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SFDL > SEC Filings for SFDL > Form 10-Q on 13-Feb-2012All Recent SEC Filings

Show all filings for SECURITY FEDERAL CORP

Form 10-Q for SECURITY FEDERAL CORP


13-Feb-2012

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 the Company by the by the Board of Governors of the Federal Reserve System ("Federal Reserve"), and our bank subsidiary by the FDIC and the South Carolina State Board of Financial Institutions, or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;

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

our ability to attract and retain deposits;

further increases in premiums for deposit insurance;

our ability to control operating costs and expenses;

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

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

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

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

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

costs and effects of litigation, including settlements and judgments;

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

increased competitive pressures among financial services companies;

changes in consumer spending, borrowing and savings habits;

the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations;

the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;

our ability to pay dividends on our common stock;

adverse changes in the securities markets;

inability of key third-party providers to perform their obligations to us;

changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, 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 Treasury's Community Development Capital Initiative ("CDCI"); and


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 Item 1A., "Risk Factors" in the 2011 10-K, which 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 on Form 10-Q 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 issue 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 December 31, 2011 and March 31, 2011

General - Total assets decreased $17.0 million or 1.8% to $916.6 million at
December 31, 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)
                                            December 31, 2011      March 31, 2011         Amount          Percent
Certificates Of Deposits With Other
  Banks                                    $         1,726,765     $       100,432     $   1,626,333       1,619.3 %
Investment And Mortgage-Backed
  Securities                                       398,393,806         372,417,915        25,975,891           7.0
Loan Receivable, Net                               445,799,290         484,470,616       (38,671,326 )        (8.0 )
Federal Home Loan Bank Stock                         8,471,100          11,267,485        (2,796,385 )       (24.8 )
Repossessed Assets Acquired In
  Settlement Of Loans                               13,660,376          14,433,853          (773,477 )        (5.4 )
Other Assets                                         5,752,349           7,865,690        (2,113,341 )       (26.9 )

Certificates of deposits with other banks increased $1.6 million or 1,619.3% to $1.7 million at December 31, 2011, from $100,000 at March 31, 2011. The Bank is eligible to participate in various grant programs as a result of its status as a community development financial institution under the Treasury's CDCI program. As part of one of these grant programs, the Bank benefits from investing in certificates of deposits with other community development financial institutions. All of these certificates are in increments of $250,000 or less and are therefore fully insured by the FDIC.

Investment and mortgage-backed securities increased $26.0 million or 7.0% to $398.4 million at December 31, 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 51 securities consisting primarily of mortgage-backed securities during the nine month period ended December 31, 2011.

Loans receivable, net, decreased $38.7 million or 8.0% to $445.8 million at December 31, 2011 from $484.5 million at March 31, 2011. This decrease was a result of the Company's efforts to implement more stringent underwriting standards and increase rates combined with lower loan demand. Residential real estate loans decreased $12.0 million to $99.0 million at December 31, 2011 from $111.0 million at March 31, 2011. Consumer loans decreased $4.5 million to $60.4 million at December 31, 2011 compared to $64.9 million at March 31, 2011. Commercial real estate loans and commercial business loans decreased $21.0 million and $2.9 million, respectively, to $286.0 million and $10.6 million, respectively, at December 31, 2011 compared to $307.0 million and $13.5 million, respectively, at March 31, 2011. Loans held for sale increased $465,000 to $5.6 million at December 31, 2011 from $5.2 million at March 31, 2011.

Repossessed assets acquired in settlement of loans decreased $773,000 or 5.4% to $13.7 million at December 31, 2011 from $14.4 million at March 31, 2011. The Company sold 17 real estate properties and repossessed 26 additional properties during the nine month period ended December 31, 2011 resulting in a decrease in repossessed assets acquired in settlement of loans during the period.


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

At December 31, 2011, the balance of repossessed assets consisted of 49 real estate properties: 15 single-family residences and 19 lots within residential 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 40 lot subdivision development and adjacent 17 acres of land in Columbia, South Carolina; a 233 acre subdivision in Blythewood, South Carolina; a 43 lot subdivision in Elgin, South Carolina; a two rental complex in Columbia, South Carolina; and 34.8 acres of land in Bluffton, South Carolina which was originally acquired as a participation loan from another financial institution.

Liabilities
Deposit Accounts

                             December 31, 2011                  March 31, 2011                Increase (Decrease)
                                           Weighted                         Weighted
                           Balance           Rate           Balance           Rate           Amount          Percent
Demand Accounts:
Checking                $ 117,002,762           0.15 %   $ 117,077,343           0.09 %   $     (74,581 )         (0.1 )%
Money Market              223,373,391           0.68 %     194,560,099           0.85 %      28,813,292           14.8 %
Statement Savings          20,658,303           0.20 %      20,582,505           0.24 %          75,798            0.4 %
Total                     361,034,456           0.48 %     332,219,947           0.54 %      28,814,509            8.7 %

Certificate Accounts
0.00 - 1.99%              259,098,600              -       239,078,153              -        20,020,447            8.4 %
2.00 - 2.99%               60,721,241              -       107,386,573              -       (46,665,332 )        (43.5 )%
3.00 - 3.99%                2,973,724              -         3,307,422              -          (333,698 )        (10.1 )%
4.00 - 4.99%                4,688,443              -         5,272,507              -          (584,064 )        (11.1 )%
5.00 - 5.99%                1,214,524              -         3,092,512              -        (1,877,988 )        (60.7 )%
Total                     328,696,532           1.41 %     358,137,167           1.71 %     (29,440,635 )         (8.2 )%
Total Deposits          $ 689,730,988           0.92 %   $ 690,357,114           1.15 %   $    (626,126 )          0.0 %

Included in the certificates above were $39.7 million and $39.7 million in brokered deposits at December 31, 2011 and March 31, 2011, respectively, with a weighted average interest rate of 1.88% 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
                             December 31, 2011                March 31, 2011                      Decrease
Fiscal Year Due:           Balance          Rate           Balance          Rate           Balance         Percent
2012                    $   7,400,000          2.85 %   $  24,950,000          2.22 %   $ (17,550,000 )        (70.3 )%
2013                       10,000,000          4.76 %      10,000,000          4.76 %               -              -
2014                       30,000,000          3.45 %      30,000,000          3.45 %               -              -
2015                       20,273,967          3.01 %      20,286,338          3.01 %         (12,371 )         (0.1 )
2016                       20,000,000          4.12 %      20,000,000          4.12 %               -              -
Thereafter                 32,900,000          4.36 %      32,900,000          4.36 %               -              -
Total Advances          $ 120,573,967          3.81 %   $ 138,136,338          3.57 %   $ (17,562,371 )        (12.7 )%

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 $148.9 million and $141.3 million, respectively at December 31, 2011 and $168.2 million and $172.9 million, respectively at March 31, 2011. Advances are subject to prepayment penalties.


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 December 31, 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
 05/24/07      05/24/17         7,900,000   4.375%      Multi-Call   05/27/08 and
                                                                     quarterly
                                                                     thereafter
 07/25/07      07/25/17         5,000,000   4.396%      Multi-Call   07/25/08 and
                                                                     quarterly
                                                                     thereafter
 08/28/08      08/28/13         5,000,000   3.113%      Multi-Call   08/30/10 and
                                                                     quarterly
                                                                     thereafter

Other Borrowings - The Bank had $9.8 million and $11.2 million in other borrowings (non-FHLB advances) at December 31, 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 December 31, 2011 and March 31, 2011, the interest rate paid on the repurchase agreements was 0.30% 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 $19.3 million and $20.6 million, respectively at December 31, 2011 and $22.7 million and $23.7 million, respectively at March 31, 2011.

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 guidelines.

The Capital Securities accrue and pay distributions quarterly at a rate of 2.25% at December 31, 2011. Prior to September 2011, one-half of the Capital Securities issued in the transaction had a fixed rate of 6.88% and the remaining half had a floating rate of three-month LIBOR plus 170 basis points. After September 2011, the rate is a floating rate of three month LIBOR plus 170 basis points as the fixed rate portion was converted to the floating rate. The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears.

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

The Capital Securities mature or are mandatorily redeemable upon maturity on December 15, 2036, and or upon earlier optional redemption as provided in the indenture. The Company has the right to redeem the Capital Securities in whole or in part, 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.


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 $4.5 million or 6.0% to $80.6 million at December 31, 2011 from $76.0 million at March 31, 2011. Accumulated other comprehensive income, net of tax increased $2.8 million to $6.4 million at December 31, 2011. The Company's net income available for common shareholders was $1.0 million for the nine month period ended December 31, 2011, after preferred stock dividends of $330,000.

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 nine months ended December 31, 2011.


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

COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2011 AND 2010

Net Income - Net income available to common shareholders increased $32,000 or 9.2% to $376,000 for the three months ended December 31, 2011 compared to $344,000 for the three months ended December 31, 2010. The increase in net income is primarily a result of an increase in other non-interest income and a decrease in other general and administrative expenses. These factors were offset slightly by a decrease in net interest income.

Net Interest Income - For the quarter ended December 31, 2011 and 2010, net interest margin was 3.09%. Net interest income decreased $185,000 or 2.8% to $6.5 million during the three months ended December 31, 2011, compared to $6.7 million for the same period in 2010, as a result of a significant decrease in the volume of interest bearing assets, particularly loans.

Total average interest-earning assets decreased $19.1 million to $846.5 million at December 31, 2011 while average interest-bearing liabilities decreased $22.6 million to $790.0 million at December 31, 2011. The interest rate spread increased two basis points to 2.99% during the three months ended December 31, 2011 compared to 2.97% for the same period in 2010.

Interest Income - Total interest income decreased $1.1 million or 10.3% to $9.5 million during the three months ended December 31, 2011 from $10.6 million for the same period in 2010. Total interest income on loans decreased $1.1 million or 13.7% to $6.9 million during the three months ended December 31, 2011 compared to $8.0 million for the same period one year prior. The decrease was a result of a decrease in the average loan portfolio balance of $71.3 million combined with the yield in the loan portfolio decreasing one basis point. Interest income from mortgage-backed securities decreased $144,000 or 7.3% to $1.8 million for the quarter ended December 31, 2011 from $2.0 million for the same quarter in 2010. This decrease was the result of a decrease in the portfolio yield of 66 basis points offset partially by an increase in the average balance of $31.5 million. Interest income from investment securities increased $151,000 or 26.1% as a result of an increase in the average balance of the investment securities portfolio of $21.4 million combined with an increase in the portfolio yield of 28 basis points.

The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the three months ended December 31, 2011 and 2010:

                                                          Three Months Ended December 31,
                                              2011                             2010
                                                                                                       Increase
                                                                                                      (Decrease)
                                                                                                     In Interest
                                                                                                     And Dividend
                                     Average                          Average                           Income
                                     Balance         Yield(1)         Balance         Yield(1)        From 2010
Loans Receivable, Net             $ 457,021,589           6.05 %   $ 528,369,487           6.06 %   $   (1,098,580 )
Mortgage-Backed Securities          254,043,358           2.87       222,572,127           3.53           (143,989 )
Investment Securities(2)            129,358,971           2.43       107,929,680           2.15            151,304
Overnight Time And
  Certificates of Deposit             6,074,163           0.05         6,730,533           0.12             (1,209 )
Total Interest-Earning Assets     $ 846,498,081           4.50 %   $ 865,601,827           4.88 %   $   (1,092,474 )

(1) Annualized
(2) Tax equivalent basis is calculated using an effective tax rate of 34% and amounted to $54,000 for the quarter ended December 31, 2011.

Interest Expense - Total interest expense decreased $907,000 or 23.4% to $3.0 million during the three months ended December 31, 2011 compared to $3.9 million for the same period one-year earlier. The decrease in total interest expense is attributable to decreases in interest rates paid combined with a decrease in the average balances of interest-bearing liabilities. Interest expense on deposits decreased $697,000 or 30.1% to $1.6 million during the period. The decrease was attributable to a 42 basis point decrease in the cost of deposits combined with a decrease in average interest-bearing deposits of $5.8 million compared to the average balance in the three months ended December 31, 2010. The decrease in the cost of deposits primarily resulted from maturing certificate accounts repricing at lower interest rates. Interest expense on advances and other borrowings decreased $174,000 or 12.6% as the cost of debt outstanding decreased six basis . . .

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