SECURITY FEDERAL CORP - Quarter Report: 2012 September (Form 10-Q)

secfedq93012.htm

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, 2012

( ) 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

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 (§232.405 of this chapter) 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 non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filed [ ] Accelerated filer [ ]

Non-accelerated filer [ ] Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell corporation (defined in Rule 12b-2 of the Exchange Act).

YES

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 13, 2012			2,944,001

Security Federal Corporation and Subsidiaries

INDEX


PART I.	FINANCIAL INFORMATION (UNAUDITED)	PAGE NO.
Item 1.	Financial Statements (Unaudited):
	Consolidated Balance Sheets at September 30, 2012 and March 31, 2012	3
	Consolidated Statements of Income for the Three and Six Months Ended September 30, 2012 and 2011	4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended September 30, 2012 and 2011	6
	Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended September 30, 2012 and 2011	7
	Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2012 and 2011	8
	Notes to Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	43
Item 4.	Controls and Procedures	43

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	45
	Signatures	47

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

Security Federal Corporation and Subsidiaries

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets

	September 30, 2012			March 31, 2012
Assets:	(Unaudited)			(Audited)
Cash And Cash Equivalents	$	14,408,177		$	9,331,372
Certificates Of Deposits With Other Banks		1,728,111			1,727,210
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized cost of $346,645,819 at September 30, 2012 and $343,421,858 at March 31, 2012)		359,820,610			353,954,857
Held To Maturity: (Fair value of $72,343,921 at September 30, 2012 and $69,965,869 at March 31, 2012)		69,033,012			67,676,210
Total Investment And Mortgage-Backed Securities		428,853,622			421,631,067
Loans Receivable, Net:
Held For Sale		4,169,733			2,671,771
Held For Investment: (Net of allowance of $11,646,159 at September 30, 2012 and $14,615,198 at March 31, 2012)		398,879,728			425,838,835
Total Loans Receivable, Net		403,049,461			428,510,606
Accrued Interest Receivable:
Loans		1,348,226			1,718,252
Mortgage-Backed Securities		954,059			987,911
Investments		927,459			793,655
Premises And Equipment, Net		18,092,616			18,726,299
Federal Home Loan Bank (“FHLB”) Stock, At Cost		6,467,000			8,471,100
Bank Owned Life Insurance		11,046,305			10,836,305
Repossessed Assets Acquired In Settlement Of Loans		11,032,720			14,160,099
Intangible Assets, Net		74,475			99,477
Goodwill		1,199,754			1,199,754
Other Assets		5,053,519			6,443,501
Total Assets	$	904,235,504		$	924,636,608

Liabilities And Shareholders’ Equity
Liabilities:
Deposit Accounts	$	687,188,549		$	696,201,056
Advances From FHLB		108,161,409			122,069,802
Other Borrowed Money		9,889,260			9,801,386
Advance Payments By Borrowers For Taxes And Insurance		574,750			350,464
Junior Subordinated Debentures		5,155,000			5,155,000
Senior Convertible Debentures		6,084,000			6,084,000
Other Liabilities		4,045,642			4,203,014
Total Liabilities	$	821,098,610		$	843,864,722

Shareholders' Equity:
Serial Preferred Stock, $.01 Par Value; Authorized Shares – 200,000; Issued And Outstanding Shares – 22,000 At September 30, 2012 And At March 31, 2012	$	22,000,000		$	22,000,000
Common Stock, $.01 Par Value; Authorized Shares – 5,000,000; Issued - 3,144,934 And Outstanding Shares – 2,944,001 At September 30, 2012 And At March 31, 2012		31,449			31,449
Warrant Issued In Conjunction With Serial Preferred Stock		400,000			400,000
Additional Paid-In Capital		11,642,807			11,626,245
Treasury Stock, (At Cost, 200,933 Shares At September 30, 2012 And March 31, 2012)		(4,330,712	)		(4,330,712	)
Accumulated Other Comprehensive Income		8,172,541			6,533,573
Retained Earnings		45,220,809			44,511,331
Total Shareholders' Equity	$	83,136,894		$	80,771,886
Total Liabilities And Shareholders' Equity	$	904,235,504		$	924,636,608

See accompanying notes to consolidated financial statements.

Security Federal Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

	Three Months Ended September 30,
	2012		2011
Interest Income:
Loans	$	5,979,342	$	7,187,593
Mortgage-Backed Securities		1,642,163		1,949,193
Investment Securities		647,720		742,887
Other		2,233		620
Total Interest Income		8,271,458		9,880,293

Interest Expense:
NOW And Money Market Accounts		291,387		462,249
Statement Savings Accounts		10,914		11,672
Certificate Accounts		944,296		1,299,700
Advances And Other Borrowed Money		1,066,410		1,306,670
Junior Subordinated Debentures		28,378		58,259
Senior Convertible Debentures		121,680		121,680
Total Interest Expense		2,463,065		3,260,230

Net Interest Income		5,808,393		6,620,063
Provision For Loan Losses		300,000		2,300,000
Net Interest Income After Provision For Loan Losses		5,508,393		4,320,063
Non-Interest Income:
Gain On Sale Of Investments		324,835		385,029
Gain On Sale Of Loans		177,524		122,414
Service Fees On Deposit Accounts		291,753		303,787
Income From Cash Value Of Life Insurance		105,000		105,000
Commissions From Insurance Agency		131,761		119,156
Trust Income		120,000		116,000
Check Card Fee Income		196,943		190,401
Other		129,873		150,680
Total Non-Interest Income		1,477,689		1,492,467

General And Administrative Expenses:
Salaries And Employee Benefits		2,709,998		2,736,234
Occupancy		505,208		472,416
Advertising		97,221		115,613
Depreciation And Maintenance Of Equipment		412,000		442,648
FDIC Insurance Premiums		152,494		264,707
Amortization Of Intangibles		12,501		12,501
Net Cost Of Operation Of Other Real Estate Owned		1,321,254		261,230
Other		860,407		891,312
Total General And Administrative Expenses		6,071,083		5,196,661

Income Before Income Taxes		914,999		615,869
Provision For Income Taxes		245,209		197,416
Net Income		669,790		418,453
Preferred Stock Dividends		110,000		110,000
Net Income Available To Common Shareholders	$	559,790	$	308,453

Basic Net Income Per Common Share	$	0.19	$	0.11
Diluted Net Income Per Common Share	$	0.19	$	0.11
Cash Dividend Per Share On Common Stock	$	0.08	$	0.08
Basic Weighted Average Shares Outstanding		2,944,001		2,944,001
Diluted Weighted Average Shares Outstanding		2,944,001		2,944,001

See accompanying notes to consolidated financial statements.

Security Federal Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

	Six Months Ended September 30,
	2012		2011
Interest Income:
Loans	$	12,065,533	$	14,528,290
Mortgage-Backed Securities		3,406,875		4,066,724
Investment Securities		1,270,256		1,514,341
Other		4,199		1,089
Total Interest Income		16,746,863		20,110,444

Interest Expense:
NOW And Money Market Accounts		582,972		909,129
Statement Savings Accounts		21,815		24,346
Certificate Accounts		1,977,401		2,740,303
Advances And Other Borrowed Money		2,199,710		2,575,726
Junior Subordinated Debentures		56,689		116,106
Senior Convertible Debentures		243,360		243,360
Total Interest Expense		5,081,947		6,608,970

Net Interest Income		11,664,916		13,501,474
Provision For Loan Losses		1,025,000		4,600,000
Net Interest Income After Provision For Loan Losses		10,639,916		8,901,474
Non-Interest Income:
Gain On Sale Of Investments		428,494		556,253
Gain On Sale Of Loans		310,476		229,684
Service Fees On Deposit Accounts		570,316		574,480
Income From Cash Value Of Life Insurance		210,000		210,000
Commissions From Insurance Agency		239,534		211,258
Trust Income		240,000		230,000
Mandatorily Redeemable Financial Instrument Valuation		-		50,000
Check Card Fee Income		401,803		392,793
Other		260,802		309,293
Total Non-Interest Income		2,661,425		2,763,761

General And Administrative Expenses:
Salaries And Employee Benefits		5,324,042		5,579,212
Occupancy		996,955		951,168
Advertising		179,165		201,293
Depreciation And Maintenance Of Equipment		816,594		855,273
FDIC Insurance Premiums		338,122		556,912
Amortization of Intangibles		25,002		35,021
Net Cost Of Operation Of Real Estate Owned		1,963,405		297,840
Other		1,726,006		1,880,466
Total General And Administrative Expenses		11,369,291		10,357,185

Income Before Income Taxes		1,932,050		1,308,050
Provision For Income Taxes		531,532		428,550
Net Income		1,400,518		879,500
Preferred Stock Dividends		220,000		220,000
Net Income Available To Common Shareholders	$	1,180,518	$	659,500

Basic Net Income Per Common Share	$	0.40	$	0.22
Diluted Net Income Per Common Share	$	0.40	$	0.22
Cash Dividend Per Share On Common Stock	$	0.16	$	0.16
Basic Weighted Average Shares Outstanding		2,944,001		2,944,001
Diluted Weighted Average Shares Outstanding		2,944,001		2,944,001

See accompanying notes to consolidated financial statements.

Security Federal Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

	Three Months Ended September 30,
	2012			2011
Net Income	$	669,790		$	418,453
Other Comprehensive Income
Unrealized Gains On Securities:
Unrealized Holding Gains On Securities Available For Sale, Net Of Taxes Of $652,769 At September 30, 2012 and $725,292 At September 30, 2011		1,268,565			1,423,069
Reclassification Adjustment For Gains Included In Net Income, Net Of Taxes Of $123,438 At September 30, 2012 and $146,310 At September 30, 2011		(201,397	)		(238,719	)
Other Comprehensive Income		1,067,168			1,184,350
Comprehensive Income	$	1,736,958		$	1,602,803

	Six Months Ended September 30,
	2012			2011
Net Income	$	1,400,518		$	879,500
Other Comprehensive Income
Unrealized Gains On Securities:
Unrealized Holding Gains On Securities Available For Sale, Net Of Taxes Of $1,002,824 At September 30, 2012 and $2,382,202 At September 30, 2011		1,904,634			4,236,728
Reclassification Adjustment For Gains Included In Net Income, Net Of Taxes Of $162,828 At September 30, 2012 and $211,376 At September 30, 2011		(265,666	)		(344,877	)
Other Comprehensive Income		1,638,968			3,891,851
Comprehensive Income	$	3,039,486		$	4,771,351

See accompanying notes to consolidated financial statements.

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, 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		-		-		-		-			-			3,891,851		-			3,891,851
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	$	11,609,684		$	(4,330,712	)	$	7,529,526	$	44,286,495		$	81,526,442

	Preferred Stock		Warrants		Common Stock		Additional Paid – In Capital		Treasury Stock				Accumulated Other Comprehensive Income		Retained Earnings			Total
Balance At March 31, 2012	$	22,000,000	$	400,000	$	31,449	$	11,626,245		$	(4,330,712	)	$	6,533,573	$	44,511,331		$	80,771,886
Net Income		-		-		-		-			-			-		1,400,518			1,400,518
Other Comprehensive Income, Net Of Tax		-		-		-		-			-			1,638,968		-			1,638,968
Stock Compensation Expense		-		-		-		16,562			-			-		-			16,562
Cash Dividends On Preferred		-		-		-		-			-			-		(220,000	)		(220,000	)
Cash Dividends On Common		-		-		-		-			-			-		(471,040	)		(471,040	)
Balance At September 30, 2012	$	22,000,000	$	400,000	$	31,449	$	11,642,807		$	(4,330,712	)	$	8,172,541	$	45,220,809		$	83,136,894

See accompanying notes to consolidated financial statements.

Security Federal Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended September 30,
	2012			2011
Cash Flows From Operating Activities:
Net Income	$	1,400,518		$	879,500
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
Depreciation Expense		705,101			742,501
Writedown On Repossessed Assets Acquired In Settlement Of Loans		1,706,500			128,920
Amortization Of Intangible Assets		25,002			22,520
Stock Option Compensation Expense		16,562			16,562
Discount Accretion And Premium Amortization, Net		3,691,308			2,392,322
Provisions For Losses On Loans		1,025,000			4,600,000
Mandatorily Redeemable Financial Instrument Valuation		-			(50,000	)
Income From Bank Owned Life Insurance		(210,000	)		(210,000	)
Gain On Sale Of Mortgage-Backed Securities Available For Sale		(388,766	)		(421,763	)
Gain On Sale Of Investment Securities Available For Sale		(39,728	)		(134,490	)
Gain On Sale Of Loans		(310,476	)		(229,684	)
Gain On Sale Of Repossessed Assets Acquired In Settlement Of Loans		(18,075	)		(74,545	)
Amortization Of Deferred Fees On Loans		(5,189	)		(11,881	)
Proceeds From Sale Of Loans Held For Sale		14,286,740			20,715,877
Origination Of Loans For Sale		(15,474,226	)		(19,283,876	)
(Increase) Decrease In Accrued Interest Receivable:
Loans		370,026			(59,042	)
Mortgage-Backed Securities		33,852			2,492
Investments		(134,705	)		44,086
Increase In Advance Payments By Borrowers		224,286			213,699
Other, Net		229,785			(219,950	)
Net Cash Provided By Operating Activities		7,133,515			9,063,248

Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed Securities Held To Maturity		766,587			619,241
Principal Repayments On Mortgage-Backed Securities Available For Sale		27,473,043			23,419,609
Purchase Of Investment Securities Available For Sale		(24,619,640	)		(28,038,478	)
Purchase Of Mortgage-Backed Securities Available For Sale		(43,254,071	)		(36,526,360	)
Purchase Of Investment Securities Held To Maturity		(3,679,337	)		(5,999,739	)
Purchase Of Mortgage-Backed Securities Held To Maturity		(7,538,727	)		(15,261,891	)
Maturities Of Investment Securities Available For Sale		10,806,538			15,052,221
Maturities Of Investment Securities Held To Maturity		8,794,373			4,358,428
Proceeds From Sale Of Mortgage-Backed Securities Available For Sale		21,047,796			24,481,906
Proceeds From Sale Of Investment Securities Available For Sale		2,359,862			9,674,531
Purchase Of FHLB Stock		(284,687	)		(34,343	)
Redemption Of FHLB Stock		2,288,787			1,909,528
Decrease In Loans To Customers		24,727,743			16,562,408
Proceeds From Sale Of Repossessed Assets		2,650,507			3,083,986
Purchase And Improvement Of Premises And Equipment		(71,418	)		(138,587	)
Net Cash Provided By Investing Activities		21,467,356			13,162,460

(Continued)

Security Federal Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended September 30,
	2012			2011
Cash Flows From Financing Activities:
Decrease In Deposit Accounts		(9,012,507	)		(7,677,906	)
Proceeds From FHLB Advances		28,900,000			63,000,000
Repayment Of FHLB Advances		(42,808,393	)		(73,758,227	)
Net Proceeds (Repayment) Of Other Borrowings		87,874			(205,534	)
Dividends To Preferred Shareholders		(220,000	)		(220,000	)
Dividends To Common Shareholders		(471,040	)		(470,988	)
Net Cash Used By Financing Activities		(23,524,066	)		(19,332,655	)

Net Increase In Cash And Cash Equivalents		5,076,805			2,893,053
Cash And Cash Equivalents At Beginning Of Period		9,331,372			7,835,638
Cash And Cash Equivalents At End Of Period	$	14,408,177		$	10,728,691

Supplemental Disclosure Of Cash Flows Information:
Cash Paid During The Period For Interest	$	5,233,582		$	6,712,526
Cash Paid During The Period For Income Taxes	$	96,656		$	971,856
Additions To Repossessed Assets Acquired In Settlement of Loans	$	1,211,553		$	2,564,423

See accompanying notes to consolidated financial statements

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 (the “Company”) 2012 Annual Report to Shareholders which was filed as an exhibit to our Annual Report on Form 10-K for the year ended March 31, 2012 (“2012 10-K”) when reviewing interim financial statements. The results of operations for the three and six month periods ended September 30, 2012 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 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, 2012 included in our 2012 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 an unexpected and 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.

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 the risk factor entitled: “Our provision for loan losses and net loan charge offs have remained at elevated levels and we may be required to make further increases in our provisions for loan losses and to charge off additional loans in the future, which could adversely affect our results of operations ,” in Item 1A. Risk Factors of our 2012 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.

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 Three Months Ended September 30,				For the Six Months Ended September 30,
	2012		2011		2012		2011
Earnings Available To Common Shareholders:
Net Income	$	669,790	$	418,453	$	1,400,518	$	879,500
Preferred Stock Dividends		110,000		110,000		220,000		220,000
Net Income Available To Common Shareholders	$	559,790	$	308,453	$	1,180,518	$	659,500

There were no dilutive securities or options at September 30, 2012 or 2011.

Security Federal Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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, 2012				Six Months Ended September 30, 2012
			Weighted Average				Weighted Average
	Shares		Exercise Price		Shares		Exercise Price
Balance, Beginning of Period		72,900	$	22.62		72,900	$	22.62
Options Granted		-		-		-		-
Options Exercised		-		-		-		-
Options Forfeited		4,500		22.58		4,500		22.58
Balance, End Of Period		68,400	$	22.63		68,400	$	22.63

Options Exercisable		43,400	$	22.12		43,400	$	22.12

Options Available For Grant		50,000				50,000

	Three Months Ended September 30, 2011				Six Months Ended September 30, 2011
			Weighted Average				Weighted Average
	Shares		Exercise Price		Shares		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

Security Federal Corporation and Subsidiaries

Notes to Consolidated Financial Statements

5. Stock-Based Compensation, Continued

At September 30, 2012, 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		18,000	$	20.55	12/31/14

01/01/06		4,000	$	23.91	01/01/16

08/24/06		3,500	$	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		14,000	$	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, 2012 or 2011 had an exercise price below the average market price during the three and six month periods ended September 30, 2012 or 2011, 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. Department of the Treasury’s (“U.S. Treasury”) 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. At September 30, 2012 and 2011, 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, 2012 and 2011.

Security Federal Corporation and Subsidiaries

Notes to Consolidated Financial Statements

7. Carrying Amounts and Fair Value of Financial Instruments

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, 2012, 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. 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.

Security Federal Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

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, 2012, 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, 2012 and March 31, 2012, the recorded investment in impaired loans was $43.2 million and $40.8 million, respectively. The average recorded investment in impaired loans was $42.2 million for the six months ended September 30, 2012 and $34.3 million for the year ended March 31, 2012.

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. The Company records these assets 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 approach. 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.

Security Federal Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

There were no liabilities measured at fair value on a recurring basis as of September 30, 2012 or March 31, 2012. Assets measured at fair value on a recurring basis are as follows as of September 30, 2012 and March 31, 2012:

	Quoted
	Market		Significant
	Price In		Other		Significant
	Active		Observable		Unobservable
	Markets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets:
FHLB Securities	$	-	$	4,324,400	$	-
Small Business Administration (“SBA”) Bonds		-		89,495,776		-
Tax Exempt Municipal Securities		-		34,211,292		-
Mortgage-Backed Securities		-		231,713,392		-
Equity Securities		-		75,750		-
Total	$	-	$	359,820,610	$	-

	Quoted
	Market		Significant
	Price In		Other		Significant
	Active		Observable		Unobservable
	Markets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)
Assets:
FHLB Securities	$	-	$	2,698,894	$	-
Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) Bonds		-		2,921,851		-
SBA Bonds		-		86,278,802		-
Tax Exempt Municipal Bonds		-		24,125,725		-
Mortgage-Backed Securities		-		237,853,835		-
Equity Securities		-		75,750		-
Total	$	-	$	353,954,857	$	-

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, 2012 and March 31, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall.

							Balance At
	Level 1		Level 2		Level 3		September 30, 2012
Assets:
Mortgage Loans Held For Sale	$	-	$	4,169,733	$	-	$	4,169,733
Impaired Loans (1)		-		-		42,305,360		42,305,360
Foreclosed Assets		-		-		11,032,720		11,032,720
Total	$	-	$	4,169,733	$	53,338,080	$	57,507,813

(1) IMPAIRED LOANS ARE REPORTED NET OF SPECIFIC RESERVES OF $846,921.

							Balance At
	Level 1		Level 2		Level 3		March 31, 2012
Assets:
Mortgage Loans Held For Sale	$	-	$	2,671,771	$	-	$	2,671,771
Impaired Loans (1)		-		-		39,160,338		39,160,338
Foreclosed Assets		-		-		14,160,099		14,160,099
Total	$	-	$	2,671,771	$	53,320,437	$	55,992,208

(1) IMPAIRED LOANS ARE REPORTED NET OF SPECIFIC RESERVES OF $1,636,848.

Security Federal Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

There were no liabilities measured at fair value on a non- recurring basis as of September 30, 2012 or March 31, 2012.

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of September 30, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair Value			Significant
	September 30,		Valuation	Unobservable
	2012		Technique	Inputs	Range
Impaired Loans	$	42,305,360	Appraised Value/Discounted Cash Flows	Appraisals And/ Or Sales Of Comparable Properties		0% - 98	%
Foreclosed Assets		11,032,720	Appraised Value/Comparable Sales	Appraisals And/ Or Sales Of Comparable Properties/Bids		0% - 91	%

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. These are classified as Level 1.

Certificates of deposits with other banks—Fair value is based on market prices for similar assets. These are classified as Level 2.

Investment securities held to maturity—Securities held to maturity are valued at quoted market prices or dealer quotes. These are classified as Level 2.

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. These are classified as Level 3.

FHLB Stock—The fair value approximates the carrying value. This is classified as Level 1.

Deposits—The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. These are classified as Level 1. 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. These are classified as Level 2.

FHLB Advances—Fair value is estimated based on discounted cash flows using current market rates for borrowings with similar terms. These are classified as Level 2.

Other Borrowed Money—The carrying value of these short term borrowings approximates fair value. These are classified as Level 1.

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. These are classified as Level 2.

Junior Subordinated Debentures—The carrying value of junior subordinated debentures approximates fair value. These are classified as Level 2.

Security Federal Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

The following table is a summary of the carrying value and estimated fair value of the Company’s financial instruments as of September 30, 2012 and March 31, 2012 presented in accordance with the applicable accounting guidance.

	September 30, 2012
	Carrying		Fair Value
(In Thousands)	Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash And Cash Equivalents	$	14,408	$	14,408	$	14,408	$	-	$	-
Certificates of Deposits With Other Banks		1,728		1,728		-		1,728		-
Investment And Mortgage-Backed Securities		428,854		432,165		-		432,165		-
Loans Receivable, Net		403,049		415,362		-		-		415,362
FHLB Stock		6,467		6,467		6,467		-		-

Financial Liabilities:
Deposits:
Checking, Savings, And Money Market Accounts	$	384,250	$	384,250	$	384,250	$	-	$	-
Certificate Accounts		302,939		304,970		-		304,970		-
Advances From FHLB		108,161		117,385		-		117,385		-
Other Borrowed Money		9,889		9,889		9,889		-		-
Senior Convertible Debentures		5,155		5,155		-		5,155		-
Junior Subordinated Debentures		6,084		6,084		-		6,084		-

	March 31, 2012
	Carrying		Estimated
	Amount		Fair Value
Financial Assets:
Cash And Cash Equivalents	$	9,331	$	9,331
Certificates of Deposits With Other Banks		1,727		1,727
Investment And Mortgage-Backed Securities		421,631		423,921
Loans Receivable, Net		428,511		427,212
FHLB Stock		8,471		8,471

Financial Liabilities:
Deposits:
Checking, Savings, And Money Market Accounts	$	371,295	$	371,295
Certificate Accounts		324,906		327,117
Advances From FHLB		122,070		131,679
Other Borrowed Money		9,801		9,801
Senior Convertible Debentures		6,084		6,084
Junior Subordinated Debentures		5,155		5,155

At September 30, 2012, the Bank had $32.5 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.

Security Federal Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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

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 determining fair value.

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 September 2011, the Intangibles topic of the Accounting Standards Codification (“ASC”) was 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 were effective for the Company on April 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 Accounting Standard Update (“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 were effective for the Company on April 1, 2012 and had no effect on its consolidated 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. These amendments were effective for its consolidated Company beginning April 1, 2012 and had no effect on its consolidated 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 and requires consecutive presentation of the statement of net income and other comprehensive income. The amendments were applicable to the Company on April 1, 2012 and have been applied retrospectively. In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while the Financial Accounting Standards Board (“FASB”) redeliberates future requirements.

In July 2012, the Intangibles topic of the ASC was amended to permit an entity to consider qualitative factors to determine whether it is more likely than not that indefinite-lived intangible assets are impaired. If it is determined to be more likely than not that indefinite-lived intangible assets are impaired, then the entity is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The amendments are not expected to have a material effect on the Company’s consolidated financial statements.

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

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, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		value
FHLB Securities	$	4,269,534	$	61,306	$	6,440	$	4,324,400
SBA Bonds		87,318,223		2,247,321		69,768		89,495,776
Tax Exempt Municipal Bonds		32,331,876		1,902,485		23,069		34,211,292
Mortgage-Backed Securities		222,623,248		9,164,426		74,282		231,713,392
Equity Securities		102,938		-		27,188		75,750
Total	$	346,645,819	$	13,375,538	$	200,747	$	359,820,610

	March 31, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		value
FHLB Securities	$	2,634,234	$	64,660	$	-	$	2,698,894
FNMA and FHLMC Bonds		2,926,566		560		5,275		2,921,851
SBA Bonds		85,064,224		1,357,490		142,912		86,278,802
Tax Exempt Municipal Bonds		23,231,375		971,739		77,389		24,125,725
Mortgage-Backed Securities		229,462,521		8,486,387		95,073		237,853,835
Equity Securities		102,938		-		27,188		75,750
Total	$	343,421,858	$	10,880,836	$	347,837	$	353,954,857

FHLB 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, 2012 and March 31, 2012, the Company held an amortized cost and fair value of $145.9 million and $152.3 million$153,500,000, respectively, and $143.8 million $143,800,000 and $149.3 million$149,300,000, 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 $23.4 million and $34.2 million, respectively, in proceeds from sales of available for sale securities during the six months ended September 30, 2012 and 2011 and recognized $428,000 and $556,000 in gross gains during the six months ended September 30, 2012 and September 30, 2011, respectively. No losses were recognized on the sale of available for sale securities during the six months ended September 30, 2012 or 2011. The Bank received $15.6 million and $25.9 million, respectively, in proceeds from sales of available for sale securities during the three months ended September 30, 2012 and 2011 and recognized $325,000 and $385,000 in gross gains during the three months ended September 30, 2012 and September 30, 2011, respectively. No losses were recognized on the sale of available for sale securities during the three months ended September 30, 2012 or 2011.

The amortized cost and fair value of investment and mortgage-backed securities available for sale at September 30, 2012 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.

	Amortized		Fair
	Cost		Value
Less Than One Year	$	-	$	-
One – Five Years		10,075,596		10,320,827
Over Five – Ten Years		57,636,711		59,062,266
After Ten Years		56,310,264		58,724,125
Mortgage-Backed Securities		222,623,248		231,713,392
Total	$	346,645,819	$	359,820,610

Security Federal Corporation and Subsidiaries

Notes to Consolidated Financial Statements

9. Securities, Continued

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 for the periods indicated.

	September 30, 2012
	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
FHLB Securities FHLB	$	2,992,640	$	6,440	$	-	$	-	$	2,992,640	$	6,440
SBA Bonds		8,311,848		69,768		-		-		8,311,848		69,768
Tax Exempt Municipal Bond		4,707,560		23,069		-		-		4,707,560		23,069
Mortgage-Backed Securities		12,976,259		68,469		1,423,642		5,813		14,399,901		74,282
Equity Securities		-		-		75,750		27,188		75,750		27,188
Total	$	28,988,307	$	167,746	$	1,499,392	$	33,001	$	30,487,699	$	200,747

	March 31, 2012
	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
FNMA And FHLMC Bonds	$	1,921,291	$	5,275	$	-	$	-	$	1,921,291	$	5,275
SBA Bonds		12,508,821		142,912		-		-		12,508,821		142,912
Tax Exempt Municipal Bond		3,390,580		77,389		-		-		3,390,580		77,389
Mortgage-Backed Securities		23,053,784		95,073		-		-		23,053,784		95,073
Equity Securities		-		-		75,750		27,188		75,750		27,188
Total	$	40,874,476	$	320,649	$	75,750	$	27,188	$	40,950,226	$	347,837

Securities classified as available for sale are recorded at fair market value. 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 was 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.

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, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
FHLB Securities	$	5,394,805	$	152,937	$	-	$	5,547,742
Federal Farm Credit Securities		1,999,556		7,924		-		2,007,480
FNMA and FHLMC Bonds		4,988,376		34,614		-		5,022,990
SBA Bonds		6,287,213		318,768		29,730		6,576,251
Mortgage-Backed Securities		50,208,062		2,872,249		45,853		53,034,458
Equity Securities		155,000		-		-		155,000
Total	$	69,033,012	$	3,386,492	$	75,583	$	72,343,921

	September 30, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
FHLB Securities	$	11,554,627	$	221,726	$	13,517	$	11,762,836
FFCB Securities		1,999,516		6,534		23,410		1,982,640
FNMA and FHLMC Bonds		6,983,004		19,863		49,147		6,953,720
SBA Bonds		3,251,151		305,430		-		3,556,581
Mortgage-Backed Securities		43,732,912		1,822,180		-		45,555,092
Equity Securities		155,000		-		-		155,000
Total	$	67,676,210	$	2,375,733	$	86,074	$	69,965,869

Included in the tables above in mortgage-backed securities are GNMA mortgage-backed securities, which are backed by the full faith and credit of the United States government. At September 30, 2012, the Company held an amortized cost and fair value of $45.9 million and $48.7 million, respectively, in GNMA mortgage-backed securities included in mortgage-backed securities listed above. At March 31, 2012, the Company held an amortized cost and fair value of $42.2 million and $43.9 million, respectively, in GNMA mortgage-backed securities, which are included in mortgage-backed securities line item 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, 2012, 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.

	Amortized		Fair
	Cost		Value
Less Than One Year	$	3,000,000	$	3,111,550
One – Five Years		395,831		408,538
Over Five – Ten Years		7,021,946		7,034,476
More Than Ten Years		8,407,173		8,754,899
Mortgage-Backed Securities		50,208,062		53,034,458
Total	$	69,033,012	$	72,343,921

Security Federal Corporation and Subsidiaries

Notes to Consolidated Financial Statements

9. Securities, Continued

The following tables show the held to maturity securities in an unrealized loss position at the time indicated.

	September 30, 2012
	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
SBA Bonds	$	3,647,501	$	29,730	$	-	$	-	$	3,647,501	$	29,730
Mortgage Backed Securities		3,229,093		45,853		-		-		3,229,093		45,853
Total	$	6,876,594	$	75,583	$	-	$	-	$	6,876,594	$	75,583

	March 31, 2012
	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
FHLB Securities	$	4,532,636	$	13,517	$	-	$	-	$	4,532,636	$	13,517
FFCB Securities		976,590		23,410		-		-		976,590		23,410
FNMA And FHLMC Bonds		4,939,150		49,147		-		-		4,939,150		49,147
Total	$	10,448,376	$	86,074	$	-	$	-	$	10,448,376	$	86,074

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 six months ended September 30, 2012 or 2011, or during the year ended March 31, 2012.

Security Federal Corporation and Subsidiaries

Notes to Consolidated Financial Statements

10. Loans Receivable, Net

Loans receivable, net, at September 30, 2012 and March 31, 2012 consisted of the following:

	September 30, 2012		March 31, 2012
Residential Real Estate	$	94,011,408	$	97,807,917
Consumer		56,334,669		58,685,000
Commercial Business		8,793,356		9,552,575
Commercial Real Estate		253,097,143		276,317,897
Total Loans Held For Investment		412,236,576		442,363,389

Loans Held For Sale		4,169,733		2,671,771
Total Loans Receivable, Gross		416,406,309		445,035,160

Less:
Allowance For Possible Loan Loss		11,646,159		14,615,198
Loans In Process		1,703,712		1,886,652
Deferred Loan Fees		6,977		22,704
		13,356,848		16,524,554
Total Loans Receivable, Net	$	403,049,461	$	428,510,606

The Company uses a risk based approach based on the following credit quality measures when analyzing the loan portfolio: pass, caution, 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.

	September 30, 2012
	Credit Quality Measures
					Special				Total
	Pass		Caution		Mention		Substandard		Loans
Residential Real Estate	$	84,688,558	$	223,807	$	294,332	$	8,804,711	$	94,011,408
Consumer		54,347,042		172,283		189,585		1,625,759		56,334,669
Commercial Business		7,940,863		355,096		158,000		339,397		8,793,356
Commercial Real Estate		168,236,093		24,213,116		17,864,675		42,783,259		253,097,143
Total	$	315,212,556	$	24,964,302	$	18,506,592	$	53,553,126	$	412,236,576

	March 31, 2012
	Credit Quality Measures
					Special				Total
	Pass		Caution		Mention		Substandard		Loans
Residential Real Estate	$	88,536,685	$	-	$	573,887	$	8,697,345	$	97,807,917
Consumer		57,113,676		159,805		27,604		1,383,915		58,685,000
Commercial Business		8,608,378		446,815		-		497,382		9,552,575
Commercial Real Estate		190,230,745		21,874,264		19,783,230		44,429,658		276,317,897
Total	$	344,489,484	$	22,480,884	$	20,384,721	$	55,008,300	$	442,363,389

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, excluding loans held for sale, at the periods indicated.

	September 30, 2012
					90 Days
					or More		Total				Total
	30-59 Days		60-89 Days		Past		Past				Loans
	Past Due		Past Due		Due		Due		Current		Receivable
Residential Real Estate	$	2,738,561	$	153,135	$	4,580,150	$	7,471,846	$	86,539,562	$	94,011,408
Consumer		1,273,679		249,426		632,354		2,155,459		54,179,210		56,334,669
Commercial Business		300,198		88,478		42,993		431,669		8,361,687		8,793,356
Commercial Real Estate		10,496,458		3,404,199		22,156,550		36,057,207		217,039,936		253,097,143
Total	$	14,808,896	$	3,895,238	$	27,412,047	$	46,116,181	$	366,120,395	$	412,236,576

	March 31, 2012
					90 Days
					or More		Total				Total
	30-59 Days		60-89 Days		Past		Past				Loans
	Past Due		Past Due		Due		Due		Current		Receivable
Residential Real Estate	$	2,778,235	$	742,345	$	3,638,929	$	7,159,509	$	90,648,408	$	97,807,917
Consumer		659,028		352,421		620,358		1,631,807		57,053,193		58,685,000
Commercial Business		174,420		209,418		20,808		404,646		9,147,929		9,552,575
Commercial Real Estate		18,332,136		4,682,891		18,378,165		41,393,192		234,924,705		276,317,897
Total	$	21,943,819	$	5,987,075	$	22,658,260	$	50,589,154	$	391,774,235	$	442,363,389

At September 30, 2012, 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, 2012 compared to March 31, 2012.


	At September 30, 2012					At March 31, 2012					$		%
	Amount		Percent (1)			Amount		Percent (1)			Increase		Increase
Non-accrual loans:
Residential real estate	$	4,580,150		1.1	%	$	3,638,929		0.8	%	$	941,221		25.9	%
Commercial business		42,993		0.0	%		20,808		-	%		22,185		106.6	%
Commercial real estate		22,156,550		5.4	%		18,378,165		4.2	%		3,778,385		20.6	%
Consumer		632,354		0.2	%		620,358		0.1	%		11,996		1.9	%
Total non-accrual loans	$	27,412,047		6.7	%	$	22,658,260		5.1	%	$	4,753,787		21.0	%

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

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, 2012
	Residential						Commercial			Commercial
	Real Estate			Consumer			Business			Real Estate			Total
Allowance For Loan Losses
Beginning Balance	$	2,030,522		$	1,251,799		$	473,224		$	8,928,782		$	12,684,327
Provision		50,497			(80,555	)		(9,339	)		339,397			300,000
Charge-Offs		(192,026	)		(113,799	)		(28,736	)		(1,076,739	)		(1,411,300	)
Recoveries		330			2,901			4,087			65,814			73,132
Ending Balance	$	1,889,323		$	1,060,346		$	439,236		$	8,257,254		$	11,646,159

Security Federal Corporation and Subsidiaries

Notes to Consolidated Financial Statements

10. Loans Receivable, Net, Continued

	For the Six Months Ended September 30, 2012
	Residential						Commercial			Commercial
	Real Estate			Consumer			Business			Real Estate			Total
Allowance For Loan Losses
Beginning Balance	$	1,928,625		$	1,498,111		$	644,855		$	10,543,607		$	14,615,198
Provision		369,607			(214,721	)		7,235			862,879			1,025,000
Charge-Offs		(418,998	)		(234,226	)		(217,466	)		(3,362,634	)		(4,233,325	)
Recoveries		10,089			11,182			4,612			213,402			239,286
Ending Balance	$	1,889,323		$	1,060,346		$	439,236		$	8,257,254		$	11,646,159

	For the Three Months Ended September 30, 2011
	Residential						Commercial			Commercial
	Real Estate			Consumer			Business			Real Estate			Total
Allowance For Loan Losses
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
	Residential						Commercial			Commercial
	Real Estate			Consumer			Business			Real Estate			Total
Allowance For Loan Losses
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

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.

	September 30, 2012
	Allowance For Loan Losses
	Individually		Collectively
	Evaluated For		Evaluated For
	Impairment		Impairment		Total
Residential Real Estate	$	155,000	$	1,734,323	$	1,889,323
Consumer		20,131		1,040,215		1,060,346
Commercial Business		-		439,236		439,236
Commercial Real Estate		671,790		7,585,464		8,257,254
Total	$	846,921	$	10,799,238	$	11,646,159

	March 31, 2012
	Allowance For Loan Losses
	Individually		Collectively
	Evaluated For		Evaluated For
	Impairment		Impairment		Total
Residential Real Estate	$	155,000	$	1,773,625	$	1,928,625
Consumer		19,568		1,478,543		1,498,111
Commercial Business		148,610		496,245		644,855
Commercial Real Estate		1,313,670		9,229,937		10,543,607
Total	$	1,636,848	$	12,978,350	$	14,615,198

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.

	September 30, 2012
	Loans Receivable
	Individually		Collectively
	Evaluated For		Evaluated For
	Impairment		Impairment		Total
Residential Real Estate	$	4,783,225	$	89,228,183	$	94,011,408
Consumer		332,892		56,001,777		56,334,669
Commercial Business		10,765		8,782,591		8,793,356
Commercial Real Estate		38,025,399		215,071,744		253,097,143
Total	$	43,152,281	$	369,084,295	$	412,236,576

	March 31, 2012
	Loans Receivable
	Individually		Collectively
	Evaluated For		Evaluated For
	Impairment		Impairment		Total
Residential Real Estate	$	3,544,061	$	94,263,856	$	97,807,917
Consumer		1,849,046		56,835,954		58,685,000
Commercial Business		172,362		9,380,213		9,552,575
Commercial Real Estate		35,231,717		241,086,180		276,317,897
Total	$	40,797,186	$	401,566,203	$	442,363,389

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 tables are a summary of information related to impaired loans as of periods indicated.

	September 30, 2012
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired Loans
With no related allowance recorded:
Residential Real Estate	$	3,372,677	$	3,477,677	$	-	$	2,714,824	$	33,106
Consumer Loans		312,761		445,761		-		863,939		4,118
Commercial Business		10,765		10,765		-		16,220		368
Commercial Real Estate		33,602,327		37,856,317		-		33,178,350		487,594

With an allowance recorded:
Residential Real Estate		1,410,548		2,257,465		155,000		1,196,138		-
Consumer Loans		20,131		20,131		20,131		13,233		178
Commercial Business		-		-		-		49,537		-
Commercial Real Estate		4,423,072		5,653,033		671,790		4,161,122		2,643

Total
Residential Real Estate		4,783,225		5,735,142		155,000		3,910,962		33,106
Consumer Loans		332,892		465,892		20,131		877,172		4,296
Commercial Business		10,765		10,765		-		65,757		368
Commercial Real Estate		38,025,399		43,509,350		671,790		37,339,472		490,237
Total	$	43,152,281	$	49,721,148	$	846,921	$	42,193,362	$	528,007

Security Federal Corporation and Subsidiaries

Notes to Consolidated Financial Statements

10. Loans Receivable, Net, Continued

	March 31, 2012
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
Impaired Loans
With no related allowance recorded:
Residential Real Estate	$	2,201,560	$	2,456,960	$	-	$	2,066,066	$	65,818
Consumer Loans		1,829,478		1,879,478		-		2,398,298		86,180
Commercial Business		23,752		47,752		-		294,894		1,677
Commercial Real Estate		27,425,873		29,175,328		-		24,020,047		1,186,679

With an allowance recorded:
Residential Real Estate		1,342,501		1,954,501		155,000		586,109		6,137
Consumer Loans		19,568		60,668		19,568		28,181		-
Commercial Business		148,610		148,610		148,610		207,135		5,608
Commercial Real Estate		7,805,844		9,945,912		1,313,670		4,687,210		228,483

Total
Residential Real Estate		3,544,061		4,411,461		155,000		2,652,175		71,955
Consumer Loans		1,849,046		1,940,146		19,568		2,426,479		86,180
Commercial Business		172,362		196,362		148,610		502,029		7,285
Commercial Real Estate		35,231,717		39,121,240		1,313,670		28,707,257		1,415,162
Total	$	40,797,186	$	45,669,209	$	1,636,848	$	34,287,940	$	1,580,582

The Company considers a loan to be a TDR when the debtor experiences financial difficulties and the Company provides concessions such that we will not collect all principal and interest in accordance with the original terms of the loan agreement. Concessions can relate to the contractual interest rate, maturity date, or payment structure of the note. As part of our workout plan for individual loan relationships, we may restructure loan terms to assist borrowers facing challenges in the current economic environment. TDRs included in impaired loans at September 30, 2012 and March 31, 2012 amounted to $16.7 million and $18.0 million, respectively.

There were no loan modifications during the six months ended September 30, 2012 that were TDRs.

	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

Security Federal Corporation and Subsidiaries

Notes to Consolidated Financial Statements

10. Loans Receivable, Net, Continued

	For the Six Months Ended September 30, 2012				For the Three Months Ended September 30, 2012
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		-		-		-		-
Commercial Real Estate		5		894,825		1		17,978
Total		5	$	894,825		1	$	17,978

	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, 2012, 13 loans that had been previously restructured were in default, four of which went into default in the six months ended September 30, 2012. The Bank considers any loan 30 days or more past due to be in default.

Our policy with respect to accrual of interest on loans restructured in a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is likely. If a borrower was materially delinquent on payments prior to the restructuring but shows capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status.

We will continue to closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. If, after previously being classified as a TDR, a loan is restructured a second time, then that loan is automatically placed on nonaccrual status. Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the loan terms before that loan can be placed back on accrual status. Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status.

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 other subsequent events occurred requiring accrual or disclosure.

Security Federal Corporation and Subsidiaries

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 the Company by the Federal Reserve Board, and our bank subsidiary by the Federal Deposit Insurance Corporation and the South Carolina Board of Financial Institutions 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 have acquired or 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, the Jumpstart Our Business Startups Act and the Basel III regulatory capital requirements 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. Department of Treasury’s Community Development Capital Initiative (“CDCI”); and

Security Federal Corporation and Subsidiaries

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

·	other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this document.

Some of these and other factors are discussed in the 2012 10-K under Item 1A, “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 2013 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, 2012 and March 31, 2012

General – Total assets decreased $20.4 million or 2.2% to $904.2 million at September 30, 2012 from $924.6 million at March 31, 2012. The primary reason for the decrease in total assets was a decrease in net loans receivable, offset slightly by increases in investments.

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

					Increase (Decrease)
	September 30, 2012		March 31, 2012		Amount			Percent
Cash And Cash Equivalents	$	14,408,177	$	9,331,372	$	5,076,805			54.4	%
Investment And Mortgage- Backed Securities – Available For Sale		359,820,610		353,954,857		5,865,753			1.7
Investment And Mortgage- Backed Securities – Held To Maturity		69,033,012		67,676,210		1,356,802			2.0
Loans Receivable, Net		403,049,461		428,510,606		(25,461,145	)		(5.9	)
Repossessed Assets Acquired In Settlement of Loans		11,032,720		14,160,099		(3,127,379	)		(22.1	)
FHLB Stock		6,467,000		8,471,100		(2,004,100	)		(23.7	)

Cash and cash equivalents increased $5.1 million or 54.4% to $14.4 million at September 30, 2012 from $9.3 million at March 31, 2012.

Investment and mortgage-backed securities available for sale increased $5.9 million or 1.7% to $359.8 million at September 30, 2012 from $354.0 million at March 31, 2012. This increase was the result of investment purchases offset slightly by principal repayments and calls on securities coupled with the sale of 51 securities during the six months ended September 30, 2012. Investment and mortgage-backed securities held to maturity increased $1.4 million or 2.0% to $69.0 million at September 30, 2012 as a result of investment purchases offset slightly by calls of securities as well as principal repayments on mortgage-backed securities.

Loans receivable, net, decreased $25.5 million or 5.9% to $403.0 million at September 30, 2012 from $428.5 million at March 31, 2012. This decrease was a result of Company’s efforts to tighten underwriting standards and increase offering rates combined with overall lower loan demand from creditworthy borrowers. Residential real estate loans decreased $3.8 million or 3.9% to $94.0 million at September 30, 2012 from $97.8 million at March 31, 2012. Consumer loans decreased $2.4 million or 4.0% to $56.3 million at September 30, 2012 compared to $58.7 million at March 31, 2012. Commercial real estate loans and commercial business loans decreased $23.2 million and $759,000, respectively, to $253.1 million and $8.8 million, respectively, at September

Security Federal Corporation and Subsidiaries

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

30, 2012 from $276.3 million and $9.6 million, respectively, at March 31, 2012. Loans held for sale increased $1.5 million or 56.1% to $4.2 million at September 30, 2012 from $2.7 million at March 31, 2012.

Repossessed assets acquired in settlement of loans decreased $3.1 million or 22.1% to $11.0 million at September 30, 2012 from $14.2 million at March 31, 2012. The Company sold 21 real estate properties and repossessed 10 additional properties during the six months ended September 30, 2012 for a net decrease during the period. At September 30, 2012, the balance of repossessed assets consisted of the following 43 real estate properties: 10 single-family residences and 17 lots within residential subdivisions located throughout our market area in South Carolina and Georgia; six parcels of land in South Carolina; five commercial buildings in South Carolina and one commercial building in Augusta, Georgia; a 40 lot subdivision development and adjacent 17 acres of land in Columbia, South Carolina; a 233 acre subdivision in Blythewood, South Carolina; a 43 lot subdivision in Elgin, South Carolina; and 34.8 acres of land in Bluffton, South Carolina which was originally acquired as a participation loan from another financial institution.

FHLB stock decreased $2.0 million or 23.7% to $6.5 million at September 30, 2012 compared to $8.5 million at March 31, 2012. The Bank, as a member of the FHLB of Atlanta, is required to acquire and hold shares of capital stock in the FHLB of Atlanta in an amount equal to a membership component, which is 0.15% of total assets plus a transaction component which equals 4.5% of outstanding advances (borrowings) from the FHLB of Atlanta. As total assets and total advances have decreased, so has the Bank’s required investment in FHLB stock.

Liabilities

Deposit Accounts – The balances, weighted average rates and increases and decreases in deposit accounts were as follows :

											Balance
	September 30, 2012					March 31, 2012					Increase (Decrease)
	Balance		Weighted Rate			Balance		Weighted Rate			Amount			Percent
Demand Accounts:
Checking	$	124,491,607		0.07	%	$	124,750,127		0.11	%	$	(258,520	)		(0.2	%)
Money Market		237,580,118		0.46			224,195,659		0.55			13,384,459			6.0
Statement Savings Accounts		22,177,789		0.20			22,348,787		0.20			(170,998	)		(0.8	)
Total		384,249,514		0.32			371,294,573		0.38			12,954,941			3.5

Certificate Accounts
0.00 – 1.99%		263,940,597					267,556,217					(3,615,620	)		(1.4	)
2.00 – 2.99%		33,636,913					49,260,643					(15,623,730	)		(31.7	)
3.00 – 3.99%		2,672,039					2,936,931					(264,892	)		(9.0	)
4.00 – 4.99%		2,093,711					4,021,999					(1,928,288	)		(47.9	)
5.00 – 5.99%		595,775					1,130,693					(534,918	)		(47.3	)
Total		302,939,035		1.18			324,906,483		1.36			(21,967,448	)		(6.8	)
Total Deposits	$	687,188,549		0.70	%	$	696,201,056		0.84	%	$	(9,012,507	)		(1.3	%)

Included in the certificates above were $22.6 million and $34.4 million in brokered deposits at September 30, 2012 and March 31, 2012, respectively, with a weighted average interest rate of 1.47% and 1.71%, respectively.

Security Federal Corporation and Subsidiaries

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

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

											Balance
	September 30, 2012					March 31, 2012					Decrease
Fiscal Year Due:	Balance		Rate			Balance		Rate			Balance			Percent
2013	$	5,000,000		4.58	%	$	18,900,000		2.70	%	$	(13,900,000	)		(73.5	)%
2014		30,000,000		3.45	%		30,000,000		3.45	%		-			-
2015		20,261,409		3.02	%		20,269,802		3.01	%		(8,393	)		(0.0	)
2016		20,000,000		4.12	%		20,000,000		4.12	%		-			-
2017		15,000,000		4.66	%		15,000,000		4.66	%		-			-
Thereafter		17,900,000		4.10	%		17,900,000		4.10	%		-			-
Total Advances	$	108,161,409		3.82	%	$	122,069,802		3.62	%	$	(13,908,393	)		(11.4	)%

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 $135.2 million and $128.1 million at September 30, 2012 and $152.8 million and $162.1 million at March 31, 2012, respectively. Advances are subject to prepayment penalties.

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

As of September 30, 2012

Borrow Date

Maturity Date

Amount

Int. Rate

Type

Call Dates

11/23/05

11/23/15

5,000,000

3.933

Multi-Call

05/23/08 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

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 $9.9 million and $9.8 million in other borrowings (non-FHLB advances) at September 30, 2012 and March 31, 2012, 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, 2012 and March 31, 2012, the interest rate paid on the repurchase agreements was 0.20% and 0.25%, respectively. The Bank had pledged as collateral for these repurchase agreements investment and mortgage-backed securities with amortized costs and fair values of $16.3 million and $17.3 million, respectively at September 30, 2012 and $17.8 million and $19.0 million, respectively, at March 31, 2012.

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 Collier-Jennings Companies received cash and was issued stock in the Company to settle the acquisition. The shares were released to the shareholder of Collier-Jennings Companies over a three-year period. The stock had a mandatorily redeemable rate at the option of the shareholder of Collier-Jennings Companies in cumulative increments of 20% per year for a five-year period at the greater of $26 per share or one and one-half times the book value per common share of the Company’s stock.

The mandatorily redeemable financial instrument was carried at fair value based on the Company’s book value per common share. The Company recorded a valuation gain of $50,000 during the six months ended September 30, 2011 compared to none during the six months ended September 30, 2012 to properly reflect the fair value of the instrument.

Security Federal Corporation and Subsidiaries

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

Junior Subordinated Debentures – On September 21, 2006, the Trust (Security Federal Statutory Trust), issued and sold fixed and floating rate capital securities of the Trust (the “Capital Securities”). The Trust used the net proceeds from the sale of the Capital Securites to purchase a like amount of junior subordinated debentures (the “Debentures”) of the Company which are reported on the Consolidated Balance Sheets as junior subordinated debentures, generating proceeds of $5.0 million. The Company used the proceeds for general corporate purposes, primarily to provide capital to the Bank. The debentures qualify as Tier 1 capital under Federal Reserve guidelines. The Debentures are the sole assets of the Trust. The Company’s obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the Trust.

The Capital Securities accrue and pay distributions annually at a rate per annum equal to 2.089% at September 30, 2012. Prior to September 2011, one-half of the Capital Securities issued in the transaction had a fixed rate of 6.88% and the remaining half had a floating rate of three-month LIBOR plus 170 basis points. After September 2011, the rate is a floating rate of three month LIBOR plus 170 basis points as the fixed rate portion was converted to the floating rate. 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.

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 and commenced on 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 are 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 $2.4 million or 2.9% to $83.1 million at September 30, 2012 from $80.8 million at March 31, 2012. Accumulated other comprehensive income, net of tax increased $1.6 million or 25.1% to $8.2 million at September 30, 2012. The Company’s net income available for common shareholders was $1.2 million for the six months ended September 30, 2012, after payment of $220, 000 in preferred stock dividends.

The Board of Directors of the Company declared common stock dividends totaling $471,000 during the period ended September 30, 2012. Book value per common share was $20.63 at September 30, 2012 and $19.83 at March 31, 2012.

Results of Operations for the Three Month Periods Ended September 30, 2012 and 2011

Net Income Available to Common Shareholders - Net income available to common shareholders increased $251,000 or 81.5% to $560,000 for the three months ended September 30, 2012 compared to $308,000 for the three months ended September 30, 2011. The increase in net income was primarily the result of a $2.0 million decrease in the provision for loan losses offset by a $812,000 decrease in net interest income and a $874,000 increase in general and administrative expenses.

Net Interest Income - The net interest margin decreased 27 basis points to 2.83% for the quarter ended September 30, 2012 from 3.10% for the comparable quarter in the previous year. The significant decrease in the volume of interest earning assets, particularly loans, resulted in a decrease in net interest income. Net interest income decreased $812,000 or 12.3% to $5.8 million during the three months ended September 30, 2012, compared to $6.6 million for the same period in 2011. During the three months ended September 30, 2012, average interest earning assets decreased $24.8 million or 2.89% to $832.5 million while average interest-bearing liabilities decreased $27.1 million or 34.0% to $772.2 million.

Interest Income - Total interest income decreased $1.6 million or 16.3% to $8.3 million during the three months ended September 30, 2012 from $9.9 million for the same period in 2011. This decrease is primarily the result of the decrease in interest earning

Security Federal Corporation and Subsidiaries

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

assets. Total interest income on loans decreased $1.2 million or 16.8% to $6.0 million during the three months ended September 30, 2012 as a result of the average loan portfolio balance decreasing $55.1 million or 11.8% to $410.0 million and the yield on the loan portfolio decreasing 35 basis points to 5.83%. Interest income from mortgage-backed securities decreased $307,000 or 15.8% to $1.6 million as a result of a 57 basis point decrease in the portfolio yield offset by a $9.7 million increase in the average balance. Tax equivalent interest income from investment securities decreased $39,000 or 5.0% to $737,000 as a result of a decrease of 40 basis points in the yield partially offset by an increase of $18.8 million in the average balance of the investment securities portfolio.

The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the three months ended September 30, 2012 and 2011:

	Three Months Ended September 30,
	2012					2011
	Average Balance		Yield(1)			Average Balance		Yield(1)			Increase (Decrease) In Interest And Dividend Income From 2011
Loans Receivable, Net	$	409,960,775		5.83	%	$	465,039,249		6.18	%	$	(1,208,251	)
Mortgage-Backed Securities		266,336,834		2.47			256,649,480		3.04			(307,030	)
Investment Securities(2)		149,601,065		1.97			130,816,906		2.37			(39,145	)
Overnight Time And Certificates of Deposit		6,561,662		0.14			4,754,474		0.05			1,613
Total Interest-Earning Assets	$	832,460,336		4.02	%	$	857,260,109		4.63	%	$	(1,552,813	)

(1) Annualized

(2) Tax equivalent basis is calculated using an effective tax rate of 34% and amounted to $88,977 and $32,955 for the quarters

ended September 30, 2012 and 2011, respectively.

Interest Expense - Total interest expense decreased $797,000 or 24.5% to $2.5 million during the three months ended September 30, 2012 compared to $3.3 million for the same period last year. The decrease in total interest expense is attributable to decreases in interest rates paid and a $27.1 million decrease in the average balance of interest-bearing liabilities. Interest expense on deposits decreased $527,000 or 29.7% to $1.2 million during the period ended September 30, 2012 compared to $1.8 million for the same period last year. The decrease was attributable to a 32 basis point decrease in the cost of certificate accounts combined with a decrease in average interest-bearing deposits of $841,000 when compared to the three month period ended September 30, 2011. 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 $240,000 or 18.4%. The average balance of FHLB advances and other borrowed money decreased $26.3 million or 18.2% to $118.2 million from $144.4 million for 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, 2012 and 2011:

	Three Months Ended September 30,
	2012					2011
	Average Balance		Yield (1)			Average Balance		Yield (1)			Decrease In Interest Expense From 2011
Now And Money Market Accounts	$	313,228,039		0.37	%	$	286,344,052		0.65	%	$	(170,862	)
Statement Savings Accounts		22,143,684		0.20			20,932,731		0.22			(758	)
Certificates Accounts		307,476,207		1.23			336,411,845		1.55			(355,404	)
FHLB Advances And Other Borrowed Money		118,153,324		3.61			144,436,325		3.62			(240,260	)
Junior Subordinated Debentures		5,155,000		2.20			5,155,000		4.52			(29,881	)
Senior Convertible Debentures		6,084,000		8.00			6,084,000		8.00			-
Total Interest-Bearing Liabilities	$	772,240,254		1.28	%	$	799,363,953		1.63	%	$	(797,165	)

(1) Annualized

Security Federal Corporation and Subsidiaries

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

Provision for Loan Losses - The amount of the provision is determined by management’s on-going monthly analysis of the loan portfolio 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.

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 $300,000 for the quarter ended September 30, 2012 compared to $2.3 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, 2012 and 2011:

	September 30, 2012			September 30, 2011
Beginning Balance	$	12,684,327		$	13,502,573
Provision		300,000			2,300,000
Charge-offs		(1,411,300	)		(2,064,354	)
Recoveries		73,132			41,214
Ending Balance	$	11,646,159		$	13,779,433

Allowance For Loan Losses As A Percentage Of Gross Loans Receivable, Held For Investment At The End Of The Period		2.83	%		2.94	%
Allowance For Loan Losses As A Percentage Of Impaired Loans At The End Of The Period		26.99	%		41.99	%
Impaired Loans	$	43,152,281		$	32,812,363
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		6.7	%		3.2	%
Gross Loans Receivable, Held For Investment and Held For Sale	$	416,406,309		$	475,893,745
Total Loans Receivable, Net	$	403,049,461		$	459,553,349

The cumulative interest not accrued during the six months ended September 30, 2012 relating to all non-performing loans totaled $721,000. 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.

Security Federal Corporation and Subsidiaries

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

Non-Interest Income - Non-interest income decreased $15,000 or 1.0% for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. The following table provides a detailed analysis of the changes in the components of non-interest income:

	Three Months Ended September 30,				Increase (Decrease)
	2012		2011		Amounts			Percent
Gain On Sale Of Investments	$	324,835	$	385,029	$	(60,194	)		(15.6	)%
Gain On Sale Of Loans		177,524		122,414		55,110			45.0
Service Fees On Deposit Accounts		291,753		303,787		(12,034	)		(4.0	)
Income From Cash Value Of Life Insurance		105,000		105,000		-			-
Commissions From Insurance Agency		131,761		119,156		12,605			10.6
Trust Income		120,000		116,000		4,000			3.5
Check Card Fee Income		196,943		190,401		6,542			3.4
Other		129,873		150,680		(20,807	)		(13.8	)
Total Non-Interest Income	$	1,477,689	$	1,492,467	$	(14,778	)		(1.0	)%

Gain on sale of investments was $325,000 during the quarter ended September 30, 2012 an increase of $60,000 or 15.6% compared to $385,000 during the same period last year. The gain resulted from the sale of seven 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 increased $55,000 or 45.0% to $178,000 during the three months ended September 30, 2012 compared to the same period last year. Other income decreased $21,000 or 13.8% to $130,000 during the three months ended September 30, 2012 compared to $151,000 during the same period in 2011.

General And Administrative Expenses –For the quarter ended September 30, 2012, non-interest expense increased $874,000 or 16.8% to $6.1 million compared to $5.2 million for the same period in 2011. The increase in non-interest expense is primarily a result of an increase in the net costs of $1.1 million during the three months ended September 30, 2012 associated with the operation of foreclosed properties including write downs on these properties. Without these costs, non-interest expense would have decreased $186,000 or 3.6% for the quarter ended September 30, 2012 compared to the same period in 2011. 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)
	2012		2011		Amounts			Percent
Salaries And Employee Benefits	$	2,709,998	$	2,736,234	$	(26,236	)		(1.0	)%
Occupancy		505,208		472,416		32,792			6.9
Advertising		97,221		115,613		(18,392	)		(15.9	)
Depreciation And Maintenance Of Equipment		412,000		442,648		(30,648	)		(6.9	)
FDIC Insurance Premiums		152,494		264,707		(112,213	)		(42.4	)
Amortization of Intangibles		12,501		12,501		-			-
Net Cost Of Operation Of Other Real Estate Owned		1,321,254		261,230		1,060,024			405.8
Other		860,407		891,312		(30,905	)		(3.5	)
Total General And Administrative Expenses	$	6,071,083	$	5,196,661	$	874,422			16.8	%

Salary and employee benefits costs remained relatively constant at $2.7 million for the three months ended September 30, 2012, decreasing $26,000 or 1.0% from the same period last year.

Occupancy expense increased $33,000 or 6.9% to $505,000 for the three months ended September 30, 2012 from $472,000 for the same period one year ago while depreciation and maintenance of equipment costs decreased $31,000 or 6.9% to $412,000 for the three months ended September 30, 2012 from $443,000 for the same period in 2011.

Advertising expense decreased $18,000 or 15.9% to $97,000 for the three months ended September 30, 2012 from $116,000 for the same period one year ago.

Security Federal Corporation and Subsidiaries

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

FDIC insurance premiums decreased $112,000 or 42.4% to $152,000 for the three month period ended September 30, 2012 compared to $265,000 for the same period a year ago as a result of a change in the calculation of the assessment base. The calculation changed from a deposit base to an asset base. Total assets have decreased from September 30, 2011 to September 30, 2012.

Net cost of operation of other real estate owned increased $1.1 million or 405.8% to $1.3 million during the quarter ended September 30, 2012 from $261,000 during the quarter ended September 30, 2011. 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. The increase was primarily the result of an increase in write downs on foreclosed assets during the period. These assets are required to be carried at the lower of carrying value or fair value. As real estate market conditions decline and properties are required to be re-appraised or re-valued, the Company has to write these properties down to their fair value. The Company wrote down $1.2 million during the three months ended September 30, 2012 compared to $129,000 during the same period in 2011.

Other expenses decreased $31,000 to $860,000 for the three month period ended September 30, 2012, a decrease of 3.5% 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 increased $48,000 or 24.2% to $245,000 for the three months ended September 30, 2012 from $197,000 for the same period one year ago. Income before income taxes was $915,000 and $616,000 for the three months ended September 30, 2012 and 2011, respectively. The Company’s combined federal and state effective income tax rate for the current quarter was 26.8% compared to 32.1% for the same quarter one year ago. The decrease in the effective income tax rate is the result of a decrease in the state income tax rate. As previously announced, on December 28, 2011, Security Federal Bank completed a charter conversion from a federally chartered stock savings bank to a South Carolina chartered commercial bank. As a result of this transaction, the Company is subject to a lower state income tax rate and therefore expects to experience lower income tax expense in future periods.

Results of Operations for the Six Month Periods Ended September 30, 2012 and 2011

Net Income Available to Common Shareholders - Net income available to common shareholders increased $521,000 or 79.0% to $1.2 million for the six months ended September 30, 2012 compared to $660,000 for the six months ended September 30, 2011. The increase in net income was primarily the result of a decrease of $3.6 million in the provision for loan losses offset by a $1.8 million decrease in net interest income and a $1.0 million increase in general and administrative expenses.

Net Interest Income - The net interest margin decreased 33 basis points to 2.82% for the six months ended September 30, 2012 from 3.15% for the comparable period in the previous year. As a result of the decrease in margin, net interest income decreased $1.8 million or 13.6% to $11.7 million for the six months ended September 30, 2012 compared to $13.5 million for the six months ended September 30, 2011

The decrease in margin is primarily a result of the significant decrease in loans. 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 $56.3 million or 11.9% to $415.6 million during the six months ended September 30, 2012 compared to $471.8 million during the same period in 2011. During the six months ended September 30, 2012, average interest earning assets decreased $21.5 million to $837.6 million while average interest-bearing liabilities decreased $22.2 million to $777.9 million.

Interest Income - Total interest income decreased $3.4 million or 16.7% to $16.7 million during the six months ended September 30, 2012 from $20.1 million for the same period in 2011. This decrease is primarily the result of the decrease in interest earning assets. Total interest income on loans decreased $2.5 million or 17.0% to $12.1 million during the six months ended September 30, 2012 as a result of the average loan portfolio balance decreasing $56.3 million to $415.6 million and the yield in the loan portfolio decreasing 35 basis points to 5.81%. Interest income from mortgage-backed securities decreased $660,000 or 16.2% to $3.4 million as a result of a 63 basis point decrease in the portfolio yield offset by a $11.0 million increase in the average balance of the portfolio. Tax equivalent interest income from investment securities decreased $126,000 or 8.1% to $1.4 million as a result of a 52 basis point decrease in the yield on investments offset by a $21.8 million increase in the average balance of investments during the six months ended September 30, 2012 to $149.9 million.

Security Federal Corporation and Subsidiaries

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the six months ended September 30, 2012 and 2011:

	Six Months Ended September 30,
	2012					2011
	Average Balance		Yield (1)			Average Balance		Yield (1)			Increase (Decrease) In Interest And Dividend Income From 2011
Loans Receivable, Net	$	415,557,749		5.81	%	$	471,824,863		6.16	%	$	(2,462,757	)
Mortgage-Backed Securities		266,853,924		2.55			255,839,109		3.18			(659,849	)
Investments (2)		149,943,976		1.91			128,144,912		2.43			(126,187	)
Overnight Time And Certificates Of Deposits		5,183,129		0.16			3,224,923		0.07			3,110
Total Interest-Earning Assets	$	837,538,778		4.04	%	$	859,033,807		4.69	%	$	(3,245,683	)

(1) Annualized

(2) Tax equivalent basis is calculated using an effective tax rate of 34% and amounted to $161,593 and $43,695 for the six months ended September 30, 2012 and 2011, respectively.

Interest Expense - Total interest expense decreased $1.5 million or 23.1% to $5.1 million during the six months ended September 30, 2012 compared to $6.6 million for the same period last year. The decrease in total interest expense is attributable to decreases in interest rates paid and a $22.2 million decrease in the average balance of interest-bearing liabilities. Interest expense on deposits decreased $1.1 million or 29.7% during the period ended September 30, 2012 from the same period in 2011. The decrease was attributable to a 34 basis point decrease in the cost of deposits offset by an increase in average interest-bearing deposits of $2.0 million when compared to the six month period ended September 30, 2011. The decrease in the cost of deposits primarily resulted from maturing certificate accounts repricing at lower interest rates. Interest expense on advances and other borrowed money decreased $376,000 or 14.6% to $2.2 million during the six months ended September 30, 2012 from $2.6 million for the same period last year. The average balance of advances and other borrowed money decreased $24.2 million or 16.7% to $121.1 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, 2012 and 2011:

	Six Months Ended September 30,
	2012					2011
	Average Balance		Yield (1)			Average Balance		Yield (1)			Decrease In Interest Expense From 2011
Now And Money Market Accounts	$	310,842,128		0.38	%	$	279,361,350		0.65	%	$	(326,157	)
Statement Savings Accounts		22,247,769		0.20			20,804,405		0.23			(2,531	)
Certificates Accounts		312,479,773		1.27			343,388,970		1.60			(762,902	)
FHLB Advances And Other Borrowed Money		121,102,552		3.63			145,349,054		3.54			(376,016	)
Junior Subordinated Debentures		5,155,000		2.20			5,155,000		4.50			(59,417	)
Senior Convertible Debentures		6,084,000		8.00			6,084,000		8.00			-
Total Interest-Bearing Liabilities	$	777,911,222		1.31	%	$	800,142,778		1.65	%	$	(1,527,023	)

(1) Annualized

Provision for Loan Losses - The provision for loan losses was $1.0 million for the six months ended September 30, 2012 compared to $4.6 million for the same period in the prior year. The decrease in provision was primarily a result of improving historical charge off trends within the Bank’s two year look back period. The Bank has been proactive in the timely identification and charge off of problem loans.

Security Federal Corporation and Subsidiaries

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

The following table details selected activity associated with the allowance for loan losses for the six months ended September 30, 2012 and 2011:

	September 30, 2012			September 30, 2011
Beginning Balance	$	14,615,198		$	12,501,800
Provision		1,025,000			4,600,000
Charge-offs		(4,233,325	)		(3,386,216	)
Recoveries		239,286			63,849
Ending Balance	$	11,646,159		$	13,779,433

Non-Interest Income - Non-interest income decreased $102,000 or 3.7% to $2.7 million for the six months ended September 30, 2012, compared to $2.8 million for the six months ended September 30, 2011. The following table provides a detailed analysis of the changes in the components of non-interest income:

	Six Months Ended September 30,				Increase (Decrease)
	2012		2011		Amounts			Percent
Gain On Sale Of Investments	$	428,494	$	556,253	$	(127,759	)		(23.0	)%
Gain On Sale Of Loans		310,476		229,684		80,792			35.2
Service Fees On Deposit Accounts		570,316		574,480		(4,164	)		(0.7	)
Income From Cash Value Of Life Insurance		210,000		210,000		-			-
Commissions From Insurance Agency		239,534		211,258		28,276			13.4
Trust Income		240,000		230,000		10,000			4.4
Mandatorily Redeemable Financial Instrument Valuation		-		50,000		(50,000	)		(100.0	)
Check Card Fee Income		401,803		392,793		9,010			2.3
Other		260,802		309,293		(48,491	)		(15.7	)
Total Non-Interest Income	$	2,661,425	$	2,763,761	$	(102,336	)		(3.7	)%

Gain on sale of investments was $428,000 during the six months ended September 30, 2012 compared to $556,000 in the same period last year. The gain resulted from the sale of 51 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 reprice down in the near future. The Company sold 29 investments during the six month period ended September 30, 2011. Gain on sale of loans increased $81,000 to $310,000 during the six months ended September 30, 2012 compared to $229.7 million for the same period last year as a result of an increase in the volume of fixed rate residential mortgages originated and sold.

Commissions from insurance agency increased $28,000 or 13.4% to $240,000 for the six months ended September 30, 2012 compared to $211,000 for the same period in 2011. The Bank has focused on promoting insurance products to increase non-interest income.

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 no expense for the six months ended September 30, 2012. 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 $9,000 or 2.3% to $402,000 during the six months ended September 30, 2012 from $393,000 for the same period last year. Other income decreased $48,000 or 15.7% to $261,000 during the six months ended September 30, 2012 compared to $309,000 during the comparable period of 2011.

General And Administrative Expenses – For the six months ended September 30, 3012, general and administrative expenses increased $1.0 million or 9.8% to $11.4 million, compared to $10.4 million for the same period in 2011. The increase in non-

Security Federal Corporation and Subsidiaries

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

interest expense is primarily a result of an increase in the net costs associated with the operation of foreclosed properties including write downs on these properties. Without these costs, non-interest expense would have decreased $653,000 or 6.5% for the six months ended September 30, 2012 as compared to the same period in 2011. 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)
	2012		2011		Amounts			Percent
Salaries And Employee Benefits	$	5,324,042	$	5,579,212	$	(255,170	)		(4.6	)%
Occupancy		996,955		951,168		45,787			4.8
Advertising		179,165		201,293		(22,128	)		(11.0	)
Depreciation And Maintenance Of Equipment		816,594		855,273		(38,679	)		(4.5	)
FDIC Insurance Premiums		338,122		556,912		(218,790	)		(39.3	)
Amortization of Intangibles		25,002		35,021		(10,019	)		(28.6	)
Net Cost Of Operation Of Other Real Estate Owned		1,963,405		297,840		1,665,565			559.2
Other		1,726,006		1,880,466		(154,460	)		(8.2	)
Total General And Administrative Expenses	$	11,369,291	$	10,357,185	$	1,012,106			9.8	%

Salary and employee benefits decreased $255,000 to $5.3 million for the six months ended September 30, 2012 from $5.6 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 214 full time employee equivalents at September 30, 2011 to 199 full time employee equivalents at September 30, 2012.

Occupancy increased $46,000 or 4.8% to $997,000 for the six months ended September 30, 2012 from $951,000 for the same period one year ago while depreciation and maintenance of equipment decreased $39,000 or 4.5% to $817,000 during the six months ended September 30, 2012 from $855,000 during the same period in 2011.

FDIC insurance premiums decreased $219,000 or 39.3% to $338,000 for the six month period ended September 30, 2012 compared to $557,000 for the same period a year ago as a result of a change in the calculation of the assessment base. The calculation changed from a deposit base to an asset base.

Net cost of operation of other real estate owned increased $1.7 or 559.2% to $2.0 million during the six months ended September 30, 2012 from $298,000 during the same period in 2011. The increase was primarily the result of an increase in write downs on foreclosed assets during the period. The Company wrote down other real estate owned by $1.7 million during the six months ended September 30, 2012 compared to $542,000 during the same period in 2011.

Other expenses decreased $154,000 to $1.7 million for the six month period ended September 30, 2012, a decrease of 8.2% 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 increased $103,000 or 24.0% to $532,000 for the six months ended September 30, 2012 from $429,000 for the same period one year ago. The Company’s combined federal and state effective income tax rate for the current period was 27.5% compared to 32.8% for the same period one year ago. The decrease in the effective income tax rate is the result of a decrease in the state income tax rate due to a charter conversion from a federally chartered stock savings bank to a South Carolina chartered commercial bank.

Current Developments – On August 6, 2012, the U.S. Treasury’s Community Development Financial Institutions Fund (“CDFI Fund”) announced its intention to award the Bank a grant totaling $1.5 million in recognition of its commitment to community development. The award is part of a CDFI program that recognizes organizations who serve low-income and distressed communities. The Bank has accepted the award and expects to receive the funds within the next quarter.

Security Federal Corporation and Subsidiaries

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, Continued

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

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

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

During the six months ended September 30, 2012 loan repayments exceeded loan disbursements resulting in a $25.5 million or 5.9% decrease in total net loans receivable. During the six months ended September 30, 2012, deposits decreased $9.0 million and FHLB advances decreased $13.9 million. The Bank had $164.8 million in additional borrowing capacity at the FHLB at the end of the period. At September 30, 2012, the Bank had $196.3 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 on maturity.

At September 30, 2012, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action with total risk based, Tier 1 risk based and Tier 1 leverage ratios of 20.23%, 18.97% and 8.99%, respectively. 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, 2012.

(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	$	44	$	165	$	3,767	$	3,976	$	26,695	$	30,671
Standby letters of credit		132		6		1,267		1,405		413		1,818
Total	$	176	$	171	$	5,034	$	5,381	$	27,108	$	32,489

Security Federal Corporation and Subsidiaries

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises principally from interest rate risk inherent in its lending, investment, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Company manages other risks such as credit quality and liquidity risk in the normal course of business, management considers interest rate risk to be its most significant market risk that could potentially have the largest material effect on the Company’s financial condition and results of operations. Other types of market risks such as foreign currency exchange rate risk and commodity price do not arise in the normal course of the Company’s business activities.

The Company’s profitability is affected by fluctuations in the market interest rate. Management’s goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. A sudden and substantial increase or decrease in interest rates may adversely impact the Company’s earnings to the extent that the interest rates on interest-earning assets and interest-bearing liabilities do not change at the same rate, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using a test that measures the impact on net interest income and net portfolio value of an immediate change in interest rates in 100 basis point increments and by measuring the Bank’s interest sensitivity gap (“Gap”). Net portfolio value is defined as the net present value of assets, liabilities, and off-balance sheet contracts. Gap is the amount of interest sensitive assets repricing or maturing over the next twelve months compared to the amount of interest sensitive liabilities maturing or repricing in the same time period.

For the six months ended September 30, 2012, the Bank's interest rate spread, defined as the average yield on interest bearing assets less the average rate paid on interest bearing liabilities was 2.73%. For the year ended March 31, 2012, the interest rate spread was 2.98%.

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, 2012 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, 2012 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.

Security Federal Corporation and Subsidiaries

Part II: Other Information

Item 1 Legal Proceedings

The Company is not engaged in any legal proceedings of a material nature at the present time. From time to time, the Company is a party to legal proceedings in the ordinary course of business wherein it enforces its security interest in mortgage loans it has made.

Item 1A Risk Factors

There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended March 31, 2012.

Item 2 Unregistered Sales of Equity Securities and Use Of Proceeds

None

Item 3 Defaults Upon Senior Securities

None

Item 4 Mine Safety Disclosures

Not applicable

Item 5 Other Information

None

Security Federal Corporation and Subsidiaries

Part II: Other Information, Continued

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 B (2)
	3.3	Amended and Restated Bylaws (3)
	4.1	Form of Stock Certificate of the Company and other instruments defining the rights of security holders, including indentures (4)
	4.2	Form of Stock Certificate for the Series B Preferred Shares (2)
	4.3	Warrant to purchase shares of the Company’s common stock dated December 19, 2008 (5)
	4.4	Form of Indenture with respect to the Company’s 8.0% Convertible Senior Debentures Due 2029 (6)
	4.5	Specimen Convertible Senior Debenture Due 2029 (6)
	4.6	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 (2)
	4.7	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 (2)
	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 (9)
	10.12	Form of Security Federal Split Dollar Agreement (9)
	10.13	Form of Compensation Modification Agreement (5)
	14	Code of Ethics (15)
	25	Form T-1; Statement Eligibility of Trustee (6)
	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 quarterended September 30, 2012, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Changes in Shareholders’Equity and Comprehensive Income; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements (16)

(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 Company’s Current Report on Form 8-K filed on September 30, 2010.

(3)

Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 19, 2011.

(4)

Filed on August 12, 1987, as an exhibit to the Company’s Registration Statement on Form 8-A and incorporated herein by reference.

(5)

Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 23, 2008.

(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.

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 June 29, 2006, as an exhibit to the Company’s Annual Report on Form 10-K and incorporated herein by reference.

(16)

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.

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 __, 2012	By:	/s/ J. Chris Verenes
		J. Chris Verenes
		President & Chief Executive Officer
		Duly Authorized Representative

Date:	November __, 2012	By:	/s/ Roy G. Lindburg
		Roy G. Lindburg
		Chief Financial Officer
		Duly Authorized Representative

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

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, 2012, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Changes in Shareholders’Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements