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SFDL > SEC Filings for SFDL > Form 10-Q on 13-Aug-2010All Recent SEC Filings

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Form 10-Q for SECURITY FEDERAL CORP


13-Aug-2010

Quarterly Report


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 2010 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 may turn out to be inaccurate as a result of our beliefs and assumptions we make in connection with the factors set forth above or because of other unidentified and unpredictable factors. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. These risks could cause our actual results for fiscal year 2011 and beyond to differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect the Company's financial condition, liquidity and operating and stock price performance.

Comparison of Financial Condition At June 30, 2010 and March 31, 2010

General - Total assets increased $5.7 million or 0.6% to $961.7 million at June
30, 2010 from $956.0 million at March 31, 2010. The primary reason for the
increase in total assets was an increase in investment and mortgage-backed
securities, offset slightly by a decrease in net loans receivable.

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

                                                                                     Increase (Decrease)
                                           June 30,            March 31,
                                             2010                2010              Amount           Percent
Cash And Cash Equivalents               $     8,855,224     $     8,804,645     $      50,579             0.6 %
Investment And Mortgage-
  Backed Securities -
  Available For Sale                        301,636,120         292,261,039         9,375,081             3.2
Investment And Mortgage-
  Backed Securities - Held
  To Maturity                                17,514,603          18,785,380        (1,270,777 )          (6.8 )
Loan Receivable, Net                        565,937,049         568,398,835        (2,461,786 )          (0.4 )
Repossessed Assets
  Acquired In
  Settlement of Loans                        10,721,609          10,773,050           (51,441 )          (0.5 )
Prepaid FDIC Premium                          3,707,589           3,987,622          (280,033 )          (7.0 )

Cash and cash equivalents remained relatively unchanged at $8.9 million at June 30, 2010, increasing $51,000 or 0.6% compared to $8.8 million at March 31, 2010.

Investment and mortgage-backed securities available for sale increased $9.4 million or 3.2% to $301.6 million at June 30, 2010 from $292.3 million at March 31, 2010. This increase was the result of investment purchases offset slightly by principal repayments and maturities on securities coupled with the sale of ten securities during the quarter ended June 30, 2010. Investment and mortgage-backed securities held to maturity decreased $1.3 million or 6.8% to $17.5 million at June 30, 2010 as a result of calls and maturities of securities during the quarter as well as principal repayments on mortgage-backed securities. The Company did not purchase or sell any held to maturity securities during the period.

Loans receivable, net decreased $2.5 million or 0.4% to $565.9 million at June 30, 2010 from $568.4 million at March 31, 2010. This decrease was a result of Company's efforts to tighten underwriting standards and increase rates combined with overall lower loan demand. Residential real estate loans decreased $2.0 million to $116.3 million at June 30, 2010 from $118.3 million at March 31, 2010. Consumer loans decreased $1.7 million to $66.8 million at June 30, 2010 compared to $68.5 million at March 31, 2010. Commercial real estate loans and commercial business loans decreased $5.8 million and $665,000, respectively, to $372.9 million and $17.1 million, respectively, at June 30, 2010 when compared to the balance at March 31, 2010. Loans held for sale increased $6.3 million to $9.5 million at June 30, 2010 from $3.2 million at March 31, 2010.


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

Repossessed assets acquired in settlement of loans decreased $51,000 to $10.7 million at June 30, 2010 from $10.8 million at March 31, 2010. The Company sold 14 real estate properties and repossessed 10 additional properties during the period for a net decrease during the quarter. At June 30, 2010, the balance of repossessed assets consisted of the following 25 real estate properties: 10 single-family residences located throughout the Company's market area in South Carolina and Georgia; three lots within two subdivisions in Aiken, South Carolina and approximately 17 acres of land in Aiken, South Carolina; one lot within a subdivision in North Augusta, South Carolina; one mobile home including small acreage in Lexington County, South Carolina and one mobile home and small acreage in Aiken, South Carolina; two commercial buildings in Lexington County, South Carolina and two commercial buildings in Augusta, Georgia; three related mobile home parks in Aiken, South Carolina; a condominium development in Atlanta, Georgia that was originally acquired as a participation loan from another financial institution; a 55 lot subdivision development and adjacent 17 acres of land in Columbia, South Carolina; and 34.8 acres of land in Blufton, South Carolina also originally acquired as a participation loan from another financial institution. In addition to the properties listed above, the balance also included $16,000 in various other repossessed assets that were not real estate.

Prepaid FDIC premium decreased $280,000 or 7.0% to $3.7 million at June 30, 2010 compared to $4.0 million at March 31, 2010. This decrease was the result of the quarterly assessment amount due during the quarter.

Liabilities
Deposit Accounts
                                                                                                 Balance
                        June 30, 2010                      March 31, 2010                  Increase (Decrease)
                                    Weighted                           Weighted
                   Balance            Rate            Balance            Rate            Amount           Percent
Demand
Accounts:
Checking        $ 111,828,004             0.21 %   $ 109,086,367             0.20 %   $   2,741,637              2.5 %
Money
Market            176,003,069             1.16       173,904,664             1.28         2,098,405              1.2
Statement
Savings
   Accounts        19,246,040             0.35        18,991,543             0.39           254,497              1.3
Total             307,077,113             0.76       301,982,574             0.83         5,094,539              1.7

Certificate
Accounts
0.00 -
1.99%             132,619,172                        118,796,507                         13,822,665             11.6
2.00 -
2.99%             248,397,189                        255,352,355                         (6,955,166 )           (2.7 )
3.00 -
3.99%               4,222,491                          4,571,860                           (349,369 )           (7.6 )
4.00 -
4.99%               8,043,448                          8,818,487                           (775,039 )           (8.8 )
5.00 -
5.99%               4,746,654                          4,730,654                             16,000              0.3
Total             398,028,954             2.11       392,269,863             2.15         5,759,091              1.5
Total
Deposits        $ 705,106,067             1.52 %   $ 694,252,437             1.58 %   $  10,853,630              1.6 %

Included in the certificates above were $39.4 million and $34.4 million in brokered deposits at June 30, 2010 and March 31, 2010, respectively, with a weighted average interest rate of 2.18% and 2.07%, 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
                          June 30, 2010                    March 31, 2010                      Decrease
Fiscal Year Due:      Balance           Rate           Balance           Rate          Balance          Percent
2011                  23,945,000           3.22 %      31,100,000           2.54 %     (7,155,000 )          23.0 %
2012                  34,700,000           3.66 %      34,700,000           3.66 %              -               -
2013                  10,000,000           4.76 %      10,000,000           4.76 %              -               -
2014                  20,000,000           3.84 %      20,000,000           3.84 %              -               -
2015                  15,299,860           3.44 %      15,303,882           3.44 %         (4,022 )          (0.0 )
Thereafter            52,900,000           4.27 %      52,900,000           4.27 %              -               -
Total Advances     $ 156,844,860           3.87 %   $ 164,003,882           3.71 %   $ (7,159,022 )          (4.4 )%

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 $116.0 million and $122.5 million at June 30, 2010 and $130.8 million and $136.0 million at March 31, 2010, 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, re-borrow funds on different terms, or convert the advance to a three-month floating rate advance tied to LIBOR.

                                  As of June 30, 2010
Borrow Date   Maturity Date   Amount       Int. Rate   Type          Call Dates

11/23/05      11/23/15         5,000,000   3.933%      Multi-Call    05/25/08 and
                                                                     quarterly
                                                                     thereafter
01/12/06      01/12/16         5,000,000   4.450%      1 Time Call   01/12/11
06/02/06      06/02/16         5,000,000   5.160%      1 Time Call   06/02/11
07/11/06      07/11/16         5,000,000   4.800%      Multi-Call    07/11/08 and
                                                                     quarterly
                                                                     thereafter
11/29/06      11/29/16         5,000,000   4.025%      Multi-Call    05/29/08 and
                                                                     quarterly
                                                                     thereafter
01/19/07      07/21/14         5,000,000   4.885%      1 Time Call   07/21/11
03/09/07      03/09/12         4,700,000   4.286%      Multi-Call    06/09/10 and
                                                                     quarterly
                                                                     thereafter
05/24/07      05/24/17         7,900,000   4.375%      Multi-Call    05/27/08 and
                                                                     quarterly
                                                                     thereafter
07/25/07      07/25/17         5,000,000   4.396%      Multi-Call    07/25/08 and
                                                                     quarterly
                                                                     thereafter
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


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


                                  As of March 31, 2010
Borrow Date   Maturity Date   Amount       Int. Rate   Type          Call Dates

06/24/05      06/24/15         5,000,000   3.710%      1 Time Call   06/24/10
11/23/05      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
06/02/06      06/02/16         5,000,000   5.160%      1 Time Call   06/02/11
07/11/06      07/11/16         5,000,000   4.800%      Multi-Call    07/11/08 and
                                                                     quarterly
                                                                     thereafter
11/29/06      11/29/16         5,000,000   4.025%      Multi-Call    05/29/08 and
                                                                     quarterly
                                                                     thereafter
01/19/07      07/21/14         5,000,000   4.885%      1 Time Call   07/21/11
03/09/07      03/09/12         4,700,000   4.286%      Multi-Call    06/09/10 and
                                                                     quarterly
                                                                     thereafter
05/24/07      05/24/17         7,900,000   4.375%      Multi-Call    05/27/08 and
                                                                     quarterly
                                                                     thereafter
07/25/07      07/25/17         5,000,000   4.396%      Multi-Call    07/25/08 and
                                                                     quarterly
                                                                     thereafter
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 $12.3 million and $12.1 million in other borrowings (non-FHLB advances) at June 30, 2010 and March 31, 2010, 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 June 30, 2010 and March 31, 2010, the interest rate paid on the repurchase agreements was 0.65% and 0.80%, respectively. The Bank had pledged as collateral for these repurchase agreements investment and mortgage-backed securities with amortized costs and fair values of $18.7 million and $19.5 million at June 30, 2010 and $20.6 million and $21.3 million at March 31, 2010, respectively.

Mandatorily Redeemable Financial Instrument - On June 30, 2006, the Company recorded a $1.4 million mandatorily redeemable financial instrument as a result of the acquisition of the Collier-Jennings Companies. The shareholder of the Collier-Jennings Companies received cash and was issued stock in the Company to settle the acquisition. The Company released the shares to the shareholder of the Collier-Jennings Companies over a three-year period. The stock is mandatorily redeemable by the shareholder of the Collier-Jennings Companies in cumulative increments of 20% per year for a five-year period at the greater of $26 per share or one and one-half times the book value of the Company's stock. At June 30, 2010, the shareholder had not elected to redeem any of the shares.

The mandatorily redeemable financial instrument is carried at fair value. At June 30, 2010 and March 31, 2010, the fair value was $1.7 million based on the Company's book value per common share. The Company recorded a valuation expense of $40,000 during the quarter ended June 30, 2010 to properly reflect the fair value of the instrument.

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

The Capital Securities accrue and pay distributions quarterly at a rate per annum equal to a blended rate of 4.56% at June 30, 2010. One-half of the Capital Securities issued in the transaction has a fixed rate of 6.88% and the remaining half has a floating rate of three-month LIBOR plus 170 basis points, which was 2.24% at June 30, 2010. 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.


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

Senior Convertible Debentures -Effective December 1, 2009, the Company issued $6.1 million in convertible senior debentures. The debentures will mature on December 1, 2029 and accrue interest at the rate of 8.0% per annum until maturity or earlier redemption or repayment. Interest on the debentures is payable on June 1 and December 1 of each year, commencing June 1, 2010. The debentures are convertible into the Company's common stock at a conversion price of $20 per share at the option of the holder at any time prior to maturity.

The debentures are redeemable, in whole or in part, at the option of the Company at any time on or after December 1, 2019, at a price equal to 100% of the principal amount of the debentures to be purchased plus any accrued and unpaid interest to, but excluding, the date of redemption. The debentures will be unsecured general obligations of the Company ranking equal in right of payment to all of our present and future unsecured indebtedness that is not expressly subordinated.

Equity - Shareholders' equity increased $1.6 million or 2.3% to $69.4 million at June 30, 2010 from $67.9 million at March 31, 2010. Accumulated other comprehensive income, net of tax increased $1.5 million to $6.1 million at June 30, 2010. The Company's net income available for common shareholders was $297,000 for the three month period ended June 30, 2010, after preferred stock dividends of $225,000 and accretion of preferred stock of $19,000. The Board of Directors of the Company declared the 78th consecutive quarterly common stock dividend, which was $0.08 per share, in May 2010, and totaled $197,000. Book value per common share was $20.86 at June 30, 2010 and $20.22 at March 31, 2010.

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

                                At June 30, 2010                 At March 31, 2010                $                 %
                                                                              Percent         Increase           Increase
                            Amount         Percent (1)         Amount           (1)          (Decrease)         (Decrease)
Loans 90 days or more
past due or
non-accrual loans:
Residential real
estate                   $  4,474,438               0.8 %   $  4,344,060            0.8 %   $     130,378                3.0 %
  Commercial business         316,624               0.1          699,182            0.1          (382,558 )            (54.7 )
Commercial real estate     22,701,042               4.0       25,479,420            4.4        (2,778,378 )            (10.9 )
Consumer                      767,323               0.1          703,288            0.1            64,035                9.1
Total non-performing
loans                      28,259,427               5.0       31,225,950            5.4        (2,966,523 )             (9.5 )

Other non-performing
assets:
Repossessed assets             15,871               0.0           43,106            0.0           (27,235 )            (63.2 )
Real estate owned          10,705,738               1.9       10,729,944            1.9           (24,206 )             (0.2 )
Total other
non-performing assets      10,721,609               1.9       10,773,050            1.9           (51,441 )             (0.5 )

Total non-performing
assets                   $ 38,981,036               6.9 %   $ 41,999,000            7.3 %   $  (3,017,964 )             (7.2 )%

Total non-performing
assets as a
    percentage of
total assets                      4.1 %                              4.4 %

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

The Company's non-performing assets decreased $3.0 million to $39.0 million at June 30, 2010 from $42.0 million at March 31, 2010. The decrease was primarily concentrated in non-performing commercial real estate loans which decreased $2.8 million to $22.7 million at June 30, 2010 from $25.5 million at March 31, 2010. The balance in non-performing commercial real estate loans consisted of 52 loans to 28 borrowers with an average loan balance of $378,000.

A large portion of the non-performing commercial real estate category, or $10.9 million consisted of 14 loans secured by commercial buildings to 13 separate borrowers. Of this amount, five loans totaling $1.7 million were secured by buildings located in the Midlands area of South Carolina; two loans totaling $871,000 were secured by buildings located in Aiken, South Carolina; one loan for $5.5 million was secured by a building located in Charleston, South Carolina; one loan for $402,000 was secured by a building in Florida; one loan for $938,000 was secured by a building in Hardeeville, South Carolina; two loans totaling $235,000 were secured by buildings located in Windsor, South Carolina; one loan totaling $1.1 million was secured by an apartment complex in Lexington, South Carolina; and one loan for $11,000 was secured by a building in North Augusta, South Carolina.


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

Of the remaining commercial real estate category $8.2 million was concentrated in construction loans and land acquisition and development type loans ("A&D loans"). The balance of these type of loans consisted of $4.8 million in A&D loans to two separate borrowers for the development of residential subdivisions in the Midlands area of South Carolina and $3.5 million in loans to 14 separate borrowers secured by builder lots or speculative houses in varying degrees of completion throughout South Carolina.

The remaining loans in the commercial real estate category were secured by first mortgages on principal residences or raw land.

Repossessed assets acquired in settlement of loans decreased $51,000 to $10.7 million at June 30, 2010 from $10.8 million at March 31, 2010. The Company foreclosed on 10 real estate properties during the quarter ended June 30, 2010 and sold 14 properties.

The Bank reviews its loan portfolio and allowance for loan losses on a monthly basis. Future additions to the Bank's allowance for loan losses are dependent on, among other things, the performance of the Bank's loan portfolio, the economy, changes in real estate values, and interest rates. There can be no assurance that additions to the allowance will not be required in future periods. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our financial condition and results of operations. Management continually monitors its loan portfolio for the impact of local economic changes. The ratio of allowance for loan losses to total loans was 2.02% at June 30, 2010 compared to 2.13% at March 31, 2010. The Bank continues to practice conservative lending and past due loans are monitored closely.

The cumulative interest not accrued during the quarter ended June 30, 2010 relating to all non-performing loans totaled $380,000. At June 30, 2010, the Company did not have any loans that were 90 days or more past due and still . . .

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