SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008
(_) 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
(Exact name of registrant as specified in its charter)
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 or a smaller reporting company.
See definition of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filed [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ 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 value July 31, 2008 2,524,406
$0.01 per share
INDEX
===============================================================================
PART I. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets at June 30, 2008 and March 31, 2008 1
Consolidated Statements of Income for the Three Months Ended
June 30, 2008 and 2007 2
Consolidated Statements of Shareholders' Equity and
Comprehensive Income at June 30, 2008 and 2007 3
Consolidated Statements of Cash Flows for the Three Months
Ended June 30, 2008 and 2007 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4T. Controls and Procedures 23
===============================================================================
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits 26
Signatures 27
===============================================================================
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information is included in the consolidated financial statements and related
notes.
Part I. Financial Information
Item 1. Financial Statements
Security Federal Corporation and Subsidiaries
Consolidated Balance Sheets
June 30, 2008 March 31, 2008
------------- --------------
Assets: (Unaudited) (Audited)
Cash And Cash Equivalents $ 11,012,237 $ 10,539,054
Investment And Mortgage-Backed Securities:
Available For Sale: (Amortized cost of
$252,999,005 at June 30, 2008 and
$240,295,683 at March 31, 2008) 250,990,200 244,157,872
Held To Maturity: (Fair value of $15,282,840
at June 30, 2008 and $20,506,250 at March
31, 2008) 15,155,000 20,154,618
------------- --------------
Total Investment And Mortgage-Backed Securities 266,145,200 264,312,490
------------- --------------
Loans Receivable, Net:
Held For Sale 3,550,781 2,295,721
Held For Investment: (Net of allowance of
$8,246,496 at June 30, 2008 and $8,066,762 at
March 31, 2008) 531,311,109 515,635,984
------------- --------------
Total Loans Receivable, Net 534,861,890 517,931,705
Accrued Interest Receivable: ------------- --------------
Loans 1,823,446 1,952,866
Mortgage-Backed Securities 897,023 822,379
Investments 586,480 764,746
Premises And Equipment, Net 21,975,557 21,544,380
Federal Home Loan Bank Stock ("FHLB"), At Cost 11,224,000 9,497,100
Bank Owned Life Insurance 8,396,559 8,310,813
Repossessed Assets Acquired In Settlement Of Loans 454,790 767,096
Intangible Assets, Net 420,000 442,500
Goodwill 1,197,954 1,197,954
Other Assets 4,380,011 1,947,403
------------- --------------
Total Assets $ 863,375,147 $ 840,030,486
============= ==============
Liabilities And Shareholders' Equity
Liabilities:
Deposit Accounts $ 577,327,950 $ 590,850,208
Advances From FHLB 216,610,143 178,234,007
Other Borrowed Money 14,582,524 12,784,094
Advance Payments By Borrowers For Taxes And
Insurance 735,022 620,467
Mandatorily Redeemable Financial Instrument 1,417,312 1,417,312
Junior Subordinated Debentures 5,155,000 5,155,000
Other Liabilities 3,148,236 3,472,985
------------- --------------
Total Liabilities $ 818,976,187 $ 792,534,073
------------- --------------
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-2,650,441 And
Outstanding Shares-2,529,706 At June 30, 2008
And 2,649,027 And 2,532,192 At March 31, 2008 25,939 25,925
Additional Paid-In Capital 5,107,563 5,072,086
Treasury Stock, (At Cost, 120,735 and 116,835
Shares at June 30, 2008 and March 31, 2008,
Respectively) (2,859,318) (2,769,446)
Accumulated Other Comprehensive Income (Loss) (1,246,887) 2,395,537
Retained Earnings, Substantially Restricted 43,371,663 42,772,311
------------- --------------
Total Shareholders' Equity $ 44,398,960 $ 47,496,413
------------- --------------
Total Liabilities And Shareholders' Equity $ 863,375,147 $ 840,030,486
============= =============
See accompanying notes to consolidated financial statements.
Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended June 30,
---------------------------
2008 2007
Interest Income: -------- --------
Loans $8,541,735 $8,791,579
Mortgage-Backed Securities 2,395,382 1,541,710
Investment Securities 888,901 1,553,520
Other 5,179 19,596
---------- ----------
Total Interest Income 11,831,197 11,906,405
---------- ----------
Interest Expense:
NOW And Money Market Accounts 924,090 1,654,839
Passbook Accounts 33,503 41,815
Certificate Accounts 3,662,926 3,242,849
Advances And Other Borrowed Money 2,011,765 1,898,333
Junior Subordinated Debentures 74,119 90,824
---------- ----------
Total Interest Expense 6,706,403 6,928,660
---------- ----------
Net Interest Income 5,124,794 4,977,745
Provision For Loan Losses 225,000 150,000
Net Interest Income After Provision For ---------- ----------
Loan Losses 4,899,794 4,827,745
Non-Interest Income: ---------- ----------
Gain On Sale of Investments 101,405 -
Gain On Sale Of Loans 118,683 176,121
Service Fees On Deposit Accounts 281,153 327,322
Income From Cash Value Of Life Insurance 85,746 62,037
Commissions On Insurance 168,992 145,673
Other Agency Income 46,937 29,258
Trust Income 105,000 98,775
Other 213,291 221,412
---------- ----------
Total Non-Interest Income 1,121,207 1,060,598
---------- ----------
General And Administrative Expenses:
Salaries And Employee Benefits 2,784,235 2,570,279
Occupancy 497,320 422,511
Advertising 140,821 102,273
Depreciation And Maintenance Of Equipment 426,924 319,525
Federal Deposit Insurance Corporation Insurance
Premiums 155,810 15,327
Amortization of Intangibles 22,500 22,500
Other 794,380 799,030
---------- ----------
Total General And Administrative Expenses 4,821,990 4,251,445
---------- ----------
Income Before Income Taxes 1,199,011 1,636,898
Provision For Income Taxes 397,106 540,867
---------- ----------
Net Income $ 801,905 $1,096,031
========== ==========
Basic Net Income Per Common Share $ 0.32 $ 0.42
========== ==========
Diluted Net Income Per Common Share $ 0.32 $ 0.42
========== ==========
Cash Dividend Per Share On Common Stock $ 0.08 $ 0.07
========== ==========
Basic Weighted Average Shares Outstanding 2,531,679 2,609,409
========== ==========
Diluted Weighted Average Shares Outstanding 2,532,377 2,618,889
========== ==========
See accompanying notes to consolidated financial statements.
2
Security Federal Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Unaudited)
Accumulated
Additional Other
Common Paid-In Treasury Comprehensive Retained
Stock Capital Stock Income (Loss) Earnings Total
------ --------- -------- ------------ -------- -------
Balance At March 31, 2007 $ 25,814 $ 4,850,029 $(651,220) $(747,316) $39,215,901 $42,693,208
Net Income - - - - 1,096,031 1,096,031
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Losses
On Securities Available
For Sale, Net Of Taxes - - - (931,559) - (931,559)
----------
Comprehensive Income - - - - - 164,472
Purchase Of Treasury Stock
At Cost, 3,162 shares - - (77,320) - - (77,320)
Employee Stock Purchase Plan 13 25,356 - - - 25,369
Stock Compensation Expense - 2,882 - - - 2,882
Cash Dividends - - - - (182,663) (182,663)
------- --------- ------- --------- ---------- ----------
Balance At June 30, 2007 $ 25,827 $ 4,878,267 $(728,540) $(1,678,875) $40,129,269 $42,625,948
======= ========= ======= ========= ========== ==========
Accumulated
Additional Other
Common Paid-In Treasury Comprehensive Retained
Stock Capital Stock Income (Loss) Earnings Total
------ --------- -------- ------------ -------- -------
Balance At March 31, 2008 $ 25,925 $ 5,072,086 $(2,769,446) $2,395,537 $42,772,311 $47,496,413
Net Income - - - - 801,905 801,905
Other Comprehensive Income,
Net Of Tax:
Unrealized Holding Losses
On Securities Available
For Sale, Net Of Taxes - - - (3,579,553) - (3,579,553)
Reclassification Adjustment
For Gains Included In Net
Income, Net Of Taxes - - - (62,871) - (62,871)
----------
Comprehensive Loss - - - - - (2,840,519)
Purchase Of Treasury Stock
At Cost, 3,900 shares - - (89,872) - - (89,872)
Employee Stock Purchase Plan
Purchases 14 27,629 - - - 27,643
Stock Compensation Expense - 7,848 - - - 7,848
Cash Dividends - - - - (202,553) (202,553)
------- --------- ------- --------- ---------- ----------
Balance At June 30, 2008 $ 25,939 $ 5,107,563 $(2,859,318) $(1,246,887) $ 43,371,663 $ 44,398,960
======= ========= ========= ========= ========== ==========
See accompanying notes to consolidated financial statements.
3
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended June 30,
--------------------------
2008 2007
------ ------
Cash Flows From Operating Activities:
Net Income $ 801,905 $ 1,096,031
Adjustments To Reconcile Net Income To Net Cash
Provided (Used) By Operating Activities:
Depreciation And Amortization Expense 368,771 264,573
Amortization Of Intangible Assets 22,500 22,500
Stock Option Compensation Expense 7,848 2,882
Discount Accretion And Premium Amortization 106,619 68,173
Provisions For Losses On Loans And Real Estate 225,000 150,000
Gain On Sale of Investments Available For Sale (120,491) -
Loss On Sale of Mortgage-Backed Securities
Available For Sale 19,087 -
Gain On Sale Of Loans (118,683) (176,121)
Gain On Sale Of Real Estate (13,694) (13,391)
Capital Improvements Repossessed Assets (20,000) -
Amortization Of Deferred Fees On Loans (27,043) (29,030)
Proceeds From Sale Of Loans Held For Sale 8,542,717 11,324,649
Origination Of Loans For Sale (9,679,094) (10,672,758)
(Increase) Decrease In Accrued Interest Receivable:
Loans 129,420 (70,332)
Mortgage-Backed Securities (74,644) 10,393
Investments 178,266 (43,744)
Increase In Advance Payments By Borrowers 114,555 166,967
Other, Net (528,787) (287,360)
--------- ---------
Net Cash Provided (Used) By Operating Activities (65,748) 1,813,432
--------- ---------
Cash Flows From Investing Activities:
Principal Repayments On Mortgage-Backed
Securities Available For Sale 13,840,922 9,730,754
Purchase Of Investment Securities Available
For Sale (5,635,679) (15,579,736)
Purchase Of Mortgage-Backed Securities
Available For Sale (36,375,912) (4,982,301)
Maturities Of Investment Securities Available
For Sale 8,075,718 3,323,609
Maturities of Investment Securities Held To
Maturity 5,000,000 8,000,000
Proceeds From Sale of Investment Securities
Available For Sale 6,108,615 -
Proceeds From Sale of Mortgage-Backed Securities
Available For Sale 1,277,417 -
Purchase Of FHLB Stock (3,837,500) (2,355,600)
Redemption Of FHLB Stock 2,110,600 1,959,800
Increase In Loans To Customers (15,873,082) (26,994,431)
Proceeds From Sale Of Repossessed Assets 346,000 49,000
Purchase And Improvement Of Premises And Equipment (799,948) (1,884,501)
Purchase Of Bank Owned Life Insurance (85,746) (2,262,037)
---------- ----------
Net Cash Used By Investing Activities (25,848,595) (30,995,443)
---------- ----------
Cash Flows From Financing Activities:
Increase (Decrease) In Deposit Accounts (13,522,258) 13,222,409
Proceeds From FHLB Advances 104,880,000 81,300,000
Repayment Of FHLB Advances (66,503,864) (65,603,787)
Net Proceeds Of Other Borrowings 1,798,430 236,035
Dividends To Shareholders (202,553) (182,663)
Purchase Of Treasury Stock (89,872) (77,320)
Proceeds From Employee Stock Purchases 27,643 25,369
---------- ----------
Net Cash Provided By Financing Activities 26,387,526 28,920,043
---------- ----------
(Continued)
See accompanying notes to consolidated financial statements.
4
Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)- Continued
Three Months Ended June 30,
--------------------------
2008 2007
------ ------
Increase (Decrease) In Cash And Cash Equivalents 473,183 (261,968)
Cash And Cash Equivalents At Beginning Of Period 10,539,054 13,438,129
----------- -----------
Cash And Cash Equivalents At End Of Period $11,012,237 $13,176,161
=========== ===========
Supplemental Disclosure Of Cash Flows Information:
Cash Paid During The Period For Interest $ 6,960,918 $ 6,987,289
Cash Paid During The Period For Income Taxes $ 305,822 $ 30,000
Additions To Repossessed Acquired Through
Foreclosure $ 20,000 $ 88,976
Increase In Unrealized Net Loss On Securities
Available For Sale, Net Of Taxes $(3,642,424) $ (931,559)
See accompanying notes to consolidated financial statements.
5
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and accounting principles generally
accepted in the United States of America; therefore, they do not include all
disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows. Such statements are unaudited but, in
the opinion of management, reflect all adjustments, which are of a normal
recurring nature and necessary for a fair presentation of results for the
selected interim periods. Users of financial information produced for interim
periods are encouraged to refer to the footnotes contained in the audited
financial statements appearing in Security Federal Corporation's 2008 Annual
Report to Shareholders when reviewing interim financial statements. The results
of operations for the three month period ended June 30, 2008 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 consolidated financial statements include the accounts of
Security Federal Corporation (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"). Security Federal Corporation has a wholly owned
subsidiary, Security Federal Statutory Trust (the "Trust"), which issued and
sold fixed and floating rate capital securities of the Trust. However, under
current accounting guidance, the Trust is not consolidated in the Company's
financial statements. The Bank is primarily engaged in the business of
accepting savings and demand deposits and originating mortgage loans and other
loans to individuals and small businesses for various personal and commercial
purposes. SFINS, SFINV, and SFT were formed during fiscal 2002 and began
operating during the December 2001 quarter. SFINS is an insurance agency
offering auto, business, health, and home insurance. SFINS has a wholly owned
subsidiary, Collier Jennings Financial Corporation which has as subsidiaries
Collier Jennings Inc., The Auto Insurance Store Inc., and Security Federal
Premium Pay Plans Inc. SFINV engages primarily in investment brokerage services.
SFT offers trust, financial planning and financial management services. SFSC is
currently an inactive subsidiary.
3. Critical Accounting Policies
The Company has adopted various accounting policies, which govern the
application of accounting principles generally accepted in the United States in
the preparation of our financial statements. Our significant accounting
policies are described in the footnotes to the audited consolidated financial
statements at March 31, 2008 included in our 2008 Annual Report to Stockholders,
which was filed as an exhibit to our Annual Report on Form 10-K for the year
ended March 31, 2008. Certain accounting policies involve significant judgments
and assumptions by management, which have a material impact on the carrying
value of certain assets and liabilities. We consider these accounting policies
to be critical accounting policies. The judgments and assumptions we use are
based on historical experience and other factors, which we believe to be
reasonable under the circumstances. Because of the nature of the judgments and
assumptions we make, actual results could differ from these judgments and
estimates which could have a material impact on our carrying values of assets
and liabilities and our results of operations.
The Company believes the allowance for loan losses is a critical accounting
policy that requires the most significant judgments and estimates used in
preparation of the consolidated financial statements. The Company provides for
loan losses using the allowance method. Accordingly, all loan losses are
charged to the related allowance and all recoveries are credited to the
allowance for loan losses. Additions to the allowance for loan losses are
provided by charges to operations based on various factors, which, in
management's judgment, deserve current recognition in estimating possible
losses. Such factors considered by management include the fair value of the
underlying collateral, stated guarantees by the borrower (if applicable), the
borrower's ability to repay from other economic resources, growth and
composition of the loan portfolios, the relationship of the allowance for loan
losses to the outstanding loans, loss experience, delinquency trends, and
general economic conditions. Management evaluates the carrying value of the
loans periodically and the allowance is adjusted accordingly. While management
uses the best information available to make evaluations, future adjustments may
be necessary if economic conditions differ substantially from the assumptions
used in making these evaluations. Allowance for loan losses are subject to
periodic evaluations by various authorities and may be subject to adjustments
based upon the information that is available at the time of their examination.
6
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
3. Critical Accounting Policies, Continued
The Company values impaired loans at the loan's fair value if it is probable
that the Company will be unable to collect all amounts due according to the
terms of the loan agreement at the present value of expected cash flows, the
market price of the loan, if available, or the value of the underlying
collateral. Expected cash flows are required to be discounted at the loan's
effective interest rate. When the ultimate collectibility of an impaired loan's
principal is in doubt, wholly or partially, all cash receipts are applied to
principal. When this doubt does not exist, cash receipts are applied under the
contractual terms of the loan agreement first to interest and then to principal.
Once the recorded principal balance has been reduced to zero, future cash
receipts are applied to interest income to the extent that any interest has been
foregone. Further cash receipts are recorded as recoveries of any amounts
previously charged off.
4. 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.
The following table provides a reconciliation of the numerators and denominators
of the basic and diluted EPS computations:
For the Quarter Ended
----------------------------------------------------------
June 30, 2008
----------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- ------------------- ---------
Basic EPS $ 801,905 2,531,679 $ 0.32
Effect of Diluted
Securities:
Stock Options - 698 -
----------------------- ----------------- ---------
Diluted EPS $ 801,905 2,532,377 $ 0.32
======================= ================= =========
For the Quarter Ended
----------------------------------------------------------
June 30, 2007
----------------------------------------------------------
Income (Numerator) Amount Shares (Denominator) Per Share
------------------------- ------------------- ---------
Basic EPS $ 1,096,031 2,609,409 $ 0.42
Effect of Diluted
Securities:
Stock Options - 9,480 -
----------------------- ----------------- ---------
Diluted EPS $ 1,096,031 2,618,889 $ 0.42
======================= ================= =========
7
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
5. 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 plans
for the quarter ended June 30, 2008:
Weighted
Average
Exercise
Shares Price
----------------------------
Balance, Beginning of Period 111,100 $ 21.55
Options granted 2,500 22.91
Options exercised - -
Options forfeited - -
----------
Balance, June 30 113,600 $ 21.58
==========
Options Exercisable 74,100 $ 20.60
==========
Options Available For Grant 124,801
==========
At June 30, 2008, the Company had the following options outstanding:
Outstanding
Grant Date Options Option Price Expiration Date
---------- ----------- ------------ ---------------
10/19/99 20,100 $16.67 09/30/05 to 09/30/09
09/01/03 3,000 $24.00 08/31/13
12/01/03 3,000 $23.65 11/30/13
01/01/04 6,500 $24.22 12/31/13
03/08/04 13,000 $21.43 03/08/14
06/07/04 2,000 $24.00 06/07/14
01/01/05 20,500 $20.55 12/31/14
01/01/06 6,000 $23.91 01/01/16
08/24/06 14,000 $23.03 08/24/16
05/24/07 2,000 $24.34 05/24/17
07/09/07 1,000 $24.61 07/09/17
10/01/07 2,000 $24.28 10/01/17
01/01/08 18,000 $23.49 01/01/18
05/19/08 2,500 $22.91 05/18/18
8
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
6. Fair Value Measurements
Effective April 1, 2008, the Company adopted SFAS No. 157, "Fair Value
Measurements" ("SFAS 157") which provides a framework for measuring and
disclosing fair value under generally accepted accounting principles. SFAS 157
requires disclosures about the fair value of assets and liabilities recognized
in the balance sheet in periods subsequent to initial recognition, whether the
measurements are made on a recurring basis (for example, available-for-sale
investment securities) or on a nonrecurring basis (for example, impaired loans).
SFAS 157 defines fair value as the exchange price that would be received for an
asset or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair
value:
Level 1
Quoted prices in active markets for identical assets or liabilities. Level
1 assets and liabilities include debt and equity securities and derivative
contracts that are traded in an active exchange market, as well as U.S.
Treasuries and money market funds.
Level 2
Observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or
liabilities. Level 2 assets and liabilities include debt securities with
quoted prices that are traded less frequently than exchange-traded
instruments, mortgage-backed securities, municipal bonds, corporate debt
securities and derivative contracts whose value is determined using a
pricing model with inputs that are observable in the market or can be
derived principally from or corroborated by observable market data. This
category generally includes certain derivative contracts and impaired
loans.
Level 3
Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities. Level
3 assets and liabilities include financial instruments whose value is
determined using pricing models, discounted cash flow methodologies, or
similar techniques, as well as instruments for which the determination of
fair value requires significant management judgment or estimation. For
example, this category generally includes certain private equity
investments, retained residual interests in securitizations, residential
mortgage servicing rights, and highly-structured or long-term derivative
contracts.
Assets and liabilities measured at fair value on a recurring basis are as
follows as of June 30, 2008:
Quoted Market Price In Significant Other Significant
Active Markets Observable Inputs Unobservable
(Level 1) (Level 2) Inputs
(Level 3)
Available-For-Sale ---------------- -------------- -----------
Investment And
Mortgage- Backed
Securities $ - $ 250,990,200 $ -
Mortgage Loans Held
For Sale - 3,550,781 -
---------------- -------------- ----------
Total $ - $ 254,540,981 $ -
================ ============== ==========
The Company has no liabilities carried at fair value or measured at fair value
on a nonrecurring basis.
9
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
6. Fair Value Measurements, Continued
The Company is predominantly an asset based lender with real estate serving as
collateral on a substantial majority of loans. Loans which are deemed to be
impaired are primarily valued on a nonrecurring basis at the fair values of the
underlying real estate collateral. Such fair values are obtained using
independent appraisals, which the Company considers to be level 2 inputs. The
aggregate carrying amount of impaired loans at March 31, 2008 was $3.5 million.
Financial Accounting Standards Board ("FASB") Staff Position No. FAS 157-2
delays the implementation of SFAS 157 until the first quarter of 2009 with
respect to goodwill, other intangible assets, real estate and other assets
acquired through foreclosure and other non-financial assets measured at fair
value on a nonrecurring basis.
The Company has no assets or liabilities whose fair values are measured using
level 3 inputs that require disclosure as of June 30, 2008.
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 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.
SFAS 141(R) is effective for acquisitions by the Company taking place on or
after April 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). 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 financial position,
results of operations and cash flows.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS 161"). SFAS 161 requires enhanced
disclosures about an entity's derivative and hedging activities and thereby
improving the transparency of financial reporting. It is intended to enhance
the current disclosure framework in SFAS No. 133 by requiring that objectives
for using derivative instruments be disclosed in terms of underlying risk and
accounting designation. This disclosure better conveys the purpose of derivative
use in terms of the risks that the entity is intending to manage. SFAS 161 is
effective for the Company on April 1, 2009. This pronouncement does not impact
accounting measurements but will result in additional disclosures if the Company
is involved in material derivative and hedging activities at that time.
10
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
7. Accounting and Reporting Changes, Continued
In February 2008, the FASB issued FASB Staff Position No. 140-3, "Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions" ("FSP
140-3"). FSP 140-3 provides guidance on accounting for a transfer of a
financial asset and the transferor's repurchase financing of the asset. This
FSP presumes that an initial transfer of a financial asset and a repurchase
financing are considered part of the same arrangement (linked transaction) under
SFAS No. 140. However, if certain criteria are met, the initial transfer and
repurchase financing are not evaluated as a linked transaction and are evaluated
separately under Statement 140. FSP 140-3 will be effective for financial
statements issued for fiscal years beginning after November 15, 2008, and
interim periods within those fiscal years and earlier application is not
permitted. Accordingly, this FSP is effective for the Company on April 1, 2009.
The Company is currently evaluating the impact, if any, the adoption of FSP
140-3 will have on its financial position, results of operations and cash flows.
In April 2008, the FASB issued FASB Staff Position No. 142-3, "Determination of
the Useful Life of Intangible Assets" ("FSP 142-3"). This FSP amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, "Goodwill and Other Intangible Assets". The intent of this FSP is to
improve the consistency between the useful life of a recognized intangible asset
under SFAS No. 142 and the period of expected cash flows used to measure the
fair value of the asset under SFAS 141(R), "Business Combinations," and other
U.S. generally accepted accounting principles. This FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years and early adoption is prohibited.
Accordingly, this FSP is effective for the Company on April 1, 2009. The
Company does not believe the adoption of FSP 142-3 will have a material impact
on its financial position, results of operations or cash flows.
In May, 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles," ("SFAS 162"). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). SFAS 162 will be effective 60 days
following the SEC's approval of the Public Company Accounting Oversight Board's
amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles." The FASB has stated that it does not
expect SFAS 162 will result in a change in current practice. The application of
SFAS 162 will have no effect on the Company's financial position, results of
operations or cash flows.
The FASB issued FASB Staff Position No. APB 14-1, "Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cash Settlement)," ("FSP APB 14-1"). The Staff Position specifies that issuers
of convertible debt instruments that may be settled in cash upon conversion
should separately account for the liability and equity components in a manner
that will reflect the entity's nonconvertible debt borrowing rate when interest
cost is recognized in subsequent periods. FSP APB 14-1 provides guidance for
initial and subsequent measurement as well as derecognition provisions. The
Staff Position is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. Early adoption is not permitted. The Company is currently analyzing the
effect, if any, the adoption of this Staff Position will have on the Company's
financial position, results of operations or cash flows.
In June, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, "Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities," ("FSP EITF 03-6-1"). The Staff Position provides
that unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents are participating securities and must be
included in the earnings per share computation. FSP EITF 03-6-1 is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years. All prior-period earnings per
share data presented must be adjusted retrospectively. Early application is not
permitted. The adoption of this Staff Position will have no material effect on
the Company's financial position, results of operations or cash flows.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations and cash flows.
11
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
8. Securities
Investment And Mortgage-Backed Securities, Available For Sale
-------------------------------------------------------------
The amortized cost, gross unrealized gains, gross unrealized losses, and fair
values of investment and mortgage-backed securities available for sale are as
follows:
Gross Gross
June 30, 2008 Amortized Unrealized Unrealized
------------- Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
FHLB Securities $28,637,576 $ 106,504 $ 255,322 $28,488,759
Federal Farm Credit Securities 10,699,502 16,292 143,708 10,572,086
FNMA Bonds 2,000,000 - 34,380 1,965,620
Mortgage-Backed Securities 211,558,989 620,543 2,303,546 209,875,985
Equity Securities 102,938 - 15,188 87,750
----------- ------- --------- -----------
Total $252,999,005 $ 743,339 $2,752,144 $250,990,200
=========== ======= ========= ===========
Gross Gross
March 31, 2008 Amortized Unrealized Unrealized
-------------- Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
FHLB Securities $ 31,891,456 $ 625,583 $ - $ 32,517,039
Federal Farm Credit Securities 14,849,646 323,594 - 15,173,240
FNMA Bonds 2,997,470 7,840 - 3,005,310
Mortgage-Backed Securities 190,454,173 3,023,143 104,283 193,373,033
Equity Securities 102,938 - 13,688 89,250
----------- ------- --------- -----------
Total $240,295,683 $3,980,160 $ 117,971 $244,157,872
=========== ========= ========= ===========
FHLB securities, Federal Farm Credit securities, Federal National Mortgage
Association ("FNMA") FNMA bonds, and FNMA and Federal Home Loan Mortgage
Corporation ("FHLMC") mortgage-backed securities are issued by government-
sponsored enterprises ("GSE's"). GSE's are not backed by the full faith and
credit of the United States government. Included in the tables above in
mortgage-backed securities are Government National Mortgage Association ("GNMA")
mortgage-backed securities, which are backed by the full faith and credit of the
United States government. At June 30, 2008, the bank held an amortized cost and
fair value of $97.5 million and $96.5 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
June 30, 2008 Amortized Unrealized Unrealized
------------- Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
FHLB Securities $13,000,000 $ 119,390 $ 3,120 $13,116,270
Federal Farm Credit Securities 2,000,000 11,570 - 2,011,570
Equity Securities 155,000 - - 155,000
---------- --------- --------- ----------
Total $15,155,000 $ 130,960 $ 3,120 $15,282,840
========== ========= ========= ==========
Gross Gross
March 31, 2008 Amortized Unrealized Unrealized
-------------- Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
FHLB Securities $17,999,618 $ 320,072 $ - $18,319,690
Federal Farm Credit Securities 2,000,000 31,560 - 2,031,560
Equity Securities 155,000 - - 155,000
---------- --------- --------- ----------
Total $20,154,618 $ 351,632 $ - $20,506,250
========== ========= ========= ==========
12
Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued
8. Securities, Continued
FHLB securities and Federal Farm Credit securities are issued by GSE's. These
enterprises are not backed by the full faith and credit of the United States
government.
9. Loans Receivable, Net
Loans receivable, net, at June 30, 2008 and March 31, 2008 consisted of the
following:
June 30, 2008 March 31, 2008
------------- --------------
Residential Real Estate $ 131,835,370 $ 131,863,466
Consumer 66,763,097 66,832,377
Commercial Business And Real Estate 349,840,672 333,386,661
Loans Held For Sale 3,550,781 2,295,721
----------- -----------
551,989,920 534,378,225
----------- -----------
Less:
Allowance For Possible Loan Loss 8,246,496 8,066,762
Loans In Process 8,569,191 8,064,728
Deferred Loan Fees 312,343 315,030
----------- -----------
17,128,030 16,446,520
----------- -----------
$ 534,861,890 $ 517,931,705
=========== ===========
13
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Safe Harbor Statement
Certain matters in this Quarterly Report on Form 10-Q for the quarter ended June
30, 2008 constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
relate to, among others, expectations of the business environment in which the
Company operates, projections of future performance, perceived opportunities in
the market, potential future credit experience, and statements regarding the
Company's mission and vision. These forward-looking statements are based upon
current management expectations, and may, therefore, involve risks and
uncertainties. The Company's actual results, performance, or achievements may
differ materially from those suggested, expressed, or implied by forward-looking
statements as a result of a wide range of factors including, but not limited to,
the general business environment, interest rates, the South Carolina real estate
market, the demand for loans, competitive conditions between banks and non-bank
financial services providers, regulatory changes, and other risks detailed in
the Company's reports filed with the SEC, including the Annual Report on Form
10-K for the year ended March 31, 2008. Forward-looking statements are
effective only as of the date that they are made and the Company assumes no
obligation to update this information
Comparison Of Financial Condition At June 30, 2008 and March 31, 2008
General - Total assets increased $23.3 million or 2.8% to $863.4 million at June
30, 2008 from $840.0 million at March 31, 2008. The primary reason for the
growth in total assets was a $16.9 million or 3.3% increase in net loans
receivable to $534.9 million and a $6.8 million or 2.8% increase in investment
and mortgage-backed securities- available for sale to $251.0 million. For the
quarter ended June 30, 2008, the demand for loans was funded with maturities of
investment and mortgage-backed securities- held to maturity of $5.0 million and
an increase in advances from the FHLB of $38.4 million or 21.5% to $216.6
million.
Assets - The increases and decreases in total assets were primarily concentrated
in the following asset categories:
Increase (Decrease)
June 30, March 31, ------------------
2008 2008 Amount Percent
------- -------- ------ -------
Cash And Cash Equivalents $11,012,237 $10,539,054 $473,183 4.5%
Investment And Mortgage-
Backed Securities-
Available For Sale 250,990,200 244,157,872 6,832,328 2.8
Investment And Mortgage-
Backed Securities-Held
To Maturity 15,155,000 20,154,618 (4,999,618) (24.8)
Loan Receivable, Net 534,861,890 517,931,705 16,930,185 3.3
Premises And Equipment,
Net 21,975,557 21,544,380 431,177 2.0
FHLB Stock, At Cost 11,224,000 9,497,100 1,726,900 18.2
Repossessed Assets
Acquired In
Settlement of Loans 454,790 767,096 (312,306) (40.7)
Other Assets 4,380,011 1,947,403 2,432,608 124.9
Investments and mortgage-backed securities available for sale increased $6.8
million or 2.8% to $251.0 million at June 30, 2008 from $244.2 million at March
31, 2008. The increase in investments and mortgage-backed securities available
for sale is attributable to additional purchases slightly offset by paydowns on
mortgage-backed securities and calls and maturities on investments.
14
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
Loans receivable, net increased $16.9 million or 3.3% to $534.9 million at June
30, 2008 from $517.9 million at March 31, 2008. Residential real estate loans
decreased $28,000 to $131.8 million at June 30, 2008 from $131.9 million at
March 31, 2008. Consumer loans remained relatively unchanged at $66.8 million
at June 30, 2008 compared to March 31, 2008, decreasing $69,000 during the
current quarter. Commercial business and real estate loans increased $16.5
million to $349.8 million at June 30, 2008 from $333.4 million at March 31,
2008. The increase in commercial and business real estate loans was
attributable to the Company's continued focus on originating this type of
lending. Loans held for sale increased $1.3 million to $3.6 million at June 30,
2008 from $2.3 million at March 31, 2008.
Premises and equipment, net increased $431,000 to $22.0 million at June 30, 2008
from $21.5 million at March 31, 2008. The majority of the increase was for the
relocation of our Clearwater branch office and for renovations to our Operations
Center in Aiken, South Carolina.
FHLB stock, at cost, increased $1.7 million to $11.2 million at June 30, 2008
from $9.5 million at March 31, 2008. The increase is attributable to a FHLB
requirement that the Company maintain stock equal to 0.20% of total assets at
June 30, 2008 plus a transaction component, which equals 4.5% of outstanding
advances (borrowings) from the FHLB of Atlanta.
Repossessed assets acquired in settlement of loans decreased $312,000 to
$455,000 at June 30, 2008 from $767,000 at March 31, 2008. The Company sold two
properties and did not repossess any additional assets during the period. At
June 30, 2008, the balance consisted of the following four properties: two lots
within one subdivision of Aiken, South Carolina; one lot within a subdivision of
Columbia, South Carolina; and a single-family residence in Augusta, Georgia.
Other assets increased $2.4 million to $4.4 million at June 30, 2008 from $2
million at March 31, 2008. The majority of this increase is the result of an
increase in the deferred tax asset attributable to a decrease in the market
value of available for sale securities.
Liabilities
Deposit Accounts
Balance
------------------
June 30, 2008 March 31, 2008 Increase(Decrease)
------------------ ------------------ -----------------
Weighted Weighted
Balance Rate Balance Rate Amount Percent
Demand Accounts: ----------- ---- ----------- ---- ------- -------
Checking $102,022,969 0.26% $100,585,610 0.47% $ 1,437,359 1.4 %
Money Market 144,460,586 2.17 143,225,218 2.84 1,235,368 0.9
Regular Savings 16,683,008 0.73 15,966,557 0.97 716,451 4.5
----------- ---- ----------- ---- ---------- ----
Total 263,166,563 1.34 259,777,385 1.87 3,389,178 1.3
----------- ---- ----------- ---- ---------- ----
Certificate Accounts
0.00 - 1.99% 1,444,713 - 1,444,713 100.0
2.00 - 2.99% 27,920,687 14,047,109 13,873,578 98.8
3.00 - 3.99% 85,174,658 59,526,823 25,647,835 43.1
4.00 - 4.99% 62,347,041 68,149,323 (5,802,282) (8.5)
5.00 - 5.99% 137,274,288 189,349,568 (52,075,280) (27.5)
----------- ---- ----------- ---- ---------- ----
Total 314,161,387 4.41 331,072,823 4.75 (16,911,436) (5.1)
----------- ---- ----------- ---- ---------- ----
Total Deposits $577,327,950 3.01% $590,850,208 3.46% $(13,522,258) (2.3)%
=========== ==== =========== ==== ========== ====
15
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
Advances From FHLB - FHLB advances are summarized by year of maturity and
weighted average interest rate in the table below:
Balance
-----------------
June 30, 2008 March 31, 2008 Increase(Decrease)
------------- -------------- -----------------
Balance Rate Balance Rate Balance Percent
------- ---- ------- ---- ------- -------
Fiscal Year Due:
2009 $83,680,000 2.58% $42,300,000 3.28% $41,380,000 97.8%
2010 10,000,000 4.88 10,000,000 4.88 - -
2011 15,000,000 4.87 15,000,000 4.87 - -
2012 24,700,000 4.56 24,700,000 4.56 - -
2013 10,000,000 4.76 10,000,000 4.76 - -
Thereafter 73,230,143 4.28 76,234,007 4.25 (3,003,864) (3.9)
----------- ----------- ---------- ----
Total Advances $216,610,143 3.75% $178,234,007 4.18% $38,376,136 21.5%
=========== =========== ========== ====
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 $146.3 million and
$146.4 million, respectively, at June 30, 2008. Advances are subject to
prepayment penalties.
The following table shows callable FHLB advances as of the dates indicated.
These advances are also included in the above table. All callable advances are
callable at the option of the FHLB. If an advance is called, the Bank has the
option to payoff the advance without penalty, re-borrow funds on different
terms, or convert the advance to a three-month floating rate advance tied to
LIBOR.
As of June 30, 2008
---------------------------------------------------------------------
Borrow Maturity
Date Date Amount Int.Rate Type Call Dates
--------- -------- ---------- -------- ---- ----------
02/20/04 02/20/14 $5,000,000 3.225% 1 Time Call 02/20/09
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 3.9325% Multi-Call 08/25/08 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
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 08/29/08 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 09/09/08 and
quarterly thereafter
05/24/07 05/24/17 7,900,000 4.375% Multi-Call 08/27/08 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 3.745% Multi-Call 11/17/08 and
quarterly thereafter
16
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
As of March 31, 2008
---------------------------------------------------------------------
Borrow Maturity
Date 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 05/25/08 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
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 05/29/08 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 06/09/08 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 3.745% Multi-Call 11/17/08 and
quarterly thereafter
Other Borrowings - The Bank had $14.6 million and $12.8 million in other
borrowings (non-FHLB advances) at June 30, 2008 and March 31, 2008,
respectively. These borrowings consist of short-term repurchase agreements with
certain commercial demand deposit customers for sweep accounts and the current
balance on a revolving line of credit with another financial institution. At
June 30, 2008 and March 31, 2008, short-term repurchase agreements were $11.6
million and $9.8 million, respectively. The repurchase agreements typically
mature within one to three days and the interest rate paid on these borrowings
floats monthly with money market type rates. At June 30, 2008 and March 31,
2008, the interest rate paid on the repurchase agreements was 2.08% and 3.01%,
respectively. The Bank had pledged as collateral for these repurchase
agreements investment securities with amortized costs and fair values of $27.0
million and $27.4 million at June 30, 2008.
In December 2007, the Company entered into a line of credit in the amount of
$10.0 million with another financial institution. At June 30, 2008 and March 31,
2008, the balance on the line of credit was $3.0 million. The unsecured line of
credit has an interest rate equal to one month LIBOR plus 2.5% and matures on
December 1, 2008.
Mandatorily Redeemable Financial Instrument - On June 30, 2006, the Company
recorded a $1.4 million mandatorily redeemable financial instrument as a result
of the acquisition of the Collier-Jennings Companies. The shareholder of the
Collier-Jennings Companies received cash and was issued stock in the Company to
settle the acquisition. The Company will release the shares to the shareholder
of the Collier-Jennings Companies over a three-year period. The stock is
mandatorily redeemable by the shareholder of the Collier-Jennings Companies in
cumulative increments of 20% per year for a five-year period at the greater of
$26 per share or one and one-half times the book value of the Company's stock.
At June 30, 2008, 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 debentures qualify as Tier 1 capital under
Federal Reserve Board guidelines.
The Capital Securities accrue and pay distributions annually at a rate per annum
equal to a blended rate of 5.68% at June 30, 2008. One-half of the Capital
Securities issued in the transaction has a fixed rate of 6.88% and the remaining
half has a floating rate of three-month LIBOR plus 170 basis points, which was
4.48% at June 30, 2008. The distribution rate payable on the Capital Securities
is cumulative and payable quarterly in arrears.
17
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
The Company has the right, subject to events of default, to defer payments of
interest on the Capital Securities for a period not to exceed 20 consecutive
quarterly periods, provided that no extension period may extend beyond the
maturity date of December 15, 2036. The Company has no current intention to
exercise its right to defer payments of interest on the Capital Securities.
The Capital Securities mature or are mandatorily redeemable upon maturity on
December 15, 2036, and or upon earlier optional redemption as provided in the
indenture. The Company has the right to redeem the Capital Securities in whole
or in part, on or after September 15, 2011. The Company may also redeem the
capital securities prior to such dates upon occurrence of specified conditions
and the payment of a redemption premium.
Equity - Shareholders' equity decreased $3.1 million or 6.5% to $44.4 million at
June 30, 2008 from $47.5 million at March 31, 2008. Accumulated other
comprehensive income (loss), net of tax, decreased $3.6 million to a loss of
$1.2 million at June 30, 2008. The Company's net income for the three-month
period was $802,000. The Board of Directors of the Company declared the 70th
consecutive quarterly dividend, which was $0.08 per share, in April 2008, and
totaled $203,000. Book value per share was $17.55 at June 30, 2008 and $18.76
at March 31, 2008.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2008
AND 2007
-------------------------------------------------------------------------------
Net Income - Net income decreased $294,000 or 26.8% to $802,000 for the three
months ended June 30, 2008 compared to $1.1 million for the three months ended
June 30, 2007. The decrease in net income is primarily the result of the Federal
Reserve's recent decrease in interest rates in conjunction with the Company's
decision to increase the provision for loan losses and an increase in general
and administrative expenses attributable to costs associated with the Company's
recent expansion. These factors were offset slightly by an increase in
non-interest income.
Net Interest Income - Net interest income increased $147,000 or 3.0% to $5.1
million during the three months ended June 30, 2008, compared to $5.0 million
for the same period in 2007, as a result of a decrease in interest expense
offset in part by a decrease in interest income. During the three months ended
June 30, 2008, average interest earning assets increased $87.4 million to $797.6
million while average interest-bearing liabilities increased $89.3 million to
$752.2 million. The interest rate spread decreased 16 basis points to 2.37%
during the three months ended June 30, 2008 compared to the same period in 2007.
The recent precipitous decrease in the prime interest rate continued to
negatively impact the Company's margin during the quarter ended June 30, 2008.
Net interest margin decreased 23 basis points to 2.57% as of June 30, 2008 from
2.80% for the comparable quarter in the previous year.
Interest Income - Total interest income decreased $75,000 or 0.6% to $11.8
million during the three months ended June 30, 2008 from $11.9 million for the
same period in 2007. Total interest income on loans decreased $250,000 or 2.8%
to $8.5 million during the three months ended June 30, 2008 as a result of the
yield in the loan portfolio decreasing 139 basis points offset by the average
loan portfolio balance increasing $80.3 million. Interest income from
mortgage-backed securities increased $854,000 or 55.4% as a result of a 21 basis
point increase in yield and a $65.4 million increase in the average balance of
the portfolio. Interest income from investment securities decreased $665,000 or
42.8% as a result of a decrease in average balance of the investment securities
portfolio offset slightly by an increase in the yield.
18
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, associated yields, and
the resulting changes in interest income for the three months ended June 30,
2008 and 2007:
Three Months Ended June 30,
------------------------------------------------
2008 2007
------------ ------------
Increase(Decrease)
In Interest And
Average Average Dividend Income
Balance Yield Balance Yield From 2007
------- ----- ------- ----- ---------
Loans Receivable, Net $527,101,104 6.48% $446,807,518 7.87% $(249,844)
Mortgage-Backed
Securities 199,929,297 4.79 134,517,110 4.58 853,672
Investment Securities 69,564,979 5.11 127,450,266 4.88 (664,619)
Other 987,149 2.10 1,403,243 5.59 (14,417)
Total Interest-Earning ----------- ---- ----------- ---- --------
Assets $797,582,529 5.93% $710,178,137 6.71% $ (75,208)
=========== ==== =========== ==== ========
Interest Expense - Total interest expense decreased $222,000 or 3.2% to $6.7
million during the three months ended June 30, 2008 compared to $6.9 million for
the same period one-year earlier. The decrease in total interest expense is
attributable to the decreases in interest rates and interest-bearing deposits
offset slightly by an increase in other borrowings. Interest expense on
deposits decreased $319.0 million or 6.5% to $462.1 million during the period as
average interest bearing deposits grew $59.7 million to $545.4 million compared
to $485.7 million for the three months ended June 30, 2007 while the cost of
deposits decreased 68 basis points to 3.39%. Interest expense on advances and
other borrowings increased $113,000 or 6.0% as the cost of debt outstanding
decreased 42 basis points during the 2008 period compared to 2007 while average
total borrowings outstanding increased approximately $29.6 million. Interest
expense on junior subordinated debentures was $74,000 for the three months ended
June 30, 2008 compared to $91,000 for the same period one year ago while the
average balance remained constant at $5.2 million for the three months ended
June 30, 2008 and 2007.
The following table compares detailed average balances, cost of funds, and the
resulting changes in interest expense for the three months ended June 30, 2008
and 2007:
Three Months Ended June 30,
----------------------------------------------------
2008 2007
--------------- ---------------
Increase
(Decrease)In
Average Average Interest Expense
Balance Yield Balance Yield From 2007
------- ----- ------- ----- ----------
Now And Money Market
Accounts $206,443,306 1.79% $207,334,992 3.19% $ (730,749)
Passbook Accounts 16,414,938 0.82 17,117,174 0.98 (8,312)
Certificate Accounts 322,502,428 4.54 261,200,638 4.97 420,077
FHLB Advances And Other
Borrowed Money 201,686,231 3.99 172,121,258 4.41 113,432
Junior Subordinated
Debentures 5,155,000 5.75 5,155,000 7.05 (16,705)
Total Interest-Bearing ---------- ---- ----------- ---- --------
Liabilities $752,201,903 3.57% $662,929,062 4.18% $ (222,257)
=========== ==== =========== ==== ========
19
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
Provision for Loan Losses - The amount of the provision is determined by
Management's on-going monthly analysis of the loan portfolio. Management uses
multiple 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. The Company considers subjective factors such as changes in
local and national economic conditions, industry trends, the composition and
volume of the loan portfolio, credit concentrations, lending policies, and the
experience and ability of the staff and Board of Directors.
Problems associated with deteriorating asset quality continued to plague the
industry during the quarter as a result of the sub prime lending and credit
crisis. Although the Company did not participate in sub prime lending, it was
indirectly impacted by these events and the general condition of the national
economy. Additions to the allowance for loan losses were $225,000 for the
quarter ended June 30, 2008 compared to $150,000 for the same quarter in the
prior year. This increase reflects the Company's concern for deteriorating
economic conditions in the local economy coupled with an increase in
non-performing assets within its loan portfolio.
The following table details selected activity associated with the allowance for
loan losses for the three months ended June 30, 2008 and 2007:
June 30, 2008 June 30, 2007
------------- -------------
Beginning Balance $ 8,066,762 $ 7,296,791
Provision 225,000 150,000
Charge-offs (50,186) (29,120)
Recoveries 4,920 13,021
------------- -------------
Ending Balance $ 8,246,496 $ 7,430,692
============= =============
Allowance For Loan Losses As A
Percentage Of Gross Loans Receivable
And Loans Held For Sale At The End
Of The Period 1.52% 1.58%
Allowance For Loan Losses As A
Percentage Of Impaired Loans At
The End Of The Period 241.87% 721.79%
Impaired Loans 3,409,465 1,029,475
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 1.24% 0.39%
Loans Receivable, Net $534,861,890 $462,347,074
Non-performing assets, which consisted of 47 non-accrual loans and four
repossessed properties, increased $385,000 to $7.2 million at June 30, 2008 from
$6.8 million at March 31, 2008. Despite the increase in non-performing assets,
the Company maintained relatively low and stable trends related to net
charge-offs. Annualized net charge-offs as a percent of gross loans were 0.03%
at June 30, 2008 compared to 0.02% at March 31, 2008 and 0.01% at June 30, 2007.
In addition, non-performing assets comprised less than 1% of total assets at
June 30, 2008 and March 31, 2008, respectively.
Non-Interest Income - Non-interest income remained relatively unchanged at $1.1
million for the three months ended June 30, 2008, increasing $61,000 or 5.7%
from the same period one year ago. The following table provides a detailed
analysis of the changes in the components of non-interest income:
Three Months Ended June 30, Increase (Decrease)
--------------------------- -------------------
2008 2007 Amounts Percent
------ ------ ------- -------
Gain On Sale Of Investments $ 101,405 $ - $ 101,405 100.0%
Gain On Sale Of Loans 118,683 176,121 (57,438) (32.6)
Service Fees On Deposit Accounts 281,153 327,322 (46,169) (14.1)
Income From Cash Value Of
Life Insurance 85,746 62,037 23,709 38.2
Commissions On Insurance 168,992 145,673 23,319 16.0
Other Agency Income 46,937 29,258 17,679 60.4
Trust Income 105,000 98,775 6,225 6.3
Other 213,291 221,412 (8,121) (3.7)
---------- ---------- --------- -----
Total Non-Interest Income $1,121,207 $1,060,598 $ 60,609 5.7%
========== ========== ========= =====
20
Security Federal Corporation and Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations, Continued
Gain on sale of investments was $101,405 for the three months ended June 30,
2008, compared to no gain in the same period one year earlier. The gain resulted
from the sale of seven investments during the three month period. No securities
were sold during the same quarter of the previous year. Gain on sale of loans
decreased $57,000 to $119,000 during the three months ended June 30, 2008
compared to the same period one year ago as a result of a decrease in the
origination and sale of fixed rate residential mortgage loans. Service fees on
deposit accounts decreased $46,000 to $281,000 for the quarter ended June 30,
2008 compared to the same quarter in 2007 as a result of a decrease in deposit
account balances. Commissions on insurance and other agency income increased
$41,000 to $167,000 for the quarter ended June 30, 2008 compared to the same
quarter in 2007 as a result of the growth and expansion of the insurance
subsidiary. Other miscellaneous income including credit life insurance
commissions, safe deposit rental income, annuity and stock brokerage
commissions, trust fees, and other miscellaneous fees, decreased $8,000 to
$213,000 during the three months ended June 30, 2008 compared to the same period
one year ago.
General And Administrative Expenses - General and administrative expenses
increased $571,000 or 13.4% to $4.8 million for the three months ended June 30,
2008 from $4.3 million for the same period one year ago. The following table
provides a detailed analysis of the changes in the components of general and
administrative expenses:
Three Months Ended June 30, Increase (Decrease)
--------------------------- -------------------
2008 2007 Amounts Percent
------ ------ ------- -------
Salaries And Employee Benefits $2,784,235 $2,570,279 $ 213,956 8.32%
Occupancy 497,320 422,511 74,809 17.7
Advertising 140,821 102,273 38,548 37.7
Depreciation And Maintenance
Of Equipment 426,924 319,525 107,399 33.6
FDIC Insurance Premiums 155,810 15,327 140,483 916.6
Amortization of Intangibles 22,500 22,500 - -
Other 794,380 799,030 (4,650) (0.6)
Total General And --------- --------- -------- ------
Administrative Expenses $4,821,990 $4,251,445 $ 570,545 13.4%
========= ========= ======== ======
Salary and employee benefits increased $214,000 or 8.3% to $2.8 million for the
three months ended June 30, 2008 from $2.6 million for the same period one year
ago and occupancy increased $75,000 or 17.7% to 497,000 for the three months
ended June 30, 2008 from $423,000 for the same period one year ago. The increase
in salary and employee benefits as well as occupancy is a result of increased
personnel and property costs related to the Company's recent expansion into two
new market areas: Richland and Lexington Counties in South Carolina and Columbia
County, Georgia. Depreciation and maintenance expense increased $107,000 or
33.6% to $427,000 for the three months ended June 30, 2008 from $320,000 for the
same period one year ago primarily as a result of the Company's recent expansion
and additional locations.
FDIC insurance premiums increased $140,000 or 916.6% to $156,000 for the three
month period ended June 30, 2008 when compared to the same period a year ago.
Prior to the quarter ended June 30, 2008, the Bank was benefiting from a
One-Time Credit assessment made available by the Federal Deposit Insurance
Reform Act of 2005. The credit assessment amount was applied to reduce the
Bank's quarterly deposit insurance assessments. The Bank exhausted this credit
during the quarter ended June 30, 2008. Advertising expense increased $39,000 or
37.7% to $141,000 for the three months ended June 30, 2008 from $102,000 for the
same period one year ago. The increase is attributable to the Company using
more print media advertising to attract deposit customers. Overall,
non-interest expenses increased $571,000 or 13.4% for the three months ended
June 30, 2008 when compared to the same period one year ago.
Provision For Income Taxes - Provision for income taxes decreased $144,000 or
26.6% to $397,000 for the three months ended June 30, 2008 from $541,000 for the
same period one year ago. Income before income taxes was $1.2 million and $1.6
million for the three months ended June 30, 2008 and 2007, respectively. The
Company's combined federal and state effective income tax rate for the current
quarter was 33.1% compared to 33.0% for 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
Liquidity Commitments, Capital Resources, and Impact of Inflation and Changing
Prices
Liquidity - The Company actively analyzes and manages the Bank's liquidity with
the objective of maintaining an adequate level of liquidity and to ensure the
availability of sufficient cash flows to support loan growth, fund deposit
withdrawals, fund operations, and satisfy other financial commitments. See the
"Consolidated Statements of Cash Flows" contained in Item 1 - Financial
Statements, herein.
The primary sources of funds are customer deposits, loan repayments, loan sales,
maturing investment securities, and advances from the FHLB. The sources of
funds, together with retained earnings and equity, are used to make loans,
acquire investment securities and other assets, and fund continuing operations.
While maturities and the scheduled amortization of loans are a predictable
source of funds, deposit flows and mortgage repayments are greatly influenced by
the level of interest rates, economic conditions, and competition. Management
believes that the Company's current liquidity position and its forecasted
operating results are sufficient to fund all of its existing commitments.
During the three months ended June 30, 2008 loan disbursements exceeded loan
repayments resulting in a $16.9 million or 3.3% increase in total net loans
receivable. During the three months ended June 30, 2008, deposits decreased
$13.5 million and FHLB advances increased $38.4 million. The Bank had $28.0
million in additional borrowing capacity at the FHLB at the end of the period
and $7.0 million borrowing capacity on a line of credit with another financial
institution. At June 30, 2008, the Bank had $297.6 million of certificates of
deposit maturing within one year. Based on previous experience, the Bank
anticipates a significant portion of these certificates will be renewed.
The Company has plans to expand its branch network, which could cause earnings
to level off or decline for a period of time. The leveling off or decline in
earnings will be attributed the lag that exists from the time a branch is built
to when it becomes profitable. In the next twelve months, we anticipate
investing $2.0 to $3.0 million in land, buildings, and equipment. In the next
twenty-four months we anticipate investing $5.0 million to $6.0 million in land,
buildings, and equipment. The anticipated costs could be affected by increased
construction costs, weather delays, economic conditions and/or other
uncertainties.
Off-Balance Sheet Commitments - The Company is a party to financial instruments
with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments generally include
commitments to originate mortgage, commercial and consumer loans, and involve to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The Company's maximum exposure to
credit loss in the event of nonperformance by the borrower is represented by the
contractual amount of those instruments. Since some commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company uses the same credit policies
in making commitments as it does for on-balance sheet instruments. Collateral
is not required to support commitments.
The following table sets forth the length of time until maturity for unused
commitments to extend credit and standby letters of credit at June 30, 2008.
After After
One Three Greater
Within Through Through Within Than
One Three Twelve One One
(Dollars in thousands) Month Months Months Year Year Total
----- ------ ------ ------ ------ -------
Unused lines of credit $1,424 $ 4,740 $34,367 $40,531 $40,596 $81,127
Standby letters of credit 3 21 480 504 28 532
----- ------ ------ ------ ------ -------
Total $1,427 $ 4,761 $34,847 $41,035 $40,624 $81,659
===== ====== ====== ====== ====== =======
22
Security Federal Corporation and Subsidiaries
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises principally from interest rate risk inherent in
its lending, investment, deposit and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Although the Company
manages other risks such as credit quality and liquidity risk in the normal
course of business, management considers interest rate risk to be its most
significant market risk that could potentially have the largest material effect
on the Company's financial condition and results of operations. Other types of
market risks such as foreign currency exchange rate risk and commodity price do
not arise in the normal course of the Company's business activities.
The Company's profitability is affected by fluctuations in the market interest
rate. Management's goal is to maintain a reasonable balance between exposure to
interest rate fluctuations and earnings. A sudden and substantial increase or
decrease in interest rates may adversely impact the Company's earnings to the
extent that the interest rates on interest-earning assets and interest-bearing
liabilities do not change at the same rate, to the same extent or on the same
basis. The Company monitors the impact of changes in interest rates on its net
interest income using a test that measures the impact on net interest income and
net portfolio value of an immediate change in interest rates in 100 basis point
increments and by measuring the Bank's interest sensitivity gap ("Gap"). Net
portfolio value is defined as the net present value of assets, liabilities, and
off-balance sheet contracts. Gap is the amount of interest sensitive assets
repricing or maturing over the next twelve months compared to the amount of
interest sensitive liabilities maturing or repricing in the same time period.
Recent net portfolio value reports furnished by the OTS indicate that the Bank's
interest rate risk sensitivity has increased slightly over the past year. The
Bank has rated favorably compared to thrift peers concerning interest rate
sensitivity.
For the three months ended June 30, 2008, 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 2.37%. For the year ended March 31,
2008, the interest rate spread was 2.44%. The Federal Reserve's recent interest
rate decreases resulted in lower yields on adjustable rate assets while intense
competition in the marketplace continued to affect interest rates paid on
deposit accounts. In addition, the Bank's liabilities tend to re-price at a more
gradual rate than its assets.
Item 4T. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the
Company's disclosure controls and procedures (as defined in Rule 13a - 15(e) of
the Securities Exchange Act of 1934 ("Act")) was carried out under the
supervision and with the participation of the Company's Chief Executive Officer,
Chief Financial Officer and several other members of the Company's senior
management as of the end of the period covered by this quarterly report. The
Company's Chief Executive Officer and Chief Financial Officer concluded that at
June 30, 2008 the Company's disclosure controls and procedures were effective in
ensuring that the information required to be disclosed by the Company in the
reports it files or submits under the Act is (i) accumulated and communicated to
the Company's management (including the Chief Executive Officer and Chief
Financial Officer) in a timely manner, and (ii) recorded, processed, summarized
and reported within the time period specified in the Securities and Exchange
Commission's rules and forms.
(b) Changes in Internal Controls: In the quarter ended June 30, 2008, 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.
23
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, 2008
except that the following risk factors are added to those previously contained
in the Form 10-K:
Our business is subject to general economic risks that could adversely impact
our results of operations and financial condition.
* Changes in economic conditions, particularly a further economic slowdown in
Aiken, Richland, and Lexington Counties in South Carolina and Columbia
County in Georgia, could hurt our business.
Our business is directly affected by market conditions, trends in industry and
finance, legislative and regulatory changes, and changes in governmental
monetary and fiscal policies and inflation, all of which are beyond our control.
In 2007, the housing and real estate sectors experienced an economic slowdown
that has continued into 2008. Further deterioration in economic conditions, in
particular within our primary market area real estate markets, could result in
the following consequences, among others, any of which could hurt our business
materially:
o loan delinquencies may increase;
o problem assets and foreclosures may increase;
o demand for our products and services may decline; and
o collateral for loans made by us, especially real estate, may decline in
value, in turn reducing a customer's borrowing power and reducing the
value of assets and collateral securing our loans.
* Downturns in the real estate markets in our primary market area could hurt
our business.
Our business activities and credit exposure are primarily concentrated in Aiken,
Richland, and Lexington Counties in South Carolina and Columbia County in
Georgia. While we do not have any sub-prime loans, our construction and land
loan portfolios, our commercial and multifamily loan portfolios and certain of
our other loans have been affected by the downturn in the residential real
estate market. We anticipate that further declines in the estate markets in our
primary market area will hurt our business. As of June 30, 2008, substantially
all of our loan portfolio consisted of loans secured by real estate located in
Aiken, Richland, and Lexington Counties in South Carolina and Columbia County in
Georgia. If real estate values continue to decline the collateral for our loans
will provide less security. As a result, our ability to recover on defaulted
loans by selling the underlying real estate will be diminished, and we would be
more likely to suffer losses on defaulted loans. The events and conditions
described in this risk factor could therefore have a material adverse effect on
our business, results of operations and financial condition.
* We may suffer losses in our loan portfolio despite our underwriting
practices.
We seek to mitigate the risks inherent in our loan portfolio by adhering to
specific underwriting practices. Although we believe that our underwriting
criteria are appropriate for the various kinds of loans we make, we may incur
losses on loans that meet our underwriting criteria, and these losses may exceed
the amounts set aside as reserves in our allowance for loan losses.
Recent negative developments in the financial industry and credit markets may
continue to adversely impact our financial condition and results of operations.
Negative developments beginning in the latter half of 2007 in the sub-prime
mortgage market and the securitization markets for such loans, together with
substantially increased oil prices and other factors, have resulted in
uncertainty in the financial markets in general and a related general economic
downturn, which have continued in 2008.
24
Security Federal Corporation and Subsidiaries
Part II: Other Information, Continued
Many lending institutions, including us, have experienced substantial declines
in the performance of their loans, including construction and land loans,
multifamily loans, commercial loans and consumer loans. Moreover, competition
among depository institutions for deposits and quality loans has increased
significantly. In addition, the values of real estate collateral supporting many
construction and land, commercial and multifamily and other commercial loans and
home mortgages have declined and may continue to decline. Bank and holding
company stock prices have been negatively affected, as has the ability of banks
and holding companies to raise capital or borrow in the debt markets compared to
recent years. These conditions may have a material adverse effect on our
financial condition and results of operations. In addition, as a result of the
foregoing factors, there is a potential for new federal or state laws and
regulations regarding lending and funding practices and liquidity standards, and
bank regulatory agencies are expected to be very aggressive in responding to
concerns and trends identified in examinations, including the expected issuance
of formal enforcement orders. Negative developments in the financial industry
and the impact of new legislation in response to those developments could
restrict our business operations, including our ability to originate or sell
loans, and adversely impact our results of operations and financial condition.
Liquidity risk could impair our ability to fund operations and jeopardize our
financial condition.
Liquidity is essential to our business. An inability to raise funds through
deposits, borrowings, the sale of loans and other sources could have a
substantial negative effect on our liquidity. Our access to funding sources in
amounts adequate to finance our activities or the terms of which are acceptable
to us could be impaired by factors that affect us specifically or the financial
services industry or economy in general. Factors that could detrimentally impact
our access to liquidity sources include a decrease in the level of our business
activity as a result of a downturn in the markets in which our loans are
concentrated or adverse regulatory action against us. Our ability to borrow
could also be impaired by factors that are not specific to us, such as a
disruption in the financial markets or negative views and expectations about the
prospects for the financial services industry in light of the recent turmoil
faced by banking organizations and the continued deterioration in credit
markets.
Item 2 Unregistered sales of Equity Securities and Use Of Proceeds
-----------------------------------------------------------
(c)Total (d)Maximum
Number of Number of
Shares Shares
Purchased that May
as Part of Yet Be
Number of (b)Average Publicly Purchased
Shares Price Paid Announced Under the
Period Purchased per Share Program Program
April 1-April 30, 2008 700 $22.94 700 8,465
May 1-May 31, 2008 1,000 23.06 1,000 7,465
June 1-June 30, 2008 2,200 23.07 2,200 5,265
----------------------------------------------------
Total 3,900 $23.04 3,900 5,265
====================================================
In May 2004, the Company's Board of Directors authorized a 5% repurchase plan,
or 126,000 shares of the Company's outstanding common stock. As of June 30,
2008, 120,735 shares have been repurchased under this program. The Company
repurchased 3,900 shares of its outstanding Common Stock during the three months
ended June 30, 2008.
Item 3 Defaults Upon Senior Securities
-------------------------------
None
Item 4 Submission Of Matters To A Vote Of Security Holders
---------------------------------------------------
None
Item 5 Other Information
-----------------
None
25
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)
10.11 2008 Equity Incentive Plan (10)
14 Code of Ethics (11)
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 20, 2008, as an exhibit to the Company's Proxy Statement
and incorporated herein by reference.
(11) Filed on June 27, 2008 as an exhibit to the Company's Annual Report on
Form 10-K and incorporated herein by reference.
26
Security Federal Corporation and Subsidiaries
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to the signed on its behalf by the
undersigned thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date: August 14, 2008 By:/s/Timothy W. Simmons
--------------- --------------------------------
Timothy W. Simmons
President
Duly Authorized Representative
Date: August 14, 2008 By:/s/Roy G. Lindburg
--------------- --------------------------------
Roy G. Lindburg
CFO
Duly Authorized Representative
27
EXHIBIT 31.1
Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
28
Certification
I, Timothy W. Simmons, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of
the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 14, 2008
/s/Timothy W. Simmons
---------------------------
Timothy W. Simmons
President and Chief Executive Officer
29
EXHIBIT 31.2
Certification of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
30
Certification
I, Roy G. Lindburg, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Security Federal
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the period presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of
the period covered by this report based on such evaluation and
c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 14, 2008
/s/Roy G. Lindburg
---------------------------------
Roy G. Lindburg
Chief Financial Officer
31
EXHIBIT 32
Certification Pursuant to Section 906 of the Sarbanes Oxley Act
32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
OF SECURITY FEDERAL CORPORATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
1350), each of the undersigned hereby certifies in his capacity as an officer of
Security Federal Corporation (the "Company") and in connection with the
Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2008 that:
1. the Report fully complies with the requirements of Section 13(a) and
15(d) of the Securities Exchange Act of 1934, as amended, and
2. the information contained in the Report fairly presents, in all material
respects, the Company's financial condition and results of operations as
of the dates and for the periods presented in the financial statements
included in the Report.
/s/Timothy W. Simmons /s/Roy G. Lindburg
------------------------- ------------------------
Timothy W. Simmons Roy G. Lindburg
Chief Executive Officer Chief Financial Officer
Dated: August 14, 2008
33