2011 from $5.9 million for the same period last year.  The following table provides a detailed analysis of the changes in the components of general and administrative expenses:

   
Three Months Ended September 30,
   
Increase (Decrease)
 
   
2011
   
2010
   
Amounts
   
Percent
 
Salaries And Employee Benefits
  $ 2,736,234     $ 3,000,691     $ (264,457 )     (8.8 )%
Occupancy
    472,416       489,774       (17,358 )     (3.5 )
Advertising
    115,613       80,554       35,059       43.5  
Depreciation And Maintenance
   Of Equipment
    442,648       468,533       (25,885 )     (5.5 )
FDIC Insurance Premiums
    264,707       316,000       (51,293 )     (16.2 )
Amortization of Intangibles
    12,501       22,500       (9,999 )     (44.4 )
Net Cost Of Operation Of Other Real
   Estate Owned
    261,230       631,601       (370,371 )     (58.6 )
Other
    891,312       842,152       49,160       5.8  
Total General And Administrative
   Expenses
  $ 5,196,661     $ 5,851,805     $ (655,144 )     (11.2 )%


 
35

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


Salary and employee benefits decreased $264,000 to $2.7 million for the three months ended September 30, 2010 from $3.0 million for the same period last year. As part of the Company’s cost savings strategies and due to the uncertainty in the economy, the Company eliminated annual raises in January 2011. In addition, due to increased efficiency and some attrition, the number of full time equivalent employees decreased by 14 to 214 full time equivalent employees at September 30, 2011 compared to 228 full time equivalent employees at September 30, 2010.

Occupancy decreased $17,000 or 3.5% to $472,000 for the three months ended September 30, 2011 from $490,000 for the same period one year ago while depreciation and maintenance of equipment decreased $26,000 or 5.5% to $443,000 for the three months ended September 30, 2011 from $469,000 for the same period in 2010.

Advertising expense increased $35,000 or 43.5% to $116,000 for the three months ended September 30, 2011 from $81,000 for the same period one year ago.

FDIC insurance premiums decreased $51,000 or 16.2% to $265,000 for the three month period ended September 30, 2011 compared to $316,000 for the same period a year ago as a result of a shrinking deposit base.

Net cost of operation of other real estate owned decreased $370,000 or 58.6% to $261,000 during the quarter ended September 30, 2011 from $632,000 during the quarter ended September 30, 2010. Net cost of operation of other real estate includes any gain or loss on the sale of other real estate owned and all other expenses related to these properties incurred during the period. As the balance of other real estate owned has slowly decreased, so has the cost associated with these properties.

Other expenses increased $49,000 to $891,000 for the three month period ended September 30, 2011, an increase of 5.8% when compared to the same period in the prior year. Other expenses include legal fees, consultant fees, and expenses associated with loan collection and workout efforts.

Provision For Income Taxes – The provision for income taxes decreased $100,000 or 33.6% to $197,000 for the three months ended September 30, 2011 from $297,000 for the same period one year ago.  Income before income taxes was $616,000 and $755,000 for the three months ended September 30, 2011 and 2010, respectively.  The Company’s combined federal and state effective income tax rate for the current quarter was 32.1% compared to 39.4% for the same quarter one year ago.

Results of Operations for the Six Month Periods Ended September 30, 2011 and 2010

Net Income Available to Common Shareholders - Net income available to common shareholders increased $127,000 or 23.8% to $660,000 for the six months ended September 30, 2011 compared to $533,000 for the six months ended September 30, 2010. The increase in net income was primarily the result of a decrease in general and administrative expense combined with a decrease in preferred stock dividends. These changes were offset partially by a $676,000 decrease in non-interest income and an increase of $550,000 in the provision for loan losses.

Net Interest Income - The net interest margin increased 5 basis points to 3.15% for the six months ended September 30, 2011 from 3.10% for the comparable period in the previous year. However, due to the significant decrease in interest earning assets, particularly loans, net interest income decreased $132,000 or 1.0% to $13.5 million during the six months ended September 30, 2011, compared to $13.6 million for the same period in 2010. This was a result of a decrease in interest income partially offset  by a decrease in interest expense.  During the six months ended September 30, 2011, average interest earning assets decreased $19.3 million to $859.0 million while average interest-bearing liabilities decreased $32.3 million to $800.1 million.  One of the Bank’s primary objectives has been to maximize risk based capital through steady earnings and a decrease in certain loan type concentrations. Average loans receivable, net decreased $82.5 million to $471.8 million during the six months ended September 30, 2011 compared to $554.3 million in 2010.
 
Interest Income - Total interest income decreased $2.3 million or 10.1% to $20.1 million during the six months ended September 30, 2011 from $22.4 million for the same period in 2010. This decrease is primarily the result of the decrease in interest earning assets. Total interest income on loans decreased $2.1 million or 12.7% to $14.5 million during the six months ended September 30, 2011 as a result of the average loan portfolio balance decreasing $82.5 million, offset slightly by the yield in the loan portfolio increasing 16 basis points. Interest income from mortgage-backed securities decreased $326,000 or 7.4% to $4.1 million as a result of a 61 basis point decrease in the portfolio yield offset by a $24.1 million increase in the average balance of the portfolio. Interest income from investment securities increased $165,000 or 12.2% to $1.5 million as a result of a $37.7 million increase in the average balance of investments during the six months ended September 30, 2011 to $128.1 million.
 
 
 
 
36

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


 
The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the six months ended September 30, 2011 and 2010:

   
Six Months Ended September 30,
 
   
2011
   
2010
       
   
 
Average
Balance
   
 
 
Yield
(1)
   
 
Average
Balance
   
 
 
Yield
(1)
   
Increase
(Decrease) In Interest And Dividend Income From 2010
 
Loans Receivable, Net
  $ 471,824,863       6.16 %   $ 554,349,321       6.00 %   $ (2,109,750 )
Mortgage-Backed Securities
    255,839,109       3.18       231,786,989       3.79       (325,921 )
Investments (2)
    128,144,912       2.43       90,432,143       2.98       208,608  
Overnight Time &
   Certificates Of Deposits
    3,224,923       0.07       1,766,992       0.17       (388 )
Total Interest-Earning Assets
  $ 859,033,807       4.69 %   $ 878,335,445       5.10 %   $ (2,227,451 )
                                         
       (1) Annualized
     (2) Tax equivalent basis is calculated using an effective tax rate of 34% and amounted to $44,000 for the six ended September 30, 2011.

Interest Expense - Total interest expense decreased $2.1 million or 24.5% to $6.6 million during the six months ended September 30, 2011 compared to $8.7 million for the same period last year.  The decrease in total interest expense is attributable to decreases in interest rates paid and a $32.3 million decrease in the average balance of interest-bearing liabilities.  Interest expense on deposits decreased $1.7 million or 31.1% during the period ended September 30, 2011. The decrease was attributable to a 48 basis point decrease in the cost of deposits combined with a decrease in average interest-bearing deposits of $14.0 million when compared to the six month period ended September 30, 2010.  The decrease in the cost of deposits primarily resulted from maturing certificate accounts re-pricing at lower interest rates while the decrease in average balance directly reflects the decrease in interest-earning assets. Interest expense on advances and other borrowings decreased $482,000 or 14.2%. The average balance of other borrowings decreased $18.3 million or 10.5% to $156.6 million from the same period last year, directly reflecting the decrease in interest earning assets.

The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the six months ended September 30, 2011 and 2010:

   
Six Months Ended September 30,
 
   
2011
   
2010
       
   
 
Average
Balance
   
 
Yield
(1)
   
 
Average
Balance
   
 
Yield
(1)
   
Decrease In
Interest Expense From 2010
 
Now And Money Market
   Accounts
  $ 279,361,350       0.65 %   $ 244,533,104       0.96 %   $ (269,521 )
 Statement Savings Accounts
    20,804,405       0.23       19,197,753       0.34       (8,711 )
Certificates Accounts
    343,388,970       1.60       393,812,118       2.09       (1,376,621 )
FHLB Advances
   And Other Borrowed Money
    145,349,054       3.54       163,695,565       3.74       (483,040 )
Junior Subordinated Debentures
    5,155,000       4.50       5,155,000       4.57       (1,564 )
Senior Convertible Debentures
    6,084,000       8.00       6,084,000       8.00       -  
Total Interest-Bearing Liabilities
  $ 800,142,778       1.65 %   $ 832,477,540       2.10 %   $ (2,139,457 )
        (1) Annualized


 
37

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



Provision for Loan Losses - The provision for loan losses was $4.6 million for the six months ended September 30, 2011 compared to $4.1 million for the same period in the prior year.

The following table details selected activity associated with the allowance for loan losses for the six months ended September 30, 2011 and 2010:

   
September 30,
2011
   
September 30,
2010
Beginning Balance
  $ 12,501,800     $ 12,307,394  
Provision
    4,600,000       4,050,000  
Charge-offs
    (3,386,216 )     (4,874,893 )
Recoveries
    63,849       45,719  
Ending Balance
  $ 13,779,433     $ 11,528,220  
                 

Non-Interest Income - Non-interest income decreased $676,000 or 19.6% for the six months ended September 30, 2011, compared to the six months ended September 30, 2010. The following table provides a detailed analysis of the changes in the components of non-interest income:

   
Six Months Ended September 30,
   
Increase (Decrease)
 
   
2011
   
2010
   
Amounts
   
Percent
 
Gain On Sale Of Investments
  $ 556,253     $ 695,406     $ (139,153 )     (20.0 )%
Gain On Sale Of Loans
    229,684       846,157       (616,473 )     (72.9 )
Service Fees On Deposit Accounts
    574,480       589,817       (15,337 )     (2.6 )
Income From Cash Value Of
   Life Insurance
    210,000       200,000       10,000       5.0  
Commissions From Insurance Agency
    211,258       208,966       2,292       1.1  
Trust Income
    230,000       219,000       11,000       5.0  
Mandatorily Redeemable Financial
   Instrument Valuation
    50,000       (85,000 )     135,000       158.8  
Check Card Fee Income
    392,793       330,749       62,044       18.8  
Other
    309,293       434,357       (125,064 )     (28.8 )
Total Non-Interest Income
  $ 2,763,761     $ 3,439,452     $ (675,691 )     (19.6 )%

Gain on sale of investments was $556,000 during the six months ended September 30, 2011 compared to $695,000 in the same period last year. The gain resulted from the sale of 29 investments during the period. Based on an analysis of the portfolio, the Company was able to maximize return by selling securities with short average lives as a result of call features or securities with adjustable rates scheduled to re-price down in the near future. The Company sold 32 investments during the six month period ended September 30, 2010. Gain on sale of loans decreased $616,000 to $230,000 during the six months ended September 30, 2011 when compared to the same period last year as a result of a decrease in the volume of fixed rate residential mortgages originated and sold.

The Company recorded $50,000 in valuation income related to the mandatorily redeemable financial instrument during the six months ended September 30, 2011 compared to an expense of $85,000 for the six months ended September 30, 2010. The mandatorily redeemable financial instrument is reported at fair value on the Consolidated Balance Sheets with any resulting valuation adjustments included in earnings. On April 11, 2011, the Company eliminated the mandatorily redeemable shares of the Company’s common stock as a result of an investor’s purchase of these shares in a private transaction. In connection with the purchase of these shares, the redemption feature was eliminated. As a result, the Company no longer has the liability related to these shares on its Consolidated Balance Sheets.

Check card fee income increased $62,000 or 18.8% to $393,000 during the six months ended September 30, 2011 from $331,000 for the same period last year. Other income decreased $125,000 or 28.8% to $309,000 during the six months ended September 30, 2011 compared to $434,000 during 2010.


 
38

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



General And Administrative Expenses – General and administrative expenses decreased $1.0 million or 9.2% to $10.4 million for the six months ended September 30, 2011 from $11.4 million for the same period last year.  The following table provides a detailed analysis of the changes in the components of general and administrative expenses:

   
Six Months Ended September 30,
   
Increase (Decrease)
 
   
2011
   
2010
   
Amounts
   
Percent
 
Salaries And Employee Benefits
  $ 5,579,212     $ 6,007,175     $ (427,963 )     (7.1 )%
Occupancy
    951,168       1,003,966       (52,798 )     (5.3 )
Advertising
    201,293       201,348       (55 )     (0.0 )
Depreciation And Maintenance
   Of Equipment
    855,273       924,568       (69,295 )     (7.5 )
FDIC Insurance Premiums
    556,912       628,048       (71,136 )     (11.3 )
Amortization of Intangibles
    35,021       45,000       (9,979 )     (22.2 )
Net Cost Of Operation Of Other
   Real Estate Owned
    297,840       805,672       (507,832 )     (63.0 )
Other
    1,880,466       1,788,756       91,710       5.1  
Total General And Administrative
   Expenses
  $ 10,357,185     $ 11,404,533     $ (1,047,348 )     (9.2 )%

Salary and employee benefits decreased $428,000 to $5.6 million for the six months ended September 30, 2011 from $6.0 million for the same period last year. This decrease was primarily the result of a decrease in full time equivalent employees during the period. As a result of increased efficiency and some attrition, the Company went from 228 full time employee equivalents at September 30, 2010 to 214 full time employee equivalents at September 30, 2011. In addition, as part of the Company’s cost savings strategies and due to the uncertainty in the economy, the Company eliminated annual raises in January 2011.

Occupancy decreased $53,000 or 5.3% to $951,000 for the six months ended September 30, 2011 from $1.0 million for the same period one year ago while depreciation and maintenance of equipment decreased $69,000 or 7.5% to $855,000 during the six months ended September 30, 2011 from $925,000 in 2010. The Company made significant efforts to reduce expenses during the period.

FDIC insurance premiums decreased $71,000 or 11.3% to $557,000 for the six month period ended September 30, 2011 compared to $628,000 for the same period a year ago as a result of the decrease in deposits.

Net cost of operation of other real estate owned decreased $508,000 or 63.0% to $298,000 during the six months ended September 30, 2011 from $806,000 during the same period in 2010. As the balance of other real estate owned has slowly decreased, the cost associated with these properties has also decreased. Other expenses increased $92,000 to $1.9 million for the six month period ended September 30, 2011, an increase of 5.1% when compared to the same period in the prior year. Other expenses include legal fees, consultant fees, and expenses associated with loan collection and workout efforts.

Provision For Income Taxes – The provision for income taxes decreased $192,000 or 30.9% to $429,000 for the six months ended September 30, 2011 from $620,000 for the same period one year ago.  The Company’s combined federal and state effective income tax rate for the current period was 32.8% compared to 38.3% for the same period one year ago.

Liquidity Commitments, Capital Resources, and Impact of Inflation and Changing Prices

Liquidity – The Company actively analyzes and manages the Bank’s liquidity with the objective of maintaining an adequate level of liquidity and to ensure the availability of sufficient cash flows to support loan growth, fund deposit withdrawals, fund operations, and satisfy other financial commitments.  See the “Consolidated Statements of Cash Flows” contained in Item 1 – Financial Statements, herein.

The primary sources of funds are customer deposits, loan repayments, loan sales, maturing investment securities, and advances from the FHLB.  The sources of funds, together with retained earnings and equity, are used to make loans, acquire investment securities and other assets, and fund continuing operations.  While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage repayments are greatly influenced by the level of interest rates, economic conditions, and competition.  Management believes that the Company’s current liquidity position and its forecasted operating results are sufficient to fund all of its existing commitments.
 
 
 
39

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



During the six months ended September 30, 2011 loan repayments exceeded loan disbursements resulting in a $24.9 million or 5.1% decrease in total net loans receivable.  During the six months ended September 30, 2011, deposits decreased $7.7 million and FHLB advances decreased $10.8 million.  The Bank had $149.5 million in additional borrowing capacity at the FHLB at the end of the period.  At September 30, 2011, the Bank had $223.7 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.

At September 30, 2011 and 2010, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” the Bank must maintain minimum total risk based, Tier 1 risk based and Tier 1 leverage ratios of 10%, 6% and 5%, respectively. There are no current conditions or events that management believes would change the Company’s or the Bank’s category.

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

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at September 30, 2011.

 
 
 
 
(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
  $ 131     $ 652     $ 4,061     $ 4,844     $ 28,069     $ 32,913  
Standby letters of credit
    10       437       998       1,445       6       1,451  
Total
  $ 141     $ 1,089     $ 5,059     $ 6,289     $ 28,075     $ 34,364  

 
40

 
Security Federal Corporation and Subsidiaries



Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures:  An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a - 15(e) of the Securities Exchange Act of 1934 (“Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management as of the end of the period covered by this quarterly report.  The Company’s Chief Executive Officer and Chief Financial Officer concluded that at September 30, 2011 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. There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended September 30, 2011 that have materially affected or are reasonably likely to affect our internal controls over financial reporting

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.
 
 
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, 2011.

Item 2.   Unregistered sales of Equity Securities and Use Of Proceeds
 
               None

Item 3.   Defaults Upon Senior Securities
None

Item 4.   [Removed and Reserved]

Item 5.   Other Information
None


 
41

 
Security Federal Corporation and Subsidiaries


Item 6.         Exhibits
 
     3.1 Articles of Incorporation, as amended (1) 
     3.2
Articles of Amendment, including Certificate of Designation relating to the Company’s Fixed Rate Cumulative Perpetual Preferred Stock Series A (2)
     3.3
Articles of Amendment, including Certificate of Designation relating to the Company’s Fixed Rate Cumulative
Perpetual Preferred Stock Series B (3)
      3.4  Bylaws (4) 
      4.1  Form of Stock Certificate of the Company and other instruments defining the rights of security holders, including indentures (5)
     4.2
Form of Certificate for the Series A Preferred Shares (2)
      4.3  Form of Certificate for the Series B Preferred Shares (3) 
     4.4
Warrant to purchase shares of the Company’s common stock dated December 19, 2008 (2)
     4.5
Letter Agreement (including Securities Purchase Agreement – Standard Terms, attached as Exhibit A) dated December 19, 2008 between the Company and the United States Department of the Treasury (2)
     4.6
Form of Indenture with respect to the Company’s 8.0% Convertible Senior Debentures Due2029 (6)
     4.7
Specimen Convertible Senior Debenture Due 2029 (6)
     4.8
Letter Agreement dated September 29, 2010 between Security Federal Corporation and the United States Department of the Treasury, including the Exchange Agreement – Standard Terms, with respect to the exchange of the Series A Fixed Rate Cumulative Perpetual Preferred Stock for the Series B Fixed Rate Cumulative Perpetual Preferred Stock (3)
     4.9
Letter Agreement dated September 29, 2010 between Security Federal Corporation and the United States Department of the Treasury, including the Securities Purchase Agreement – Standard Terms, with respect to the purchase of the Series B Fixed Rate Cumulative Perpetual Preferred Stock (3)
         10.1  1993 Salary Continuation Agreements (7) 
        10.2
Amendment One to 1993 Salary Continuation Agreements (8)
        10.3
Form of 2006 Salary Continuation Agreement (9)
        10.4 1999 Stock Option Plan (10) 
         10.5  2002 Stock Option Plan (11) 
          10.6   2006 Stock Option Plan (12) 
        10.7
2008 Equity Incentive Plan (13)
        10.8
Form of incentive stock option agreement and non-qualified stock option agreement pursuant to the 2006 Stock Option Plan (12)
         10.9  2004 Employee Stock Purchase Plan (14) 
           10.10  Incentive Compensation Plan (7) 
            10.11   Form of Security Federal Bank Salary Continuation Agreement (15) 
           10.12  Form of Security Federal Split Dollar Agreement (9) 
           10.13  Form of Compensation Modification Agreement (2) 
    13
Annual Report to Stockholders
   14
Code of Ethics (16)
       31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
       31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
    32
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
      101
The following materials from Security Federal Corporation’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2011, formatted in Extensible Business Reporting Language (XBRL):(a) Consolidated Balance  Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Shareholders’ Equity and Comprehensive Income; (d) Consolidated Statements of Cash Flows; and(e) Notes to Consolidated Financial Statements*
 
________________
  (*) 
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 
(1)
Filed on June 26, 1998, as an exhibit to the Company’s Proxy Statement and incorporated herein by reference.
  (2)  Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on December 23, 2008. 
  (3)  Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on September 30, 2010. 
 
(4)
Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed on October 17, 2011.
 
(5)
Filed on August 12, 1987, as an exhibit to the Company’s Registration Statement on Form 8-A and incorporated by reference.
  (6)
Filed on July 13, 2009 as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-160553) and incorporated herein by reference.
 
(7)
Filed on June 28, 1993, as an exhibit to the Company’s Annual Report on Form 10-KSB and incorporated herein by reference.
 
 
 
 
 
42

 
 
Security Federal Corporation and Subsidiaries
 
 
 
(8)
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.
 
(9)
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.
 
(10)
Filed on March 2, 2000, as an exhibit to the Company’s Registration Statement on Form S-8 and incorporated herein by reference
  (11)
Filed on January 3, 2003, as an exhibit to the Company’s Registration Statement on Form S-8 and incorporated herein by reference.
 
(12)
Filed on August 22, 2006, as an exhibit to the Company’s Registration Statement on Form S-8 (Registration Statement No. 333-136813) and incorporated herein by reference.
  (13)
Filed on November 12, 2008, as an exhibit to the Company’s Registration Statement on Form S-8 and incorporated herein by reference.
 
(14)
Filed on June 18, 2004, as an exhibit to the Company’s Proxy Statement and incorporated herein by reference.
 
(15)
Filed on May 24, 2006 as an exhibit to the Current Report on Form 8-K and incorporated herein by reference.
  (16)   Filed on June 29, 2006, as an exhibit to the Company’s Annual Report on Form 10-K and incorporated herein by reference.
 
          
 
43

 
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 be signed on its behalf by the undersigned thereunto duly authorized.
                
      SECURITY FEDERAL CORPORATION 
         
         
Date:
November 10, 2011
 
By:
  /s/Timothy W. Simmons
 
Timothy W. Simmons
 
President
 
Duly Authorized Representative
 

 
Date:
November 10, 2011
 
By:
  /s/Roy G. Lindburg
 
Roy G. Lindburg
 
CFO
 
Duly Authorized Representative



 
44

 
Security Federal Corporation and Subsidiaries


EXHIBIT INDEX

 
31.1
Certifications of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
 
31.2
Certifications of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
 
32
Certifications of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
 
101
The following materials from Security Federal Corporation’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2011, formatted in Extensible Business Reporting Language (XBRL):(a) Consolidated Balance  Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Shareholders’ Equity and Comprehensive Income; (d) Consolidated Statements of Cash Flows; and(e) Notes to Consolidated Financial Statements

 
 
 
 
45