Attached files
file | filename |
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EX-32 - EXHIBIT 32 - SECURITY FEDERAL CORP | ex32aiken63012.htm |
EX-31.2 - EXHIBIT 31.2 - SECURITY FEDERAL CORP | ex312aiken63012.htm |
EX-31.1 - EXHIBIT 31.1 - SECURITY FEDERAL CORP | ex311aiken63012.htm |
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
|
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 | $ |