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SFDL > SEC Filings for SFDL > Form 10-Q on 14-Nov-2011All Recent SEC Filings

Show all filings for SECURITY FEDERAL CORP

Form 10-Q for SECURITY FEDERAL CORP


14-Nov-2011

Quarterly Report


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

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

Some of these and other factors are discussed in the 2011 10-K under the caption "Risk Factors" Such developments could have an adverse impact on our financial position and our results of operations.

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

Financial Condition At September 30, 2011 and March 31, 2011

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

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

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

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

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

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

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


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

subdivisions located throughout our market area in South Carolina and Georgia; three parcels of land in South Carolina; one mobile home including small acreage in Lexington County, South Carolina; five commercial buildings in the Midlands area of South Carolina and one commercial building in Augusta, Georgia; a 55 lot subdivision development and adjacent 17 acres of land in Columbia, South Carolina; a 229.24 acre subdivision in Blythewood, South Carolina; and 34.8 acres of land in Bluffton, South Carolina also originally acquired as a participation loan from another financial institution.

Liabilities
Deposit Accounts

                      September 30, 2011                 March 31, 2011                 Increase (Decrease)
                                    Weighted                         Weighted
                    Balance           Rate           Balance           Rate            Amount          Percent
Demand
Accounts:
Checking         $ 118,817,537           0.13 %   $ 117,077,343            0.09 %   $   1,740,194           1.5 %
Money Market       216,094,880           0.74 %     194,560,099            0.85 %      21,534,781          11.1 %
Statement
Savings             21,054,515           0.20 %      20,582,505            0.24 %         472,010           2.3 %
Total              355,966,932           0.50 %     332,219,947            0.54 %      23,746,985           7.1 %

Certificate
Accounts
0.00 - 1.99%       252,551,771                      239,078,153                        13,473,618           5.6 %
2.00 - 2.99%        63,543,316                      107,386,573                       (43,843,257 )       (40.8 )%
3.00 - 3.99%         3,233,404                        3,307,422                           (74,018 )        (2.2 )%
4.00 - 4.99%         4,986,264                        5,272,507                          (286,243 )        (5.4 )%
5.00 - 5.99%         2,397,521                        3,092,512                          (694,991 )       (22.5 )%
Total              326,712,276           1.47 %     358,137,167            1.71 %     (31,424,891 )        (8.8 )%
Total
Deposits         $ 682,679,208           0.97 %   $ 690,357,114            1.15 %   $  (7,677,906 )        (1.1 )%

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

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

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

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


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

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

                               As of September 30, 2011
Borrow Date   Maturity Date   Amount       Int. Rate   Type         Call Dates

11/23/05      11/23/15         5,000,000   3.933%      Multi-Call   05/25/08 and
                                                                    quarterly
                                                                    thereafter
07/11/06      07/11/16         5,000,000   4.800%      Multi-Call   07/11/08 and
                                                                    quarterly
                                                                    thereafter
11/29/06      11/29/16         5,000,000   4.025%      Multi-Call   05/29/08 and
                                                                    quarterly
                                                                    thereafter
03/09/07      03/09/12         4,700,000   4.286%      Multi-Call   06/09/10 and
                                                                    quarterly
                                                                    thereafter
05/24/07      05/24/17         7,900,000   4.375%      Multi-Call   05/27/08 and
                                                                    quarterly
                                                                    thereafter
07/25/07      07/25/17         5,000,000   4.396%      Multi-Call   07/25/08 and
                                                                    quarterly
                                                                    thereafter
08/28/08      08/28/13         5,000,000   3.113%      Multi-Call   08/30/10 and
                                                                    quarterly
                                                                    thereafter

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

Mandatorily Redeemable Financial Instrument - On June 30, 2006, the Company recorded a $1.4 million mandatorily redeemable financial instrument as a result of the acquisition of the Collier-Jennings Companies. The shareholder of the Collier-Jennings Companies received cash and was issued stock in the Company to settle the acquisition. The Company released the shares to the shareholder of the Collier-Jennings Companies over a three-year period. The stock had a mandatorily redeemable rate of 20% per year for a five-year period at the greater of $26 per share or one and one-half times the book value of the Company's stock.

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

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

The Capital Securities accrue and pay distributions quarterly at a rate per annum equal to a blended rate of 4.46% at September 30, 2011. One-half of the Capital Securities issued in the transaction has a fixed rate of 6.88% and the remaining half has a floating rate of three-month LIBOR plus 170 basis points, which was 2.05% at September 30, 2011. The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears.

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

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


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

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

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

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

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

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

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

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

Net Interest Income - The net interest margin increased 3 basis points to 3.10% for the quarter ended September 30, 2011 from 3.07% for the comparable quarter in the previous year. Despite an increase in the margin, the significant decrease in the volume of interest earning assets, particularly loans, resulted in a decrease in net interest income. Net interest income decreased $89,000 or 1.3% to $6.6 million during the three months ended September 30, 2011, compared to $6.7 million for the same period in 2010. During the three months ended September 30, 2011, average interest earning assets decreased $16.6 million to $857.3 million while average interest-bearing liabilities decreased $29.6 million to $799.4 million.

Interest Income - Total interest income decreased $1.2 million or 10.4% to $9.9 million during the three months ended September 30, 2011 from $11.0 million for the same period in 2010. This decrease is primarily the result of the decrease in interest earning assets. Total interest income on loans decreased $1.1 million or 13.1% to $7.2 million during the three months ended September 30, 2011 as a result of the average loan portfolio balance decreasing $78.9 million, offset slightly by the yield on the loan portfolio increasing 10 basis points. Interest income from mortgage-backed securities decreased $143,000 or 6.8% to $1.9 million as a result of a 60 basis point decrease in the portfolio yield offset by a $27.0 million increase in the average balance. Interest income from investment securities increased $75,000 or 11.2% to $743,000 as a result of an increase of $34.3 million in the average balance of the investment securities portfolio partially offset by a decrease of 40 basis points in the yield.


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

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

                                                           Three Months Ended September 30,
                                              2011                             2010
                                                                                                        Increase
                                                                                                     (Decrease) In
                                                                                                      Interest And
                                     Average                          Average                       Dividend Income
                                     Balance         Yield(1)         Balance         Yield(1)         From 2010
Loans Receivable, Net             $ 465,039,249           6.18 %   $ 543,930,014           6.08 %   $     (1,081,609 )
Mortgage-Backed Securities          256,649,480           3.04       229,668,165           3.64             (143,034 )
Investment Securities(2)            130,816,906           2.37        96,556,897           2.77              107,659
Overnight Time And
  Certificates of Deposit             4,754,474           0.05         3,690,431           0.14                 (683 )
Total Interest-Earning Assets     $ 857,260,109           4.63 %   $ 873,845,507           5.05 %   $     (1,117,667 )

(1) Annualized
(2) Tax equivalent basis is calculated using an effective tax rate of 34% and amounted to $33,000 for the quarter ended September 30, 2011.

Interest Expense - Total interest expense decreased $1.1 million or 24.6% to $3.3 million during the three months ended September 30, 2011 compared to $4.3 million for the same period last year. The decrease in total interest expense is attributable to decreases in interest rates paid and a $29.6 million decrease in the average balance of interest-bearing liabilities. Interest expense on deposits decreased $870,000 or 32.9% during the period ended September 30, 2011. The decrease was attributable to a 46 basis point decrease in the cost of deposits combined with a decrease in average interest-bearing deposits of $16.0 million when compared to the three month period ended September 30, 2010. The decrease in the cost of deposits primarily resulted from maturing certificate accounts re-pricing at lower interest rates. Interest expense on advances and other borrowings decreased $190,000 or 12.7%. The average balance of other borrowings decreased $13.7 million or 8.1% to $155.7 million from the same period last year, directly reflecting the decrease in interest earning assets.

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

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

(1) Annualized

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


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

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

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

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

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

. . .

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