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SFDL > SEC Filings for SFDL > Form 10-Q on 15-Nov-2010All Recent SEC Filings

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Form 10-Q for SECURITY FEDERAL CORP


15-Nov-2010

Quarterly Report


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

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;

Future legislative changes and our ability to continue to comply with the requirements of the U.S. Treasury Community Development Capital Initiative ("CDCI"); 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.

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

Financial Condition At September 30, 2010 and March 31, 2010

General - Total assets decreased $6.9 million or 0.7% to $949.1 million at September 30, 2010 from $956.0 million at March 31, 2010. The primary reason for the decrease in total assets was a decrease in net loans receivable, offset by increases in Investments, Cash and Cash Equivalents and Repossessed Assets Acquired in Settlement of Loans.

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

                                                                                    Increase (Decrease)
                                           September 30,        March 31,
                                                2010              2010             Amount          Percent
Cash And Cash Equivalents                  $   16,335,069     $   8,804,645     $   7,530,424           85.5 %
Investment And Mortgage-Backed
  Securities -  Available For Sale            310,668,247       292,261,039        18,407,208            6.3
Investment And Mortgage-Backed
  Securities -  Held to Maturity               15,255,128        18,785,380        (3,530,252 )        (18.8 )
Loan Receivable, Net                          537,174,436       568,398,835       (31,224,399 )         (5.5 )
Repossessed Assets Acquired in
  Settlement of Loans                          15,597,726        10,773,050         4,824,676           44.8
Prepaid FDIC Premiums                           3,424,672         3,987,622          (562,950 )        (14.1 )

Cash and Cash Equivalents, increased $7.5 million or 85.5% to $16.3 million at September 30, 2010, from $8.8 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

Investment and mortgage-backed securities available for sale increased $18.4 million or 6.3% to $310.7 million at September 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 32 securities consisting primarily of mortgage-backed securities during the six month period ended September 30, 2010. Investment and mortgage-backed securities held to maturity decreased $3.5 million or 18.8% to $15.3 million at September 30, 2010 as a result of calls and maturities of securities during the six month period ended September 30, 2010, 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 $31.2 million or 5.5% to $537.2 million at September 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 lower loan demand. Residential real estate loans decreased $5.0 million to $113.2 million at September 30, 2010 from $118.3 million at March 31, 2010. Consumer loans decreased $1.7 million to $66.8 million at September 30, 2010 compared to $68.5 million at March 31, 2010. Commercial real estate loans and commercial business loans decreased $29.0 million and $1.6 million, respectively, to $349.8 million and $16.3 million, respectively, at September 30, 2010 when compared to the balances at March 31, 2010. Loans held for sale increased $5.2 million to $8.4 million at September 30, 2010 from $3.2 million at March 31, 2010.

Repossessed assets acquired in settlement of loans increased $4.8 million or 44.8% to $15.6 million at September 30, 2010 from $10.8 million at March 31, 2010. The Company sold 19 real estate properties and repossessed 21 additional properties during the period for a net decrease during the six month period ended September 30, 2010. At September 30, 2010, the balance of repossessed assets consisted of the following 31 real estate properties: 15 single-family residences located throughout the Company's market area in South Carolina and Georgia; eight lots within five subdivisions in Aiken County and Lexington County, South Carolina and approximately 17 acres of land in Aiken, South Carolina; and one mobile home and small acreage in Aiken County, South Carolina; two commercial buildings in Lexington County, South Carolina and one commercial buildings in Augusta, Georgia; 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, and a commercial building in Charleston, South Carolina that was a loan originally acquired through a loan broker. 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 $563,000 or 14.1% to $3.4 million at September 30, 2010 compared to $4.0 million at March 31, 2010. This decrease was the result of the amortization of premiums during the period

Liabilities
Deposit Accounts

                              September 30, 2010                      March 31, 2010                  Increase (Decrease)
                          Balance         Weighted Rate         Balance         Weighted Rate         Amount         Percent
Demand Accounts:
Checking               $ 108,694,344                0.16 %   $ 109,086,367                0.20 %   $    (392,023 )      (0.36 )%
Money Market             182,093,980                0.97 %     173,904,664                1.28 %       8,189,316         4.71 %
Statement
Savings Accounts          19,515,623                0.30 %      18,991,543                0.39 %         524,080         2.76 %
Total                    310,303,947                0.64 %     301,982,574                0.83 %       8,321,373         2.76 %

Certificate
Accounts
 0.00 - 1.99%            171,523,273                           118,796,507                            52,726,766        44.38 %
 2.00 - 2.99%            200,565,432                           255,352,355                           (54,786,923 )     (21.46 )%
 3.00 - 3.99%              3,909,293                             4,571,860                              (662,567 )     (14.49 )%
 4.00 - 4.99%              6,981,165                             8,818,487                            (1,837,322 )     (20.83 )%
 5.00 - 5.99%              4,456,380                             4,730,654                              (274,274 )      (5.80 )%
Total                    387,435,543                2.11 %     392,269,863                2.15 %      (4,834,320 )      (1.23 )%
Total Deposits         $ 697,739,490                1.46 %   $ 694,252,437                1.58 %   $   3,487,053         0.50 %


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

Included in the certificates above were $34.4 million and $34.4 million in
brokered deposits at September 30, 2010 and March 31, 2010, respectively with a
weighted average interest rate 2.20% and 2.07%, respectively.

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

                                                                                  Balance
                    September 30, 2010          March 31, 2010              Increase (Decrease)
Fiscal Year Due:     Balance     Rate        Balance       Rate             Balance       Percent
2011             $  10,000,000     4.76% $  31,100,000   2.54%         $  (21,100,000)     (67.9%)
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                15,297,168     3.44     15,303,882        3.44             (6,714)    (0.04)
Thereafter          52,900,000     4.27     52,900,000        4.27                   -         -
Total Advances   $ 142,897,168     4.04% $ 164,003,882        3.71%    $  (21,106,714)      (12.9)%

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 $110.9 million and $117.1 million at September 30, 2010 and $130.8 million and $136.0 million at March 31, 2010, respectively. Advances are subject to prepayment penalties.


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

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

                                 As of September 30, 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




                                   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 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 September 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 September 30, 2010 and March 31, 2010, the interest rate paid on the repurchase agreements was 0.45% 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 $18.3 million and $19.4 million at September 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 September 30, 2010, the shareholder had not elected to redeem any of the shares.


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

The mandatorily redeemable financial instrument is carried at fair value. At September 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 $85,000 during the six month period ended September 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 4.57% at September 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 1.99% at September 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.

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 $10.0 million or 15% to $77.9 million at September 30, 2010 from $67.9 million at March 31, 2010. Accumulated other comprehensive income, net of tax increased $1.9 million to $6.6 million at September 30, 2010. The Company's net income available for common shareholders was $533,00 for the six month period ended September 30, 2010, after preferred stock dividends of $446,000 and accretion of preferred stock of $19,000. The Board of Directors of the Company declared common stock dividends, totaling $394,000 during the period ended September 30, 2010. Book value per common share was $19.39 at September 30, 2010 and $20.22 at March 31, 2010.

On September 29, 2010, the Company entered into a Letter Agreement with the U.S. Department of the Treasury in connection with participation in the Community Development Capital Initiative (the "CDCI") established by the Treasury pursuant to the Troubled Asset Relief Program ("TARP"). That same day, pursuant to the Exchange Agreement, all 18,000 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference amount $1,000 per share previously sold to the Treasury on December 19, 2008 pursuant to the TARP Capital Purchase Program, were exchanged for 18,000 shares of our newly designated Fixed Rate Cumulative Perpetual Preferred Stock, Series B, liquidation preference amount $1,000 per share.

In connection with our participation in the CDCI, on September 29, 2010, we also entered into a Letter Agreement with the Treasury, pursuant to which Security Federal Corporation sold an additional 4,000 shares of Series B Preferred Stock to the Treasury that same day at a price of $4.0 million. As a result of our participation in the CDCI and the transactions under the Exchange Agreement and the Purchase Agreement, the Treasury now holds 22,000 shares of the Security Federal Corporation Series B Preferred Stock, with an aggregate liquidation preference amount of $22.0 million

The additional capital received by us from the Treasury pursuant to the Purchase Agreement was contingent upon the Company's completion of a separate stock offering of the same amount, as required by our primary regulator, the Office of Thrift Supervision.


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

In satisfaction of this requirement, on September 29, 2010, the Company sold 400,000 shares of its common stock, in a private offering at a price of $10.00 per share, for gross proceeds of $4.0 million. Together with the gross proceeds of the sale of Series B Preferred Stock to the Treasury pursuant to the Purchase Agreement, the Company raised $8.0 million of capital in the aggregate.

Non-performing Assets.

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

                                 At September 30, 2010                  At March 31, 2010                               $              %
                                                                                                        Increase           Increase
                                Amount           Percent (1)         Amount         Percent (1)        (Decrease)         (Decrease)
Loans 90 days or more
past due or non-accrual
loans:
Residential real estate    $      3,554,719               0.6 %   $  4,344,060               0.8 %   $     (789,341 )            (18.2 )%
  Commercial business               326,518               0.1          699,182               0.1           (372,664 )            (53.3 )
Commercial real estate           15,491,127               2.7       25,479,420               4.4         (9,988,293 )            (39.2 )
Consumer                            694,894               0.1          703,288               0.1             (8,394 )             (1.2 )
Total non-performing
loans                            20,067,258               3.5       31,225,950               5.4        (11,158,692 )            (35.7 )

Other non-performing
assets:
Repossessed assets                   14,370               0.0           43,106               0.0            (28,736 )            (66.7 )
Real estate owned                15,583,356               2.7       10,729,944               1.9          4,853,412               45.2
Total other
non-performing assets            15,597,726               2.7       10,773,050               1.9          4,824,676               44.8
Total non-performing
assets                     $     35,664,984               6.3 %   $ 41,999,000               7.3 %   $   (6,334,016 )            (15.1 )%

Total non-performing
assets as a percentage
of total assets                         3.8 %                              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 $6.3 million to $35.7 million at September 30, 2010 from $42.0 million at March 31, 2010. The decrease was primarily concentrated in non-performing commercial real estate loans which decreased $10.0 million to $15.5 million at September 30, 2010 from $25.5 million at March 31, 2010. The balance in non-performing commercial real estate loans consisted of 43 loans to 27 borrowers with an average loan balance of $360,000.

A large portion of the non-performing commercial real estate category, or $7.0 million consisted of four loans to three separate borrowers. Of this amount, $4.9 million was for two land acquisition and development type loan to two . . .

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