SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD:
FROM:_______________ TO: _______________
COMMISSION FILE NUMBER: 0-16120
SECURITY FEDERAL CORPORATION
South Carolina 57-0858504
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1705 WHISKEY ROAD, AIKEN, SOUTH CAROLINA 29801
(Address of Principal Executive Office) (Zip code)
(803) 641-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "large
accelerated filer" and "accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (defined in
Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
CLASS: OUTSTANDING SHARES AT: SHARES:
----------------- ---------------------- -------------
Common Stock, par July 31, 2007 2,606,792
value $0.01 per share
INDEX
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PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at June 30, 2007 and
March 31, 2007 1
Consolidated Statements of Income for the Three Months
Ended June 30, 2007 and 2006 2
Consolidated Statements of Shareholders' Equity and
Comprehensive Income at June 30, 2007 and 2006 3
Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2007 and 2006 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 21
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 1A. Risk Factors 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5 Other Information 22
Item 6. Exhibits 23
Signatures 24
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SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information is included in the consolidated financial statements and related
notes.
Part I. Financial Information
Item 1. Financial Statements
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets
June 30, 2007 March 31, 2007
------------- --------------
Assets: (Unaudited) (Audited)
Cash And Cash Equivalents $13,176,161 $13,438,129
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized cost of
$194,408,107 at June 30, 2007 and $186,970,867
at March 31, 2007) 191,701,990 185,766,296
Held To Maturity:(Fair value of $55,023,821
at June 30, 2007 and $63,441,641 at March
31, 2007) 56,141,118 64,138,589
------------ ------------
Total Investment And Mortgage-Backed Securities 247,843,108 249,904,885
Loans Receivable, Net: ------------ ------------
Held For Sale 1,053,978 1,529,748
Held For Investment:(Net of allowance of
$7,430,692 at June 30, 2007 and $7,296,791 at
March 31, 2007) 461,293,096 434,508,612
------------ ------------
Total Loans Receivable, Net 462,347,074 436,038,360
Accrued Interest Receivable: ------------ ------------
Loans 1,529,525 1,459,193
Mortgage-Backed Securities 540,289 550,682
Investments 1,225,383 1,181,639
Premises And Equipment, Net 17,515,120 15,895,192
Federal Home Loan Bank Stock ("FHLB"), At Cost 8,605,000 8,209,200
Bank Owned Life Insurance 8,045,657 5,783,620
Repossessed Assets Acquired In Settlement Of Loans 78,276 24,909
Intangible Assets, Net 510,000 532,500
Goodwill 1,197,954 1,197,954
Other Assets 4,845,797 3,893,928
------------ ------------
Total Assets $767,459,344 $738,110,191
============ ============
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $536,960,001 $523,737,592
Advances From FHLB 168,745,485 153,049,272
Other Borrowed Money 8,324,229 8,088,194
Advance Payments By Borrowers For Taxes And
Insurance 653,068 486,101
Mandatorily Redeemable Financial Instrument 1,417,312 1,417,312
Junior Subordinated Debentures 5,155,000 5,155,000
Other Liabilities 3,578,301 3,483,512
------------ ------------
Total Liabilities $724,833,396 $695,416,983
------------ ------------
Shareholders' Equity:
Serial Preferred Stock, $.01 Par Value;
Authorized Shares - 200,000; Issued And
Outstanding Shares - None $ - $ -
Common Stock, $.01 Par Value; Authorized Shares-
5,000,000; Issued ( 2,639,220 And Outstanding
Shares - 2,607,232 At June 30, 2007 And 2,637,942
And 2,609,116 At March 31, 2007 25,827 25,814
Additional Paid-In Capital 4,878,267 4,850,029
Treasury Stock, (At Cost, 31,988 and 28,826 Shares
at June 30 and March 31, 2007, Respectively) (728,540) (651,220)
Indirect Guarantee Of Employee Stock Ownership
Trust Debt - -
Accumulated Other Comprehensive Loss (1,678,875) (747,316)
Retained Earnings, Substantially Restricted 40,129,269 39,215,901
------------ ------------
Total Shareholders' Equity $ 42,625,948 $ 42,693,208
------------ ------------
Total Liabilities And Shareholders' Equity $767,459,344 $738,110,191
============ ============
See accompanying notes to consolidated financial statements.
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended June 30,
---------------------------
2007 2006
Interest Income: -------- --------
Loans $ 8,791,579 $ 7,020,675
Mortgage-Backed Securities 1,541,710 1,443,350
Investment Securities 1,553,520 1,146,342
Other 19,596 14,483
----------- -----------
Total Interest Income 11,906,405 9,624,850
----------- -----------
Interest Expense:
NOW And Money Market Accounts 1,654,839 1,581,170
Passbook Accounts 41,815 41,876
Certificate Accounts 3,242,849 2,155,401
Advances And Other Borrowed Money 1,898,333 1,435,727
Junior Subordinated Debentures 90,824 -
----------- -----------
Total Interest Expense 6,928,660 5,214,174
----------- -----------
Net Interest Income 4,977,745 4,410,676
Provision For Loan Losses 150,000 150,000
Net Interest Income After Provision For Loan ----------- -----------
Losses 4,827,745 4,260,676
Other Income: ----------- -----------
Gain On Sale Of Loans 176,121 113,255
Service Fees On Deposit Accounts 327,322 277,868
Income From Cash Value Of Life Insurance 62,037 56,508
Commissions On Insurance 145,673 -
Other Agency Income 29,258 -
Trust Income 98,775 96,000
Other 221,412 208,363
----------- -----------
Total Other Income 1,060,598 751,994
----------- -----------
General And Administrative Expenses:
Salaries And Employee Benefits 2,570,279 2,125,369
Occupancy 422,511 317,595
Advertising 102,273 74,649
Depreciation And Maintenance Of Equipment 319,525 291,469
Federal Deposit Insurance Corporation Insurance
Premiums 15,327 14,142
Amortization of Intangibles 22,500 -
Other 799,030 620,080
----------- -----------
Total General And Administrative Expenses 4,251,445 3,443,304
----------- -----------
Income Before Income Taxes 1,636,898 1,569,366
Provision For Income Taxes 540,867 546,994
----------- -----------
Net Income $ 1,096,031 $ 1,022,372
=========== ===========
Basic Net Income Per Common Share $ 0.42 0.40
=========== ===========
Diluted Net Income Per Common Share $ 0.42 0.40
=========== ===========
Cash Dividend Per Share On Common Stock $ 0.07 0.06
=========== ===========
Basic Weighted Average Shares Outstanding 2,609,409 2,538,951
=========== ===========
Diluted Weighted Average Shares Outstanding 2,618,889 2,564,893
=========== ===========
See accompanying notes to consolidated financial statements.
2
Security Federal Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Unaudited)
--------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Indirect Other
Common Paid - In Treasury Guarantee of Comprehensive Retained
Stock Capital Stock ESOP Debt Income (Loss) Earnings Total
------ ---------- -------- ------------ ------------- --------- ----------
Balance At March 31, 2006 $25,582 $4,404,110 (238,656) (215,503) (2,086,509) 35,712,735 37,601,759
Net Income - - - - - 1,022,372 1,022,372
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Losses
On Securities Available
For Sale - - - - (804,892) - (804,892)
--------
Comprehensive Income - - - - - - 217,480
Decrease In Indirect Guarantee
Of Employee Stock Ownership
("ESOP") Debt - - - 215,503 - - 215,503
Cash Dividends - - - - - (152,815) (152,815)
------ ---------- -------- ------------ ------------- --------- ----------
Balance At June 30, 2006 $ 25,582 $4,404,110 $(238,656) $ - $ (2,891,401) $36,582,292 $37,881,927
====== ========== ======== ============ ============= ========== ==========
Accumulated
Additional Indirect Other
Common Paid - In Treasury Guarantee of Comprehensive Retained
Stock Capital Stock ESOP Debt Income (Loss) Earnings Total
------ ---------- -------- ------------ ------------- --------- ----------
Balance At March 31, 2007 $ 25,814 $4,850,029 $(651,220) $ - $ (747,316) $39,215,901 $42,693,208
Net Income - - - - - 1,096,031 1,096,031
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Losses
On Securities Available
For Sale - - - - (931,559) - (931,559)
--------
Comprehensive Income - - - - - - 164,472
Purchase Of Treasury Stock
At Cost, 3,162 shares - - (77,320) - - - (77,320)
Employee Stock Purchase Plan 13 25,356 - - - - 25,369
Stock Compensation Expense - 2,882 - - - - 2,882
Cash Dividends - - - - - (182,663) (182,663)
------ ---------- -------- ------------ ------------- --------- ----------
Balance At June 30, 2007 $ 25,827 $4,878,267 $(728,540) $ - $(1,678,875) $40,129,269 $42,625,948
====== ========== ======== ============ ============= ========== ==========
See accompanying notes to consolidated financial statements.
3
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended June 30,
---------------------------
2007 2006
Cash Flows From Operating Activities: -------- --------
Net Income $1,096,031 $1,022,372
Adjustments To Reconcile Net Income To Net
Cash Provided (Used) By Operating Activities:
Depreciation And Amortization Expense 264,573 232,989
Amortization Of Intangible Assets 22,500 -
Stock Option Compensation Expense 2,882 -
Discount Accretion And Premium Amortization 68,173 122,918
Provisions For Losses On Loans And Real Estate 150,000 150,000
Gain On Sale Of Loans (176,121) (113,255)
Gain On Sale Of Real Estate (13,391) (48,678)
Amortization Of Deferred Fees On Loans (29,030) (63,989)
Proceeds From Sale Of Loans Held For Sale 11,324,649 6,154,987
Origination Of Loans For Sale (10,672,758) (7,197,156)
(Increase) Decrease In Accrued Interest
Receivable:
Loans (70,332) (142,658)
Mortgage-Backed Securities 10,393 8,770
Investments (43,744) 52,710
Increase In Advance Payments By Borrowers 166,967 172,300
Other, Net (287,360) (390,544)
---------- ----------
Net Cash Provided (Used) By Operating Activities 1,813,432 (39,234)
---------- ----------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Available For Sale 9,730,754 9,666,628
Purchase Of Investment Securities Available
For Sale (15,579,736) (2,976,845)
Purchase Of Mortgage-Backed Securities
Available For Sale (4,982,301) (4,614,465)
Maturities Of Investment Securities Available
For Sale 3,323,609 1,218,707
Maturities of Investment Securities Held To
Maturity 8,000,000 3,000,000
Purchase Of FHLB Stock (2,355,600) (1,813,100)
Redemption Of FHLB Stock 1,959,800 1,199,000
Increase In Loans To Customers (26,994,431) (21,656,962)
Proceeds From Sale Of Repossessed Assets 49,000 119,700
Purchase And Improvement Of Premises And
Equipment (1,884,501) (842,095)
Purchase Of Bank Owned Life Insurance (2,262,037) (597,508)
---------- ----------
Net Cash Used By Investing Activities (30,995,443) (17,296,940)
---------- ----------
Cash Flows From Financing Activities:
Increase In Deposit Accounts 13,222,409 1,418,191
Proceeds From FHLB Advances 81,300,000 77,845,000
Repayment Of FHLB Advances (65,603,787) (64,622,477)
Net (Repayments) Proceeds Of Other Borrowings 236,035 (424,924)
Dividends To Shareholders (182,663) (152,815)
Purchase Of Treasury Stock (77,320) -
Proceeds From Employee Stock Purchases 25,369 -
---------- ----------
Net Cash Provided By Financing Activities 28,920,043 14,062,975
---------- ----------
(Continued)
See accompanying notes to consolidated financial statements.
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)- Continued
Three Months Ended June 30,
---------------------------
2007 2006
-------- --------
Decrease In Cash And Cash Equivalents (261,968) (3,273,199)
Cash And Cash Equivalents At Beginning Of Period 13,438,129 14,351,208
---------- ----------
Cash And Cash Equivalents At End Of Period $13,176,161 $11,078,009
========== ==========
Supplemental Disclosure Of Cash Flows Information:
Cash Paid During The Period For Interest $6,987,289 $ 5,109,698
Cash Paid During The Period For Income Taxes $ 30,000 $ -
Additions To Repossessed Acquired Through
Foreclosure $ 88,976 $ -
Decrease(Increase) In Unrealized Net Loss On
Securities Available For Sale, Net Of Taxes $ (931,559) $ (804,892)
Issuance Of A Mandatorily Redeemable Financial
Instrument Through The Issuance Of Common Stock $ - $ 1,440,270
See accompanying notes to consolidated financial statements.
5
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and accounting principles generally
accepted in the United States of America; therefore, they do not include all
disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows. Such statements are unaudited but, in
the opinion of management, reflect all adjustments, which are of a normal
recurring nature and necessary for a fair presentation of results for the
selected interim periods. Users of financial information produced for interim
periods are encouraged to refer to the footnotes contained in the audited
financial statements appearing in Security Federal Corporation's (the "Company")
2007 Annual Report to Shareholders when reviewing interim financial statements.
The results of operations for the three month period ended June 30, 2007 are not
necessarily indicative of the results that may be expected for the entire fiscal
year. This Quarterly Report on Form 10-Q contains certain forward-looking
statements with respect to the financial condition, results of operations, and
business of the Company. These forward-looking statements involve certain risks
and uncertainties. Factors that may cause actual results to differ materially
from those anticipated by such forward-looking statements include, but are not
limited to, changes in interest rates, the demand for loans, the regulatory
environment, general economic conditions and inflation, and the securities
markets. Management cautions readers of this Form 10-Q not to place undue
reliance on the forward-looking statements contained herein.
2. Principles of Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, Security Federal Bank
(the "Bank"), and the Bank's wholly owned subsidiaries, Security Federal
Insurance, Inc. ("SFINS"), Security Federal Investments, Inc. ("SFINV"),
Security Federal Trust, Inc. ("SFT"), and Security Financial Services
Corporation ("SFSC"). The Bank is primarily engaged in the business of
accepting savings and demand deposits and originating mortgage and other loans
to individuals and small businesses for various personal and commercial
purposes. SFINS, SFINV, and SFT were formed during the year ended March 31,
2002 and began operation during the December 2001 quarter. SFINS is an
insurance agency offering business, health, home, auto and life insurance.
SFINV engages primarily in investment brokerage services. SFT offers trust,
financial planning and financial management services. SFSC is currently
inactive.
3. Critical Accounting Policies
The Company has adopted various accounting policies, which govern the
application of accounting principles generally accepted in the United States in
the preparation of our financial statements. Our significant accounting
policies are described in the footnotes to the audited consolidated financial
statements at March 31, 2007 included in our 2007 Annual Report to Stockholders,
which was filed as an exhibit to our Annual Report on Form 10-K for the year
ended March 31, 2007. Certain accounting policies involve significant judgments
and assumptions by management, which have a material impact on the carrying
value of certain assets and liabilities. We consider these accounting policies
to be critical accounting policies. The judgments and assumptions we use are
based on historical experience and other factors, which we believe to be
reasonable under the circumstances. Because of the nature of the judgments and
assumptions we make, actual results could differ from these judgments and
estimates which could have a material impact on our carrying values of assets
and liabilities and our results of operations.
The Company believes the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates used in
preparation of the consolidated financial statements. The Company provides for
loan losses using the allowance method. Accordingly, all loan losses are
charged to the related allowance and all recoveries are credited to the
allowance for loan losses. Additions to the allowance for loan losses are
provided by charges to operations based on various factors, which, in
management's judgment, deserve current recognition in estimating possible
losses. Such factors considered by management include the fair value of the
underlying collateral; stated guarantees by the borrow, if applicable, the
borrower's ability to repay from other economic resources, growth and
composition of the loan portfolios, the relationship of the allowance for loan
losses to the outstanding loans, loss experience, delinquency trends, and
general economic conditions. Management evaluates the carrying value of the
loans periodically and the allowance is adjusted accordingly. While management
uses the best information available to make evaluations, future adjustments may
be necessary if economic conditions differ substantially from the assumptions
used in making these evaluations. Allowance for loan losses are subject to
periodic evaluations by various authorities and may be subject to adjustments
based upon the information that is available at the time of their examination.
6
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
3. Critical Accounting Policies, Continued
The Company values impaired loans at the loan's fair value if it is probable
that the Company will be unable to collect all amounts due according to the
terms of the loan agreement at the present value of expected cash flows, the
market price of the loan, if available, or the value of the underlying
collateral. Expected cash flows are required to be discounted at the loan's
effective interest rate. When the ultimate collectibility of an impaired loan's
principal is in doubt, wholly or partially, all cash receipts are applied to
principal. When this doubt does not exist, cash receipts are applied under the
contractual terms of the loan agreement first to interest and then to principal.
Once the recorded principal balance has been reduced to zero, future cash
receipts are applied to interest income to the extent that any interest has been
foregone. Further cash receipts are recorded as recoveries of any amounts
previously charged off.
4. Acquisition
On June 30, 2006, the Company completed the acquisition of the insurance and
premium finance businesses of Collier-Jennings Financial Corporation and its
subsidiaries Collier-Jennings, Inc., The Auto Insurance Store, Inc., and
Collier-Jennings Premium Pay Plans, Inc (the "Collier-Jennings Companies"). The
purpose of the acquisition was to expand the Company's insurance services and
increase non-interest income. The shareholder of the Collier-Jennings Companies
received $180,000 in cash and 54,512 shares of the Company's common stock valued
at $26 per share for an approximate purchase price of $1,597,312. The Company
will release the shares to the shareholder of the Collier-Jennings Companies
over a three-year period. The stock is mandatorily redeemable by the
shareholder of Collier-Jennings Companies at his option in cumulative increments
of 20% per year for a five-year period at the greater of $26 per share or one
and one-half times the book value of the Company's stock. A summary of the
purchase price of the transaction is as follows:
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at June 30, 2006, the date of acquisition, including
subsequent adjustments to the allocation of the purchase price.
Cash And Cash Equivalents $ 43,192
Accounts Receivable 784,247
Premises And Equipment 41,696
Other Assets 56,289
Intangible Assets 600,000
Goodwill 1,197,954
-----------
Total Assets Acquired 2,723,378
-----------
Notes Payable 386,185
Other Liabilities 739,881
-----------
Total Liabilities Assumed 1,126,066
-----------
Net Assets Acquired $ 1,597,312
===========
5. Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." SFAS
No. 128 specifies the computation, presentation and disclosure requirements for
EPS for entities with publicly held common stock or potential common stock such
as options, warrants, convertible securities or contingent stock agreements if
those securities trade in a public market.
This standard specifies computation and presentation requirements for both basic
EPS and, for entities with complex capital structures, diluted EPS. Basic EPS
is computed by dividing net income by the weighted average number of common
shares outstanding. Diluted EPS is similar to the computation of basic EPS
except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common
shares had been issued. The dilutive effect of options outstanding under the
Company's stock option plan is reflected in diluted earnings per share by
application of the treasury stock method.
7
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
5. Earnings Per Share, Continued
The following table provides a reconciliation of the numerators and denominators
of the basic and diluted EPS computations:
For the Quarter Ended
----------------------------------------------------------
June 30, 2007
----------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ---------
Basic EPS $ 1,096,031 2,609,409 $ 0.42
Effect of Diluted
Securities:
Stock Options - 9,480 -
------------------------- -------------------- ---------
Diluted EPS $ 1,096,031 2,618,889 $ 0.42
========================= ==================== =========
For the Quarter Ended
----------------------------------------------------------
June 30, 2006
----------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ---------
Basic EPS $ 1,022,372 2,538,951 $ 0.40
Effect of Diluted
Securities:
Stock Options - 17,971 -
ESOP - 7,971 -
------------------------- -------------------- ---------
Diluted EPS $ 1,022,372 2,564,893 $ 0.40
========================= ==================== =========
6. Stock-Based Compensation
Certain officers of the Company participate in an incentive stock option plan.
Options are granted at exercise prices not less than the fair value of the
Company's common stock on the date of the grant. The following is a summary of
the activity under the Company's incentive stock option plan for the quarter
ended June 30, 2007:
-----------------------
Weighted
Average
Exercise
Shares Price
-----------------------
Balance, Beginning of Period 99,600 $ 20.55
Options granted - -
Options exercised - -
Options forfeited (500) 20.55
---------
Balance, June 30 99,100 $ 20.55
=========
Options Exercisable 85,100 $ 20.14
=========
Options Available For Grant 87,488
=========
8
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
6. Stock-Based Compensation, Continued
At June 30, 2007, the Company had the following options outstanding:
Outstanding Expiration
Grant Date Options Option Price Date
---------- ----------- ------------ ------------------
10/19/99 30,600 $16.67 9/30/05 to 9/30/09
9/1/03 3,000 $24.00 8/31/13
12/1/03 3,000 $23.65 11/30/13
1/01/04 7,000 $24.22 12/31/13
3/8/04 13,000 $21.43 2/28/14
6/7/04 2,000 $24.00 5/31/14
1/1/05 20,500 $20.55 12/31/14
1/1/06 6,000 $23.91 12/31/16
8/24/06 14,000 $23.03 8/24/16
7. Accounting and Reporting Changes
The following is a summary of recent authoritative pronouncements that could
impact the accounting, reporting, and / or disclosure of financial information
by the Company.
In September 2006, the FASB issued SFAS No. 157 which provides enhanced guidance
for using fair value to measure assets and liabilities. The standard also
requires expanded disclosures about the extent to which companies measure assets
and liabilities at fair value, the information used to measure fair value, and
the effect of fair value measurements on earnings. SFAS No. 157 is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years and is not expected to have
a significant impact on the Company's financial statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans" ("SFAS 158"), which
amends SFAS 87 and SFAS 106 to require recognition of the overfunded or
underfunded status of pension and other postretirement benefit plans on the
balance sheet. Under SFAS 158, gains and losses, prior service costs and
credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that
have not yet been recognized through net periodic benefit cost will be
recognized in accumulated other comprehensive income, net of tax effects, until
they are amortized as a component of net periodic cost. The measurement date -
the date at which the benefit obligation and plan assets are measured - is
required to be the company's fiscal year end. SFAS 158 is effective for publicly
held companies for fiscal years ending after December 15, 2006, except for the
measurement date provisions, which are effective for fiscal years ending after
December 15, 2008. The Company does not have a defined benefit pension plan.
Therefore, SFAS 158 will not impact o the Company's financial conditions or
results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115." This statement permits, but does not require, entities to
measure many financial instruments at fair value. The objective is to provide
entities with an opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. Entities electing this option will apply it
when the entity first recognizes an eligible instrument and will report
unrealized gains and losses on such instruments in current earnings. This
statement 1) applies to all entities, 2) specifies certain election dates, 3)
can be applied on an instrument-by-instrument basis with some exceptions, 4) is
irrevocable and 5) applies only to entire instruments. One
9
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
exception is demand deposit liabilities, which are explicitly excluded as
qualifying for fair value. With respect to SFAS 115, available-for-sale and
held-to-maturity securities at the effective date are eligible for the fair
value option at that date.
7. Accounting and Reporting Changes, Continued
If the fair value option is elected for those securities at the effective date,
cumulative unrealized gains and losses at that date shall be included in the
cumulative-effect adjustment and thereafter, such securities will be accounted
for as trading securities.
SFAS 159 is effective for the Company on January 1, 2008. Earlier adoption is
permitted in 2007 if the Company also elects to apply the provisions of SFAS
157. The Company did not early adopt SFAS No. 159 and believes that it is
unlikely that it will expand its use of fair value accounting upon the January
1, 2008 effective date.
In September 2006, The FASB ratified the consensuses reached by the FASB's
Emerging Issues Task Force ("EITF") relating to EITF 06-4 "Accounting for the
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements". EITF 06-4 addresses employer
accounting for endorsement split-dollar life insurance arrangements that provide
a benefit to an employee that extends to postretirement periods should recognize
a liability for future benefits in accordance with SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions", or Accounting
Principles Board ("APB") Opinion No. 12, "Omnibus Opinion-1967". EITF 06-4 is
effective for fiscal years beginning after December 15, 2007. Entities should
recognize the effects of applying this Issue through either (a) a change in
accounting principle through a cumulative-effect adjustment to retained earnings
or to other components of equity or net assets in the statement of financial
position as of the beginning of the year of adoption or (b) a change in
accounting principle through retrospective application to all prior periods.
The Company's split dollar life insurance arrangements do not provide a benefit
that extends into postretirement periods. Therefore EITF 06-4 will not have an
impact on the Company's consolidated financial statements.
In September 2006, the FASB ratified the consensus reached related to EITF 06-5,
"Accounting for Purchases of Life Insurance-Determining the Amount That Could Be
Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for
Purchases of Life Insurance." EITF 06-5 states that a policyholder should
consider any additional amounts included in the contractual terms of the
insurance policy other than the cash surrender value in determining the amount
that could be realized under the insurance contract.
EITF 06-5 also states that a policyholder should determine the amount that could
be realized under the life insurance contract assuming the surrender of an
individual-life-by-individual-life policy (or certificate by certificate in a
group policy). EITF 06-5 is effective for fiscal years beginning after December
15, 2007. Although the Company does not believe the adoption of EITF 06-5 will
have a material impact on the Company's consolidated financial statements,
management is currently analyzing the impact of adoption.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations and cash flows.
10
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
8. Securities
Investment And Mortgage-Backed Securities, Available For Sale
-------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities available for sale are as
follows:
Gross Gross
June 30, 2007 Amortized Unrealized Unrealized
------------- Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
FHLB Securities $49,851,322 $ - $ 727,502 $49,123,820
Federal Farm Credit Securities 10,189,315 - 167,300 10,022,015
FNMA Bonds 2,906,666 - 62,246 2,844,420
FHLMC Bonds 33,982 - 34 33,948
Mortgage-Backed Securities 131,323,884 202,618 1,952,215 129,574,287
Equity Securities 102,938 562 - 103,500
----------- ---------- ---------- -----------
Total $194,408,107 $ 203,180 $2,909,297 $191,701,990
=========== ========== ========== ===========
Gross Gross
March 31, 2007 Amortized Unrealized Unrealized
-------------- Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
FHLB Securities $ 38,487,381 17,627 131,886 38,373,122
Federal Farm Credit Securities 9,217,205 8,580 11,504 9,214,281
FNMA Bonds 2,942,530 - 12,141 2,930,389
FHLMC Bonds 64,071 - 94 63,977
Mortgage-Backed Securities 136,156,742 276,292 1,352,007 135,081,027
Equity Securities 102,938 562 - 103,500
--------- ---------- ---------- ----------
Total $186,970,867 303,061 1,507,632 185,766,296
=========== ========== ========== ===========
FHLB securities, Federal Farm Credit securities, FNMA bonds, FHLMC bonds and
FNMA and FHLMC mortgage- backed securities are issued by government-sponsored
enterprises ("GSE's"). GSE's are not backed by the full faith and credit of the
United States government. Included in the tables above in mortgage-backed
securities are GNMA mortgage-backed securities, which are backed by the full
faith and credit of the United States government. At June 30, 2007, the bank
held an amortized cost and fair value of $46.6 million in GNMA mortgage-backed
securities included in mortgage-backed securities listed above.
11
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
8. Securities, Continued
Investment and Mortgage-Backed Securities, Held to Maturity
-----------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities held to maturity are as
follows:
Gross Gross
June 30, 2007 Amortized Unrealized Unrealized
------------- Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
FHLB Securities $47,996,533 $ - $ 895,842 $47,100,691
Federal Farm Credit Securities 7,989,585 - 221,455 7,768,130
Equity Securities 155,000 - - 155,000
Total $56,141,118 $ - $1,117,297 $55,023,821
Gross Gross
March 31, 2007 Amortized Unrealized Unrealized
-------------- Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
FHLB Securities $55,994,852 $ 21,560 $ 573,841 $55,442,571
Federal Farm Credit Securities 7,988,737 - 144,667 7,844,070
Equity Securities 155,000 - - 155,000
Total $64,138,589 $ 21,560 $ 718,508 $63,441,641
FHLB securities and Federal Farm Credit securities are issued by GSE's. These
enterprises are not backed by the full faith and credit of the United States
government.
9. Loans Receivable, Net
Loans receivable, net, at June 30, 2007 and March 31, 2007 consisted of the
following:
June 30, 2007 March 31, 2007
------------- --------------
Residential Real Estate $ 125,030,666 $ 125,512,411
Consumer 65,188,311 63,809,478
Commercial Business And Real Estate 284,617,315 259,207,877
Loans Held For Sale 1,053,978 1,529,748
------------- --------------
475,890,270 450,059,514
------------- --------------
Less:
Allowance For Possible Loan Loss 7,430,692 7,296,791
Loans In Process 5,839,261 6,443,372
Deferred Loan Fees 273,243 280,991
------------- --------------
13,543,196 14,021,154
------------- --------------
$ 462,347,074 $ 436,038,360
============= ==============
12
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Safe Harbor Statement
Certain matters in this Quarterly Report on Form 10-Q for the quarter ended June
30, 2007 constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
relate to, among others, expectations of the business environment in which the
Company operates, projections of future performance, perceived opportunities in
the market, potential future credit experience, and statements regarding the
Company's mission and vision. These forward-looking statements are based upon
current management expectations, and may, therefore, involve risks and
uncertainties. The Company's actual results, performance, or achievements may
differ materially from those suggested, expressed, or implied by forward-looking
statements as a result of a wide range of factors including, but not limited to,
the general business environment, interest rates, the South Carolina real estate
market, the demand for loans, competitive conditions between banks and non-bank
financial services providers, regulatory changes, and other risks detailed in
the Company's reports filed with the SEC, including the Annual Report on Form
10-K for the year ended March 31, 2007. Forward-looking statements are
effective only as of the date that they are made and the Company assumes no
obligation to update this information
Comparison Of Financial Condition At June 30, 2007 and March 31, 2007
General - Total assets increased $29.4 million or 4.0% to $767.5 million at June
30, 2007 from $738.1 million at March 31, 2007. The primary reason for the
growth in total assets was a $26.3 million or 6.0% increase in net loans
receivable to $462.3 million. For the quarter ended June 30, 2007, the demand
for loans was funded with decreased cash and cash equivalents of $262,000 or
2.0%, maturities of investment and mortgage- backed securities- held to maturity
of $8.0 million or 12.5%, increased deposits of $13.3 million or 2.5% and
advances from the FHLB of $15.7 million or 10.3%.
Assets - The increases and decreases in total assets were primarily concentrated
in the following asset categories:
Increase (Decrease)
-------------------
June 30, March 31,
2007 2007 Amount Percent
-------- -------- -------- ---------
Cash And Cash Equivalents $13,176,161 $13,438,129 $(261,968) (2.0)%
Investment And Mortgage-
Backed Securities -
Available For Sale 191,701,990 185,766,296 5,935,694 3.2
Investment And Mortgage-
Backed Securities -
Held To Maturity 56,141,118 64,138,589 (7,997,471) (12.5)
Loan Receivable, Net 462,347,074 436,038,360 26,308,714 6.0
Premises And Equipment, Net 17,515,120 15,895,192 1,619,928 10.2
FHLB Stock, At Cost 8,605,000 8,209,200 395,800 4.8
Bank Owned Life Insurance 8,045,657 5,783,620 2,262,037 39.1
Other Assets 4,845,797 3,893,928 951,869 24.4
Investments and mortgage-backed securities available for sale increased $5.9
million or 3.2% to $191.7 million at June 30, 2007 from $185.8 million at March
31, 2007. The increase in investments and mortgage-backed securities is
attributable to additional purchases slightly offset by paydowns on
mortgage-backed securities and calls and maturities on investments.
13
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
Loans receivable, net increased $26.3 million or 6.0% to $462.3 million at June
30, 2007 from $436.0 million at March 31, 2007. Residential real estate loans
decreased $482,000 to $125.0 million at June 30, 2007 from $125.5 million at
March 31, 2007. Consumer loans increased $1.4 million to $65.2 million at June
30, 2007 from $63.8 million at March 31, 2007. The increase in consumer loans
is attributable to a special rate promotion that was being advertised in print
media. Commercial business and real estate loans increased $25.4 million to
$284.6 million at June 30, 2007 from $259.2 million at March 31, 2007. The
increase in commercial loans was attributable to the Company's continued focus
on originating this type of lending. Loans held for sale decreased $476,000 to
$1.1 million at June 30, 2007 from $1.5 million at March 31, 2007.
Premises and equipment, net increased $1.6 million to $17.5 million at June 30,
2007 from $15.9 million at March 31, 2007. The majority of the increase is for
furniture and equipment for our Whiskey Road branch office in Aiken, South
Carolina, and for the ongoing construction of future office sites in downtown
Columbia, South Carolina and Evans, Georgia.
FHLB stock, at cost, increased $396,000 to $8.6 million at June 30, 2007 from
$8.2 million at March 31, 2007. The increase is attributable to a FHLB
requirement that the Company maintain stock equal to 0.20% of total assets at
June 30, 2007 plus a transaction component, which equals 4.5% of outstanding
advances (borrowings) from the FHLB of Atlanta.
Bank owned life insurance increased $2.3 million to $8.0 million at June 30,
2007 from $5.8 million at March 31, 2007. The Company purchased additional life
insurance to provide key man life insurance for additional executive officers
and the cash surrender value continues to increase.
Other assets increased $952,000 to $4.8 million at June 30, 2007 from $3.9
million at March 31, 2007. The majority of this increase is the result of an
increase in the deferred tax asset attributable to a change in the market value
of available for sale securities.
Liabilities
Deposit Acounts
Balance
-----------------
June 30, 2007 March 31, 2007 Increase(Decrease)
---------------- ---------------- -----------------
Weighted Weighted
Balance Rate Balance Rate Amount Percent
------- -------- ------- -------- ------ -------
Demand Accounts:
Checking $105,646,235 0.68% $105,515,095 0.63% $ 131,140 .1%
Money Market 145,735,053 4.14 145,491,774 4.14 243,279 .2
Regular Savings 16,586,507 0.98 17,458,680 0.98 (872,173) (5.0)
----------- ----- ----------- ----- --------- -----
Total 267,967,795 2.58 268,465,549 2.55 (497,754) (.2)
----------- ----- ----------- ----- --------- -----
Certificate Accounts
0.00 - 1.99% - - - -
2.00 - 2.99% 2,217,332 2,971,616 (754,284) (25.3)
3.00 - 3.99% 35,503,678 36,044,826 (541,148) (1.5)
4.00 - 4.99% 27,743,803 35,617,605 (7,873,802) (22.1)
5.00 - 5.99% 203,527,393 180,637,996 22,889,397 12.7
----------- ----- ----------- ----- ---------- -----
Total 268,992,206 5.04 255,272,043 4.99 13,720,163 5.4
----------- ----- ----------- ----- ---------- -----
Total Deposits $536,960,001 3.81% $523,737,592 3.74%$13,222,409 2.5%
=========== ===== =========== ===== ========== =====
14
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 year of maturity and
weighted average interest rate in the table below:
Balance
-----------------
June 30, 2007 March 31, 2007 Increase(Decrease)
---------------- ---------------- -----------------
Fiscal Year Due: Balance Rate Balance Rate Balance Percent
------- -------- ------- -------- ------- -------
2008 $12,800,000 4.64% $10,000,000 4.25% $2,800,000 28.0%
2009 25,000,000 4.75 25,000,000 4.75 - -
2010 5,000,000 3.09 5,000,000 3.09 - -
2011 10,000,000 4.76 10,000,000 4.76 - -
2012 19,700,000 4.77 19,700,000 4.77 - -
Thereafter 96,245,485 4.32 83,349,272 4.20 12,896,213 15.5
----------- ----------- ----------
Total Advances $168,745,485 4.45% $153,049,272 4.36%$15,696,213 10.3%
=========== =========== ==========
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 approximate amortized cost and fair value of $101.8 million and
$99.9 million, respectively at June 30, 2007. 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, 2007
-------------------------------------------------------------------------
Borrow Date Maturity Date Amount Int. Rate Type Call Dates
----------- ------------- ------ --------- --------- ----------
11/07/02 11/07/12 $5,000,000 3.354% 1 Time Call 11/07/07
02/20/04 02/20/14 5,000,000 3.225 1 Time Call 02/20/09
04/16/04 04/16/14 3,000,000 3.330 1 Time Call 04/16/08
09/16/04 09/16/09 5,000,000 3.090 1 Time Call 09/17/07
06/24/05 06/24/15 5,000,000 3.710 1 Time Call 06/24/10
07/22/05 07/22/15 5,000,000 3.790 1 Time Call 07/22/08
11/10/05 11/10/15 5,000,000 4.400 1 Time Call 11/10/09
11/23/05 11/23/15 5,000,000 3.933 Multi-Call 11/23/07 and
quarterly thereafter
11/29/05 11/29/13 5,000,000 4.320 1 Time Call 05/29/09
12/14/05 12/14/11 5,000,000 4.640 1 Time Call 09/14/09
01/12/06 01/12/16 5,000,000 4.450 1 Time Call 01/12/11
03/01/06 03/03/14 5,000,000 4.720 1 Time Call 03/03/10
03/24/06 03/25/13 5,000,000 4.580 1 Time Call 03/25/08
04/21/06 04/22/13 5,000,000 4.530 Multi-Call 04/23/07 and
quarterly thereafter
06/02/06 06/02/16 5,000,000 5.160 1 Time Call 06/02/11
07/11/06 07/11/08 5,000,000 4.800 Multi-Call 07/11/08 and
quarterly thereafter
10/25/06 12/25/11 5,000,000 4.830 1 Time Call 10/27/08
11/29/06 11/29/16 5,000,000 4.025 Multi-Call 11/29/07 and
quarterly thereafter
01/19/07 07/21/14 5,000,000 4.885 1 Time Call 07/21/11
03/09/07 03/09/12 4,700,000 4.286 Multi-Call 06/11/07 and
quarterly thereafter
05/24/07 05/24/17 7,900,000 4.375 Multi-Call 05/27/08 and
quarterly thereafter
06/29/07 06/29/12 5,000,000 4.945 1 Time Call 06/29/09
15
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
As of March 31, 2007
-------------------------------------------------------------------------
Borrow Date Maturity Date Amount Int. Rate Type Call Dates
----------- ------------- ------ --------- --------- ----------
11/07/02 11/07/12 $5,000,000 3.354% 1 Time Call 11/07/07
02/20/04 02/20/14 5,000,000 3.225% 1 Time Call 02/20/09
04/16/04 04/16/14 3,000,000 3.330% 1 Time Call 04/16/08
09/16/04 09/16/09 5,000,000 3.090% 1 Time Call 09/17/07
06/24/05 06/24/15 5,000,000 3.710% 1 Time Call 06/24/10
07/22/05 07/22/15 5,000,000 3.790% 1 Time Call 07/22/08
11/10/05 11/10/15 5,000,000 4.400% 1 Time Call 11/10/09
11/23/05 11/23/15 5,000,000 3.933% Multi-Call 11/23/07 and
quarterly thereafter
11/29/05 11/29/13 5,000,000 4.320% 1 Time Call 05/29/09
12/14/05 12/14/11 5,000,000 4.640% 1 Time Call 09/14/09
01/12/06 01/12/16 5,000,000 4.450% 1 Time Call 01/12/11
03/01/06 03/03/14 5,000,000 4.720% 1 Time Call 03/03/10
03/24/06 03/24/16 5,000,000 4.120% Multi-Call 06/26/07 and
quarterly thereafter
03/24/06 03/25/13 5,000,000 4.580% 1 Time Call 03/25/08
04/21/06 04/22/13 5,000,000 4.53% Multi-Call 06/26/07 and
quarterly thereafter
06/02/06 06/02/16 5,000,000 5.16% 1 Time Call 06/02/11
07/11/06 07/11/16 5,000,000 4.80% Multi-Call 07/11/08 and
quarterly thereafter
10/25/06 10/25/11 5,000,000 4.83% 1 Time Call 10/27/08
11/29/06 11/29/16 5,000,000 4.025% Multi-Call 11/29/07 and
quarterly thereafter
01/19/07 07/21/14 5,000,000 4.885% 1 Time Call 07/21/11
03/09/07 03/09/12 4,700,000 4.286% Multi-Call 06/11/07 and
quarterly thereafter
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. See Note 4,
"Acquisition." The shareholder of the Collier-Jennings Companies received cash
and was issued stock in the Company to settle the acquisition. The Company will
release the shares to the shareholder of the Collier-Jennings Companies over a
three-year period. The stock is mandatorily redeemable by the shareholder of
the Collier-Jennings Companies in cumulative increments of 20% per year for a
five-year period at the greater of $26 per share or one and one-half times the
book value of the Company's stock.
Junior Subordinated Debentures - On September 21, 2006, Security Federal
Statutory Trust (the "Trust"), a wholly-owned subsidiary of the Company, 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 annually at a rate per annum
equal to a blended rate of 6.97% at June 30, 2007. 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
7.06% at June 30, 2007. 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.
Equity - Shareholders' equity decreased $67,000 or 0.2% to $42.6 million at June
30, 2007 from $42.7 million at March 31, 2007. Accumulated Other Comprehensive
Loss, net of tax, increased $932,000 to $1.7 million during the three months
ended June 30, 2007. The Company's net income for the three-month period was
$1.1 million. The Board of Directors of the Company declared the 66th
consecutive quarterly dividend, which was $.07 per share, in March 2007, and
totaled $183,000. Book value per share was $16.35 at June 30, 2007 and March
31, 2007.
16
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30,
2007 AND 2006
---------------------------------------------------------------------------
Net Income - Net income increased $73,659 or 7.2% to $1.1 million for the three
months ended June 30, 2007 compared to $1.0 million for the three months ended
June 30, 2006. The primary reason for the increased earnings was increases in
net interest income and non-interest income offset partially by an increase in
non-interest expenses.
Net Interest Income - Net interest income increased $567,000 or 12.9% to $5.0
million during the three months ended June 30, 2007, compared to $4.4 million
for the same period in 2006, as a result of an increase in interest income
offset in part by an increase in interest expense. During the three months
ended June 30, 2007, average interest earning assets increased $74.8 million to
$710.2 million while average interest-bearing liabilities increased $75.6
million to $662.9 million. The interest rate spread increased 2 basis points to
2.53% during the three months ended June 30, 2007 compared to the same period in
2006.
The Company's net interest margin was 2.80% and 2.78% for the quarters ended
June 30, 2007 and 2006, respectively.
Interest Income - Total interest income increased $2.3 million or 23.7% to $11.9
million during the three months ended June 30, 2007 from $9.6 million for the
same period in 2006. Total interest income on loans increased $1.8 million or
25.2% to $8.8 million during the three months ended June 30, 2007 as a result of
the average loan portfolio balance increasing $61.8 million and the yield in the
loan portfolio increasing 58 basis points. Interest income from mortgage-backed
securities increased $98,000 or 6.8% as a result of an increase in yield offset
partially by a $2.3 million decrease in the average balance of the portfolio.
Interest income from investment securities increased $407,000 or 35.5% as a
result of an increase in the yield and 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 June 30,
2007 and 2006:
Three Months Ended June 30,
-----------------------------------------------
2007 2006 Increase
-------------- -------------- (Decrease) In
Interest And
Average Average Dividend Income
Balance Yield Balance Yield From 2006
------- ----- ------- ----- -----------
Loans Receivable, Net $446,807,518 7.87% $384,991,473 7.29% $1,770,904
Mortgage-Backed Securities 134,517,110 4.58 136,802,790 4.22 98,360
Investment Securities 127,450,266 4.88 112,271,060 4.08 404,448
Other 1,403,243 5.59 1,302,992 4.45 5,113
Total Interest-Earning ----------- ---- ----------- ---- ---------
Assets $710,178,137 6.71% $635,368,315 6.06% $2,281,555
=========== ==== =========== ==== =========
Interest Expense - Total interest expense increased $1.7 million or 32.9% to
$6.9 million during the three months ended June 30, 2007 compared to $5.2
million for the same period one-year earlier. The increase in total interest
expense is attributable to the increases in short-term interest rates,
interest-bearing deposits, and borrowings. Interest expense on deposits
increased $1.2 million or 30.7% during the period as average interest bearing
deposits grew $43.7 million compared to the average balance in the three months
ended June 30, 2006 while the cost of deposits increased 63 basis points.
Interest expense on advances and other borrowings increased $463,000 or 32.2% as
the cost of debt outstanding increased 46 basis points during the 2007 period
compared to 2006 while average total borrowings outstanding increased
approximately $26.7 million. Interest expense on junior subordinated debentures
was $91,000 for the three months ended June 30, 2007 compared to zero for the
same period one year ago. The junior subordinated debentures are the result of
the Company's $5.0 million trust preferred securities offering.
17
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
The following table compares detailed average balances, cost of funds, and the
resulting changes in interest expense for the three months ended June 30, 2007
and 2006:
Three Months Ended June 30,
-----------------------------------------------
2007 2006 Increase
-------------- -------------- (Decrease) In
Interest
Average Average Expense
Balance Yield Balance Yield From 2006
------- ----- ------- ----- -----------
Now And Money Market
Accounts $207,334,992 3.19% $214,426,429 2.95% $ 73,669
Passbook Accounts 17,117,174 0.98 17,132,517 0.98 (61)
Certificate Accounts 261,200,638 4.97 210,361,963 4.10 1,087,448
FHLB Advances And Other
Borrowed Money 172,121,258 4.41 145,409,127 3.95 462,606
Junior Subordinated
Debentures 5,155,000 7.05 - - 90,824
Total Interest-Bearing ----------- ---- ----------- ---- ---------
Liabilities $662,929,062 4.18% $587,330,036 3.55% $1,714,486
=========== ==== =========== ==== =========
Provision for Loan Losses - The amount of the provision is determined by
management's on-going monthly analysis of the loan portfolio. Management uses
three methods to measure the estimate of the adequacy of the allowance for loan
losses. These methods incorporate percentage of classified loans, five-year
averages of historical loan losses in each loan category and current economic
trends, and the assignment of percentage targets of reserves in each loan
category. Management has used all three methods for the past seven fiscal
years.
The Bank's provision for loan losses was $150,000 during the three months ended
June 30, 2007 and 2006, respectively. The following table details selected
activity associated with the allowance for loan losses for the three months
ended June 30, 2007 and 2006.
June 30, 2007 June 30, 2006
--------------- ---------------
Beginning Balance $ 7,296,791 $ 6,704,734
Provision 150,000 150,000
Charge-offs (29,120) (29,619)
Recoveries 13,021 28,793
--------------- ---------------
Ending Balance $ 7,430,692 $ 6,853,908
=============== ===============
Allowance For Loan Losses As A Percentage
Of Gross Loans Receivable And Loans Held
For Sale At The End Of The Period 1.58% 1.69%
Allowance For Loan Losses As A Percentage Of
Impaired Loans At The End Of The Period 721.79% 508.93%
Impaired Loans 1,029,475 1,346,727
Nonaccrual Loans And 90 Days Or More Past
Due Loans As A Percentage Of Gross Loans
Receivable And Loans Held For Sale At The
End Of The Period 0.39% 0.27%
Loans Receivable, Net $ 462,347,074 $ 397,835,451
18
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
Non-Interest Income - Non-interest income increased $309,000 or 41.0% to $1.1
million for the three months ended June 30, 2007 from $752,000 for the same
period one year ago. The following table provides a detailed analysis of the
changes in the components of non-interest income:
Three Months Ended June 30, Increase (Decrease)
-------------------------- ------------------
2007 2006 Amounts Percent
------ ------ ------- -------
Gain On Sale Of Loans $176,121 $113,255 $62,866 55.5%
Service Fees On Deposit Accounts 327,322 277,868 49,454 17.8
Income From Cash Value Of Life
Insurance 62,037 56,508 5,529 9.8
Commissions On Insurance 145,673 - 145,673 100.0
Other Agency Income 29,258 - 29,258 100.0
Trust Income 98,775 96,000 2,775 2.9
Other 221,412 208,363 13,049 6.3
--------- -------- -------- -----
Total non-interest income $1,060,598 $ 751,994 $ 308,604 41.0%
========= ======== ======== =====
Gain on sale of loans increased $63,000 to $176,000 during the three months
ended June 30, 2007 when compared to the same period one year ago due to an
increase in the origination and sale of fixed rate residential mortgage loans.
Commissions on insurance and other agency income increased $175,000 as a result
of the Collier-Jennings Companies acquisition. Service fees on deposit accounts
increased $49,000 to $327,000 for the quarter ended June 30, 2007 compared to
the same quarter in 2006. Other miscellaneous income including credit life
insurance commissions, safe deposit rental income, annuity and stock brokerage
commissions, trust fees, and other miscellaneous fees, increased $13,000 to
$221,000 during the three months ended June 30, 2007 compared to the same period
one year ago.
Non-Interest Expense - Non-interest expense increased $808,000 or 23.5% to $4.3
million for the three months ended June 30, 2007 from $3.4 million for the same
period one year ago. The following table provides a detailed analysis of the
changes in the components of non-interest expense:
Three Months Ended June 30, Increase (Decrease)
-------------------------- ------------------
2007 2006 Amounts Percent
------ ------ ------- -------
Salaries And Employee Benefits $2,570,279 $2,125,369 $ 444,910 20.9%
Occupancy 422,511 317,595 104,916 33.0
Advertising 102,273 74,649 27,624 37.0
Depreciation And Maintenance
Of Equipment 319,525 291,469 28,056 9.6
FDIC Insurance Premiums 15,327 14,142 1,185 8.4
Amortization of Intangibles 22,500 - 22,500 100.0
Other 799,030 620,080 178,950 28.9
--------- --------- -------- -----
Total Non-Interest Expenses $4,251,445 $3,443,304 $ 808,141 23.5%
========= ========= ======== =====
Salary and employee benefits increased $445,000 to $2.6 million for the three
months ended June 30, 2007 from $2.1 million for the same period one year ago.
The majority of the increase is the result of hiring additional staff to handle
the Company's growth and increased regulatory reporting requirements and
integrating the Collier-Jennings Companies' employees. Without the acquisition
of the Collier- Jennings Companies, salary and employee benefits would have
increased approximately $270,000 or 12.7%. Occupancy also increased due to the
acquisition of the Collier- Jennings Companies and additional facilities.
Occupancy increased to 33% to 423,000 for the three months ended June 30, 2006
from $318,000 for the same period one year ago. Advertising expense increased
$28,000 to $102,000 for the three months ended June 30, 2007 from $75,000 for
the same period one year ago. The increase is attributable to the Company using
more print media advertising to attract deposits and consumer loans.
Overall, non-interest expenses increased $808,000 or 23.5% for the three months
ended June 30, 2007 when compared to the same period one year ago. The
acquisition of the Collier- Jennings Companies accounted for $345,000 or 42.7%
of this increase. Without the acquisition of the Collier- Jennings Companies
this increase would have been approximately $463,000 or 13.4%.
19
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
Provision For Income Taxes - Provision for income taxes decreased $6,000 or 1.1%
to $541,000 for the three months ended June 30, 2007 from $547,000 for the same
period one year ago. Income before income taxes was $1.6 million for the three
months ended June 30, 2007 and 2006, respectively. The Company's combined
federal and state effective income tax rate for the current quarter was 33.0%
compared to 34.9% for the same quarter one year ago.
Liquidity Commitments, Capital Resources, and Impact of Inflation and Changing
Prices
Liquidity - The Company actively analyzes and manages the Bank's liquidity with
the objective of maintaining an adequate level of liquidity and to ensure the
availability of sufficient cash flows to support loan growth, fund deposit
withdrawals, fund operations, and satisfy other financial commitments. See the
"Consolidated Statements of Cash Flows" contained in Item 1 - Financial
Statements, herein.
The primary sources of funds are customer deposits, loan repayments, loan sales,
maturing investment securities, and advances from the FHLB. The sources of
funds, together with retained earnings and equity, are used to make loans,
acquire investment securities and other assets, and fund continuing operations.
While maturities and the scheduled amortization of loans are a predictable
source of funds, deposit flows and mortgage repayments are greatly influenced by
the level of interest rates, economic conditions, and competition. Management
believes that the Company's current liquidity position and its forecasted
operating results are sufficient to fund all of its existing commitments.
During the three months ended June 30, 2007 loan disbursements exceeded loan
repayments resulting in a $26.3 million or 6.0% increase in total net loans
receivable. During the three months ended June 30, 2007, deposits increased
$13.2 million and FHLB advances increased $15.7 million. The Bank had $61.3
million in additional borrowing capacity at the FHLB at the end of the period.
At June 30, 2007, the Bank had $252.4 million of certificates of deposit
maturing within one year. Based on previous experience, the Bank anticipates a
significant portion of these certificates will be renewed.
The Company has plans to expand its branch network, which could cause earnings
to level off or decline for a period of time. The leveling off or decline in
earnings will be attributed the lag that exists from the time a branch is built
to when it becomes profitable. In the next twelve months, we anticipate
investing $5.0 to $6.0 million in land, buildings, and equipment. In the next
twenty-four months, we anticipate investing $8.0 to $10.0 million in land,
buildings, and equipment. The anticipated costs could be affected by increased
construction costs, weather delays, and/or other uncertainties.
Off-Balance Sheet Commitments - The Company is a party to financial instruments
with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments generally include
commitments to originate mortgage, commercial and consumer loans, and involve to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The Company's maximum exposure to
credit loss in the event of nonperformance by the borrower is represented by the
contractual amount of those instruments. Since some commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company uses the same credit policies
in making commitments as it does for on-balance sheet instruments. Collateral
is not required to support commitments.
The following table sets forth the length of time until maturity for unused
commitments to extend credit and standby letters of credit at June 30, 2007.
After After
One Three Greater
Within Through Through Within Than
One Three Twelve One One
(Dollars in thousands) Month Months Months Year Year Total
------ ------ ------ ------ ------- -------
Unused lines of credit $ 5,065 $ 1,959 $48,694 $55,718 $45,583 $101,301
Standby letters of credit - 142 743 885 147 1,032
------ ------ ------ ------ ------ -------
Total $ 5,065 $ 2,101 $49,437 $56,603 $45,730 $102,333
====== ====== ====== ====== ====== =======
20
Security Federal Corporation and Subsidiaries
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises principally from interest rate risk inherent in
its lending, investment, deposit and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Although the Company
manages other risks such as credit quality and liquidity risk in the normal
course of business, management considers interest rate risk to be its most
significant market risk that could potentially have the largest material effect
on the Company's financial condition and results of operations. Other types of
market risks such as foreign currency exchange rate risk and commodity price do
not arise in the normal course of the Company's business activities.
The Company's profitability is affected by fluctuations in the market interest
rate. Management's goal is to maintain a reasonable balance between exposure to
interest rate fluctuations and earnings. A sudden and substantial increase or
decrease in interest rates may adversely impact the Company's earnings to the
extent that the interest rates on interest-earning assets and interest-bearing
liabilities do not change at the same rate, to the same extent or on the same
basis. The Company monitors the impact of changes in interest rates on its net
interest income using a test that measures the impact on net interest income and
net portfolio value of an immediate change in interest rates in 100 basis point
increments and by measuring the Bank's interest sensitivity gap ("Gap"). Net
portfolio value is defined as the net present value of assets, liabilities, and
off-balance sheet contracts. Gap is the amount of interest sensitive assets
repricing or maturing over the next twelve months compared to the amount of
interest sensitive liabilities maturing or repricing in the same time period.
Recent net portfolio value reports furnished by the OTS indicate that the Bank's
interest rate risk sensitivity has increased slightly over the past year. The
Bank has rated favorably compared to thrift peers concerning interest rate
sensitivity.
For the three months ended June 30, 2007, the Bank's interest rate spread,
defined as the average yield on interest bearing assets less the average rate
paid on interest bearing liabilities was 2.53%. For the year ended March 31,
2007, the interest rate spread was 2.51%. The interest rate spread increased
due to the growth in loans outpacing the growth in investments. Loan receivables
earn a higher yield than investment securities. However, if interest rates were
to increase suddenly and significantly, the Bank's net interest income and net
interest spread would be compressed.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Rule 13a - 15(e) of
the Securities Exchange Act of 1934 ("Act")) was carried out under the
supervision and with the participation of the Company's Chief Executive Officer,
Chief Financial Officer and several other members of the Company's senior
management as of the end of the period covered by this quarterly report. The
Company's Chief Executive Officer and Chief Financial Officer concluded that at
June 30, 2007 the Company's disclosure controls and procedures were effective in
ensuring that the information required to be disclosed by the Company in the
reports it files or submits under the Act is (i) accumulated and communicated to
the Company's management (including the Chief Executive Officer and Chief
Financial Officer) in a timely manner, and (ii) recorded, processed, summarized
and reported within the time period specified in the Securities and Exchange
Commission's rules and forms.
(b) Changes in Internal Controls: In the quarter ended June 30, 2007, the
Company did not make any significant changes in, nor take any corrective actions
regarding, its internal controls or other factors that could significantly
affect these controls.
21
Security Federal Corporation and Subsidiaries
Part II: Other Information
Item 1 Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings of a material
nature at the present time. From time to time, the Company is a
party to legal proceedings in the ordinary course of business wherein
it enforces its security interest in mortgage loans it has made.
Item 1A Risk Factors
------------
There have been no material changes in the risk factors previously
disclosed in the Company's Annual Report on Form 10-K for the year
ended March 31, 2007.
Item 2 Unregistered sales of Equity Securities and Use Of Proceeds
-----------------------------------------------------------
(a)Total (c)Total Number of (d)Maximum Number
Number of (b)Average Shares Purchased as of Shares that May
Shares Price Paid Part of Publicly Yet Be Purchased
Period Purchased per Share Announced Program Under the Program
April 1-April 30, 2007 - - - 97,174
May 1-May 31, 2007 920 $24.29 920 96,254
June 1-June 30, 2007 2,242 24.55 2,242 94,012
---------------------------------------------------------
Total 3,162 $24.48 3,162 94,012
=========================================================
In May 2004, the Company's Board of Directors authorized a 5%
repurchase plan, or 126,000 shares of the Company's outstanding
common stock. As of June 30, 2007, 31,988 shares have been
repurchased under this program. The Company repurchased 3,162 shares
of its outstanding Common Stock during the three months ended June
30, 2007.
Item 3 Defaults Upon Senior Securities
-------------------------------
None
Item 4 Submission Of Matters To A Vote Of Security Holders
---------------------------------------------------
None
Item 5 Other Information
-----------------
None
22
Security Federal Corporation and Subsidiaries
Part II: Other Information, Continued
Item 6 Exhibits
--------
3.1 Articles Of Incorporation, as amended (1)
3.2 Bylaws (2)
4 Instruments defining the rights of security holders, including
indentures (3)
10.1 1993 Salary Continuation Agreements (4)
10.2 Amendment One to 1993 Salary Continuation Agreement (5)
10.3 Form of 2006 Salary Continuation Agreement(6)
10.4 1999 Stock Option Plan (2)
10.5 1987 Stock Option Plan (4)
10.6 2002 Stock Option Plan (7)
10.7 2004 Employee Stock Purchase Plan (8)
10.8 Incentive Compensation Plan (4)
10.9 Form of Security Federal Bank Salary Continuation Agreement (9)
10.10 Form of Security Federal Split Dollar Agreement (9)
14 Code of Ethics (10)
31.1 Certification of the Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act.
31.2 Certification of the Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act.
32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act.
(1) Filed on June 26, 1998, as an exhibit to the Company's Proxy Statement
and incorporated herein by reference.
(2) Filed on March 2, 2000, as an exhibit to the Company's Registration
Statement on Form S-8 and incorporated herein by reference.
(3) Filed on August 12, 1987, as an exhibit to the Company's Registration
Statement on Form 8-A and incorporated herein by reference.
(4) Filed on June 28, 1993, as an exhibit to the Company's Annual Report on
Form 10-KSB and incorporated herein by reference.
(5) Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended September 30, 1993 and incorporated herein by
reference.
(6) Filed on May 24, 2006 as an exhibit to the Company's Current Report on
Form 8-K dated May 18, 2006 and incorporated herein by reference.
(7) Filed on June 19, 2002, as an exhibit to the Company's Proxy Statement
and incorporated herein by reference.
(8) Filed on June 18, 2004, as an exhibit to the Company's Proxy Statement
and incorporated herein by reference.
(9) Filed on May 24, 2006 as an exhibit to the Current Report on Form 8-K
and incorporated herein by reference.
(10) Filed on June 27, 2007 as an exhibit to the Company's Annual Report on
Form 10-K and incorporated herein by reference.
23
Security Federal Corporation and Subsidiaries
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: August 13, 2007 By: /s/Timothy W. Simmons
------------------- ----------------------------------
Timothy W. Simmons
President
Duly Authorized Representative
Date: August 13, 2007 By: /s/Roy G. Lindburg
------------------- ----------------------------------
Roy G. Lindburg
Treasurer/CFO
Duly Authorized Representative
24
EXHIBIT 31.1
Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
25
Certification
I, Timothy W. Simmons, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 13, 2007
/s/Timothy W. Simmons
-------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
26
EXHIBIT 31.2
Certification of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
27
Certification
I, Roy G. Lindburg, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of
the period covered by this report based on such evaluation and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 13, 2007
/s/Roy G. Lindburg
----------------------------------
Roy G. Lindburg
Chief Financial Officer
28
EXHIBIT 32
Certification Pursuant to Section 906 of the Sarbanes Oxley Act
29
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF SECURITY FEDERAL CORPORATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
1350), each of the undersigned hereby certifies in his capacity as an officer of
Security Federal Corporation (the "Company") and in connection with the
Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2007 that:
1. the Report fully complies with the requirements of Section 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the Report fairly presents, in all material
respects, the Company's financial condition and results of operations as
of the dates and for the periods presented in the financial statements
included in the Report.
/s/Timothy W. Simmons /s/Roy G. Lindburg
------------------------- ----------------------------
Timothy W. Simmons Roy G. Lindburg
Chief Executive Officer Chief Financial Officer
Dated: August 13, 2007
30