Forward-Looking Statements and "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995

This document, including information included or incorporated by reference, contents, and future filings by the Company on Form 10-K, Form 10-Q, and Form 8-K, and future oral and written statements by the Company and its management may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often include the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated, including, but not limited to:

· 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 affected 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 Board of Governors of the Federal Reserve System ("Federal Reserve"), and our bank subsidiary by the Federal Deposit Insurance Corporation 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 risk 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 have acquired or 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 new legislation such as the Jumpstart Our Business Startups Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (including the Basel III regulatory capital reforms), 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 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 comply with the requirements of the U.S. Department of Treasury's Community Development Capital Initiative; and other economic, competitive, governmental, regulatory, and

technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this document.

Some of these and other factors are discussed in our 2012 10-K under Item 1A, "Risk Factors." Such developments could have an adverse impact on our financial position and our results of operations.

Any forward-looking statements are based upon management's beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included or incorporated by reference in this document or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur, and you should not put undue reliance on any forward-looking statements.

Comparison of Financial Condition At June 30, 2012 and March 31, 2012

General - Total assets decreased $14.5 million or 1.6% to $910.1 million at June 30, 2012 from $924.6 million at March 31, 2012. The primary reason for the decrease in total assets was a decrease of $15.4 million in loans receivable, net, offset slightly by an increase of $4.4 million in investment and mortgage-backed securities.

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

                                                                                       Increase (Decrease)
                                              June 30,            March 31,
                                                2012                2012              Amount          Percent
Cash And Cash Equivalents                  $    10,653,208     $     9,331,372     $   1,321,836           14.2 %
Investment And Mortgage-
  Backed Securities -
  Available For Sale                           358,337,230         353,954,857         4,382,373            1.2
Investment And Mortgage-
  Backed Securities - Held
  To Maturity                                   65,089,398          67,676,210        (2,586,812 )         (3.8 )
Loans Receivable, Net                          413,066,895         428,510,606       (15,443,711 )         (3.6 )
Repossessed Assets
  Acquired In
  Settlement of Loans                           13,745,651          14,160,099          (414,448 )         (2.9 )
FHLB Stock                                       6,928,496           8,471,100        (1,542,604 )        (18.2 )

Cash and cash equivalents increased $1.3 million to $10.7 million at June 30, 2012 compared to $9.3 million at March 31, 2012.

Investment and mortgage-backed securities available for sale increased $4.4 million or 1.2% to $358.3 million at June 30, 2012 from $354.0 million at March 31, 2012. This increase was the result of investment purchases offset slightly by principal repayments and calls on securities coupled with the sale of 44 securities during the quarter ended June 30, 2012. Investment and mortgage-backed securities held to maturity decreased $2.6 million or 3.8% to $65.1 million at June 30, 2012 as a result of calls of securities as well as principal repayments on mortgage-backed securities.

Loans receivable, net, decreased $15.4 million or 3.6% to $413.1 million at June 30, 2012 from $428.5 million at March 31, 2012. This decrease was a result of Company's efforts to tighten underwriting standards and increase offering rates combined with overall lower loan demand from credit-worthy borrowers. Residential real estate loans decreased $2.1 million or 2.2% to $95.7 million at June 30, 2012 from $97.8 million at March 31, 2012. Consumer loans decreased $1.4 million or 2.3% to $57.3 million at June 30, 2012 compared to $58.7 million at March 31, 2012. Commercial real estate loans and commercial business loans decreased $14.1 million and $659,000, respectively, to $262.2 million and $8.9 million, respectively, at June 30, 2012 from $276.3 million and $9.5 million, respectively at March 31, 2012. Loans held for sale increased $487,000 or 18.2% to $3.2 million at June 30, 2012 from $2.7 million at March 31, 2012.

Repossessed assets acquired in settlement of loans decreased $414,000 or 2.9% to $13.7 million at June 30, 2012 from $14.2 million at March 31, 2012. The Company sold 12 real estate properties and repossessed eight additional properties during the quarter ended June 30, 2012 for a net decrease during the quarter. At June 30, 2012, the balance of repossessed assets consisted of the following 50 real estate properties: 15 single-family residences and 17 lots within residential subdivisions located throughout our market area in South Carolina and Georgia; six parcels of land in South Carolina and one in Georgia; 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 unit 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.

FHLB stock decreased $1.5 million or 18.2% to $6.9 million at June 30, 2012 compared to $8.5 million at March 31, 2012. The Bank, as a member of the FHLB of Atlanta, is required to acquire and hold shares of capital stock in the FHLB of Atlanta in an amount equal to a membership component, which is 0.15% of total assets plus a transaction component which equals 4.5% of outstanding advances (borrowings) from the FHLB of Atlanta. As total assets and total advances have decreased, so has the Bank's required investment in FHLB stock.

Liabilities
Deposit Accounts- The increases and decreases in deposit accounts were as
follows:
                                                                                                     Balance
                        June 30, 2012                        March 31, 2012                    Increase (Decrease)
                 Balance         Weighted Rate         Balance         Weighted Rate         Amount           Percent
Demand
Accounts:
Checking      $ 125,339,394                0.24 %   $ 124,750,127                0.11 %   $     589,267             0.5 %
Money
Market          232,066,933                0.37       224,195,659                0.55         7,871,274             3.5
Statement
Savings
 Accounts        22,190,874                0.20        22,348,787                0.20          (157,913 )          (0.7 )
Total           379,597,201                0.32       371,294,573                0.38         8,302,628             2.2

Certificate
Accounts
 0.00 -
1.99%           271,185,754                           267,556,217                             3,629,537             1.4
 2.00 -
2.99%            36,736,773                            49,260,643                           (12,523,870 )         (25.4 )
 3.00 -
3.99%             2,889,920                             2,936,931                               (47,011 )          (1.6 )
 4.00 -
4.99%             3,140,997                             4,021,999                              (881,002 )         (21.9 )
 5.00 - 5.99%       969,029                             1,130,693                              (161,664 )         (14.3 )
Total           314,922,473                1.28       324,906,483                1.36        (9,984,010 )          (3.1 )
Total
Deposits      $ 694,519,674                0.75 %   $ 696,201,056                0.84 %   $  (1,681,382 )          (0.2 )%

Included in the certificates above were $27.6 million and $34.4 million in brokered deposits at June 30, 2012 and March 31, 2012, respectively, with a weighted average interest rate of 1.51% and 1.71%, 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, 2012                    March 31, 2012                      Decrease
Fiscal Year Due:           Balance           Rate           Balance           Rate           Balance          Percent
2013                    $   10,000,000          3.59 %   $   18,900,000          2.70 %   $   (8,900,000 )        (47.1 )%
2014                        25,000,000          3.62 %       30,000,000          3.45 %       (5,000,000 )        (16.7 )
2015                        20,265,616          3.02 %       20,269,802          3.01 %           (4,186 )         (0.0 )
2016                        20,000,000          4.12 %       20,000,000          4.12 %                -              -
2017                        15,000,000          4.66 %       15,000,000          4.66 %                -              -
Thereafter                  17,900,000          4.10 %       17,900,000          4.10 %                -              -
Total Advances          $  108,165,616          3.82 %   $  122,069,802          3.62 %   $  (13,904,186 )        (11.4 )%

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 $147.4 million and $142.3 million at June 30, 2012 and $152.8 million and $162.1 million at March 31, 2012, 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, 2012
 Borrow Date   Maturity Date   Amount       Int. Rate   Type         Call Dates

 11/23/05      11/23/15      $  5,000,000   3.933%      Multi-Call   05/23/08 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 $10.0 million and $9.8 million in other borrowings (non-FHLB advances) at June 30, 2012 and March 31, 2012, 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, 2012 and March 31, 2012, the interest rate paid on the repurchase agreements was 0.25%. The Bank had pledged as collateral for these repurchase agreements investment and mortgage-backed securities with amortized costs and fair values of $17.9 million and $19.2 million at June 30, 2012 and $17.8 million and $19.0 million at March 31, 2012, 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 Collier-Jennings Companies received cash and was issued stock in the Company to settle the acquisition. The shares were released to the shareholder of Collier-Jennings Companies over a three-year period. The stock had a mandatorily redeemable rate at the option of the shareholder of 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 per common share of the Company's stock.

The mandatorily redeemable financial instrument was carried at fair value based on the Company's book value per common share. The Company recorded a valuation gain of $50,000 during the quarter ended June 30, 2011 compared to none during the quarter ended June 30, 2012 to properly reflect the fair value of the instrument.

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"). The Trust used the net proceeds from the sale of the Capital Securities to purchase a like amount of junior subordinated debentures (the "Debentures") of the Company which are reported on the Consolidated Balance Sheets as junior subordinated debentures, generating proceeds of $5.0 million. The Company used the proceeds for general corporate purposes, primarily to provide capital to the Bank. The debentures qualify as Tier 1 capital under Federal Reserve guidelines. The Debentures are the sole assets of the Trust. The Company's obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the Trust.

The Capital Securities accrue and pay distributions annually at a rate per annum equal to 2.168% at June 30, 2012. 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.

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, and commenced 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 are 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 $965,000 or 1.2% to $81.7 million at June 30, 2012 from $80.8 million at March 31, 2012. Accumulated other comprehensive income, net of tax increased $571,000 or 8.7% to $7.1 million at June 30, 2012 from $6.5 million at March 31, 2012. The Company's net income available for common shareholders was $621,000 for the three month period ended June 30, 2012, after preferred stock dividends of $110,000.

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 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 quarter ended June 30, 2011.

The Board of Directors of the Company declared the 86th consecutive quarterly common stock dividend, which was $0.08 per share, in May 2012, and totaled $236,000. Book value per common share was $20.16 at June 30, 2012 and $19.83 at March 31, 2012.

COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2012 AND 2011

Net Income Available to Common Shareholders - Net income available to common shareholders increased $270,000 or 76.8% to $621,000 for the three months ended June 30, 2012 compared to $351,000 for the three months ended June 30, 2011. The increase in net income was primarily the result of a $1.6 million decrease in the provision for loan losses.

Net Interest Income -The net interest margin decreased 44 basis points to 2.81% for the quarter ended June 30, 2012 from 3.25% for the comparable quarter in the previous year. Net interest income decreased $1.0 million or 14.9% to $5.9 million for the three months ended June 30, 2012 as a result of a decrease in interest income offset slightly by a decrease in interest expense. During the three months ended June 30, 2012, average interest earning assets decreased $18.3 million or 2.1% to $842.6 million while average interest-bearing liabilities decreased $17.3 million or 2.2% to $783.6 million. The interest rate spread decreased 41 basis points to 2.72% during the three months ended June 30, 2012 compared 3.16% for the same period in 2011.

Interest Income - Total interest income decreased $1.8 million or 17.2% to $8.5 million during the three months ended June 30, 2012 from $10.2 million for the same period in 2011. This decrease is the result of the decrease in interest earning assets and the decrease in the yield. Total interest income on loans receivable, net decreased $1.3 million or 17.1% to $6.1 million during the three months ended June 30, 2012 from $7.3 million for the comparable period in 2011. The decrease is a result of the average loan portfolio balance decreasing $57.6 million combined with a 35 basis point decrease in the yield on the loan portfolio. Interest income from mortgage-backed securities decreased $353,000 or 16.7% to $1.8 million during the three months ended June 30, 2012 from $2.1 million for the comparable period in 2011 as a result of a 68 basis point decrease in yield offset by a $12.4 million increase in the average balance of the portfolio. Tax equivalent interest income from investment securities decreased $181,000 to $693,000 for the three months ended June 30, 2012 as a result of an increase of $24.8 million in the average balance of the investment securities portfolio offset by a 95 basis point decrease in the yield.

The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the three months ended June 30, 2012 and 2011:

                                                             Three Months Ended June 30,
                                              2012                             2011
                                                                                                        Increase
                                                                                                     (Decrease) In
                                                                                                      Interest And
                                     Average                          Average                       Dividend Income
                                     Balance         Yield(1)         Balance         Yield(1)         From 2012
. . .