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SFDL > SEC Filings for SFDL > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for SECURITY FEDERAL CORP

Form 10-Q for SECURITY FEDERAL CORP


14-Nov-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 Federal Reserve Board, and our bank subsidiary by the Federal Deposit Insurance Corporation and the South Carolina 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 have acquired or 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, the Jumpstart Our Business Startups Act and the Basel III regulatory capital requirements 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 continue to comply with the requirements of the U.S. Department of Treasury's Community Development Capital Initiative ("CDCI"); and


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

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 the 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 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 2013 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, 2012 and March 31, 2012

General - Total assets decreased $20.4 million or 2.2% to $904.2 million at
September 30, 2012 from $924.6 million at March 31, 2012. The primary reason for
the decrease in total assets was a decrease in net loans receivable, offset
slightly by increases in investments.

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

                                                                                      Increase (Decrease)
                                           September 30,
                                                2012          March 31, 2012         Amount          Percent
Cash And Cash Equivalents                  $   14,408,177     $     9,331,372     $   5,076,805           54.4 %
Investment And Mortgage-
  Backed Securities -
  Available For Sale                          359,820,610         353,954,857         5,865,753            1.7
Investment And Mortgage-
  Backed Securities - Held
  To Maturity                                  69,033,012          67,676,210         1,356,802            2.0
Loans Receivable, Net                         403,049,461         428,510,606       (25,461,145 )         (5.9 )
Repossessed Assets
  Acquired In
  Settlement of Loans                          11,032,720          14,160,099        (3,127,379 )        (22.1 )
FHLB Stock                                      6,467,000           8,471,100        (2,004,100 )        (23.7 )

Cash and cash equivalents increased $5.1 million or 54.4% to $14.4 million at September 30, 2012 from $9.3 million at March 31, 2012.

Investment and mortgage-backed securities available for sale increased $5.9 million or 1.7% to $359.8 million at September 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 51 securities during the six months ended September 30, 2012. Investment and mortgage-backed securities held to maturity increased $1.4 million or 2.0% to $69.0 million at September 30, 2012 as a result of investment purchases offset slightly by calls of securities as well as principal repayments on mortgage-backed securities.

Loans receivable, net, decreased $25.5 million or 5.9% to $403.0 million at September 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 creditworthy borrowers. Residential real estate loans decreased $3.8 million or 3.9% to $94.0 million at September 30, 2012 from $97.8 million at March 31, 2012. Consumer loans decreased $2.4 million or 4.0% to $56.3 million at September 30, 2012 compared to $58.7 million at March 31, 2012. Commercial real estate loans and commercial business loans decreased $23.2 million and $759,000, respectively, to $253.1 million and $8.8 million, respectively, at September


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

30, 2012 from $276.3 million and $9.6 million, respectively, at March 31, 2012. Loans held for sale increased $1.5 million or 56.1% to $4.2 million at September 30, 2012 from $2.7 million at March 31, 2012.

Repossessed assets acquired in settlement of loans decreased $3.1 million or 22.1% to $11.0 million at September 30, 2012 from $14.2 million at March 31, 2012. The Company sold 21 real estate properties and repossessed 10 additional properties during the six months ended September 30, 2012 for a net decrease during the period. At September 30, 2012, the balance of repossessed assets consisted of the following 43 real estate properties: 10 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; five commercial buildings in 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; 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 $2.0 million or 23.7% to $6.5 million at September 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 balances, weighted average rates and increases and
decreases in deposit accounts were as follows :

                                                                                                  Balance
                            September 30, 2012                 March 31, 2012               Increase (Decrease)
                                          Weighted                         Weighted
                          Balance           Rate           Balance           Rate           Amount         Percent
Demand Accounts:
Checking               $ 124,491,607           0.07 %   $ 124,750,127           0.11 %   $    (258,520 )       (0.2 %)
Money Market             237,580,118           0.46       224,195,659           0.55        13,384,459          6.0
Statement Savings
 Accounts                 22,177,789           0.20        22,348,787           0.20          (170,998 )       (0.8 )
Total                    384,249,514           0.32       371,294,573           0.38        12,954,941          3.5

Certificate Accounts
0.00 - 1.99%             263,940,597                      267,556,217                       (3,615,620 )       (1.4 )
2.00 - 2.99%              33,636,913                       49,260,643                      (15,623,730 )      (31.7 )
3.00 - 3.99%               2,672,039                        2,936,931                         (264,892 )       (9.0 )
4.00 - 4.99%               2,093,711                        4,021,999                       (1,928,288 )      (47.9 )
5.00 - 5.99%                 595,775                        1,130,693                         (534,918 )      (47.3 )
Total                    302,939,035           1.18       324,906,483           1.36       (21,967,448 )       (6.8 )
Total Deposits         $ 687,188,549           0.70 %   $ 696,201,056           0.84 %   $  (9,012,507 )       (1.3 %)

Included in the certificates above were $22.6 million and $34.4 million in brokered deposits at September 30, 2012 and March 31, 2012, respectively, with a weighted average interest rate of 1.47% 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
                            September 30, 2012                March 31, 2012                      Decrease
Fiscal Year Due:           Balance          Rate           Balance          Rate           Balance         Percent
2013                    $   5,000,000          4.58 %   $  18,900,000          2.70 %   $ (13,900,000 )        (73.5 )%
2014                       30,000,000          3.45 %      30,000,000          3.45 %               -              -
2015                       20,261,409          3.02 %      20,269,802          3.01 %          (8,393 )         (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          $ 108,161,409          3.82 %   $ 122,069,802          3.62 %   $ (13,908,393 )        (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 $135.2 million and $128.1 million at September 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, reborrow funds on different terms, or convert the advance to a three-month floating rate advance tied to LIBOR.

                                      As of September 30, 2012
Borrow Date    Maturity Date   Amount          Int. Rate       Type          Call Dates

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

Other Borrowings - The Bank had $9.9 million and $9.8 million in other borrowings (non-FHLB advances) at September 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 September 30, 2012 and March 31, 2012, the interest rate paid on the repurchase agreements was 0.20% and 0.25%, respectively. The Bank had pledged as collateral for these repurchase agreements investment and mortgage-backed securities with amortized costs and fair values of $16.3 million and $17.3 million, respectively at September 30, 2012 and $17.8 million and $19.0 million, respectively, at March 31, 2012.

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 six months ended September 30, 2011 compared to none during the six months ended September 30, 2012 to properly reflect the fair value of the instrument.


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

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 Securites 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 2.089% at September 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.

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 on 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 $2.4 million or 2.9% to $83.1 million at September 30, 2012 from $80.8 million at March 31, 2012. Accumulated other comprehensive income, net of tax increased $1.6 million or 25.1% to $8.2 million at September 30, 2012. The Company's net income available for common shareholders was $1.2 million for the six months ended September 30, 2012, after payment of $220, 000 in preferred stock dividends.

The Board of Directors of the Company declared common stock dividends totaling $471,000 during the period ended September 30, 2012. Book value per common share was $20.63 at September 30, 2012 and $19.83 at March 31, 2012.

Results of Operations for the Three Month Periods Ended September 30, 2012 and 2011

Net Income Available to Common Shareholders - Net income available to common shareholders increased $251,000 or 81.5% to $560,000 for the three months ended September 30, 2012 compared to $308,000 for the three months ended September 30, 2011. The increase in net income was primarily the result of a $2.0 million decrease in the provision for loan losses offset by a $812,000 decrease in net interest income and a $874,000 increase in general and administrative expenses.

Net Interest Income - The net interest margin decreased 27 basis points to 2.83% for the quarter ended September 30, 2012 from 3.10% for the comparable quarter in the previous year. The significant decrease in the volume of interest earning assets, particularly loans, resulted in a decrease in net interest income. Net interest income decreased $812,000 or 12.3% to $5.8 million during the three months ended September 30, 2012, compared to $6.6 million for the same period in 2011. During the three months ended September 30, 2012, average interest earning assets decreased $24.8 million or 2.89% to $832.5 million while average interest-bearing liabilities decreased $27.1 million or 34.0% to $772.2 million.

Interest Income - Total interest income decreased $1.6 million or 16.3% to $8.3 million during the three months ended September 30, 2012 from $9.9 million for the same period in 2011. This decrease is primarily the result of the decrease in interest earning


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

assets. Total interest income on loans decreased $1.2 million or 16.8% to $6.0 million during the three months ended September 30, 2012 as a result of the average loan portfolio balance decreasing $55.1 million or 11.8% to $410.0 million and the yield on the loan portfolio decreasing 35 basis points to 5.83%. Interest income from mortgage-backed securities decreased $307,000 or 15.8% to $1.6 million as a result of a 57 basis point decrease in the portfolio yield offset by a $9.7 million increase in the average balance. Tax equivalent interest income from investment securities decreased $39,000 or 5.0% to $737,000 as a result of a decrease of 40 basis points in the yield partially offset by an increase of $18.8 million in the average balance of the investment securities portfolio.

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

                                                           Three Months Ended September 30,
                                              2012                             2011
                                                                                                        Increase
                                                                                                      (Decrease) In
                                                                                                      Interest And
                                     Average                          Average                        Dividend Income
                                     Balance         Yield(1)         Balance         Yield(1)          From 2011
Loans Receivable, Net             $ 409,960,775           5.83 %   $ 465,039,249           6.18 %   $      (1,208,251 )
Mortgage-Backed Securities          266,336,834           2.47       256,649,480           3.04              (307,030 )
Investment Securities(2)            149,601,065           1.97       130,816,906           2.37               (39,145 )
Overnight Time And
  Certificates of Deposit             6,561,662           0.14         4,754,474           0.05                 1,613
Total Interest-Earning Assets     $ 832,460,336           4.02 %   $ 857,260,109           4.63 %   $      (1,552,813 )

(1) Annualized
(2) Tax equivalent basis is calculated using an effective tax rate of 34% and amounted to $88,977 and $32,955 for the quarters ended September 30, 2012 and 2011, respectively.

Interest Expense - Total interest expense decreased $797,000 or 24.5% to $2.5 million during the three months ended September 30, 2012 compared to $3.3 million for the same period last year. The decrease in total interest expense is attributable to decreases in interest rates paid and a $27.1 million decrease in the average balance of interest-bearing liabilities. Interest expense on deposits decreased $527,000 or 29.7% to $1.2 million during the period ended September 30, 2012 compared to $1.8 million for the same period last year. The . . .

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