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SFDL > SEC Filings for SFDL > Form 10-Q on 12-Feb-2010All Recent SEC Filings

Show all filings for SECURITY FEDERAL CORP

Form 10-Q for SECURITY FEDERAL CORP


12-Feb-2010

Quarterly Report


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 us by the Office of Thrift Supervision or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;

legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules;

our ability to attract and retain deposits;

further increases in premiums for deposit insurance;

our ability to control operating costs and expenses;

the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;

difficulties in reducing risks associated with the loans on our balance sheet;

staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;

computer systems on which we depend could fail or experience a security breach;

our ability to retain key members of our senior management team;

costs and effects of litigation, including settlements and judgments;

our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;

increased competitive pressures among financial services companies;

changes in consumer spending, borrowing and savings habits;

the 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; and

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


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

Some of these and other factors are discussed in the 2009 10-K under the caption "Risk Factors" Such developments could have an adverse impact on our financial position and our results of operations.

Any of the forward-looking statements that we make in this quarterly report and in other public statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. 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 2010 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.

Comparison Of Financial Condition At December 31, 2009 and March 31, 2009

General - Total assets decreased $5.2 million or 0.5% to $979.5 million at December 31, 2009 from $984.7 million at March 31, 2009. The primary reason for the decrease in total assets was a $21.5 million or 3.5% decrease in net loans receivable to $589.6 million combined with a $10.3 million or 33.1% decrease in investment and mortgage-backed securities-held to maturity. These decreases were offset partially by an increase in cash, investment and mortgage-backed securities available for sale and other assets.

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

                                                                                Increase (Decrease)
                                    December 31,          March 31,
                                        2009                2009               Amount           Percent
Cash And Cash Equivalents          $     9,999,440     $     6,562,394     $    3,437,046            52.4 %
Investment And Mortgage-
  Backed Securities -
  Available For Sale                   298,559,096         282,832,735         15,726,361             5.6
Investment And Mortgage-
  Backed Securities - Held
  To Maturity                           20,925,353          31,265,866        (10,340,513 )         (33.1 )
Loan Receivable, Net                   589,604,964         611,089,873        (21,484,909 )          (3.5 )
Premises And Equipment,
  Net                                   20,997,475          21,675,434           (677,959 )          (3.1 )
Bank Owned Life Insurance                9,911,305           9,641,305            270,000             2.8
Repossessed Assets
 Acquired in Settlement of
 Loans                                   3,582,754           1,985,172          1,597,582            80.5
Other Assets                             7,993,708           1,657,189          6,336,519           382.4

Cash and cash equivalents increased $3.4 million to $10.0 million at December 31, 2009 from $6.6 million at March 31, 2009.

Investments and mortgage-backed securities available for sale increased $15.7 million or 5.6% to $298.6 million at December 31, 2009 from $282.8 million at March 31, 2009. The increase in investments and mortgage-backed securities available for sale is attributable to additional purchases of mortgage-backed securities and investments and increases in the market values of these securities. This is offset partially by paydowns on mortgage-backed securities and sales, calls and maturities on mortgage-backed securities and investments. Investments and mortgage-backed securities held to maturity decreased $10.3 million to $20.9 million at December 31, 2009 compared to $31.3 million at March 31, 2009. This is a result of maturities and paydowns on investments.

Loans receivable, net decreased $21.5 million or 3.5% to $589.6 million at December 31, 2009 from $611.1 million at March 31, 2009. The decrease is a result of the slowing down of the national and local economy combined with more restrcitive underwriting standards. Residential real estate loans decreased $8.4 million to $118.6 million at December 31, 2009 from $127.0 million at March 31, 2009 primarily as a result of a slowdown in the local real estate market combined with generally lower market interest rates. In a low interest rate environment, borrowers tend to refinance their mortgages into lower fixed rate loans. We typically sell these types of loans to minimize interest rate risk. Consumer loans increased $1.0 million to $70.1 million at December 31, 2009 from $69.0 million at March 31, 2009.


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

Commercial business loans decreased $1.9 to $19.2 million at December 31, 2009 from $21.0 million at March 31, 2009 while commercial real estate loans decreased $9.9 million to $394.5 million at December 31, 2009 from $404.4 million at March 31, 2009. Loans held for sale decreased $554,000 or 9.7% to $5.2 million at December 31, 2009 from $5.7 million at March 31, 2009.

Premises and equipment, net decreased $678,000 or 3.1% to $21.0 million at December 31, 2009 from $21.7 million at March 31, 2009. The majority of the decrease related to depreciation consistent with the normal course of business. The Company did not undergo any significant asset purchases during the period. Bank Owned Life Insurance increased $270,000 or 2.8% to $9.9 million at December 31, 2009 from $9.6 million at March 31, 2009.

Repossessed assets acquired in settlement of loans increased $1.6 million or 80.5% to $3.6 million at December 31, 2009 from $2.0 million at March 31, 2009. The Company sold five real estate properties and repossessed 13 additional properties during the quarter ended December 31, 2009. At December 31, 2009, the balance of repossessed assets consisted of the following 21 real estate properties: two lots within one subdivision of Aiken, South Carolina, one lot within a subdivision of Lexington, South Carolina and one lot within a subdivision of Martinez, Georgia; approximately 17 acres of land and one commercial building in Aiken, South Carolina; a commercial building and four single-family residences in Augusta, Georgia; one single-family residence under construction in North Augusta, South Carolina; three manufactured homes in South Carolina; and six single-family residences in South Carolina.

Other assets increased $6.3 million or 382.4% to $8.0 million at December 31, 2009 from $1.7 million at March 31, 2009. The majority of this increase was attributable to $4.3 million in prepaid FDIC insurance premiums at December 31, 2009. In accordance with the guidelines mandated by the FDIC that are applicable to all FDIC insured depository institutions, the Company recorded $4.7 million in FDIC prepaid insurance premiums. The prepaid insurance premiums paid are intended to cover the Bank's insurance premiums through June 30, 2013.

Liabilities
Deposit Accounts
                                                                                                    Balance
                       December 31, 2009                    March 31, 2009                    Increase (Decrease)
                                    Weighted                            Weighted
                   Balance            Rate             Balance            Rate              Amount            Percent
Demand Accounts:
Checking        $ 106,916,219              0.20 %   $ 104,662,377              0.21 %   $    2,253,842               2.2 %
Money
Market            168,608,501              1.42       150,513,010              1.88         18,095,491              12.0
Statement
Savings
 Accounts          17,561,666              0.44        17,187,295              0.54            374,371               2.2
Total             293,086,386              0.92       272,362,682              1.15         20,723,704               7.6

Certificate
Accounts
0.00 -
0.99%              13,312,828                                   -                           13,312,828             100.0
1.00 -
1.99%              96,270,279                          21,143,194                           75,127,085             355.3
2.00 -
2.99%             229,336,950                         112,373,285                          116,963,665             104.1
3.00 -
3.99%               7,280,652                          76,088,180                          (68,807,528 )           (90.4 )
4.00 -
4.99%              28,561,434                         173,467,216                         (144,905,782 )           (83.5 )
5.00 -
5.99%               4,915,453                           6,279,018                           (1,363,565 )           (21.7 )
Total             379,677,596              2.32       389,350,893              3.51        ( 9,673,297 )            (2.5 )
Total
Deposits        $ 672,763,982              1.71 %   $ 661,713,575              2.54 %   $   11,050,407               1.7 %

Included in the certificates above were $30.0 million and $25.4 million in brokered deposits at December 31, 2009 and March 31, 2009, respectively with a weighted average interest rate of 2.03% and 2.04%, 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 year of maturity and
weighted average interest rate in the table below:

                                                                                                    Balance
                           December 31, 2009                    March 31, 2009                Increase (Decrease)
Fiscal Year Due:        Balance              Rate           Balance           Rate           Balance         Percent
2010                  $             -              - %   $  91,080,000           0.94 %   $ (91,080,000 )       (100.0 %)
2011                       38,425,000           2.14        15,000,000           4.87        23,425,000         156.17
2012                       34,700,000           3.66        24,700,000           4.56        10,000,000           40.5
2013                       10,000,000           4.76        10,000,000           4.76                 -              -
2014                       20,000,000           3.84        20,000,000           3.84                 -              -
Thereafter                 68,206,548           4.08        58,218,434           4.30         9,988,114           17.2
Total Advances       $    171,331,548           3.57 %   $ 218,998,434           2.95 %   $ (47,666,886 )        (21.8 )%

Advances from the FHLB decreased $47.7 million to $171.3 million at December 31, 2009 from $219.0 million at March 31, 2009. The Company replaced maturing FHLB advances with lower cost TAF borrowings, which increased $30.0 million to $40.0 million during the same nine month period. In addition, the decrease in loans during the period allowed the Company to repay some of these advances.

Advances from the FHLB are secured by a blanket collateral agreement with the FHLB by pledging the Bank's portfolio of residential first mortgage loans and investment securities with approximate amortized cost and fair value of $140.4 million and $145.8 million, respectively, at December 31, 2009. Advances are subject to prepayment penalties.

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

                                 As of December 31, 2009
 Borrow Date   Maturity Date   Amount       Int. Rate   Type          Call Dates

 06/24/05      06/24/15         5,000,000 3 3.710%      1 Time Call   06/24/10
 11/23/05      11/23/15         5,000,000   3.933%      Multi-Call    05/25/08 and
                                                                      quarterly
                                                                      thereafter
 01/12/06      01/12/16         5,000,000   4.450%      1 Time Call   01/12/11
 03/01/06      03/03/14         5,000,000   4.720%      1 Time Call   03/03/10
 06/02/06      06/02/16         5,000,000   5.160%      1 Time Call   06/02/11
 07/11/06      07/11/16         5,000,000   4.800%      Multi-Call    07/11/08 and
                                                                      quarterly
                                                                      thereafter
 11/29/06      11/29/16         5,000,000   4.025%      Multi-Call    05/29/08 and
                                                                      quarterly
                                                                      thereafter
 01/19/07      07/21/14         5,000,000   4.885%      1 Time Call   07/21/11
 05/24/07      05/24/17         7,900,000   4.375%      Multi-Call    05/27/08 and
                                                                      quarterly
                                                                      thereafter
 07/25/07      07/25/17         5,000,000   4.396%      Multi-Call    07/25/08 and
                                                                      quarterly
                                                                      thereafter
 11/16/07      11/16/11         5,000,000   3.745%      Multi-Call    11/17/08 and
                                                                      quarterly
                                                                      thereafter
 08/28/08      08/28/13         5,000,000   3.113%      Multi-Call    08/30/10 and
                                                                      quarterly
                                                                      thereafter
 08/28/08      08/28/18         5,000,000   3.385%      1 Time Call   08/29/11

Other Borrowings - The Bank had $10.4 million and $16.1 million in other borrowings at December 31, 2009 and March 31, 2009, respectively. These borrowings consist of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts and the current balance on a revolving line of credit with another financial institution. At December 31, 2009 and March 31, 2009, short-term repurchase agreements were $10.4 million and $11.3 million, respectively. The repurchase agreements typically mature within one to three days and the interest rate paid on these borrowings floats monthly with money market type rates. At December 31, 2009 and March 31, 2009, the interest rate paid on the repurchase agreements was 0.85% and 1.24%, respectively. The Bank had pledged as collateral for these repurchase agreements investment and mortgage-backed securities with amortized costs and fair values of $20.6 million and $21.7 million, respectively, at December 31, 2009 and $25.5 million and $26.0 million, respectively, at March 31, 2009.

At March 31, 2009, the balance on the revolving line of credit was $4.8 million. At December 31, 2009, the balance was zero. The unsecured line of credit had an interest rate equal to one month LIBOR plus 2.0% and matured on December 1, 2009.


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

Term Auction Facility Borrowings - During the year ended March 31, 2009, the Company began participating in the Federal Reserve's TAF (Term Auction Facility) program, an auction program designed to provide liquidity for qualifying depository institutions. Under the program, institutions place a bid for an advance from their local Federal Reserve Bank at an interest rate that is determined as the result of the auction. Borrowings under the program typically have a maturity of 84-days or less. At December 31, 2009, the Company had $40.0 million outstanding in advances obtained through the TAF program, an increase of $30.0 million from $10.0 million at March 31, 2009. The interest rate on these advances was 0.25% at December 31, 2009 and March 31, 2009. The balance at December 31, 2009 matures within three months. The Company had pledged as collateral for these borrowings investment and mortgage-backed securities with amortized costs and fair values of $64.3 million and $65.2 million, respectively, at December 31, 2009 and $17.8 million and $17.9 million, respectively, at March 31, 2009.

Mandatorily Redeemable Financial Instrument - On June 30, 2006, the Company recorded a $1.4 million mandatorily redeemable financial instrument as a result of the acquisition of the Collier-Jennings Companies. The shareholder of the Collier-Jennings Companies received cash and was issued stock in the Company to settle the acquisition. The Company will release the shares to the shareholder of the Collier-Jennings Companies over a three-year period. The stock is mandatorily redeemable at the option of the shareholder of the Collier-Jennings Companies in cumulative increments of 20% per year for a five-year period at the greater of $26 per share or one and one-half times the book value of the Company's stock. At December 31, 2009, the shareholder had not elected to have any of the shares redeemed.

Senior Convertible Debentures Offering - Effective December 1, 2009, the Company issued $6.1 million in 8.0% convertible senior debentures to be due December 1, 2029. The debentures are convertible into the Company's common stock at a conversion price of $20 per share at the option of the holder at any time prior to maturity. The debentures are redeemable at the option of the Company, in whole or in part, at any time on or after December 1, 2019 at the redemption price equal to 100% of the principal amount of the debentures to be redeemed, plus accrued and unpaid interest, if any.

Junior Subordinated Debentures - On September 21, 2006, Security Federal Statutory Trust (the "Trust"), a wholly-owned subsidiary of the Company, issued and sold fixed and floating rate capital securities of the Trust (the "Capital Securities"), which are reported on the consolidated balance sheet as junior subordinated debentures, generating proceeds of $5.0 million. The Trust loaned these proceeds to the Company to use for general corporate purposes, primarily to provide capital to the Bank. The debentures qualify as Tier 1 capital under Federal Reserve Board guidelines.

The Capital Securities accrue and pay distributions quarterly at a rate per annum equal to a blended rate of 4.42% at December 31, 2009. One-half of the Capital Securities issued in the transaction has a fixed rate of 6.88% and the remaining half has a floating rate of three-month LIBOR plus 170 basis points, which was 1.95% at December 31, 2009. The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears.

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

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

Equity - Shareholders' equity increased $846,000 or 1.3% to $67.9 million at December 31, 2009 from $67.1 million at March 31, 2009. Accumulated other comprehensive income, net of tax increased $551,000 to $4.4 million at December 31, 2009. The Company's net income available for common shareholders was $787,000 for the nine month period ended December 31, 2009, after preferred stock dividends of $675,000 and accretion of preferred stock of $54,000. The Board of Directors of the Company declared the 74th, 75th, and 76th consecutive quarterly common stock dividends, which were $0.08 per share, in May 2009, August 2009, and October 2009, which totaled $591,000. Book value per common share was $20.26 at December 31, 2009 and $19.95 at March 31, 2009.


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


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

                                At December 31, 2009            At March 31, 2009           $ Increase     % Increase
                                Amount      Percent (1)       Amount        Percent (1)     (Decrease)     (Decrease)
Loans 90 days or more past
due or non-accrual loans:
   Residential real estate    $ 3,213,009       0.6%       $   1,112,023         0.2%        $ 2,100,986       188.9%
   Commercial business            745,811       0.1            2,808,080        0.5          (2,062,269)     (73.4)
    Commercial real estate     34,079,054       5.7             8,044,372       1.3          26,034,682       323.6
   Consumer                     1,199,579       0.2               955,683       0.1             243,896        25.5
Total non-performing loans     39,237,453       6.6            12,920,158       2.1          26,317,295       203.7

Other non-performing assets
Repossessed assets                 57,526       0.0                61,126       0.0              (3,600)       (5.9)
Real estate owned               3,525,228       0.6             1,924,046        0.3          1,601,182        83.2
Total other non-performing
assets                          3,582,754       0.6             1,985,172       0.3           1,597,582        80.5
Total non-performing assets  $ 42,820,207     7.2%          $  14,905,330      2.4%        $ 27,914,877        187.3%

Total non-performing assets
as a percentage of total
assets                               4.4%                            1.5%

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

. . .

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