UNITED STATES
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 DECEMBER 31, 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 filed [ ] 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 January 31, 2008 2,536,045
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 December 31, 2007
and March 31, 2007 1
Consolidated Statements of Income for the Three and
Nine Months Ended December 31, 2007 and 2006 2
Consolidated Statements of Shareholders' Equity and
Comprehensive Income at December 31, 2007 and 2006 4
Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 2007 and 2006 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 28
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 1A. Risk Factors 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5 Other Information 29
Item 6. Exhibits 30
Signatures 31
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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 (Unaudited)
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 2007 March 31, 2007
------------------- ----------------
Assets: (Unaudited) (Audited)
Cash And Cash Equivalents $ 12,799,687 $ 13,438,129
Investment And Mortgage-Backed
Securities:
Available For Sale: (Amortized cost
of $214,036,848
at December 31,
2007 and
$186,970,867 at
March 31, 2007) 215,388,331 185,766,296
Held To Maturity: (Fair value of
$45,284,720 at
December 31, 2007
and $63,441,641
at March 31, 2007) 45,144,829 64,138,589
------------------- ---------------
Total Investment And Mortgage-Backed
Securities 260,533,160 249,904,885
------------------- ---------------
Loans Receivable, Net:
Held For Sale 2,770,678 1,529,748
Held For Investment: (Net of allowance of
$7,648,376 at December
31, 2007 and $7,296,791
at March 31, 2007) 497,320,751 434,508,612
------------------- ---------------
Total Loans Receivable, Net 500,091,429 436,038,360
------------------- ---------------
Accrued Interest Receivable:
Loans 1,846,313 1,459,193
Mortgage-Backed Securities 672,182 550,682
Investments 1,153,921 1,181,639
Premises And Equipment, Net 20,501,003 15,895,192
Federal Home Loan Bank Stock, At Cost 9,284,200 8,209,200
Bank Owned Life Insurance 8,225,067 5,783,620
Repossessed Assets Acquired In Settlement
Of Loans 477,796 24,909
Intangible Assets, Net 465,000 532,500
Goodwill 1,197,954 1,197,954
Other Assets 3,000,026 3,893,928
------------------- ---------------
Total Assets $ 820,247,738 $ 738,110,191
=================== ===============
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $ 573,915,279 $ 523,737,592
Advances From Federal Home Loan Bank 177,737,852 153,049,272
Other Borrowed Money 12,695,552 8,088,194
Advance Payments By Borrowers For Taxes
And Insurance 463,950 486,101
Mandatorily Redeemable Financial Instrument 1,417,312 1,417,312
Junior Subordinated Debentures 5,155,000 5,155,000
Other Liabilities 3,662,886 3,483,512
------------------- ---------------
Total Liabilities $ 775,047,831 $ 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 -
2,647,891 And Outstanding Shares -
2,536,752 At December 31, 2007 And
2,637,942 And 2,609,116 At March 31,
2007 25,913 25,814
Additional Paid-In Capital 5,039,139 4,850,029
Treasury Stock, (At Cost, 111,139 and
28,826 Shares, at December 31, 2007
and March 31, 2007, Respectively) (2,637,911) (651,220)
Accumulated Other Comprehensive Income (Loss) 838,283 (747,316)
Retained Earnings, Substantially Restricted 41,934,483 39,215,901
------------------- ---------------
Total Shareholders' Equity $ 45,199,907 $ 42,693,208
------------------- ---------------
Total Liabilities And Shareholders'
Equity $ 820,247,738 $ 738,110,191
=================== ===============
See accompanying notes to consolidated financial statements.
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended December 31,
---------------------------------
2007 2006
---------------- --------------
Interest Income:
Loans $ 9,416,982 $ 8,012,722
Mortgage-Backed Securities 1,937,244 1,456,544
Investment Securities 1,365,705 1,314,913
Other 17,277 29,551
---------------- --------------
Total Interest Income 12,737,208 10,813,730
---------------- --------------
Interest Expense:
NOW And Money Market Accounts 1,603,372 1,684,765
Passbook Accounts 38,586 41,189
Certificate Accounts 3,927,298 2,846,184
Federal Home Loan Bank Advances And
Other Borrowed Money 2,096,187 1,715,572
Junior Subordinated Debentures 93,267 91,983
---------------- --------------
Total Interest Expense 7,758,710 6,379,693
---------------- --------------
Net Interest Income 4,978,498 4,434,037
Provision For Loan Losses 150,000 150,000
---------------- --------------
Net Interest Income After Provision For
Loan Losses 4,828,498 4,284,037
---------------- --------------
Non-Interest Income:
Gain On Sale Of Loans 134,732 88,137
Service Fees On Deposit Accounts 307,045 296,135
Income From Cash Value Of Life Insurance 92,246 62,037
Commissions On Insurance 145,148 198,772
Other Agency Income 19,670 20,248
Trust Income 102,000 110,211
Other 227,250 212,558
---------------- --------------
Total Non- Interest Income 1,028,091 988,098
---------------- --------------
General And Administrative Expenses:
Salaries And Employee Benefits 2,660,655 2,361,104
Occupancy 425,489 359,530
Advertising 80,857 98,672
Depreciation And Maintenance Of Equipment 333,985 300,211
FDIC Insurance Premiums 15,402 4,624
Amortization of Intangibles 22,500 22,500
Other 789,044 670,071
---------------- --------------
Total General And Administrative Expenses 4,327,932 3,816,712
---------------- --------------
Income Before Income Taxes 1,528,657 1,455,423
Provision For Income Taxes 488,046 478,638
---------------- --------------
Net Income $ 1,040,611 $ 976,785
================ ==============
Basic Net Income Per Common Share $ 0.40 $ 0.37
================ ==============
Diluted Net Income Per Common Share $ 0.40 $ 0.37
================ ==============
Cash Dividend Per Share On Common Stock $ 0.07 $ 0.06
================ ==============
Basic Weighted Average Shares Outstanding 2,585,234 2,617,037
================ ==============
Diluted Weighted Average Shares Outstanding 2,588,318 2,625,945
================ ==============
See accompanying notes to consolidated financial statements.
2
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Nine Months Ended December 31,
--------------------------------
2007 2006
-------------- --------------
Interest Income:
Loans $ 27,625,147 $ 22,789,715
Mortgage-Backed Securities 5,036,650 4,223,959
Investment Securities 4,583,201 3,646,142
Other 45,179 62,023
-------------- --------------
Total Interest Income 37,290,177 30,721,839
-------------- --------------
Interest Expense:
NOW And Money Market Accounts 4,931,098 4,982,221
Passbook Accounts 121,535 125,095
Certificate Accounts 10,797,386 7,437,930
Federal Home Loan Bank Advances And
Other Borrowed Money 6,047,885 4,690,964
Junior Subordinated Debentures 276,345 101,985
-------------- --------------
Total Interest Expense 22,174,249 17,338,195
-------------- --------------
Net Interest Income 15,115,928 13,383,644
Provision For Loan Losses 450,000 450,000
-------------- --------------
Net Interest Income After Provision For
Loan Losses 14,665,928 12,933,644
-------------- --------------
Non-Interest Income:
Gain On Sale Of Loans 416,303 295,390
Service Fees On Deposit Accounts 957,790 865,638
Income From Cash Value Of Life Insurance 241,447 180,582
Commissions On Insurance 464,309 413,407
Other Agency Income 75,838 30,674
Trust Income 340,625 327,767
Other 641,747 539,354
-------------- --------------
Total Non-Interest Income 3,138,059 2,652,812
-------------- --------------
General And Administrative Expenses:
Salaries And Employee Benefits 7,858,206 6,789,633
Occupancy 1,293,602 1,027,793
Advertising 270,278 234,622
Depreciation And Maintenance Of Equipment 990,601 908,006
FDIC Insurance Premiums 45,599 33,586
Amortization of Intangibles 67,500 45,000
Other 2,434,592 1,950,577
-------------- --------------
Total General And Administrative Expenses 12,960,378 10,989,217
-------------- --------------
Income Before Income Taxes 4,843,609 4,597,239
Provision For Income Taxes 1,579,392 1,571,083
-------------- --------------
Net Income $ 3,264,217 $ 3,026,156
============== ==============
Basic Net Income Per Common Share $ 1.26 $ 1.17
============== ==============
Diluted Net Income Per Common Share $ 1.25 $ 1.16
============== ==============
Cash Dividend Per Share On Common Stock $ 0.21 $ 0.18
============== ==============
Basic Weighted Average Shares Outstanding 2,599,352 2,588,864
============== ==============
Diluted Weighted Average Shares Outstanding 2,605,686 2,600,966
============== ==============
See accompanying notes to consolidated financial statements.
3
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 - - - - - 3,026,156 3,026,156
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding Gains
On Securities Available
For Sale - - - - 991,431 - 991,431
-----------
Comprehensive Income - - - - - - 4,017,587
Purchase Of Treasury Stock
At Cost, 8,553 shares - - (198,399) - - - (198,399)
Decrease In Indirect
Guarantee Of ESOP Debt - - - 215,503 - - 215,503
Exercise Of Stock Options 212 393,033 - - - - 393,245
Stock Compensation Expense - 4,804 - - - - 4,804
Cash Dividends - - - - - (466,691) (466,691)
-------- ---------- --------- ---------- ----------- ----------- -----------
Balance At December 31,
2006 $ 25,794 $4,801,947 $(437,055) $ - $(1,095,078) $38,272,200 $41,567,808
======== ========== ========= ========== =========== =========== ===========
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 - - - - - 3,264,217 3,264,217
Other Comprehensive
Income, Net Of Tax:
Unrealized Holding
Gains On Securities
Available For Sale - - - - 1,585,599 - 1,585,599
-----------
Comprehensive Income - - - - - - 4,849,816
Purchase Of Treasury
Stock At Cost, 82,313
shares - - (1,986,691) - - - (1,986,691)
Employee Stock Purchase
Plan Purchases 36 74,145 - - - - 74,181
Exercise Of Stock
Options 63 104,958 - - - - 105,021
Stock Compensation
Expense - 10,007 - - - - 10,007
Cash Dividends - - - - - (545,635) (545,635)
-------- ---------- ----------- ---------- --------- ---------- -----------
Balance At December 31,
2007 $ 25,913 $5,039,139 $(2,637,911) $ - $ 838,283 $41,934,483 $45,199,907
======== ========== =========== ========== ========= =========== ===========
See accompanying notes to consolidated financial statements.
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended December 31,
---------------------------------
2007 2006
-------------- --------------
Cash Flows From Operating Activities:
Net Income $ 3,264,217 $ 3,026,156
Adjustments To Reconcile Net Income To Net
Cash Provided (Used) By Operating
Activities:
Depreciation Expense 789,116 745,479
Amortization Of Intangible Assets 67,500 45,000
Stock Option Compensation Expense 10,007 4,804
Discount Accretion And Premium Amortization 161,021 321,311
Provisions For Losses On Loans And Real Estate 450,000 450,000
Gain On Sale Of Loans (416,303) (295,390)
Gain On Sale Of Real Estate (27,293) (48,678)
Amortization Of Deferred Fees On Loans (87,601) (227,638)
Loss on Disposition of Premises and Equipment 356 215
Proceeds From Sale Of Loans Held For Sale 25,998,343 17,846,130
Origination Of Loans For Sale (26,822,970) (20,778,758)
(Increase) Decrease In Accrued Interest
Receivable:
Loans (387,120) (388,700)
Mortgage-Backed Securities (121,500) (38,533)
Investments 27,718 (135,413)
Decrease In Advance Payments By Borrowers (22,151) (202,218)
Other, Net 99,559 (578,090)
-------------- --------------
Net Cash Provided (Used) By Operating
Activities 2,982,899 (254,323)
-------------- --------------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Available For Sale 27,258,442 27,419,083
Purchase Of Investment Securities Available
For Sale (29,542,601) (18,941,966)
Purchase Of Mortgage-Backed Securities
Available For Sale (47,317,221) (26,982,890)
Maturities Of Investment Securities
Available For Sale 22,371,400 4,738,645
Maturities of Investment Securities Held
To Maturity 19,000,000 9,000,000
Purchase Of Federal Home Loan Bank Stock (8,272,900) (5,482,400)
Redemption Of Federal Home Loan Bank Stock 7,197,900 4,698,800
Increase In Loans To Customers (63,895,411) (43,368,622)
Proceeds From Sale Of Repossessed Assets 295,279 139,700
Purchase And Improvement Of Premises And
Equipment (5,395,783) (3,679,725)
Proceeds From Sale of Premises And Equipment 500 -
Purchase Of Bank Owned Life Insurance (2,441,447) (721,582)
-------------- --------------
Net Cash Used By Investing Activities (80,741,842) (53,180,957)
-------------- --------------
Cash Flows From Financing Activities:
Increase In Deposit Accounts 50,177,687 28,332,720
Proceeds From Federal Home Loan Bank
Advances 296,700,000 222,223,450
Repayment Of Federal Home Loan Bank
Advances (272,011,420) (205,233,409)
Net (Repayments) Proceeds Of Other
Borrowings 4,607,358 (427,653)
Proceeds From Junior Subordinated Debentures - 5,155,000
Dividends To Shareholders (545,635) (466,691)
Purchase Of Treasury Stock (1,986,691) (198,399)
Proceeds From Employee Stock Purchases 74,181 -
Proceeds From Exercise of Stock Options 105,021 393,245
-------------- --------------
Net Cash Provided By Financing Activities 77,120,501 49,778,263
-------------- --------------
(Continued)
5
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended December 31,
--------------------------------
2007 2006
-------------- -------------
Net Decrease In Cash And Cash Equivalents (638,442) (3,657,017)
Cash And Cash Equivalents At Beginning Of
Period 13,438,129 14,351,208
-------------- -------------
Cash And Cash Equivalents At End Of Period $ 12,799,687 $ 10,694,191
============== =============
Supplemental Disclosure Of Cash Flows
Information:
Cash Paid During The Period For Interest $ 22,011,826 $ 16,896,006
Cash Paid During The Period For Income
Taxes $ 1,304,290 $ 1,117,000
Additions To Repossessed Acquired Through
Foreclosure $ 720,873 $ -
Decrease In Unrealized Net Loss On
Securities Available For Sale,
Net Of Taxes $ 1,585,599 $ 991,431
Issuance Of A Mandatorily Redeemable
Financial Instrument Through The
Issuance Of Common Stock - 1,417,312
See accompanying notes to consolidated financial statements.
6
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 nine month period
ended December 31, 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 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. The Company's significant
accounting policies are described in the footnotes to the audited consolidated
financial statements at March 31, 2007 included in its 2007 Annual Report to
Stockholders, which was filed as an exhibit to the 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. The Company
considers these accounting policies to be critical accounting policies. The
judgments and assumptions the Company uses are based on historical experience
and other factors, which the Company believes 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 the carrying values of assets and liabilities
and the 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.
7
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
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 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 $1.6
million. 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.
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.
8
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
--------------------------------------------------------
December 31, 2007
--------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ---------
Basic EPS $ 1,040,611 2,585,234 $ 0.40
Effect of Diluted
Securities:
Stock Options - 3,084 -
------------------------- -------------------- ---------
Diluted EPS $ 1,040,611 2,588,318 $ 0.40
========================= ==================== =========
For the Quarter Ended
--------------------------------------------------------
December 31, 2006
--------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ---------
Basic EPS $ 976,785 2,617,037 $ 0.37
Effect of Diluted
Securities:
Stock Options - 8,908 -
------------------------- -------------------- ---------
Diluted EPS $ 976,785 2,625,945 $ 0.37
========================= ==================== =========
For the Nine Months Ended
--------------------------------------------------------
December 31, 2007
--------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ---------
Basic EPS $ 3,264,217 2,599,352 $ 1.26
Effect of Diluted
Securities:
Stock Options - 6,334 (.01)
------------------------- -------------------- ---------
Diluted EPS $ 3,264,217 2,605,686 $ 1.25
========================= ==================== =========
For the Nine Months Ended
--------------------------------------------------------
December 31, 2006
--------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- -------------------- ---------
Basic EPS $ 3,026,156 2,588,864 $ 1.17
Effect of Diluted
Securities:
Stock Options - 12,102 (.01)
------------------------- -------------------- ---------
Diluted EPS $ 3,026,156 2,600,966 $ 1.16
========================= ==================== =========
9
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
6. Stock-Based Compensation
Certain officers and directors of the Company participate in an incentive and
non- qualified 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 stock
option plan for the three and nine months ended December 31, 2007:
Three Months Ended Six Months Ended
December 31, 2007 December 31, 2007
--------------------- ---------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Balance, Beginning of
Period/Year 91,100 $21.09 99,600 $20.55
Options granted 2,000 24.28 5,000 24.37
Options exercised - - 6,300 16.67
Options forfeited - - 5,200 17.40
------- -------
Balance, December 31, 2007 93,100 $21.17 93,100 $21.17
======= =======
Options Exercisable 74,100 $20.60
=======
Range of Exercise Prices For
Exercisable Options $16.67-$24.22
Options Available For Grant 145,216
=======
The weighted average remaining contractual life of all outstanding options at
December 31, 2007 was 6.06 years and the aggregate intrinsic value of these
options was $214,000. All non-vested awards are expected to be recognized over
a weighted average period of 6.63 years.
The following table summarizes the stock-based awards granted by the Company,
the fair market value of each award granted as estimated on the date of grant
using the Black-Scholes option-pricing model, and the weighted average
assumptions used for such grants for the periods indicated:
For Awards Granted During For Awards Granted During
The Three Month Period Ended The Nine Month Period Ended
December 31, December 31,
-------------------------- --------------------------
2007 2006 2007 2006
----------- ----------- ------------ -----------
Awards granted 2,000 - 5,000 13,500
Dividend Yield 1.60% - 1.52%-1.60% 1.03%
Weighted Average Expected
Volatility 20.92% - 22.71% 30.21%
Risk-free interest rate 4.50% - 4.76% 4.36%
Expected life 9.00 - 9.00 9.01
10
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
6. Stock-Based Compensation, Continued
At December 31, 2007, the Company had the following options outstanding:
Outstanding
Grant Date Options Option Price Expiration Date
------------ ----------- ------------ ---------------------
10/19/99 20,100 $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 6,500 $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
5/24/07 2,000 $24.34 5/24/17
7/9/07 1,000 $24.61 7/9/17
10/1/07 2,000 $24.28 10/1/17
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 Financial Accounting Standards Board ("FASB") issued
SFAS No. 157, "Fair Value Measurements." SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
This standard eliminates inconsistencies found in various prior pronouncements
but does not require any new fair value measurements. SFAS 157 is effective
for the Company on April 1, 2008 and will not impact the Company's accounting
measurements but it is expected to result in additional disclosures.
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"). Entities purchase
life insurance for various reasons including protection against loss of key
employees and to fund postretirement benefits. The two most common types of
life insurance arrangements are endorsement split dollar life and collateral
assignment split dollar life. EITF 06-4 covers the former and EITF 06-10
(discussed below) covers the latter. EITF 06-4 states that entities with
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," (if, in
substance, a postretirement benefit plan exists) or Accounting Principles
Board ("APB") Opinion No. 12, "Omnibus Opinion 1967" (if the arrangement is,
in substance, an individual deferred compensation contract). 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. EITF 06-4 is effective for the Company on April 1, 2008. The Company
does not believe the adoption of EITF 06-4 will have a material impact on its
financial position, results of operations or cash flows.
11
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
7. Accounting and Reporting Changes, Continued
In September 2006, the FASB ratified the consensus reached on 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"). 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 the Company on April 1, 2008. The
Company does not believe the adoption of EITF 06-5 will have a material impact
on its financial position, results of operations or cash flows.
In March 2007, the FASB ratified the consensus reached on EITF 06-10,
"Accounting for Collateral Assignment Split-Dollar Life Insurance
Arrangements" ("EITF 06-10"). The postretirement aspect of this EITF is
substantially similar to EITF 06-4 discussed above and requires that an
employer recognize a liability for the postretirement benefit related to a
collateral assignment split-dollar life insurance arrangement in accordance
with either FASB Statement No. 106 or APB Opinion No. 12, as appropriate, if
the employer has agreed to maintain a life insurance policy during the
employee's retirement or provide the employee with a death benefit based on
the substantive agreement with the employee. In addition, a consensus was
reached that an employer should recognize and measure an asset based on the
nature and substance of the collateral assignment split-dollar life insurance
arrangement. EITF 06-10 is effective for the Company on April 1, 2008. The
Company does not believe the adoption of EITF 06-10 will have a material
impact on its financial position, results of operations or cash flows.
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" ("SFAS 159"). 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 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. 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 April 1, 2008. The
Company is currently analyzing the fair value option that is permitted, but
not required, under SFAS 159.
In June 2007, the FASB ratified the consensus reached by the EITF with respect
to EITF 06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based
Payment Awards" ("EITF 06-11"). Under EITF 06-11, a realized income tax
benefit from dividends or dividend equivalents that are charged to retained
earnings and are paid to employees for equity-classified nonvested equity
shares, nonvested equity share units and outstanding equity share options
should be recognized as an increase in additional paid-in capital. This EITF
is to be applied prospectively to the income tax benefits that result from
dividends on equity-classified employee share-based payment awards that are
declared beginning in 2008, and interim periods within those fiscal years.
Early application is permitted. The Company does not believe the adoption of
EITF 06-11 will have a material impact on its financial position, results of
operations or cash flows.
In November 2007, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 109, "Written Loan Commitments Recorded at Fair Value
Through Earnings" ("SAB 109"). SAB 109 expresses the current view of the SEC
staff that the expected net future cash flows related to the associated
servicing of the loan should be included in the measurement of all written
loan commitments that are accounted for at fair value through earnings. SEC
registrants are expected to apply this guidance on a prospective basis to
derivative loan commitments issued or modified in the first quarter of 2008
and thereafter. The Company is currently analyzing the impact of this
guidance, which relates to the Company's mortgage loans held for sale.
12
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
7. Accounting and Reporting Changes, Continued
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations,"
("SFAS 141(R)") which replaces SFAS 141. SFAS 141(R) establishes principles
and requirements for how an acquirer in a business combination recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any controlling interest; recognizes and measures
goodwill acquired in the business combination or a gain from a bargain
purchase; and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. FAS 141(R) is effective for acquisitions by the Company
taking place on or after January 1, 2009. Early adoption is prohibited.
Accordingly, the Company is required to record and disclose business
combinations following existing accounting guidance until April 1, 2009. The
Company will assess the impact of SFAS 141(R) if and when a future acquisition
occurs.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Before this statement, limited guidance existed for reporting
noncontrolling interests (minority interest). As a result, diversity in
practice exists. In some cases minority interest is reported as a liability
and in others it is reported in the mezzanine section between liabilities and
equity. Specifically, SFAS 160 requires the recognition of a noncontrolling
interest (minority interest) as equity in the consolidated financials
statements and separate from the parent's equity. The amount of net income
attributable to the noncontrolling interest will be included in consolidated
net income on the face of the income statement. SFAS 160 clarifies that
changes in a parent's ownership interest in a subsidiary that do not result in
deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent
recognize gain or loss in net income when a subsidiary is deconsolidated. Such
gain or loss will be measured using the fair value of the noncontrolling
equity investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interests. SFAS 160 is effective for the Company on April 1,
2009. Earlier adoption is prohibited. The Company is currently evaluating
the impact, if any, the adoption of SFAS 160 will have on its consolidated
financial statements.
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 or cash flows.
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
December 31, 2007 Amortized Unrealized Unrealized
------------------ Cost Gains Losses Fair Value
------------ ---------- ---------- ------------
FHLB Securities $ 42,017,906 $ 526,775 $ 7,375 $ 42,537,306
Federal Farm Credit
Securities 12,977,252 167,445 10,898 13,133,799
FNMA Bonds 1,997,248 4,322 - 2,001,570
Mortgage-Backed Securities 156,941,504 1,183,161 508,009 157,616,656
Equity Securities 102,938 - 3,938 99,000
------------ ---------- ---------- ------------
Total $214,036,848 $1,881,703 $ 530,220 $215,388,331
============ ========== ========== ============
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 1,997,187 - 9,367 1,987,820
FHLMC Bonds 64,071 - 94 63,977
Mortgage-Backed Securities 137,102,085 276,292 1,354,781 136,023,596
Equity Securities 102,938 562 - 103,500
------------ ---------- ---------- ------------
Total $186,970,867 $ 303,061 $1,507,632 $185,766,296
============ ========== ========== ============
13
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
8. Securities, Continued
FHLB securities, Federal Farm Credit securities, FNMA bonds, FHLMC bonds and
FNMA and FHLMC mortgage- backed securities are issued by government-sponsored
enterprises ("GSEs"). GSEs 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 December 31, 2007, the
Bank held an amortized cost and fair value of $63.9 million and $64.5 million,
respectively in GNMA mortgage-backed securities included in mortgage-backed
securities listed above.
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
December 31, 2007 Amortized Unrealized Unrealized
------------------ Cost Gains Losses Fair Value
----------- ---------- ---------- ------------
FHLB Securities $37,998,576 $ 153,478 $ 12,964 $ 38,139,090
Federal Farm Credit
Securities 6,991,253 8,437 9,060 6,990,630
Equity Securities 155,000 - - 155,000
----------- --------- ---------- ------------
Total $45,144,829 $ 161,915 $ 22,024 $ 45,284,720
=========== ========= ========== ============
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 GSEs. These
enterprises are not backed by the full faith and credit of the United States
government.
9. Loans Receivable, Net
Loans receivable, net, at December 31, 2007 and March 31, 2007 consisted of
the following:
December 31, 2007 March 31, 2007
------------------- ----------------
Residential Real Estate $ 129,617,563 $ 125,512,411
Consumer 66,958,427 63,809,478
Commercial Business & Real Estate 314,522,220 259,207,877
Loans Held For Sale 2,770,678 1,529,748
------------------- ----------------
513,868,888 450,059,514
------------------- ----------------
Less:
Allowance For Possible Loan Loss 7,648,376 7,296,791
Loans In Process 5,814,744 6,443,372
Deferred Loan Fees 314,339 280,991
------------------- ----------------
13,777,459 14,021,154
------------------- ----------------
$ 500,091,429 $ 436,038,360
=================== ================
14
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
December 31, 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 Securities and Exchange Commission, including the
Annual Report on Form 10-K for the fiscal 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 December 31, 2007 and March 31, 2007
General - Total assets increased $82.1 million or 11.1% to $820.2 million at
December 31, 2007 from $738.1 million at March 31, 2007. The primary reason
for the growth in total assets was a $64.1 million or 14.7% increase in net
loans receivable to $500.1 million. For the nine months ended December 31,
2007, the demand for loans was funded primarily with increased deposits of
$50.2 million or 9.6%, increased advances from the Federal Home Loan Bank of
Atlanta ("FHLB") of $24.7 million or 16.1% and increased other borrowed money
of $4.6 million or 57.0%.
Assets - The increases and decreases in total assets were primarily
concentrated in the following asset categories:
Increase (Decrease)
-------------------
December 31, March 31,
2007 2007 Amount Percent
------ ------ ------ -------
Cash And Cash Equivalents $ 12,799,687 $ 13,438,129 $ (638,442) (4.8)%
Investment And Mortgage-
Backed Securities
Available For Sale 215,388,331 185,766,296 29,622,035 15.9
Investment And Mortgage-
Backed Securities - Held
To Maturity 45,144,829 64,138,589 (18,993,760) (29.6)
Loan Receivable, Net 500,091,429 436,038,360 64,053,069 14.7
Premises And Equipment,
Net 20,501,003 15,895,192 4,605,811 29.0
FHLB Stock, At Cost 9,284,200 8,209,200 1,075,000 13.1
Bank Owned Life Insurance 8,225,067 5,783,620 2,441,447 42.2
Repossessed Assets
Acquired in Settlement of
Loans 477,796 24,909 452,887 1,818.2%
Cash and cash equivalents decreased $638,000 to $12.8 million at December 31,
2007 from $13.4 million at March 31, 2007. The reason for the decrease is the
Company used cash and cash equivalents to fund loans and purchase investment
and mortgage- backed securities.
Investment and mortgage-backed securities available for sale increased $29.6
million or 15.9% to $215.4 million at December 31, 2007 from $185.8 million at
March 31, 2007. The increase in investments and mortgage-backed securities
available for sale can be attributed to additional purchases of securities and
increases in market value offset slightly by principal paydowns and investment
calls. Investment and mortgage-backed securities held to maturity decreased
$19.0 million to $45.1 million at December 31, 2007 from $64.1 million at
March 31, 2007. This decrease was the result of maturities and calls that
occurred during the period.
15
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Loans receivable, net increased $64.1 million or 14.7% to $500.1 million at
December 31, 2007 from $436.0 million at March 31, 2007. Residential real
estate loans increased $4.1 million to $129.6 million at December 31, 2007
from $125.5 million at March 31, 2007. Consumer loans increased $3.1 million
to $67.0 million at December 31, 2007 from $63.8 million at March 31, 2007.
The increase in residential real estate and consumer loans can be attributed
to normal growth of the Company. Commercial business and real estate loans
increased $55.3 million to $314.5 million at December 31, 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 loan. Loans held
for sale increased $1.2 million to $2.8 million at December 31, 2007 from $1.5
million at March 31, 2007. The increase is attributable to the lag between
the time a mortgage loan is originated and sold to an investor and an overall
increase in the number of mortgage loans originated to be sold.
Premises and equipment, net increased $4.6 million to $20.5 million at
December 31, 2007 from $15.9 million at March 31, 2007. The majority of the
increase is attributable to the construction and establishment of new branch
locations in Evans, Georgia and in Columbia, South Carolina.
FHLB stock, at cost, increased $1.1 million to $9.3 million at December 31,
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 December 31, 2007 plus a transaction component, which equals 4.5% of
outstanding advances (borrowings) from the FHLB of Atlanta.
Bank owned life insurance increased $2.4 million to $8.2 million at December
31, 2007 from $5.8 million at March 31, 2007. The Company purchased
additional life insurance to provide key man life insurance for additional
officers and the cash surrender value continued to increase.
Repossessed assets acquired in the settlement of loans increased $453,000 to
$478,000 at December 31, 2007 from $25,000 at March 31, 2007 as the result of
three properties that were foreclosed on during the nine month period. All
three properties were residential lots and secured two loans to the same
contractor. At March 31, 2007 the balance in repossessed assets consisted of
only one property.
Other assets decreased $894,000 to $3.0 million at December 31, 2007 from $3.9
million at March 31, 2007. The majority of the decrease resulted from a
decrease in the deferred tax asset related to increases in the market values
of available for sale investment and mortgage-backed securities.
Liabilities
Deposit Accounts
Balance
--------------------
December 31, 2007 March 31, 2007 Increase (Decrease)
------------------ ------------------ --------------------
Weighted Weighted
Balance Rate Balance Rate Amount Percent
------- ---- ------------ ---- ----------- -------
Demand Accounts:
Checking $ 99,175,456 0.65% $105,515,095 0.63% $(6,339,639) (6.0)%
Money Market 143,713,354 3.88 145,491,774 4.14 (1,778,420) (1.2)
Regular Savings 15,138,221 0.97 17,458,680 0.98 (2,320,459) (13.3)
------------ ---- ------------ ----- ----------- ------
Total 258,027,031 2.47 268,465,549 2.55 (10,438,518) (3.9)
------------ ---- ------------ ----- ----------- ------
Certificate Accounts
2.00 - 2.99% 3,511,939 2,971,616 540,323 1.82
3.00 - 3.99% 30,089,389 36,044,826 (5,955,437) (16.5)
4.00 - 4.99% 43,054,567 35,617,605 7,436,962 20.9
5.00 - 5.99% 239,232,353 180,637,996 58,594,357 32.4
------------ ---- ------------ ----- ----------- ------
Total 315,888,248 5.04 255,272,043 4.99 60,616,205 23.7
------------ ---- ------------ ----- ----------- ------
Total Deposits $573,915,279 3.88% $523,737,592 3.74% $50,177,687 9.6%
============ ==== ============ ===== =========== ======
16
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
------------------
December 31, 2007 March 31, 2007 Increase
-------------------- ----------------- ------------------
Fiscal Year Due: Balance Rate Balance Rate Balance Percent
-------------------- ----------------- ------------------
2008 $16,800,000 4.14% $10,000,000 4.25% $ 6,800,000 68.0%
2009 25,000,000 4.58 25,000,000 4.75 - -
2010 10,000,000 4.88 5,000,000 3.09 5,000,000 100.0
2011 15,000,000 4.87 10,000,000 4.76 5,000,000 50.0
2012 24,700,000 4.56 19,700,000 4.47 5,000,000 25.3
Thereafter 86,237,852 4.31 83,349,272 4.20 2,888,580 3.4
------------ ------------ ----------- ------
Total Advances $177,737,852 4.44% $153,049,272 4.36% $24,688,580 16.1%
============ ============ =========== ======
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 $104.0
million and $105.3 million, respectively, at December 31, 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 December 31, 2007
------------------------------------------------------------------------------
Borrow Date Maturity Date Amount Int. Rate Type Call Dates
----------- ------------- --------- --------- ----------- -----------------
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
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
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 10/25/11 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
07/25/07 07/25/17 5,000,000 4.396 Multi- Call 07/25/08 and
quarterly
thereafter
11/16/07 11/16/11 5,000,000 3.750% Multi- Call 11/17/08 and
quarterly
thereafter
17
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 4.530 Multi-Call 06/26/07 and
quarterly
thereafter
06/02/06 06/02/16 5,000,000 5.160 1 Time Call 06/02/11
07/11/06 07/11/16 5,000,000 4.800 Multi-Call 07/11/08 and
quarterly
thereafter
10/25/06 10/25/11 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
Other Borrowed Money - Other borrowed money consists of short- term retail
repurchase agreements and a revolving line of credit with another financial
institution. The retail repurchase agreements typically mature within one to
three days and have interest rates that float with market rates. The
unsecured line of credit has an interest rate equal to LIBOR plus 2.5% and
matures on December 1, 2008.
Other borrowed money increased $4.6 million or 57.0% to $12.7 million at
December 31, 2007 from $8.1 million at March 31, 2007. The weighted average
interest rate of retail repurchase agreements was 4.12% at December 31, 2007.
As of December 31, 2007, the line of credit had a balance of $3.0 million
compared to no balance at March 31, 2007. The weighted average interest rate
was 6.77% at December 31, 2007. The Company borrowed these funds to provide
additional capital to fund loans.
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 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 Collier-Jennings Companies over
a three-year period. The stock is mandatorily redeemable 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 of the Company's stock. As of December 31, 2007
the shareholder had not elected to redeem any of the shares.
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 Capital Securities accrue and pay distributions annually at a rate per
annum equal to a blended rate of 6.79% at December 31, 2007. One-half of the
Capital Securities issued in the transaction have a fixed rate of 6.88% and
the remaining half has a floating rate of three-month LIBOR plus 170 basis
points, which was 6.69% at December 31, 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.
18
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
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 increased $2.5 million or 5.9% to $45.2 million
at December 31, 2007 from $42.7 million at March 31, 2007. Accumulated other
comprehensive income, net of tax, increased $1.6 million to $838,000 at
December 31, 2007 from a loss of $747,000 at March 31, 2007. The Company's
net income for the nine-month period was $3.3 million. The Board of Directors
of the Company declared the 66th, 67th, and 68th consecutive quarterly
dividend, which was $.07 per share, in May, August, and November 2007, which
totaled $546,000. Book value per share was $17.82 at December 31, 2007
compared to $16.36 at March 31, 2007.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER
31, 2007 AND 2006
----------------------------------------------------------------------------
Net Income - Net income increased $64,000 or 6.5% to $1.0 million for the
three months ended December 31, 2007 compared to $977,000 for the three months
ended December 31, 2006. The primary reason for the increased earnings was an
increase in net interest income and non-interest income offset partially by an
increase in non-interest expenses.
Net Interest Income - Net interest income increased $544,000 or 12.3% to $5.0
million during the three months ended December 31, 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 December 31, 2007, average interest earning assets increased
$91.5 million to $762.8 million while average interest-bearing liabilities
increased $96.3 million to $717.8 million. The interest rate spread increased
three basis points to 2.36% during the three months ended December 31, 2007
compared to the same period in 2006.
The Company's net interest margin was 2.61% and 2.64% for the quarters ended
December 31, 2007 and 2006, respectively.
Interest Income - Total interest income increased $1.9 million or 17.8% to
$12.7 million during the three months ended December 31, 2007 from $10.8
million for the same period in 2006. Total interest income on loans increased
$1.4 million or 17.5% to $9.4 million during the three months ended December
31, 2007 compared to $8.0 million for the same period in 2006. The increase is
a result of the average loan portfolio balance increasing $75.2 million
slightly offset by the yield in the loan portfolio decreasing three basis
points. Interest income from mortgage-backed securities increased $481,000 or
33.0% to $1.9 million as a result of an increase in yield and an increase in
the average balance of the portfolio. Interest income from investment
securities increased $51,000 or 3.9% to $1.4 million as a result of an
increase in the average balance of the investments portfolio slightly offset
by a decrease in yield.
The following table compares detailed average balances, associated yields, and
the resulting changes in interest income for the three months ended December
31, 2007 and 2006:
Three Months Ended December 31,
------------------------------------------------------
2007 2006
------------------ ------------------
Increase
(Decrease)
In Interest
And Dividend
Average Average Income
Balance Yield Balance Yield From 2006
------------ ----- ------------ ----- ------------
Loans Receivable, Net $495,376,936 7.60% $420,191,159 7.63% $ 1,404,260
Mortgage-Backed
Securities 140,981,296 5.50 132,975,594 4.38 480,700
Investments 124,623,250 4.38 116,074,130 4.54 50,792
Overnight Time 1,845,087 3.75 2,080,466 5.15 (12,274)
------------ ----- ------------ ----- -----------
Total Interest-Earning
Assets $762,826,569 6.68% $671,321,349 6.44% $ 1,923,478
============ ===== ============ ===== ===========
19
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Interest Expense - Total interest expense increased $1.4 million or 21.6% to
$7.8 million during the three months ended December 31, 2007 compared to $6.4
million for the same period one-year earlier. The increase in total interest
expense can be primarily attributed to increases in interest rates paid for
certificate accounts and FHLB advances during the period coupled with
increases in the amount of total interest-bearing deposits and other
borrowings. The Company offered higher interest rates on certificates
accounts during the period to remain competitive with new and existing
financial institutions entering the market place.
Interest expense on deposits increased $997,000 or 21.8% during the period as
average interest bearing deposits grew $67.3 million compared to the average
balance in the three months ended December 31, 2006. In addition, the cost of
deposits increased 25 basis points compared to the same period in the prior
year. Interest expense on advances and other borrowings increased $381,000 or
22.2% as a result of the cost of borrowings increasing 14 basis points and
average total borrowings outstanding increasing approximately $29.0 million to
$184.8 million during the 2007 period compared to $155.8 million during 2006.
Interest expense on junior subordinated debentures was $93,000 for the three
months ended December 31, 2007 compared to $92,000 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 in 2006.
The following table compares detailed average balances, cost of funds, and the
resulting changes in interest expense for the three months ended December 31,
2007 and 2006:
Three Months Ended December 31,
------------------------------------------------------
2007 2006
------------------ ----------------
Increase
(Decrease)
In Interest
Average Average Expense
Balance Yield Balance Yield From 2006
------------ ----- ------------ ----- ------------
Now And Money Market
Accounts $203,523,577 3.15% $207,023,453 3.26% $ (81,393)
Passbook Accounts 15,671,523 0.98 16,683,742 0.99 (2,603)
Certificate Accounts 308,615,496 5.09 236,810,841 4.81 1,081,114
FHLB Advances And Other
Borrowed Money 184,848,789 4.54 155,837,665 4.40 380,615
Junior Subordinated
Debentures 5,155,000 7.24 5,155,000 7.14 1,284
------------ ----- ------------ ----- ----------
Total Interest-Bearing
Liabilities $717,814,385 4.32% $621,510,701 4.11% $1,379,017
============ ===== ============ ===== ==========
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.
20
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
The Company's provision for loan losses was $150,000 during the three months
ended December 31, 2007 and 2006, respectively. The following table details
selected activity associated with the allowance for loan losses for the three
months ended December 31, 2007 and 2006:
December 31, 2007 December 31, 2006
------------------- ------------------
Beginning Balance $ 7,564,211 $ 6,994,623
Provision 150,000 150,000
Charge-offs (144,482) (35,912)
Recoveries 78,647 24,604
------------------ -----------------
Ending Balance $ 7,648,376 $ 7,133,315
================== =================
Allowance For Loan Losses As A
Percentage Of Gross Loans Receivable
And Loans Held For Sale At The End
Of The Period 1.51% 1.66%
Allowance For Loan Losses As A
Percentage Of Impaired Loans At
The End Of The Period 557.82% 451.86%
Impaired Loans 1,371,125 1,578,672
Non-accrual 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 0.73% 0.25%
Loans Receivable, Net $ 500,091,429 $ 421,483,354
Non-accrual loans and loans 90 days or more past due increased $2.6 million to
$3.7 million for the three months ended December 31, 2007 when compared to the
same period in 2006. The increase is primarily attributable to a slowing down
of the real estate market in the Company's market area. The Company does not
have a sub-prime lending program therefore this increase is not a direct
result of the sub-prime lending crisis.
Non-Interest Income - Non-interest income increased $40,000 or 4.0% to $1.0
million for the three months ended December 31, 2007 from $988,000 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 December 31, Increase (Decrease)
------------------------------- ------------------
2007 2006 Amounts Percent
---------- -------- -------- -------
Gain On Sale Of Loans $ 134,732 $ 88,137 $ 46,595 52.9%
Service Fees On Deposit
Accounts 307,045 296,135 10,910 3.7
Income From Cash Value Of
Life Insurance 92,246 62,037 30,209 48.7
Commissions On Insurance 145,148 198,772 (53,624) (27.0)
Other Agency Income 19,670 20,248 (578) (2.9)
Trust Income 102,000 110,211 (8,211) (7.5)
Other 227,250 212,558 14,692 6.9
---------- -------- -------- -------
Total Non-Interest Income $1,028,091 $988,098 $ 39,993 4.0%
========== ======== ======== =======
Gain on sale of loans increased $47,000 or 52.9% to $135,000 for the three
months ended December 31, 2007 compared to the same period one year ago. This
increase is attributable to an increase in the origination and sale of fixed
rate residential mortgage loans. Income from the cash value of life insurance
was $92,000 for the three months ended December 31, 2007 compared to $62,000
during the same period one year ago. This increase is the result of the
Company's purchase of bank owned life insurance for certain officers of the
Company and the continued increase of the cash surrender value. Commissions on
insurance decreased $54,000 to $145,000 during the quarter ended December 31,
2007 when compared to the same quarter one year ago.
21
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
The decrease can be attributed primarily to changes in South Carolina
insurance laws enacted during the year that negatively impacted revenue, in
addition to a decrease in the commissions percentages earned from the
insurance companies. The Company anticipated these changes and is in the
process of integrating and expanding its product lines and network to attempt
to increase the revenues from this activity. Trust income decreased $8,000 to
$102,000 during the period compared to $110,000 for the same period one year
ago as a result of a decrease in the market value of the underlying trust
accounts offset slightly by an increase in the number of trust accounts. The
Bank earns trust fees as a percentage of the market value of each trust
account. The market value of these accounts decreased approximately $1.0
million during the quarter ended December 31, 2007 when compared to the same
quarter in the prior year due to a general decline in economic conditions in
the market place.
Other miscellaneous income including credit life insurance commissions, safe
deposit rental income, annuity and stock brokerage commissions, and other
miscellaneous fees, increased $15,000 to $227,000 during the three months
ended December 31, 2007 compared to $213,000 during the same period one year
ago.
Non-Interest Expense - Non-interest expense increased $511,000 or 13.4% to
$4.3 million for the three months ended December 31, 2007 from $3.8 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 December 31, Increase (Decrease)
------------------------------- ------------------
2007 2006 Amounts Percent
---------- -------- ------- -------
Salaries And Employee
Benefits $ 2,660,655 $2,361,104 $ 299,551 12.7%
Occupancy 425,489 359,530 65,959 18.3
Advertising 80,857 98,672 (17,815) (18.1)
Depreciation And Maintenance
Of Equipment 333,985 300,211 33,774 11.3
FDIC Insurance Premiums 15,402 4,624 10,778 233.1
Amortization of Intangibles 22,500 22,500 - -
Other 789,044 670,071 118,973 17.8
----------- ---------- --------- -----
Total Non-Interest Expenses $ 4,327,932 $3,816,712 $ 511,220 13.4%
=========== ========== ========= =====
Salary and employee benefits increased $300,000 to $2.7 million for the three
months ended December 31, 2007 from $2.4 million for the same period one year
ago. The majority of the increase is the result of hiring additional staff in
connection with the Company's growth. Occupancy increased $66,000 or 18.3% to
$425,000 for the three months ended December 31, 2007 when compared to
$359,000 for the same period a year ago as a result of an increased number of
facilities. Advertising expense decreased $18,000 to $81,000 for the three
months ended December 31, 2007 from $99,000 for the same period one year ago.
Other non- interest expenses increased $119,000 or 17.8% to $789,000 when
compared to $670,000 for the same period one year ago.
Provision For Income Taxes - Provision for income taxes increased $9,000 or
2.0% to $488,000 for the three months ended December 31, 2007 from $479,000
for the same period one year ago. Income before income taxes was $1.5 million
for the three months ended December 31, 2007 and 2006, respectively. The
Company's combined federal and state effective income tax rate for the current
quarter was 31.9% compared to 32.9% for the same quarter one year ago.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31,
2007 AND 2006
------------------------------------------------------------------------------
Net Income - Net income increased $238,000 or 7.9% to $3.3 million for the
nine months ended December 31, 2007 compared to $3.0 million for the nine
months ended December 31, 2006. The primary reason for the increased earnings
was an increase in net interest income and non-interest income offset
partially by an increase in non-interest expenses.
22
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
Net Interest Income - Net interest income increased $1.7 million or 12.9% to
$15.1 million during the nine months ended December 31, 2007, compared to
$13.4 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. Average
interest earning assets increased $87.2 million to $737.4 million while
average interest-bearing liabilities increased $90.0 million to $691.5
million. The interest rate spread remained constant at 2.46% during the nine
months ended December 31, 2007 and 2006. The Company's net interest margin
decreased one basis point to 2.73% for the nine months ended December 31, 2007
from 2.74% for the same period last year.
Interest Income - Total interest income increased $6.6 million or 21.4% to
$37.3 million during the nine months ended December 31, 2007 from $30.7
million for the same period in 2006. Total interest income on loans increased
$4.8 million or 21.2% to $27.6 million during the nine months ended December
31, 2007, compared to $22.8 million for the same period in 2006. The increase
is a result of the average loan portfolio balance increasing $69.8 million and
the yield in the loan portfolio increasing 25 basis points.
Interest income from mortgage-backed securities increased $813,000 or 19.2% to
$5.0 million as a result of an increase in the yield in the mortgage-backed
portfolio and an increase in the average balance of the portfolio of $2.6
million. Interest income from investment securities increased $937,000 or
25.7% to $4.6 million 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 nine months ended December
31, 2007 and 2006:
Nine Months Ended December 31,
------------------------------------------------------
2007 2006
------------------ ----------------
Increase
(Decrease)
In Interest
And Dividend
Average Average Income
Balance Yield Balance Yield From 2006
------------ ----- ------------ ----- ------------
Loans Receivable, Net $472,350,077 7.80% $402,524,591 7.55% $ 4,835,432
Mortgage-Backed
Securities 136,239,152 4.93 133,593,423 4.22 812,691
Investments 127,408,732 4.80 112,603,515 4.32 937,059
Overnight Time 1,435,612 4.20 1,561,374 5.30 (16,844)
------------ ----- ------------ ----- -----------
Total Interest-Earning
Assets $737,433,573 6.74% $650,282,903 6.30% $ 6,568,338
============ ===== ============ ===== ===========
Interest Expense - Total interest expense increased $4.8 million or 27.9% to
$22.2 million during the nine months ended December 31, 2007 compared to $17.3
million for the same period one year earlier. The increase in total interest
expense is attributable to the increases in interest rates paid and the
increase in the total amount of interest-bearing deposits and borrowings. The
Company offered higher interest rates on certificate accounts during the
period to remain competitive with new and existing financial institutions
entering the market place during the period. Interest expense on deposits
increased $3.3 million or 26.3% during the period as average interest bearing
deposits grew $56.9 million compared to the average balance in the nine months
ended December 31, 2006 while the cost of interest bearing deposits increased
45 basis points. Interest expense on advances and other borrowings increased
$1.4 million or 28.9% as the cost of borrowings increased 30 basis points and
average total borrowings outstanding increased approximately $30.0 million to
$179.4 million during the nine months ended December 31, 2007 compared to the
same period in 2006 while average total borrowings outstanding increased
approximately $30.0 million. Interest expense on junior subordinated
debentures was $276,000 for the nine months ended December 31, 2007 compared
to $102,000 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 in 2006.
23
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 nine months ended December 31,
2007 and 2006:
Nine Months Ended December 31,
------------------------------------------------------
2007 2006
------------------ -------------------
Increase
(Decrease)
In Interest
Average Average Expense
Balance Yield Balance Yield From 2006
------------ ----- ------------ ----- ------------
Now And Money Market
Accounts $205,550,000 3.20% $210,937,813 3.15% $ (51,123)
Passbook Accounts 16,479,117 0.98 16,926,574 0.99 (3,560)
Certificate Accounts 284,859,916 5.05 222,170,422 4.46 3,359,456
FHLB Advances And Other
Borrowed Money 179,454,602 4.49 149,495,522 4.19 1,356,921
Junior Subordinated
Debentures 5,155,000 7.15 1,947,000 6.98 174,360
------------ ---- ------------ ----- ----------
Total Interest-Bearing
Liabilities $691,498,635 4.28% $601,477,331 3.84% $4,836,054
============ ===== ============ ===== ==========
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 Company's provision for loan losses was $450,000 during the nine months
ended December 31, 2007 and 2006, respectively. The following table details
selected activity associated with the allowance for loan losses for the nine
months ended December 31, 2007 and 2006.
December 31, 2007 December 31, 2006
------------------- -----------------
Beginning Balance $ 7,296,791 $ 6,704,734
Provision 450,000 450,000
Charge-offs (212,893) (111,191)
Recoveries 114,478 89,772
------------------- ----------------
Ending Balance $ 7,648,376 $ 7,133,315
=================== =================
Allowance For Loan Losses As A
Percentage Of Gross Loans Receivable
And Loans Held For Sale At The End
Of The Period 1.51% 1.66%
Allowance For Loan Losses As A
Percentage Of Impaired Loans At The
End Of The Period 557.82% 451.86%
Impaired Loans 1,371,125 1,578,672
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 0.73% 0.51%
Loans Receivable, Net $ 500,091,429 $ 421,483,354
Non-accrual loans and loans 90 days or more past due increased slightly during
the nine months ended December 31, 2007 when compared to the prior period. The
increase is primarily attributable to a slowing down of the real estate market
in the Company's market area. The Company does not have a sub-prime lending
program therefore this increase is not a direct result of the sub- prime
lending crisis.
24
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 $485,000 or 18.3% to $3.1
million for the nine months ended December 31, 2007 from $2.7 million for the
same period one year ago. The following table provides a detailed analysis of
the changes in the components of non-interest income:
Nine Months Ended December 31, Increase
------------------------------- ------------------
2007 2006 Amounts Percent
---------- -------- ------- -------
Gain On Sale Of Loans $ 416,303 $ 295,390 $ 120,913 40.9%
Service Fees On Deposit
Accounts 957,790 865,638 92,152 10.6
Income From Cash Value Of
Life Insurance 241,447 180,582 60,865 33.7
Commissions On Insurance 464,309 413,407 50,902 12.3
Other Agency Income 75,838 30,674 45,164 147.2
Trust Income 340,625 327,767 12,858 3.9
Other 641,747 539,354 102,393 19.0
---------- ---------- --------- -----
Total Non-Interest Income $3,138,059 $2,652,812 $ 485,247 18.3%
========== ========== ========= =====
Gain on sale of loans increased $121,000 or 40.9% to $416,000 for the nine
month period ended December 31, 2007 compared to $295,000 for the same period
one year ago. Income from cash value of life insurance was $241,000 for the
nine months ended December 31, 2007 compared to $181,000 during the same
period one year ago. This increase is the result of the Company purchasing
bank owned life insurance for certain officers of the Company and increases in
the cash surrender value. Commissions on insurance and other agency income
increased $96,000 to $540,000 during the nine months ended December 31, 2007
compared to $444,000 during the same period one year ago. This increase is
attributable to the acquisition of the Collier Jennings' Companies which took
place at the end of the first quarter in 2006, offset partially by decreases
in second and third quarter earnings when compared to the same quarters in the
prior year. The decreases in second and third quarter earnings were the result
of changes in South Carolina insurance laws that negatively impacted revenue
and decreases in commission percentages earned from the insurance companies.
Other miscellaneous income including credit life insurance commissions, safe
deposit rental income, annuity and stock brokerage commissions, and other
miscellaneous fees, increased $102,000 to $642,000 during the nine months
ended December 31, 2007 compared to $539,000 during the same period one year
ago.
Non-Interest Expense - Non-interest expense increased $2.0 million or 17.9% to
$13.0 million for the nine months ended December 31, 2007 from $11.0 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:
Nine Months Ended December 31, Increase
------------------------------- ------------------
2007 2006 Amounts Percent
---------- -------- ------- -------
Salaries And Employee
Benefits $ 7,858,206 $ 6,789,633 $ 1,068,573 15.7%
Occupancy 1,293,602 1,027,793 265,809 25.9
Advertising 270,278 234,622 35,656 15.2
Depreciation And Maintenance
Of Equipment 990,601 908,006 82,595 9.1
FDIC Insurance Premiums 45,599 33,586 12,013 35.8
Amortization of Intangibles 67,500 45,000 22,500 50.0
Other 2,434,592 1,950,577 484,015 24.8
----------- ----------- ---------- -----
Total Non-Interest Expenses $12,960,378 $10,989,217 $1,971,161 17.9%
=========== =========== ========== =====
Salary and employee benefits increased $1.1 million to $7.9 million for the
nine months ended December 31, 2007 from $6.8 million for the same period one
year ago. The majority of the increase is the result of hiring additional
staff in connection with the Company's growth including absorbing the
Collier-Jennings Companies' employees and increased regulatory reporting
requirements. Occupancy costs increased $266,000 or 25.9% to $1.3 million for
the nine months ended December 31, 2007 as compared to $1.0 million for the
same period one year ago as a result of the acquisition and construction of
additional facilities during the period. Advertising expense increased $36,000
to $270,000 for the nine months ended December 31, 2007 from $235,000 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.
25
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 increased $8,000 or
0.5% to $1.6 million for the nine months ended December 31, 2007 and 2006.
Income before income taxes was $4.8 million for the nine months ended December
31, 2007 compared to $4.6 million for the nine months ended December 31, 2006.
The Company's combined federal and state effective income tax rate for the
nine months ended December 31, 2007 was 32.6% compared to 34.2% for the same
period 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 nine months ended December 31, 2007 loan disbursements exceeded
loan repayments resulting in a $64.1 million or 14.7% increase in total net
loans receivable. During the nine months ended December 31, 2007, deposits
increased $50.2 million, the Company drew $3.0 million on a line of credit
with another financial institution and FHLB advances increased $24.7 million.
The Bank had $57.2 million in additional borrowing capacity at the FHLB and
$7.0 million remaining on the line of credit at the end of the period. At
December 31, 2007, the Bank had $298.0 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 opened two new branches during the quarter ended December 31, 2007
and intends to continue expanding 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 to the lag that exists from the time a
branch is built to when it becomes profitable. In the next 12 months, the
Company anticipates investing $3.0 to $4.0 million in land, buildings, and
equipment. In the next 24 months, we anticipate investing $6.0 to $9.0
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.
26
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations, Continued
The following table sets forth the length of time until maturity for unused
commitments to extend credit and standby letters of credit at December 31,
2007.
After
After One Three Greater
Within Through Through Than
One Three Twelve Within One
(Dollars in thousands) Month Months Months One Year Year Total
------ ------- ------- -------- ------- -------
Unused lines of credit $ 1,691 $ 7,268 $32,584 $41,543 $44,098 $85,641
Standby letters of credit 11 30 331 372 137 509
------- -------- ------- ------- ------- -------
Total $ 1,702 $ 7,298 $32,915 $41,915 $44,235 $86,150
======= ======== ======= ======= ======== =======
27
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 nine months ended December 31, 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 2.46%. For the year ended March 31,
2007, the interest rate spread was 2.51%. The interest rate spread decreased
as a result of the rates paid on deposits outpacing the rates received on
loans. The rate differential was offset partially by the growth of loan
receivables. 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 December 31, 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 December 31, 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.
28
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
-----------------------------------------------------------
(c)Total
Number (d)Maximum
of Shares Number of
Purchased Shares that
(a) Total as Part of May Yet Be
Number of (b)Average Publicly Purchased
Shares Price Paid Announced Under
Period Purchased per Share Program the Program
-------- --------- --------- --------- -----------
October 1 -
October 31, 2007 6,250 $24.16 6,250 68,725
November 1 -
November 30, 2007 7,201 24.04 7,201 61,524
December 1 -
December 31, 2007 46,663 23.99 46,663 14,861
--------------------------------------------------
Total 60,114 $24.01 60,114 14,861
==================================================
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 December
31, 2007, 111,139 shares have been repurchased under this program. The
Company repurchased 60,114 shares of its outstanding Common Stock during the
three months ended December 31, 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
29
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.
30
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: February 14, 2008 By:/s/Timothy W. Simmons
-------------------------------
Timothy W. Simmons
President
Duly Authorized Representative
Date: February 14, 2008 By:/s/Roy G. Lindburg
-------------------------------
Roy G. Lindburg
Chief Financial Officer
Duly Authorized Representative
31
EXHIBIT 31.1
Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
32
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: February 14, 2008
/s/Timothy W. Simmons
-------------------------------------
Timothy W. Simmons
President and Chief Executive Officer
33
EXHIBIT 31.2
Certification of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
34
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: February 14, 2008
/s/Roy G. Lindburg
--------------------------------
Roy G. Lindburg
Chief Financial Officer
35
EXHIBIT 32
Certification Pursuant to Section 906 of the Sarbanes Oxley Act
36
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
December 31, 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: February 14, 2008
37