PINX:SFDL Security Federal Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

PINX:SFDL Fair Value Estimate
Premium
PINX:SFDL Consider Buying
Premium
PINX:SFDL Consider Selling
Premium
PINX:SFDL Fair Value Uncertainty
Premium
PINX:SFDL Economic Moat
Premium
PINX:SFDL Stewardship
Premium
 
 
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, DC  20549
 
FORM 10 – Q
 
 
(Mark one)
 
 
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012
 
 
(_) 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
incorporation or organization)
(IRS Employer Identification No.)
 
 
238 RICHLAND AVENUE WEST, 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 has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes [ X ] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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
X
 
NO
 
 

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 $0.01 per share
 
August 13, 2012
 
2,944,001

 
 

 
 
INDEX
 
       
PART I.
FINANCIAL INFORMATION (UNAUDITED)
 
PAGE NO.
Item 1.
Financial Statements (Unaudited):
   
       
 
Consolidated Balance Sheets at June 30, 2012 and March 31, 2012
 
1
       
 
Consolidated Statements of Income for the Three Months Ended June 30, 2012 and 2011
 
2
       
 
Consolidated Statements of Comprehensive Income for the Three Months Ended June 30, 2012 and 2011
 
3
       
 
Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended June 30, 2012 and 2011
 
4
       
 
Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2012 and 2011
 
5
       
 
Notes to Consolidated Financial Statements
 
7
       
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
26
       
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
37
       
Item 4.
Controls and Procedures
 
37
       
PART II.
OTHER INFORMATION
   
       
Item 1.
Legal Proceedings
 
38
       
Item 1A.
Risk Factors
 
38
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
38
       
Item 3.
Defaults Upon Senior Securities
 
38
       
Item 4.
Mine Safety Disclosures
 
38
       
Item 5.
Other Information
 
38
       
Item 6.
Exhibits
 
39
       
 
Signatures
 
41
 
 
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, 2012
   
March 31, 2012
 
Assets:
 
(Unaudited)
   
(Audited)
 
Cash And Cash Equivalents
  $ 10,653,208     $ 9,331,372  
Certificates Of Deposits With Other Banks
    1,727,657       1,727,210  
Investment And Mortgage-Backed Securities:
               
Available For Sale:   (Amortized cost of $346,882,376 at June 30, 2012 and $343,421,858 
                                     at March 31, 2012)
    358,337,230       353,954,857  
Held To Maturity:     (Fair value of $67,704,158 at June 30, 2012 and  $69,965,869 
                                     at March 31, 2012)
    65,089,398       67,676,210  
Total Investment And Mortgage-Backed Securities
    423,426,628       421,631,067  
Loans Receivable, Net:
               
Held For Sale
    3,158,501       2,671,771  
Held For Investment: (Net of allowance of $12,684,327 at June 30, 2012 and $14,615,198
                                       at March 31, 2012)
    409,908,394       425,838,835  
Total Loans Receivable, Net
    413,066,895       428,510,606  
Accrued Interest Receivable:
               
Loans
    1,422,592       1,718,252  
Mortgage-Backed Securities
    953,180       987,911  
Investments
    1,038,772       793,655  
Premises And Equipment, Net
    18,423,662       18,726,299  
Federal Home Loan Bank (“FHLB”) Stock, At Cost
    6,928,496       8,471,100  
Bank Owned Life Insurance
    10,941,305       10,836,305  
Repossessed Assets Acquired In Settlement Of Loans
    13,745,651       14,160,099  
Intangible Assets, Net
    86,976       99,477  
Goodwill
    1,199,754       1,199,754  
Other Assets
    6,496,787       6,443,501  
Total Assets
  $ 910,111,563     $ 924,636,608  
                 
Liabilities And Shareholders’ Equity
               
Liabilities:
               
Deposit Accounts
  $ 694,519,674     $ 696,201,056  
Advances From FHLB
    108,165,616       122,069,802  
Other Borrowed Money
    10,022,895       9,801,386  
Advance Payments By Borrowers For Taxes And Insurance
    487,150       350,464  
Junior Subordinated Debentures
    5,155,000       5,155,000  
Senior Convertible Debentures
    6,084,000       6,084,000  
Other Liabilities
    3,940,053       4,203,014  
Total Liabilities
  $ 828,374,388     $ 843,864,722  
                 
Shareholders' Equity:
               
Serial Preferred Stock, $.01 Par Value; Authorized Shares  – 200,000; Issued
      And Outstanding Shares –  22,000 At June 30, 2012 And At March 31, 2012
  $ 22,000,000     $ 22,000,000  
Common Stock, $.01 Par Value; Authorized Shares – 5,000,000; Issued -
      3,144,934 And Outstanding Shares – 2,944,001 At June 30, 2012 And At
      March 31, 2012
      31,449         31,449  
Warrant Issued In Conjunction With Serial Preferred Stock
    400,000       400,000  
Additional Paid-In Capital
    11,634,526       11,626,245  
Treasury Stock, (At Cost, 200,933 Shares At June 30, 2012 And March 31,
      2012, Respectively)
    (4,330,712 )     (4,330,712 )
Accumulated Other Comprehensive Income
    7,105,373       6,533,573  
Retained Earnings
    44,896,539       44,511,331  
Total Shareholders' Equity
  $ 81,737,175     $ 80,771,886  
Total Liabilities And Shareholders' Equity
  $ 910,111,563     $ 924,636,608  
See accompanying notes to consolidated financial statements.



 
1

 

Security Federal Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
   
Three Months Ended June 30,
 
   
2012
   
2011
 
Interest Income:
           
Loans
  $ 6,086,191     $ 7,340,697  
Mortgage-Backed Securities
    1,764,712       2,117,531  
Investment Securities
    622,536       771,454  
Other
    1,966       469  
Total Interest Income
    8,475,405       10,230,151  
                 
Interest Expense:
               
NOW And Money Market Accounts
    291,585       446,880  
Statement Savings Accounts
    10,901       12,674  
Certificate Accounts
    1,033,105       1,440,603  
Advances And Other Borrowed Money
    1,133,300       1,269,056  
Junior Subordinated Debentures
    28,311       57,847  
Senior Convertible Debentures
    121,680       121,680  
Total Interest Expense
    2,618,882       3,348,740  
                 
Net Interest Income
    5,856,523       6,881,411  
Provision For Loan Losses
    725,000       2,300,000  
Net Interest Income After Provision For Loan Losses
    5,131,523       4,581,411  
Non-Interest Income:
               
Gain On Sale Of Investments
    103,659       171,224  
Gain On Sale Of Loans
    132,952       107,270  
Service Fees On Deposit Accounts
    278,563       270,693  
Income From Cash Value Of Life Insurance
    105,000       105,000  
Commissions On Insurance
    107,773       92,102  
Trust Income
    120,000       114,000  
Mandatorily Redeemable Financial Instrument Valuation
    -       50,000  
Check Card Fee Income
    204,860       202,392  
Other
    130,929       158,613  
Total Non-Interest Income
    1,183,736       1,271,294  
                 
General And Administrative Expenses:
               
Salaries And Employee Benefits
    2,614,044       2,842,978  
Occupancy
    491,747       478,752  
Advertising
    81,944       85,680  
Depreciation And Maintenance Of Equipment
    404,594       412,625  
FDIC Insurance Premiums
    185,628       292,205  
Amortization Of Intangibles
    12,501       22,520  
Net Cost Of Operation Of Other Real Estate Owned
    642,151       36,610  
Other
    865,599       989,154  
Total General And Administrative Expenses
    5,298,208       5,160,524  
                 
Income Before Income Taxes
    1,017,051       692,181  
Provision For Income Taxes
    286,323       231,134  
Net Income
    730,728       461,047  
Preferred Stock Dividends
    110,000       110,000  
Net Income Available To Common Shareholders
  $ 620,728     $ 351,047  
                 
Basic Net Income Per Common Share
  $ 0.21     $ 0.12  
Diluted Net Income Per Common Share
  $ 0.21     $ 0.12  
Cash Dividend Per Share On Common Stock
  $ 0.08     $ 0.08  
Basic Weighted Average Shares Outstanding
    2,944,001       2,944,001  
Diluted Weighted Average Shares Outstanding
    2,944,001       2,944,001  
See accompanying notes to consolidated financial statements.

 
2

 

Security Federal Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)


   
Three Months Ended June 30,
 
   
2012
   
2011
 
Net Income
  $ 730,728     $ 461,047  
Other Comprehensive Income
               
Unrealized Gains On Securities:
               
   Unrealized Holding Gains On Securities Available For Sale, Net Of Taxes Of $389,848
    636,069       2,813,659  
   Reclassification Adjustment For Gains Included In Net Income, Net Of
      Taxes Of $39,390
    (64,269 )     (106,158 )
Other Comprehensive Income
    571,800       2,707,501  
Comprehensive Income
  $ 1,302,528     $ 3,168,548  

See accompanying notes to consolidated financial statements.


 
3

 

Security Federal Corporation and Subsidiaries
 Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
 
 
      Preferred Stock       Warrants    
  Common
Stock
      Additional Paid – In  Capital    
  Treasury
Stock
      Accumulated Other Comprehensive Income       Retained Earnings       Total  
Balance At March 31, 2011
  $ 22,000,000     $ 400,000     $ 30,884     $ 10,176,375     $ (4,330,712 )   $ 3,637,675     $ 44,097,983     $ 76,012,205  
Net Income
    -       -       -       -       -       -       461,047       461,047  
Other Comprehensive Income,
   Net Of Tax
-       -       -       -        -       2,707,501       -       2,707,501  
Redemption Of Mandatorily Redeemable Financial Instrument
      -          -         565         1,416,747        -         -         -         1,417,312  
Stock Compensation Expense
    -       -       -       -       -       -       8,281       8,281  
Cash Dividends On Preferred
    -       -       -       -       -       -       (110,000 )     (110,000 )
Cash Dividends On Common
    -       -       -       -       -       -       (235,520 )     (235,520 )
Balance At June 30, 2011
  $ 22,000,000     $ 400,000     $ 31,449     $ 11,593,122     $ (4,330,712 )   $ 6,345,176     $ 44,221,791     $ 80,260,826  
 

 
   
Preferred
Stock
   
 
Warrants
   
Common
Stock
   
Additional
Paid – In
 Capital
 
Treasury
Stock
   
Accumulated Other Comprehensive Income
   
Retained Earnings
   
 
Total
 
Balance At March 31, 2012
  $ 22,000,000     $ 400,000     $ 31,449     $ 11,626,245     $ (4,330,712 )   $ 6,533,573     $ 44,511,331     $ 80,771,886  
Net Income
    -       -       -       -       -       -       730,728       730,728  
Other Comprehensive Income,
   Net Of Tax
-       -       -       -        -       571,800       -       571,800  
Stock Compensation Expense
    -       -       -       8,281       -       -       -       8,281  
Cash Dividends On Preferred
    -       -       -       -       -       -       (110,000 )     (110,000 )
Cash Dividends On Common
    -       -       -       -       -       -       (235,520 )     (235,520 )
Balance At June 30, 2012
  $ 22,000,000     $ 400,000     $ 31,449     $ 11,634,526     $ (4,330,712 )   $ 7,105,373     $ 44,896,539     $ 81,737,175  
 

 

See accompanying notes to consolidated financial statements

 
4

 

Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)

       
Three Months Ended June 30,
     
2012
 
2011
 
Cash Flows From Operating Activities:
       
 
     Net Income
$
730,728
$
461,047
           
 
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
       
 
  Depreciation And Amortization Expense
 
354,164
 
368,806
 
  Amortization Of Intangible Assets
 
12,501
 
22,520
 
  Stock Option Compensation Expense
 
8,281
 
8,281
 
  Discount Accretion And Premium Amortization
 
1,796,814
 
1,065,030
 
  Provisions For Losses On Loans
 
725,000
 
2,300,000
 
  Gain On Sale of Investments Available For Sale
 
(4,063)
 
(102,865)
 
  Gain On Sale of Mortgage-Backed Securities Available For Sale
 
(99,596)
 
(68,359)
 
  Gain On Sale Of Loans
 
(132,952)
 
(107,270)
 
  Gain On Sale Of Real Estate
 
(9,286)
 
(62,222)
 
  Write Down On Real Estate
 
541,500
 
-
 
  Amortization Of Deferred Fees On Loans
 
(1,645)
 
(6,406)
 
  Mandatorily Redeemable Financial Instrument Valuation
 
-
 
(50,000)
 
      Income From Bank Owned Life Insurance
 
(105,000)
 
(105,000)
 
  Proceeds From Sale Of Loans Held For Sale
 
6,661,202
 
11,132,175
 
  Origination Of Loans For Sale
 
(7,014,980)
 
(9,910,939)
 
  (Increase) Decrease In Accrued Interest Receivable:
       
 
  Loans
 
295,660
 
118,001
 
  Mortgage-Backed Securities
 
34,731
 
2,581
 
  Investments
 
(245,564)
 
(219,347)
 
   Increase In Advance Payments By Borrowers
 
136,686
 
128,736
 
   Other, Net
 
(666,302)
 
(161,204)
 
Net Cash Provided By Operating Activities
 
3,017,879
 
4,813,565
           
 
Cash Flows From Investing Activities:
       
 
    Principal Repayments On Mortgage-Backed Securities Available For Sale
 
13,192,807
 
11,555,205
 
    Principal Repayments On Mortgage-Backed Securities Held To Maturity
 
440,472
 
375,243
 
    Purchase Of Investment Securities Available For Sale
 
(15,664,373)
 
(11,597,706)
 
Purchase Of Mortgage-Backed Securities Available For Sale
 
(15,566,323)
 
(8,913,028)
 
Purchase Of Investment Securities Held To Maturity
 
-
 
(1,990,350)
 
Purchase Of Mortgage-Backed Securities Held To Maturiy
 
-
 
(8,704,676)
 
Maturities Of Investment Securities Available For Sale
 
5,265,399
 
3,547,649
 
Maturities of Investment Securities Held To Maturity
 
2,000,000
 
1,000,000
 
Proceeds From Sale of Investment Securities Available For Sale
 
1,723,299
 
4,658,750
 
Proceeds From Sale of Mortgage-Backed Securities Available For Sale
 
6,041,858
 
3,592,201
 
Purchase Of FHLB Stock
 
-
 
(34,343)
 
Redemption Of FHLB Stock
 
1,542,604
 
1,247,628
 
Decrease In Loans To Customers
 
14,054,080
 
11,350,642
 
Proceeds From Sale Of Repossessed Assets
 
1,035,240
 
2,739,952
 
Purchase And Improvement Of Premises And Equipment
 
(51,527)
 
(27,412)
 
Net Cash Provided By Investing Activities
 
14,013,536
 
8,799,755
           
         
(Continued)
           
 
See accompanying notes to consolidated financial statements.

 
5

 

Security Federal Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)- Continued

 
    Three Months Ended June 30,  
   
2012
   
2011
 
Cash Flows From Financing Activities:
           
Decrease In Deposit Accounts
  $ (1,681,382 )   $ (6,164,151 )
Proceeds From FHLB Advances
    18,800,000       34,400,000  
Repayment Of FHLB Advances
    (32,704,186 )     (39,154,103 )
Net Proceeds (Repayments) Of Other Borrowings
    221,509       (480,676 )
Dividends To Preferred Shareholders
    (110,000 )     (110,000 )
Dividends To Common Shareholders
    (235,520 )     (235,520 )
Net Cash Used By Financing Activities
    (15,709,579 )     (11,744,450 )
                 
Increase In Cash And Cash Equivalents
    1,321,836       1,868,870  
Cash And Cash Equivalents At Beginning Of Period
    9,331,372       7,835,638  
Cash And Cash Equivalents At End Of Period
  $ 10,653,208     $ 9,704,508  
                 
Supplemental Disclosure Of Cash Flows Information:
               
Cash Paid During The Period For Interest
  $ 2,837,441     $ 3,476,818  
Cash Paid During The Period For Income Taxes
  $ 31,781     $ 456,321  
Additions To Repossessed Assets Acquired Through Foreclosure
  $ 1,153,006     $ 1,897,773  
Change In Unrealized Gain or Loss On Securities Available For Sale,                      
     Net Of Taxes
  $ 571,800     $ 2,707,501  

See accompanying notes to consolidated financial statements.

 
6

 

Security Federal Corporation and Subsidiaries
 Notes to Consolidated Financial Statements (Unaudited)

1.  
Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and accounting principles generally accepted in the United States of America; therefore, they do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows.  Such statements are unaudited but, in the opinion of management, reflect all adjustments, which are of a normal recurring nature and necessary for a fair presentation of results for the selected interim periods.  Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the audited financial statements appearing in Security Federal Corporation’s (the “Company”) 2012 Annual Report to Shareholders which was filed as an exhibit to our Annual Report on Form 10-K for the year ended March 31, 2012 (“2012 10-K”) when reviewing interim financial statements.  The results of operations for the three month period ended June 30, 2012 are not necessarily indicative of the results that may be expected for the entire fiscal year.

2.  
Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Security Federal Bank (the “Bank”) and the Bank’s wholly owned subsidiaries, Security Federal Insurance, Inc. (“SFINS”) and Security Financial Services Corporation (“SFSC”). SFINS was formed during fiscal 2002 and began operating during the December 2001 quarter and 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. (the “Collier Jennings Companies”). Security Federal Premium Pay Plans Inc. has one wholly owned premium finance subsidiary and also has an ownership interest in four other premium finance subsidiaries.

SFSC was formed in 1975 and was inactive for several years. During the quarter ended December 31, 2010, it was reactivated and utilized to hold and operate a repossessed hotel located in Hardeeville, South Carolina. Subsequently, in fiscal 2012 the hotel was sold and the subsidiary once again returned to inactive status.

The Company 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.

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, 2012 included in our 2012 Annual Report to Stockholders.  Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, and, as such, have a greater possibility of producing results that could be materially different than originally reported.  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 impact of an unexpected and sudden large loss could deplete the allowance and potentially require increased provisions to replenish the allowance, which would negatively affect earnings. 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 portfolio, 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.

 
7

 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

3.  
Critical Accounting Policies, Continued

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.  The allowance for loan losses is 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. For additional information see the risk factor entitled: “Our provision for loan losses and net loan charge offs have remained at elevated levels and we may be required to make further increases in our provisions for loan losses and to charge off additional loans in the future, which could adversely affect our results of operations ,” in Item 1A. Risk Factors of our 2012 Form 10-K. 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.

The Company uses assumptions and estimates in determining income taxes payable or refundable for the current year, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. The Company exercises considerable judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments and estimates are reevaluated on a continual basis as regulatory and business factors change. No assurance can be given that either the tax returns submitted by us or the income tax reported on the Consolidated Financial Statements will not be adjusted by either adverse rulings by the United States Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service.

4.  
Earnings Per Common Share

Accounting guidance specifies the computation, presentation and disclosure requirements for earnings per share (“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. 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 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.

Net income available to common shareholders represents consolidated net income adjusted for preferred dividends declared, accretions of discounts and amortization of premiums on preferred stock issuances and cumulative dividends related to the current dividend period that have not been declared as of period end. The following table provides a reconciliation of net income to net income available to common shareholders for the periods presented:

   
For the Quarter Ended June 30,
 
   
2012
   
2011
 
Earnings Available To Common Shareholders:
           
   Net Income
  $ 730,728     $ 461,047  
Preferred Stock Dividends
    110,000       110,000  
Net Income Available To Common Shareholders
  $ 620,728     $ 351,047  


 
8

 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

4.   Earnings Per Common Share, Continued

The following table shows the effect of dilutive options and warrants on the Company’s earnings per common share for the periods indicated:

 
For the Quarter Ended
 
June 30, 2012
 
Income (Numerator) Amount
 
Shares (Denominator)
 
Per Share
           
Basic EPS
$                                620,728
 
2,944,001
$
0.21
Effect Of Diluted Securities:
         
     Stock Options And Warrants
-
 
-
 
-
Diluted EPS
$                                620,728
 
2,944,001
$
0.21


 
For the Quarter Ended
 
June 30, 2011
 
Income (Numerator) Amount
 
Shares (Denominator)
 
Per Share
           
Basic EPS
$                                351,047
 
2,944,001
$
0.12
Effect Of Diluted Securities:
         
     Stock Options And Warrants
-
 
-
 
-
Diluted EPS
$                                351,047
 
2,944,001
$
0.12


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 periods presented:

 
June 30, 2012
June 30, 2011
 
 
For the Quarter Ended
 
Shares
Weighted Average
Exercise Price
 
Shares
Weighted Average
Exercise Price
Balance, Beginning of Period
72,900
$22.62
81,400
$22.51
Options Granted
-
-
-
-
Options Exercised
-
-
-
-
Options Forfeited
-
-
7,000
21.72
Balance, End Of Period
72,900
$22.62
74,400
$22.59
         
Options Exercisable
44,000
$22.07
49,900
$21.91
         
Options Available For Grant
50,000
 
50,000
 





 
9

 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

5.      Stock-Based Compensation, Continued

At June 30, 2012, the Company had the following options outstanding:

 
Grant Date
 
 
Outstanding Options
 
 
Option Price
 
 
Expiration Date
             
09/01/03
 
2,400
 
$24.00
 
08/31/13
             
12/01/03
 
3,000
 
$23.65
 
11/30/13
             
01/01/04
 
5,000
 
$24.22
 
12/31/13
             
03/08/04
 
7,000
 
$21.43
 
03/08/14
             
06/07/04
 
2,000
 
$24.00
 
06/07/14
             
01/01/05
 
19,000
 
$20.55
 
12/31/14
             
01/01/06
 
4,000
 
$23.91
 
01/01/16
             
08/24/06
 
6,000
 
$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
 
15,000
 
$23.49
 
01/01/18
             
05/19/08
 
2,500
 
$22.91
 
05/19/18
             
07/01/08
 
2,000
 
$22.91
 
07/01/18

None of the options outstanding at June 30, 2012 or 2011 had an exercise price below the average market price during the three month period ended June 30, 2012 or 2011, respectively. Therefore these options were not deemed to be dilutive to earnings per share in those periods.

6.     Stock Warrants

In conjunction with its participation in the U.S. Department of the Treasury’s (“U.S. Treasury”) Capital Purchase Program, the Company sold a warrant to the U.S. Treasury to purchase 137,966 shares of the Company’s common stock at $19.57 per share. The warrant has a 10-year term and was immediately exercisable upon issuance. At June 30, 2012 and 2011, the warrant was not deemed to be dilutive. There were no changes in the Company’s stock warrants during the three months ended June 30, 2012 and 2011.

7.    Carrying Amounts and Fair Value of Financial Instruments

Accounting guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).





 
10

 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

7.    Carrying Amounts and Fair Value of Financial Instruments, Continued

Level 1
Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. 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
Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. 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
Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. At June 30, 2012, the Company’s investment portfolio was comprised of government and agency bonds, mortgage-backed securities issued by government agencies or government sponsored enterprises, municipal securities and one equity investment. The portfolio did not contain any private label mortgage-backed securities. Fair value measurement is based upon prices obtained from third party pricing services who use independent pricing models which rely on a variety of factors including reported trades, broker/dealer quotes, benchmark yields, economic and industry events and other relevant market information. As such, these securities are classified as Level 2.

Mortgage Loans Held for Sale

The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with Freddie Mac or other investors, are carried in the Company’s loans held for sale portfolio.  These loans are fixed rate residential loans that have been originated in the Company’s name and have closed.  Virtually all of these loans have commitments to be purchased by investors and the majority of these loans were locked in by price with the investors on the same day or shortly thereafter that the loan was locked in with the Company’s customers.  Therefore, these loans present very little market risk for the Company.

The Company usually delivers to, and receives funding from, the investor within 30 days.  Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts" basis. The Company is not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. As a result of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is the same as the value of the loan amount at its origination. These loans are classified as Level 2.


 
11

 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

7.    Carrying Amounts and Fair Value of Financial Instruments, Continued

Impaired Loans

The Company does not record loans held for investment at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established as necessary. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment.

Fair value is estimated using one of the following methods: fair value of the collateral less estimated costs to sell, discounted cash flows, or market value of the loan based on similar debt. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, the Company reviews the most recent appraisal and if it is over 24 months old will request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, management may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. Specifically as an example, in situations where the collateral on a nonperforming commercial real estate loan is out of the Company’s primary market area, management would typically order an independent appraisal immediately, at the earlier of the date the loan becomes nonperforming or immediately following the determination that the loan is impaired. However, as a second example, on a nonperforming commercial real estate loan where management is familiar with the property and surrounding areas and where the original appraisal value far exceeds the recorded investment in the loan, management may perform an internal analysis whereby the previous appraisal value would be reviewed and adjusted for current conditions including recent sales of similar properties in the area and any other relevant economic trends. These valuations are reviewed at a minimum on a quarterly basis.

Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2012, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The Company records impaired loans as nonrecurring Level 3.

As of June 30, 2012 and March 31, 2012, the recorded investment in impaired loans was $42.6 million and $40.8 million, respectively. The average recorded investment in impaired loans was $41.7 million for the quarter ended June 30, 2012 and $34.3 million for the year ended March 31, 2012.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. The Company records these assets as nonrecurring Level 3.

Goodwill and Other Intangible Assets

Goodwill and identified intangible assets are subject to impairment testing. The Company’s approach to testing for impairment is to compare the business unit’s carrying value to the implied fair value based on a multiple of revenue approach. Impairment testing is performed annually as of September 30th or when events or circumstances occur indicating that goodwill of the reporting unit might be impaired.  In the event the fair value is determined to be less than the carrying value, the asset is recorded at fair value as determined by the valuation model. As such, goodwill and other intangible assets subjected to nonrecurring fair value adjustments are classified as Level 3.


 
12

 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

7.    Carrying Amounts and Fair Value of Financial Instruments, Continued

Assets measured at fair value on a recurring basis are as follows as of June 30, 2012:

 
 
Assets:
 
Quoted Market
Price In Active Markets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
FHLB Securities
   -      2,511,640      -  
Federal National Mortgage
   Association (“FNMA”) and
   Federal Home Loan Mortgage
   Corporation (“FHLMC”) Bonds
         -           1,000,790            -  
Small Business Administration
   (“SBA”) Bonds
    -       89,401,019        -  
Tax Exempt Municipal Securities
    -       31,969,427       -  
Mortgage-Backed Securities
    -       233,381,604       -  
Equity Securities
    -       72,750       -  
Total
   -      358,337,230      -  
 
 
There were no liabilites measured at fair value on a recurring basis as of June 30, 2012 or March 31, 2012. Assets measured at fair value on a recurring basis are as follows as of March 31, 2012:

 
 
Assets:
 
Quoted Market Price In Active Markets
(Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
FHLB Securities
   -      2,698,894      -  
FNMA and FHLMC Bonds
    -       2,921,851       -  
SBA Bonds
    -       86,278,802       -  
Tax Exempt Municipal Bonds
    -       24,125,725       -  
Mortgage-Backed Securities
    -       237,853,835       -  
Equity Securities
    -       75,750       -  
Total
 
$
     353,954,857      -  

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. The tables below present assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2012 and March 31, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall. 

 
Assets:
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Balance At
June 30, 2012
Mortgage Loans Held For Sale
$
-
$
3,158,501
$
-
$
3,158,501
Impaired Loans (1)
 
-
 
-
 
42,586,079
 
42,586,079
Foreclosed Assets
 
-
 
-
 
13,745,651
 
13,745,651
Total
$
                -
$
    3,158,501
$
56,331,730
$
          59,490,231
                 
       (1) IMPAIRED LOANS ARE REPORTED NET OF SPECIFIC RESERVES OF $44,541.

 
13

 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

7.    Carrying Amounts and Fair Value of Financial Instruments, Continued

 
Assets:
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Balance At
March 31, 2012
Mortgage Loans Held For Sale
$
-
$
2,671,771
$
-
$
$2,671,771
Impaired Loans (1)
 
-
 
-
 
39,160,338
 
39,160,338
Foreclosed Assets
 
-
 
-
 
14,160,099
 
14,160,099
Total
$
                -
$
2,671,771
$
53,320,437
$
55,992,208
                 
    (1) IMPAIRED LOANS ARE REPORTED NET OF SPECIFIC RESERVES OF $1,636,848.

There were no liabilites measured at fair value on a non- recurring basis as of June 30, 2012 or March 31, 2012.

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of June 30, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

   
Fair Value
June 30, 2012
 
 
Valuation Technique
 
Significant Unobservable
Inputs
 
 
Range
 
Impaired Loans
 
$
 
42,586,079
 
Appraised Value/
Discounted Cash Flows
 
Appraisals And/ Or Sales Of
Comparable Properties
 
 
0% - 98%
 
Foreclosed Assets
 
 
13,745,651
 
Appraised Value/
Comparable Sales
 
Appraisals And/ Or Sales Of
Comparable Properties/Bids
 
 
0% - 91%


For assets and liabilities that are not presented on the balance sheet at fair value, the following methods are used to determine the fair value:
 
Cash and cash equivalents—The carrying amount of these financial instruments approximates fair value. All mature within 90 days and do not present unanticipated credit concerns. These are classified as Level 1.
 
Certificates of deposits with other banks—Fair value is based on market prices for similar assets. These are classified as Level 1.
 
Investment securities held to maturity—Securities held to maturity are valued at quoted market prices or dealer quotes. These are classified as Level 2.
 
Loans—The fair value of loans are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. As discount rates are based on current loan rates as well as management estimates, the fair values presented may not be indicative of the value negotiated in an actual sale. These are classified as Level 2.
 
FHLB Stock—The fair value approximates the carrying value. This is classified as Level 1.
 
Deposits—The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. These are classified as Level 1. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities. These are classified as Level 2.
 
 FHLB Advances—Fair value is estimated based on discounted cash flows using current market rates for borrowings with similar terms. These are classified as Level 2.
 
Other Borrowed Money—The carrying value of these short term borrowings approximates fair value. These are classified as Level 1.
 

 
14

 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

7.    Carrying Amounts and Fair Value of Financial Instruments, Continued
 
Senior Convertible Debentures— The fair value is estimated by discounting the future cash flows using the current rates at which similar debenture offerings with similar terms and maturities would be issued by similar institutions. As discount rates are based on current debenture rates as well as management estimates, the fair values presented may not be indicative of the value negotiated in an actual sale. These are classified as Level 2.
 
Junior Subordinated Debentures—The carrying value of junior subordinated debentures approximates fair value. These are classified as Level 2.
 
The following table is a summary of the carrying value and estimated fair value of the Company’s financial instruments as of June 30, 2012 and March 31, 2012 presented in accordance with the applicable accounting guidance.

 
June 30, 2012
     
Fair Value
 
(In Thousands)
 
Carrying
Amount
 
 
Total
 
 
Level 1
 
 
Level 2
 
 
Level 3
Financial Assets:
                   
Cash And Cash Equivalents
$
10,653
$
10,653
$
10,653
$
-
$
-
Certificates of Deposits With Other Banks
 
1,728
 
1,728
 
1,728
 
-
 
-
Investment And Mortgage-Backed Securities
 
423,427
 
426,041
 
-
 
426,041
 
-
Loans Receivable, Net
 
413,067
 
411,970
 
-
 
411,970
 
-
FHLB Stock
 
6,928
 
6,928
 
6,928
 
-
 
-
                     
Financial Liabilities:
                   
Deposits:
                   
   Checking, Savings, And Money Market
   Accounts
 
 
379,597
 
 
379,597
 
 
379,597
 
 
-
 
 
-
   Certificate Accounts
 
314,922
 
317,069
 
-
 
317,069
 
-
Advances From FHLB
 
108,166
 
117,571
 
-
 
117,571
 
-
Other Borrowed Money
 
10,023
 
10,023
 
10,023
 
-
 
-
Senior Convertible Debentures
 
5,155
 
5,155
 
-
 
5,155
 
-
Junior Subordinated Debentures
 
6,084
 
6,084
 
-
 
6,084
 
-
                     


   
March 31, 2012
 
   
Carrying
Amount
   
Estimated
Fair Value
 
   
In Thousands
 
Financial Assets:
           
Cash And Cash Equivalents
  $ 9,331     $ 9,331  
Certificates of Deposits With Other Banks
    1,727       1,727  
Investment And Mortgage-Backed Securities
    421,631       423,921  
Loans Receivable, Net
    428,511       427,212  
FHLB Stock
    8,471       8,471  
                 
Financial Liabilities:
               
Deposits:
               
   Checking, Savings, And Money Market Accounts
  $ 371,295     $ 371,295  
   Certificate Accounts
    324,906       327,117  
Advances From FHLB
    122,070       131,679  
Other Borrowed Money
    9,801       9,801  
Senior Convertible Debentures
    6,084       6,084  
Junior Subordinated Debentures
    5,155       5,155  


 
15

 


Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

7.    Carrying Amounts and Fair Value of Financial Instruments, Continued

At June 30, 2012, the Bank had $33.4 million of off-balance sheet financial commitments.  These commitments are to originate loans and unused consumer lines of credit and credit card lines.  Because these obligations are based on current market rates, if funded, the original principal is considered to be a reasonable estimate of fair value.

Fair value estimates are made on a specific date, based on relevant market data and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale the Bank’s entire holdings of a particular financial instrument.  Because no active market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, current interest rates and prepayment trends, risk characteristics of various financial instruments, and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in any of these assumptions used in calculating fair value would also significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  For example, the Bank has significant assets and liabilities that are not considered financial assets or liabilities including deposit franchise values, loan servicing portfolios, deferred tax liabilities, and premises and equipment.

In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. The Company has used management’s best estimate of fair value on the above assumptions.  Thus, the fair values presented may not be the amounts, which could be realized, in an immediate sale or settlement of the instrument.  In addition, any income taxes or other expenses that would be incurred in an actual sale or settlement are not taken into consideration in determing fair value.

8.      Accounting and Reporting Changes

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of financial information by the Company.

In September 2011, the Intangibles topic of the Accounting Standards Codification (“ASC”) was amended to permit an entity to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test.  These amendments were effective for the Company on April 1, 2012.

In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC  was amended by Accounting Standard Update (“ASU”) 2011-03.  The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control.  The other criteria to assess effective control were not changed.  The amendments were effective for the Company on April 1, 2012 and had no effect on the financial statements.

ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements.  These amendments were effective for the Company beginning April 1, 2012 and had no effect on the financial statements.

The Comprehensive Income topic of the ASC was amended in June 2011.  The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and requires consecutive presentation of the statement of net income and other comprehensive income.  The amendments were applicable to the Company on April 1, 2012 and have been applied retrospectively.  In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements.  Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while the Financial Accounting Standards Board (“FASB”) redeliberates future requirements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 
16

 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

9.           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:
 
   
June 30, 2012
 
   
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
 
Fair value
 
                         
    FHLB Securities    2,440,263      71,377    
$
 -      2,511,640  
FNMA and FHLMC Bonds
    1,000,000       790       -       1,000,790  
SBA Bonds
    87,773,083       1,730,497       102,561       89,401,019  
Tax Exempt Municipal Bonds
    30,632,658       1,398,464       61,695       31,969,427  
Mortgage-Backed Securities
    224,933,434       8,589,965       141,795       233,381,604  
Equity Securities
    102,938       -       30,188       72,750  
    $ 346,882,376     $ 11,791,093     $ 336,239     $ 358,337,230  
                                 


   
March 31, 2012
 
   
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair value
 
                         
FHLB Securities
  $ 2,634,234     $ 64,660     $ -     $ 2,698,894  
   FNMA And FHLMC Bonds
    2,926,566       560       5,275       2,921,851  
SBA Bonds
    85,064,224       1,357,490       142,912       86,278,802  
Tax Exempt Municipal Bonds
    23,231,375       971,739       77,389       24,125,725  
Mortgage-Backed Securities
    229,462,521       8,486,387       95,073       237,853,835  
Equity Securities
    102,938       -       27,188       75,750  
    $ 343,421,858     $ 10,880,836     $ 347,837     $ 353,954,857  


FHLB securities, FNMA and FHLMC bonds, and FNMA and FHLMC mortgage-backed securities are issued by government-sponsored enterprises (“GSEs”).  GSEs are not backed by the full faith and credit of the United States government.  SBA bonds are backed by the full faith and credit of the United States government. Included in the tables above in mortgage-backed securities are GNMA mortgage-backed securities, which are also backed by the full faith and credit of the United States government.  At June 30, 2012 and March 31, 2012, the Company held an amortized cost and fair value of $147.8 million and $153.5 million, respectively, and $143.8 million and $149.3 million, respectively, in GNMA mortgage-backed securities included in mortgage-backed securities listed above. All mortgage-backed securities in the Company’s portfolio are either GSEs or GNMA mortgage-backed securities. The balance does not include any private label mortgage-backed securities.

The Bank received approximately $7.8 million and $8.3 million, respectively, in proceeds from sales of available for sale securities during the quarters ended June 30, 2012 and 2011 and recognized $104,000 and $171,000 in gross gains during the quarters ended June 30, 2012 and June 30, 2011, respectively.


 
17

 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

9.      Securities, Continued

The amortized cost and fair value of investment and mortgage-backed securities available for sale at June 30, 2012 are shown below by contractual maturity.  Expected maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are presented as a separate line item since paydowns are expected to occur before the contractual maturity dates.

   
Amortized Cost
   
Fair Value
 
             
Less Than One Year
   -      -  
One – Five Years
    11,294,504       11,549,597  
Over Five – Ten Years
    49,782,758       50,761,034  
After Ten Years
    60,871,680       62,644,995  
Mortgage-Backed Securities
    224,933,434       233,381,604  
    $ 346,882,376     $ 358,337,230  

The following tables show gross unrealized losses and fair value, aggregated by investment category, and length of time that individual available for sale securities have been in a continuous unrealized loss position for the periods indicated.

   
June 30, 2012
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
 Losses
 
SBA Bonds
   10,726,866      102,561  
$
   -  
$
   -      10,726,866      102,561  
Tax Exempt Municipal Bond
    8,577,089       61,695       -       -       8,577,089       61,695  
Mortgage-Backed Securities
    21,961,960       141,795       -       -       21,961,960       141,795  
Equity Securities
    -       -       72,750       30,188       72,750       30,188  
    $ 41,265,915     $ 306,051    $   72,750     30,188     $ 41,338,665     $ 336,239  

   
March 31, 2012
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
FNMA And FHLMC Bonds  
  $  1,921,291      5,275  
$
   -  
$
   -      1,921,291      5,275  
SBA Bonds
    12,508,821       142,912       -       -       12,508,821       142,912  
Tax Exempt Municipal Bond
    3,390,580       77,389       -       -       3,390,580       77,389  
Mortgage-Backed Securities
    23,053,784       95,073       -       -       23,053,784       95,073  
Equity Securities
    -       -       75,750       27,188       75,750       27,188  
    $ 40,874,476     $ 320,649     75,750    $   27,188     $ 40,950,226     $ 347,837  

Securities classified as available for sale are recorded at fair market value. The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature.  The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value was attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary. The Company reviews its investment securities portfolio at least quarterly and more frequently when economic conditions warrant, assessing whether there is any indication of other-than-temporary impairment (“OTTI”). Factors considered in the review include estimated future cash flows, length of time and extent to which market value has been less than cost, the financial condition and near term prospects of the issuer, and our intent and ability to retain the security to allow for an anticipated recovery in market value.

If the review determines that there is OTTI, then an impairment loss is recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made, or a portion may be recognized in other comprehensive income. The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment.

 
18

 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

9.      Securities, Continued

Investment and Mortgage-Backed Securities, Held to Maturity
 
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment and mortgage-backed securities held to maturity are as follows:
 
 
 
June 30, 2012
 
 
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
 
Fair Value
 
FHLB Securities
  $ 10,547,804     $ 196,752     -     $ 10,744,556  
Federal Farm Credit Securities
    1,999,540       13,720       -       2,013,260  
FNMA and FHLMC Bonds
    5,985,244       46,006       -       6,031,250  
SBA Bonds
    3,251,636       356,074       -       3,607,710  
Mortgage-Backed Securities
    43,150,174       2,002,208       -       45,152,382  
Equity Securities
    155,000       -       -       155,000  
Total
  $ 65,089,398     $ 2,614,760      $ -     $ 67,704,158  

       
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
 
Fair Value
 
   March 31, 2012
                       
FHLB Securities
  $ 11,554,627     $ 221,726     $ 13,517     $ 11,762,836  
FFCB Securities
    1,999,516       6,534       23,410       1,982,640  
FNMA and FHLMC Bonds
    6,983,004       19,863       49,147       6,953,720  
SBA Bonds
    3,251,151       305,430       -       3,556,581  
Mortgage-Backed Securities
    43,732,912       1,822,180       -       45,555,092  
Equity Securities
    155,000       -       -       155,000  
    $ 67,676,210     $ 2,375,733     $ 86,074     $ 69,965,869  

Included in the tables above in mortgage-backed securities are GNMA mortgage-backed securities, which are also backed by the full faith and credit of the United States government.  At June 30, 2012, the Company held an amortized cost and fair value of $41.9 million and $43.8 million, respectively, in GNMA mortgage-backed securities included in mortgage-backed securities listed above. At March 31, 2012, the Company held an amortized cost and fair value of $42.2 million and $43.9 million, respectively, in GNMA mortgage-backed securities, which are included in mortgage-backed securities line item in the table above. All mortgage-backed securities in the Company’s portfolio above are either GSEs or GNMA mortgage-backed securities. The balance does not include any private label mortgage-backed securities.

The amortized cost and fair value of investment and mortgage-backed securities held to maturity at June 30, 2012, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities resulting from call features on certain investments. Mortgage-backed securities are presented as a separate line item since paydowns are expected to occur before the contractual maturity dates.

   
Amortized Cost
   
Fair Value
 
             
 Less Than One Year
  $ 1,000,000     $ 1,045,040  
 One – Five Years
    5,368,392       5,505,044  
Over Five – Ten Years
    7,990,319       8,039,860  
More Than Ten Years
    7,580,513       7,961,832  
Mortgage-Backed Securities
    43,150,174       45,152,382  
    $ 65,089,398     $ 67,704,158  
                 
 
 

 
19

 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

9.      Securities, Continued

The Company did not have any held to maturity securities in an unrealized loss position at June 30, 2012. The following table shows the held to maturity securities in an unrealized loss position at March 31, 2012.


   
March 31, 2012
 
   
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
 Losses
 
FHLB Securities
  $ 4,532,636     $ 13,517     -     -     $ 4,532,636     $ 13,517  
FFCB Securities
    976,590       23,410       -       -       976,590       23,410  
FNMA And FHLMC Bonds
    4,939,150       49,147       -       -       4,939,150       49,147  
    $ 10,448,376     $ 86,074     $ -     -     $ 10,448,376     $ 86,074  

The Company’s held to maturity portfolio is recorded at amortized cost.  The Company has the ability and intends to hold these securities to maturity. There were no sales of securities held to maturity during the quarters ended June 30, 2012 or 2011, or during the year ended March 31, 2012.

10.            Loans Receivable, Net

Loans receivable, net, at June 30, 2012 and March 31, 2012 consisted of the following:

   
June 30, 2012
   
March 31, 2012
 
Residential Real Estate
  $ 95,674,036     $ 97,807,917  
Consumer
    57,310,488       58,685,000  
Commercial Business
    8,893,669       9,552,575  
Commercial Real Estate
    262,203,015       276,317,897  
   Total Loans Held For Investment
    424,081,208       442,363,389  
                 
 Loans Held For Sale
    3,158,501       2,671,771  
      Total Loans Receivable, Gross
    427,239,709       445,035,160  
                 
Less:
               
Allowance For Possible Loan Loss
    12,684,327       14,615,198  
Loans In Process
    1,472,379       1,886,652  
Deferred Loan Fees
    16,108       22,704  
      14,172,814       16,524,554  
      Total Loans Receivable, Net
  $ 413,066,895     $ 428,510,606  

The Company uses a risk based approach based on the following credit quality measures when analyzing the loan portfolio: pass, caution, special mention, and substandard. These indicators are used to rate the credit quality of loans for the purposes of determining the Company’s allowance for loan losses. Pass loans are loans that are performing and are deemed adequately protected by the net worth of the borrower or the underlying collateral value. These loans are considered the least risky in terms of determining the allowance for loan losses. Substandard loans are considered the most risky category. These loans typically have an identified weakness or weaknesses and are inadequately protected by the net worth of the borrower or collateral value. All loans 60 days or more past due are automatically classified in this category. The other two categories fall in between these two grades.


 
20

 

Security Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited), Continued

10.            Loans Receivable, Net, Continued

The following tables list the loan grades used by the Company as credit quality indicators and the balance in each category, excluding loans held for sale, for the periods indicated.

   
June 30, 2012
 
   
Credit Quality Measures
 
   
Pass
   
Caution
   
Special
Mention
   
Substandard
   
Total Loans
 
Residential Real Estate
  $ 87,436,807     $ 225,553     $ 295,572     $ 7,716,104     $ 95,674,036  
Consumer
    55,352,127       177,115       103,146       1,678,100       57,310,488  
Commercial Business
    7,932,730       395,763       177,500       387,676       8,893,669  
Commercial Real Estate
    181,617,951       18,860,609       17,022,335       44,702,120       262,203,015  
Total
  $ 332,339,615     $ 19,659,040     $ 17,598,553     $ 54,484,000     $ 424,081,208  

   
March 31, 2012
 
   
Credit Quality Measures
 
   
Pass
   
Caution
   
Special
Mention
   
Substandard
   
Total Loans
 
Residential Real Estate
  $ 88,536,685     -     $ 573,887     $ 8,697,345     $ 97,807,917  
Consumer
    57,113,676       159,805       27,604       1,383,915       58,685,000  
Commercial Business
    8,608,378       446,815       -       497,382       9,552,575  
Commercial Real Estate
    190,230,745       21,874,264       19,783,230       44,429,658       276,317,897  
Total
  $ 344,489,484     22,480,884     $ 20,384,721     $ 55,008,300     $ 442,363,389  

The following tables present an age analysis of past due balances by category, excluding loans held for sale, at the periods indicated.

 
 
June 30, 2012
 
30-59 Days
Past Due
   
60-89 Days
Past Due
   
90 Day or
More Past
Due
   
Total Past
Due
   
 
Current
   
Total Loans Receivable
 
Residential
   Real Estate
  $ 1,463,721     $ 166,352     $ 3,353,517     $ 4,983,590     $ 90,690,446     $ 95,674,036  
Consumer
    935,040       188,277       549,203       1,672,520       55,637,968       57,310,488  
Commercial
   Business
    230,448       224,071       45,888       500,407       8,393,262       8,893,669  
Commercial
   Real Estate
    21,559,130       2,466,893