SECURITY FEDERAL CORP
10-Ks and 10-Qs
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UNITED
STATES
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SECURITIES
AND EXCHANGE COMMISSION
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Washington,
D.C. 20549
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________________________
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FORM
10-K
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[X]
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended March 31,
2010
OR
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[
]
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from __________ to __________
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Commission
File Number: 0-16120
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SECURITY
FEDERAL CORPORATION
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(Exact
Name of Registrant as Specified in its Charter)
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South
Carolina
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57-08580504
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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238
Richland Avenue West, Aiken, South Carolina
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29801
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:
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(803)
641-3000
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Securities
registered pursuant to Section 12(b) of the Act:
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None
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Securities
registered pursuant to Section 12(g) of the Act:
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Common
Stock, par value $0.01 per share
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(Title
of Class)
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Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. YES
NO
X
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. YES
NO
X
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 Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes [_] No [ _]
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [
]
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 definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act (Check one):
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Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company
X
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Indicate by check mark whether the
Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). YES
NO
X
As of June 15, 2010, there were issued
and outstanding 2,461,095 shares of the registrant’s Common Stock, which are
traded on the over-the-counter market through the OTC “Electronic Bulletin
Board” under the symbol “SFDL.” The aggregate market value of the
voting stock held by non-affiliates of the registrant, computed by reference to
the average of the bid and asked price of such stock as of September 30, 2009,
was $23.1 million. (The exclusion from such amount of the market
value of the shares owned by any person shall not be deemed an admission by the
registrant that such person is an affiliate of the registrant.)
DOCUMENTS
INCORPORATED BY REFERENCE
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1.
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Portions
of the Registrant’s Annual Report to Stockholders for the Fiscal Year
Ended March 31, 2010. (Part
II)
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2.
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Portions
of the Registrant’s Proxy Statement for the 2010 Annual Meeting of
Stockholders. (Part III)
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Forward-Looking
Statements
This Form 10-K, including information
included or incorporated by reference, contents, and future filings by the
Company on Form 10-Q, and Form 8-K, and future oral and written statements by
the Company and its management may contain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements often include the words “believes,”
“expects,” “anticipates,” “estimates,” “forecasts,” “intends,” “plans,”
“targets,” “potentially,” “probably,” “projects,” “outlook” or similar
expressions or future or conditional verbs such as “may,” “will,” “should,”
“would” and “could.” These forward-looking statements are subject to known and
unknown risks, uncertainties and other factors that could cause actual results
to differ materially from the results anticipated, including, but not limited
to:
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$
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the
credit risks of lending activities, including changes in the level and
trend of loan delinquencies and write-offs and changes in our allowance
for loan losses and provision for loan losses that may be impacted by
deterioration in the housing and commercial real estate
markets;
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$
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changes
in general economic conditions, either nationally or in our market
areas;
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$
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changes
in the levels of general interest rates, and the relative differences
between short and long term interest rates, deposit interest rates, our
net interest margin and funding
sources;
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$
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fluctuations
in the demand for loans, the number of unsold homes, land and other
properties and fluctuations in real estate values in our market
areas;
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$
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results
of examinations of us by the Office of Thrift Supervision (the “OTS”) or
the FDIC or other regulatory authorities, including the possibility that
any such regulatory authority may, among other things, require us to
increase our reserve for loan losses, write-down assets, change our
regulatory capital position or affect our ability to borrow funds or
maintain or increase deposits, which could adversely affect our liquidity
and earnings;
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$
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legislative
or regulatory changes that adversely affect our business including changes
in regulatory policies and principles, or the interpretation of
regulatory capital or other rules;
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$
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further
increases in premiums for deposit
insurance;
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$
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our
ability to control operating costs and
expenses;
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$
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the
use of estimates in determining fair value of certain of our assets, which
estimates may prove to be incorrect and result in significant declines in
valuation;
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$
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difficulties
in reducing risk associated with the loans on our balance
sheet;
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$
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staffing
fluctuations in response to product demand or the implementation of
corporate strategies that affect our workforce and potential associated
charges;
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$
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computer
systems on which we depend could fail or experience a security
breach;
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$
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our
ability to retain key members of our senior management
team;
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$
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costs
and effects of litigation, including settlements and
judgments;
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$
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our
ability to implement our branch expansion
strategy;
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$
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our
ability to successfully integrate any assets, liabilities, customers,
systems, and management personnel we have acquired or may in the future
acquire into our operations and our ability to realize related revenue
synergies and cost savings within expected time frames and any goodwill
charges related thereto;
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$
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changes
in premiums or claims that adversely affect our insurance
segment;
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$
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increased
competitive pressures among financial services
companies;
|
i
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$
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changes
in consumer spending, borrowing and savings
habits;
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$
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the
availability of resources to address changes in laws, rules, or
regulations or to respond to regulatory
actions;
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$
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our
ability to pay dividends on our common
stock;
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$
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adverse
changes in the securities markets;
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$
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inability
of key third-party providers to perform their obligations to
us;
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$
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changes
in accounting policies and practices, as may be adopted by the financial
institution regulatory agencies or the Financial Accounting Standards
Board, including additional guidance and interpretation on accounting
issues and details of the implementation of new accounting
methods;
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$
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future
legislative changes in the Troubled Asset Relief Program Capital Purchase
Program Capital Purchase Program;
and
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$
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other
economic, competitive, governmental, regulatory, and technological factors
affecting our operations, pricing, products and services and the other
risks described elsewhere in this
document.
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These developments could have an
adverse impact on our financial position and our results of
operations.
Any forward-looking statements are
based upon management’s beliefs and assumptions at the time they are made. We
undertake no obligation to publicly update or revise any forward-looking
statements included or incorporated by reference in this document or to update
the reasons why actual results could differ from those contained in such
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
statements discussed in this document might not occur, and you should not put
undue reliance on any forward-looking statements.
As used throughout this report, the
terms “we”, “our” or “us” refer to Security Federal Corporation and our
consolidated subsidiary, Security Federal Bank.
Available
Information
The Company provides a link on its
investor information page at
www.securityfederalbank.com
to the Securities and Exchange Commission’s (“SEC”) website (
www.sec.gov
) for
purposes of providing copies of its annual report to shareholders, annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
press releases. These filings are available free of charge and also
can be obtained by calling the SEC at 1-800-SEC-0330.
Security Federal
Corporation
Security Federal Corporation (the
“Company”) was incorporated under the laws of the State of Delaware in July 1987
for the purpose of becoming the savings and loan holding company
for Security Federal Bank (“Security Federal” or the “Bank”) upon the
Bank’s conversion from mutual to the stock form (the
“Conversion”). Effective August 17, 1998, the Company changed its
state of incorporation from Delaware to South Carolina.
As a South Carolina corporation, the
Company is authorized to engage in any activity permitted by South Carolina
General Corporation Law. The Company is a unitary savings and loan
holding company. Through the unitary holding company structure, it is
possible to expand the size and scope of the financial services offered beyond
those currently offered by the Bank. The holding company structure
also provides the Company with greater flexibility than the Bank would have to
diversify its business activities, through existing or newly formed
subsidiaries, or through acquisitions or mergers of stock thrift institutions as
well as other companies. There are no current arrangements,
understandings or agreements regarding any such acquisition. Future
activities of the Company, other than the continuing operations of Security
Federal, will be funded through dividends from Security Federal and through
borrowings from third parties. See “Regulation – Savings and Loan
Holding Company Regulation” and “Taxation.” Activities of the Company may also
be funded through sales of additional securities or income generated by other
activities of the Company. At this time, there are no plans regarding
sales of additional securities or other activities.
At March 31, 2010, the Company had
assets of $956.0 million, deposits of $694.3 million and shareholders’ equity of
$67.9 million.
The executive office of the Company is
located at 238 Richland Avenue West, Aiken, South Carolina 29801, and its
telephone number is (803) 641-3000.
Security Federal
Bank
General
. Security
Federal is a federally chartered stock savings bank headquartered in Aiken,
South Carolina. Security Federal, with 13 branch offices in Aiken,
Richland and Lexington Counties, South Carolina and Columbia County, Georgia,
was originally chartered under the name Aiken Building and Loan Association on
March 27, 1922. It received its federal charter and changed its name
to Security Federal Savings and Loan Association of Aiken on March 7, 1962, and
later changed its name to Security Federal Savings Bank of South Carolina, on
November 11, 1986. Effective April 8, 1996, the Bank changed its name
to Security Federal Bank. The Bank converted from the mutual to the
stock form of organization on October 30, 1987.
In October 1993, Security Federal
increased its branch network to nine offices with the completion of its
acquisition of four former NationsBank of South Carolina, N.A. branches located
in Aiken County. In February 1996, Security Federal opened a new
branch office in the Aiken Wal-Mart Superstore. The Bank opened a
branch in West Columbia, Lexington County, South Carolina, in December 2000,
which provided the Bank with the opportunity to expand its market
area. In August 2003, the Bank opened a new branch in Lexington,
South Carolina. During February 2004, the Bank completed the sale of
its Denmark, South Carolina branch office to South Carolina Bank and Trust, N.A.
of Orangeburg, South Carolina. In January 2006, the Bank closed its
branch in the Aiken Wal-Mart Superstore and replaced it with a free standing
branch on an out parcel in the Aiken Exchange Shopping Center. In
December 2007, the Bank opened a new full service branch office in Evans,
Georgia, and a new full service branch office in Columbia, South
Carolina.
The principal business of Security
Federal is accepting deposits from the general public and originating commercial
real estate loans, commercial business loans, consumer loans, as well as
mortgage loans to buy or refinance one-to-four family residential real
estate. The Bank also originates construction loans on single-family
residences, multi-family dwellings and projects, and commercial real
estate, as well as loans for the acquisition, development and construction of
residential subdivisions and commercial projects.
1
Security Federal’s income is derived
primarily from interest and fees earned in connection with its lending
activities, and its principal expenses are interest paid on savings deposits and
borrowings and operating expenses.
Issuance of Convertible
Senior Debentures
On December 1, 2009, the Company issued
$6.1 million in convertible senior debentures. The debentures mature
on December 1, 2029 and accrue interest at the rate of 8.0% per annum until
maturity or earlier redemption or repayment. Interest on the debentures is
payable on June 1 and December 1 of each year, commencing June 1, 2010. The
debentures are convertible into the Company’s common stock at a conversion price
of $20 per share at the option of the holder at any time prior to
maturity.
The debentures are redeemable, in whole
or in part, at the option of the Company at any time on or after December 1,
2019, at a price equal to 100% of the principal amount of the debentures to be
purchased plus any accrued and unpaid interest to, but excluding, the date of
redemption. The debentures will be unsecured general obligations of the Company
ranking equal in right of payment to all of our present and future unsecured
indebtedness that is not expressly subordinated.
Participation in Troubled
Asset Relief Program (“TARP”) Capital Purchase Program
(“CPP”)
On December 19, 2008, as part of the
TARP CPP of the United States Department of the Treasury (“Treasury”), the
Company sold to Treasury 18,000 shares of Cumulative Perpetual Preferred Stock,
Series A and a warrant to purchase 137,966 shares of the Company’s common stock,
par value $0.01 per share, for an aggregate purchase price of $18.0 million in
cash. For additional information regarding the TARP CPP
transaction, see Item 1A, “Risk Factors – Risks Related to Recent Economic
Conditions and Governmental Response Efforts – Risks specific to our
participation in TARP.”
Selected Consolidated
Financial Information
This information is incorporated by
reference to page 7 of the 2010 Annual Report to Stockholders (“Annual
Report”).
Yields Earned and Rates
Paid
This information is incorporated by
reference to page 18 of the Annual Report.
Rate/Volume
Analysis
This information is incorporated by
reference to page 17 of the Annual Report.
Lending
Activities
General
. The
primary source of revenue for the Bank is interest and fee income from lending
activities. The principal lending activities are making loans on
commercial real estate and one-to-four family residential real estate. The Bank
originates fixed rate residential real estate loans for sale in the secondary
market and adjustable rate mortgage loans to be held in its
portfolio. The Bank also originates construction loans on single
family residences, multi-family dwellings and commercial real estate, and loans
for the acquisition, development and construction of residential subdivisions
and commercial projects. To a lesser extent, the Bank
originates consumer loans and commercial business loans.
The loan-to-value ratio, maturity and
other provisions of loans made by the Bank reflect its policy of making the
maximum loan permissible consistent with applicable regulations, established
lending policies and market conditions. The Bank requires title
insurance (or acceptable legal opinions on smaller loans secured by real estate)
and fire insurance, and flood insurance where applicable, on loans secured by
improved real estate.
2
Loan Portfolio
Composition.
The following table sets forth information
concerning the composition of the Bank’s loan portfolio in dollar amounts and in
percentages by type of loan, and presents a reconciliation of total
loans
receivable before net items.
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At
March 31,
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2010
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2009
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2008
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2007
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2006
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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(Dollars
in Thousands)
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TYPE OF
LOAN:
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Fixed rate
loans
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Residential
real estate
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$ | 11,488 | 2.0 | % | $ | 13,738 | 2.2 | % | $ | 12,036 | 2.3 | % | $ | 11,620 | 2.6 | % | $ | 11,594 | 3.0 | % | ||||||||||||||||||||
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Commercial
business and
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commercial
real
estate
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280,702 | 47.9 | 239,076 | 38.1 | 154,558 | 28.9 | 126,987 | 28.2 | 99,446 | 25.4 | ||||||||||||||||||||||||||||||
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Consumer
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30,223 | 5.1 | 33,881 | 5.4 | 37,026 | 6.9 | 37,123 | 8.2 | 32,342 | 8.3 | ||||||||||||||||||||||||||||||
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Total
fixed rate loans
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322,413 | 55.0 | 286,695 | 45.7 | 203,620 | 38.1 | 175,730 | 39.0 | 143,382 | 36.7 | ||||||||||||||||||||||||||||||
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Adjustable rate
loans
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Residential
real
estate
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109,930 | 18.7 | 118,955 | 19.0 | 122,123 | 22.9 | 115,422 | 25.7 | 111,753 | 28.6 | ||||||||||||||||||||||||||||||
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Commercial
business and
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commercial
real
estate
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115,831 | 19.8 | 186,359 | 29.7 | 178,829 | 33.4 | 132,221 | 29.4 | 109,768 | 28.0 | ||||||||||||||||||||||||||||||
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Consumer
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38,303 | 6.5 | 35,144 | 5.6 | 29,806 | 5.6 | 26,687 | 5.9 | 26,271 | 6.7 | ||||||||||||||||||||||||||||||
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Total
adjustable rate loans
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264,064 | 45.0 | 340,458 | 54.3 | 330,758 | 61.9 | 274,330 | 61.0 | 247,792 | 63.3 | ||||||||||||||||||||||||||||||
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Total
loans
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586,477 | 100.0 | % | 627,153 | 100.0 | % | 534,378 | 100.0 | % | 450,060 | 100.0 | % | 391,174 | 100.0 | % | |||||||||||||||||||||||||
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Less
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Loans
in
process
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5,620 | 5,602 | 8,064 | 6,443 | 9,185 | |||||||||||||||||||||||||||||||||||
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Deferred
fees and discounts
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151 | 279 | 315 | 281 | 175 | |||||||||||||||||||||||||||||||||||
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Allowance
for loan
losses
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12,307 | 10,182 | 8,067 | 7,297 | 6,705 | |||||||||||||||||||||||||||||||||||
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Total
loans
receivable
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$ | 568,399 | $ | 611,090 | $ | 517,932 | $ | 436,039 | $ | 375,109 | ||||||||||||||||||||||||||||||
The total amount of loans due after
March 31, 2011, which have predetermined or fixed interest rates is $205.8
million, while the total amount of loans due after that date which have floating
or adjustable interest rates is $189.2 million.
3
The following table sets forth
information concerning the composition of the Bank’s loan portfolio in dollar
amounts and in percentages by type of loan, and presents a reconciliation of
total loans receivable before net items.
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At
March 31,
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2010
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2009
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2008
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2007
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2006
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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|||||||||||||||||||||||||||||||
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(Dollars
in Thousands)
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TYPE
OF LOAN:
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Real
Estate Loans:
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Residential
real estate
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$ | 105,170 | 17.9 | % | $ | 115,507 | 18.4 | % | $ | 116,184 | 21.7 | % | $ | 109,532 | 24.3 | % | $ | 99,561 | 25.4 | % | ||||||||||||||||||||
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Owner
occupied residential
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construction
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16,248 | 2.8 | 17,186 | 2.8 | 17,975 | 3.4 | 17,510 | 3.9 | 23,786 | 6.1 | ||||||||||||||||||||||||||||||
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Total
residential real estate loans
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121,418 | 20.7 | 132,693 | 21.2 | 134,159 | 25.1 | 127,042 | 28.2 | 123,347 | 31.5 | ||||||||||||||||||||||||||||||
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Commercial
business
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17,813 | 3.0 | 21,032 | 3.3 | 22,070 | 4.1 | 23,856 | 5.3 | 21,772 | 5.6 | ||||||||||||||||||||||||||||||
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Commercial
real estate
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366,002 | 62.4 | 392,087 | 62.5 | 300,406 | 56.2 | 231,663 | 51.5 | 186,208 | 47.6 | ||||||||||||||||||||||||||||||
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Multi-family
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12,718 | 2.2 | 12,316 | 2.0 | 10,911 | 2.1 | 3,689 | 0.8 | 1,234 | 0.3 | ||||||||||||||||||||||||||||||
| 396,533 | 67.6 | 425,435 | 67.8 | 333,387 | 62.4 | 259,208 | 57.6 | 209,214 | 53.5 | |||||||||||||||||||||||||||||||
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Consumer
loans:
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||||||||||||||||||||||||||||||||||||||||
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Deposit
account
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985 | 0.2 | 757 | 0.1 | 1,569 | 0.3 | 1,647 | 0.4 | 1,180 | 0.3 | ||||||||||||||||||||||||||||||
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Home
equity lines
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29,944 | 5.1 | 28,298 | 4.5 | 22,693 | 4.2 | 20,086 | 4.4 | 20,059 | 5.1 | ||||||||||||||||||||||||||||||
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Consumer
first and second mortgages
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18,545 | 3.1 | 12,835 | 2.1 | 19,076 | 3.6 | 22,868 | 5.1 | 22,144 | 5.7 | ||||||||||||||||||||||||||||||
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Premium
finance
|
406 | 0.1 | 532 | 0.1 | 778 | 0.1 | 892 | 0.2 | -- | -- | ||||||||||||||||||||||||||||||
|
Other
|
18,646 | 3.2 | 26,603 | 4.2 | 22,716 | 4.3 | 18,317 | 4.1 | 15,230 | 3.9 | ||||||||||||||||||||||||||||||
|
Total
consumer loans
|
68,526 | 11.7 | 69,025 | 11.0 | 66,832 | 12.5 | 63,810 | 14.2 | 58,613 | 15.0 | ||||||||||||||||||||||||||||||
|
Total
loans
|
586,477 | 100.0 | % | 627,153 | 100.0 | % | 534,378 | 100.0 | % | 450,060 | 100.0 | % | 391,174 | 100.0 | % | |||||||||||||||||||||||||
|
Less:
|
||||||||||||||||||||||||||||||||||||||||
|
Loans
in process
|
5,620 | 5,602 | 8,064 | 6,443 | 9,185 | |||||||||||||||||||||||||||||||||||
|
Deferred
fees and discounts
|
151 | 279 | 315 | 281 | 175 | |||||||||||||||||||||||||||||||||||
|
Allowance
for loan losses
|
12,307 | 10,182 | 8,067 | 7,297 | 6,705 | |||||||||||||||||||||||||||||||||||
|
Total
loans receivable
|
$ | 568,399 | $ | 611,090 | $ | 517,932 | $ | 436,039 | $ | 375,109 | ||||||||||||||||||||||||||||||
4
The following schedule illustrates the
maturities of Security Federal’s loan portfolio at March 31,
2010. Mortgages which have adjustable or renegotiable interest rates
are shown as maturing in the period when the contract is due. This
schedule does not reflect the effects of possible prepayments or enforcement of
due-on-sale clauses.
|
At
March 31, 2010
|
||||||||||||||||||||||||
|
Residential
Real
Estate
|
Residential/
Real
Estate
Construction
|
Commercial
Construction
and
Acquisition
and
Development
|
Consumer
|
Commercial
Business
and
|
Total
|
|||||||||||||||||||
|
(In
Thousands)
|
||||||||||||||||||||||||
|
Six
months or less (1)
|
$ | 1 | $ | 38,982 | $ | 24,419 | $ | 9,015 | $ | 64,387 | $ | 136,804 | ||||||||||||
|
Over
six months to one year
|
12 | 8,675 | 3,415 | 2,303 | 34,648 | 49,053 | ||||||||||||||||||
|
Over
one year to three years
|
682 | -- | 209 | 9,488 | 94,909 | 105,288 | ||||||||||||||||||
|
Over
three to five years
|
797 | -- | -- | 7,472 | 94,268 | 102,537 | ||||||||||||||||||
|
Over
five to ten years
|
2,485 | -- | -- | 8,895 | 30,681 | 42,061 | ||||||||||||||||||
|
Over
ten years
|
95,573 | -- | -- | 31,353 | 18,188 | 145,114 | ||||||||||||||||||
|
Total
(2)
|
$ | 99,550 | $ | 47,657 | $ | 28,043 | $ | 68,526 | $ | 337,081 | $ | 580,857 | ||||||||||||
___________
| (1) |
Includes
demand loans, loans having no stated maturity, overdraft loans and equity
line of credit loans.
|
| (2) | Loan amounts are net of undisbursed funds for loans in process of $5.6 million. |
Loan Originations, Purchases
and Sales
. The following table shows the loan origination,
purchase, sale and repayment activities of the Bank for the years
indicated.
|
Year
Ended March 31,
|
||||||||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
|
(In
Thousands)
|
||||||||||||||||||||
|
Originated:
|
||||||||||||||||||||
|
Adjustable
rate – residential real estate
|
$ | 27,644 | $ | 34,571 | $ | 47,432 | $ | 40,380 | $ | 45,259 | ||||||||||
|
Fixed
rate – residential real estate (1)
|
65,229 | 48,689 | 39,268 | 30,542 | 28,946 | |||||||||||||||
|
Consumer
|
19,450 | 30,366 | 31,663 | 34,748 | 33,621 | |||||||||||||||
|
Commercial
business and commercial real estate
|
289,246 | 350,505 | 311,839 | 283,749 | 198,360 | |||||||||||||||
|
Total
consumer/commercial business real estate
|
308,696 | 380,871 | 343,502 | 318,497 | 231,981 | |||||||||||||||
|
Total
loans originated
|
401,569 | 464,131 | 430,202 | 389,419 | 306,186 | |||||||||||||||
|
Purchased
|
-- | -- | 15,618 | 10,200 | 5,060 | |||||||||||||||
|
Acquired
in acquisition of Collier Jennings
Financial
Corporation
|
-- | -- | -- | 708 | -- | |||||||||||||||
|
Less:
|
||||||||||||||||||||
|
Sold:
|
||||||||||||||||||||
|
Fixed
rate – residential real
estate
|
67,779 | 45,273 | 38,502 | 30,333 | 29,903 | |||||||||||||||
|
Fixed
rate – commercial real estate
|
-- | -- | 4,695 | 8,106 | -- | |||||||||||||||
|
Adjustable
rate – commercial real estate
|
-- | -- | 4,000 | 3,240 | 2,300 | |||||||||||||||
|
Principal
repayments
|
374,466 | 326,083 | 315,108 | 299,763 | 225,830 | |||||||||||||||
|
Increase
(decrease) in other items, net
|
2,015 | (383 | ) | 1,622 | (2,044 | ) | (5,007 | ) | ||||||||||||
|
Net
increase (decrease)
|
$ | (42,691 | ) | $ | 93,158 | $ | 81,893 | $ | 60,929 | $ | 58,220 | |||||||||
___________
|
(1)
|
Includes
newly originated fixed rate loans held for sale and construction/permanent
loans converted to fixed rate loans and
sold.
|
5
In addition to interest earned on
loans, the Bank receives loan origination fees or “points” for originating
loans. Loan points are a percentage of the principal amount of the
mortgage loan which are charged to the borrower for the
creation
of the loan. The Bank’s loan origination fees are generally 1% on
conventional residential mortgages, and 0.25% to 1% on commercial real estate
loans and commercial business loans. The total fee income (including
amounts amortized to income as yield adjustments) for the fiscal year ended
March 31, 2010 was $454,000.
Loan origination and commitment fees
are volatile sources of income. These fees vary with the volume and
type of loans and commitments made and purchased and with competitive conditions
in mortgage markets, which in turn are governed by the demand for and
availability of money.
The following table shows deferred
mortgage loan origination fees recognized as income by the Bank expressed as a
percentage of the dollar amount of total mortgage loans originated (and retained
in the Bank’s portfolio) and purchased during the periods indicated and the
dollar amount of deferred loan origination fees at the end of each respective
period.
|
At
or For the Year Ended March 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Dollars
in Thousands)
|
||||||||||||
|
Net
deferred mortgage loan origination fees earned during the period
(1)
|
$ | 88 | $ | 93 | $ | 103 | ||||||
|
Mortgage
loan origination fees earned as a percentage of total
portfolio
|
||||||||||||
|
mortgage
loans originated during the
period
|
0.3 | % | 0.3 | % | 0.2 | % | ||||||
|
Net
deferred mortgage loan origination fees in loan portfolio at end
of
period
|
$ | 86 | $ | 103 | $ | 115 | ||||||
___________
|
(1)
|
Includes
amounts amortized to interest income as yield adjustments; does not
include fees earned on loans sold.
|
The Bank also receives other fees and
charges related to existing loans, conversion fees, assumption fees, late
charges and other fees collected in connection with a change in borrower or
other loan modifications.
Security Federal currently sells
substantially all conforming fixed rate loans with terms of 15 years or greater
in the secondary mortgage market. These loans are sold in order to
provide a source of funds and as one of the strategies available to close the
gap between the maturities of the Bank’s interest-earning assets and
interest-bearing liabilities. Currently, most fixed rate, long-term
mortgage loans are being originated based on Federal National Mortgage
Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie
Mac”) underwriting standards.
Secondary market sales have been made
primarily to Freddie Mac, or other banks or investors. Freddie Mac is
a quasi-governmental agency that purchases residential mortgage loans from
federally insured financial institutions and certain other
lenders. All loans sold to Freddie Mac are without recourse to
Security Federal and generally all other loans sold to other investors are
without recourse. For the past few years, substantially all loans
have been sold on a servicing released basis.
In fiscal 2010, Security Federal sold
$67.8 million in 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 Bank’s “loans held for sale”
portfolio. At March 31, 2010, the Bank had $3.2 million of loans held
for sale. These loans are fixed rate residential loans that have been
originated in the Bank’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 Bank’s
customers. Therefore, these loans present very little market risk for
the Bank. The Bank usually delivers to, and receives funding from,
the investor within 30 days. Security Federal originates all of its
loans held for sale on a “best efforts” basis. Best efforts means
that the Bank suffers no penalty if it is unable to deliver a loan to a
potential investor.
6
The Bank also originates and holds
adjustable and fixed rate construction loans. The construction loans are for one
year terms. At March 31, 2010, the Bank held $16.2 million, or 2.8%
of the total loan portfolio, in construction
loans to
individuals in its residential portfolio. Construction loans to individuals,
also known as construction/permanent loans, generally have a construction period
of one year or less where the borrower pays interest only during that
period. At the end of construction, the loan converts to a one year
ARM or a three year/one year ARM. At that time, the borrower also has
a one time option to convert the loan to a fixed rate loan, which is then sold
immediately to the secondary market. At March 31, 2010, the Bank also held
approximately $6.6 million in longer term fixed rate residential mortgage
loans. These loans, which were 1.1% of the entire loan portfolio at
March 31, 2010, had converted from ARM loans to fixed rate loans
during the previous 60 months, and had remaining maturities of 10 to 29
years. The Bank no longer originates ARM loans with conversion
features that are not sold on the secondary market upon
conversion.
Loan Solicitation and
Processing
. The Bank actively solicits mortgage loan
applications from existing customers, real estate agents, builders, real estate
developers and others. The Bank also receives mortgage loan
applications as a result of customer referrals and from walk-in
customers.
Detailed loan applications are obtained
to determine the borrower’s creditworthiness and ability to
repay. The more significant items on loan applications are verified
through the use of credit reports, financial statements and
confirmations. After analysis of the loan application and property or
collateral involved, including an appraisal of the property (residential
appraisals are obtained through independent fee appraisers), the lending
decision is made in accordance with the underwriting guidelines of the
Bank. These guidelines are generally consistent with Freddie Mac and
Fannie Mae guidelines for residential real estate loans. With respect
to commercial real estate loans, the Bank also reviews the capital adequacy of
the business, the income potential of the property, the ability of the borrower
to repay the loan and honor its other obligations, and general economic and
industry conditions.
Upon receipt of a loan application and
all required related information from a prospective borrower, the loan
application is submitted for approval or rejection. The residential
mortgage loan underwriters approve loans which meet Freddie Mac and Fannie Mae
underwriting requirements, not to exceed $417,000 per loan, Federal Housing
Administration (“FHA”) loans not to exceed $271,050 and Veterans’ Administration
(“VA”) loans not to exceed $417,000. The Chairman of the Company, the Chief
Executive Officer of the Bank, or the President of the Bank individually have
the authority to approve loans of $500,000 or less, except as set forth above
for conforming conventionally underwritten, single family mortgage loans, which
are approved by the underwriters. The two Executive Vice
Presidents/Lending and the Senior Vice President/Mortgage Lending have the
authority to approve loans up to $500,000. Loans in excess of
$500,000 up to $1.0 million require the approval of any three of the
following: Chairman of the Company, the Chief Executive Officer of
the Bank, the President of the Bank , the Senior Vice President/Mortgage
Lending, either of the two Executive Vice Presidents/Lending, or any of the
other members of the Executive Committee. Any loan in an amount in
excess of $1.0 million must be approved by the Bank’s Executive Committee, which
operates as the Bank’s Loan Committee. The loan approval limits shown
are the aggregate of all loans to any one borrower or entity, not including
loans that are the borrower’s primary residence, and are conventionally
underwritten.
The general policy of Security Federal
is to issue loan commitments to qualified borrowers for a specified time
period. These commitments are generally for a period of 45 days or
less. With management approval, commitments may be extended for a up
to 45 days. As of March 31, 2010, Security Federal had $494,000 of
residential mortgage loan commitments for portfolio loans issued (excluding
undisbursed portions of construction loans in process). Security
Federal had outstanding commitments available on retail lines of credit
(including home equity and other consumer loans) totaling $29.3 million as of
March 31, 2010. See Note 17 of the Notes to Consolidated Financial
Statements contained in the Annual Report.
Permanent Residential
Mortgage Lending
. Permanent residential real estate mortgage
loans constituted approximately 17.9% of the Bank’s total outstanding loan
portfolio at March 31, 2010.
Security Federal offers a variety of
ARMs which offer adjustable rates of interest, payments, loan balances or terms
to maturity which vary according to specified indices. The Bank’s
ARMs generally have a loan term of 15 to 30 years with initial rate adjustments
every one, three, five or seven years during the term of the
loan. After the initial rate adjustment, the loan rate then adjusts
annually. Most of the Bank’s ARMs contain a 200 basis point limit as
to the
7
maximum
amount of change in the interest rate at any adjustment period and a 500 or 600
basis point limit over the life of the loan. The Bank generally originates ARMs
to hold in its portfolio. These loans are generally made
consistent with
Freddie
Mac and Fannie Mae guidelines. At March 31, 2010, residential ARMs
totaled $109.9 million, or 18.7% of the Bank’s loan portfolio. For
the year ended March 31, 2010, the Bank originated $92.9 million in residential
real estate loans, 29.8% of which had adjustable rates of interest.
There are unquantifiable risks
resulting from possible increased costs to the borrower as a result of periodic
repricing. Despite the benefits of ARMs to the Bank’s asset/liability
management program, these loans also pose potential additional risks, primarily
because as interest rates rise, the underlying payment by the borrower rises,
increasing the potential for default. At the same time, marketability
of the underlying property may be adversely affected by higher interest
rates.
When making a one- to four-family
residential mortgage loan, the Bank evaluates both the borrower’s
creditworthiness and his or her general ability to make principal and interest
payments, and the value of the property that will secure the
loan. The Bank generally makes loans on one- to four-family
residential properties in amounts of 95% or less of the appraised value
thereof. Where loans are made in amounts which exceed 80% of the
appraised value of the underlying real estate, the Bank’s general policy is to
require private mortgage insurance on the portion of the loan in excess of 80%
of the appraised value. In general, the Bank restricts its
residential lending to South Carolina and the nearby Augusta, Georgia
market.
The Bank also provides construction
financing for single family dwellings to
owner-occupants. Construction loans are generally made for periods of
six months to one year with either adjustable or fixed rates. At
March 31, 2010, residential construction loans on one- to four-family dwellings
to owner-occupants totaled $16.2 million, or 2.8%, of the Bank’s loan portfolio.
On loans of this type, the Bank seeks to evaluate the financial condition and
prior performance of the builder, as well as the borrower’s creditworthiness and
his or her general ability to make principal and interest payments, and the
value of the property that will secure the loan. On construction
loans offered to individuals (non-builders), the Bank offers a
construction/permanent loan. The construction portion of the loan has
an adjustable rate (typically prime) or a fixed rate (typically prime
plus 0.25%) during the construction period. The borrower
typically pays interest on the loan during the construction
phase. During the current year, because the prime rate was so low,
the Bank added a floor of 5% or 6% to these construction loans. After
construction, the loan then automatically converts to a one year ARM and on a
three year/one year ARM loan. The borrower also has the option, after
the construction period only, to convert the loan to a fixed rate loan which the
Bank then sells on the secondary market immediately on a service released
basis.
Commercial Business and
Commercial Real Estate Loans
. The commercial business loans
originated by the Bank are primarily secured by business equipment, furniture
and fixtures, inventory and receivables or are unsecured. At March 31, 2010, the
Bank had $17.8 million, or 3.0%, of the Bank's total loan portfolio, in
commercial business loans. A total of $3.8 million, or 21.6% of these
loans were unsecured at March 31, 2010.
The commercial real estate loans
originated by the Bank are primarily secured by non-residential commercial
properties, churches, hotels, residential developments, single family
construction loans to builders for speculative or pre-sold homes, lot loans to
builders, income property developments, and undeveloped land. At
March 31, 2010, the Bank had $366.0 million, or 62.4%, of the Bank's total loan
portfolio, in commercial real estate loans. Included in these loans at March 31,
2010 is $22.2 million in acquisition and development loans with terms of
typically two to three years. Also included in commercial real estate loans is
$31.4 million in loans for the construction of single family dwellings to
builders with a term of typically one year.
The multi-family commercial real estate
loans originated by the Bank are primarily secured by commercial residential
properties including apartment complexes, condominiums or townhouses, and loans
for acquisition and development of, or improvements to multi-family residential
properties. At March 31, 2010, the Bank had $12.7 million, or 2.2%, of the
Bank's total loan portfolio, in multi-family commercial loans.
8
The following table summarizes the
Bank’s commercial business, commercial real estate and multi-family loans by
geographic market area at March 31, 2010.
|
Aiken
|
Midlands,
|
Augusta,
|
||||||||||||||||||
|
County
|
SC
|
GA
|
Other
|
Total
|
||||||||||||||||
| (In Thousands) | ||||||||||||||||||||
|
Commercial
real
estate
|
$ | 146,145 | $ | 93,331 | $ | 70,236 | $ | 56,290 | $ | 366,002 | ||||||||||
|
Multi-family
|
2,683 | 4,416 | 2,103 | 3,516 | 12,718 | |||||||||||||||
|
Commercial
business
|
10,686 | 3,839 | 2,879 | 409 | 17,813 | |||||||||||||||
|
Total
|
$ | 159,514 | $ | 101,586 | $ | 75,218 | $ | 60,215 | $ | 396,533 | ||||||||||
|
|
||||||||||||||||||||
Loans secured by commercial real estate
are typically written for terms of 10 to 20 years. Commercial loans
not secured by real estate are typically based on terms of three to 60
months.
Both
commercial real estate loans and commercial loans not secured by real estate can
be originated on adjustable or fixed rate terms. Adjustable rates are
tied to the prime rate as quoted in the Wall Street Journal and typically adjust
on a daily basis. Recently, the Bank instituted floors of typically
6% on newly originated adjustable rate commercial loans. If ceilings
are used, the loan will typically balloon in 60 months or less. Fixed
rate loans on commercial real estate usually balloon in 36 to 60
months. Fixed rate loans on non-real estate collateral are generally
amortizing in 5 years or less.
Commercial real estate lending entails
significant additional credit risk when compared to residential lending.
Commercial real estate loans typically involve large loan balances to single
borrowers or groups of related
borrowers. Because
payments on loans secured by commercial properties often depend upon the
successful operation and management of the properties, repayment of these loans
may be affected by adverse conditions in the real estate market or the
economy. The Bank previously had a maximum loan-to-value ratio limit
of 75% to 85% for commercial real estate loans. However, due to
economic conditions, the Bank recently changed this maximum loan-to-value ratio
to 65% to 75%. In order to minimize the risks associated with this
type of loan, the Bank generally limits the maximum loan-to-value ratio to 65%
to 75%, appraises the property at the time of the loan by appraisers designated
by the Bank, and strictly scrutinizes the financial condition of the borrower,
the quality of the collateral and the management of the property securing the
loan. Although the creditworthiness of the business and its
principals is of primary consideration, the underwriting process also includes a
comparison of the value of the security, if any, in relation to the proposed
loan amount.
Commercial business lending generally
involves greater risk than residential mortgage lending and involves risks that
are different from those associated with residential lending. Real estate
lending is generally considered to be collateral based lending with loan amounts
based on predetermined loan-to-collateral values, and liquidation of the
underlying real estate collateral is viewed as the primary source of repayment
in the event of borrower default. Although commercial business loans often have
equipment, inventory, accounts receivable or other business assets as
collateral, the liquidation of collateral in the event of a borrower default is
often not a sufficient source of repayment because accounts receivable may be
uncollectible and inventories and equipment may be obsolete or of limited use,
among other conditions. Accordingly, the repayment of a commercial business loan
depends primarily on the creditworthiness of the borrower (and any guarantors),
while liquidation of collateral is a secondary and often insufficient source of
repayment. The Bank seeks to minimize these risks by strictly scrutinizing the
borrower’s current financial condition, ability to pay, past earnings and
payment history. In addition, the current financial condition and
payment history of all principals are reviewed. Typically, the Bank
requires the principal or owners of a business to guarantee all loans made to
their business by the Bank. Although the creditworthiness of the
business and its principals is of primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.
Federal law restricts the Bank’s
permissible lending limits to one borrower to the greater of $500,000 or 15% of
unimpaired capital and surplus. At March 31, 2010, the Bank’s lending
limit under this restriction was $12.1 million and, at that date, the Bank
believes its largest single loan to one borrower, as a result of limited
guarantees on the loan, was $9.2 million, which was performing according to its
original terms. There are different methodologies in determining
whether the limited guarantees on the loan can be taken into consideration when
calculating the amount of the Bank’s loan to one borrower
limitation. If the limited guarantees cannot be considered in
determining the amount of the Bank’s loan to one borrower limit, the Bank would
have three loan to one borrower relationships of $14.2 million,
9
$12.4
million and $12.4 million that are in excess of its loan to one borrower lending
limit at March 31, 2010. These three lending relationships are current in
payment, performing according to their original terms, and are, in management’s
opinion, well collateralized. In light of the different methodologies
regarding limited guarantees taken on these loans, the Bank is attempting to
reduce its loan to one borrower amounts through the sale
of participations in these loans.
Consumer
Loans
. The Bank originates consumer loans for any personal,
family or household purpose, including the financing of home improvements, loans
to individuals for residential lots for a future home, automobiles, boats,
mobile homes, recreational vehicles and education. The Bank also
makes consumer first and second mortgage loans secured by
residences. These loans typically do not qualify for sale in the
secondary market, but are generally not considered sub-prime lending. In
addition, the Bank offers home equity lines of credit. Home equity
loans are secured by mortgage lines on the borrower’s principal or second
residence. Home equity lines are open end lines of credit where the borrowers
pay a minimum of interest only monthly on drawn lines. The terms are
for a maximum period of 20 years and the rate is a variable rate tied to prime
and flats monthly. Margins range from zero to one
percent. The Bank recently instituted a floor of 6% on new
originations and a maximum loan-to-value ratio of 80% for first mortgages
originated by Security Federal and 60% for first mortgages originated by other
lenders. Previously, the maximum loan- to-value ratio was 90%, but
was decreased because of the current economic environment. At March
31, 2010, the Bank had $29.9 million of home equity lines of credit outstanding
and $24.9 million of additional commitments of home equity lines of
credit. The Bank also makes secured and unsecured lines of credit
available. Although consumer loans involve a higher level of risk
than one- to four-family residential mortgage loans, they generally provide
higher yields and have shorter terms to maturity than one- to four-family
residential mortgage loans. At March 31, 2010, the Bank had total
consumer loans of $68.5 million, or 11.7% of the Bank’s loan
portfolio.
The Bank’s underwriting standards for
consumer loans include a determination of the applicant’s payment history on
other debts and an assessment of ability to meet existing obligations and
payments on the proposed loan. The stability of the applicant’s
monthly income is determined by verification of gross monthly income from
primary employment, and from any verifiable secondary
income. Although creditworthiness of the applicant is of primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
The Bank also has a credit card
program. As of March 31, 2010, the Bank had issued 2,682 Visa credit
cards with total approved credit lines of $6.7 million, of which $2.1 million
was outstanding on that date.
Loan Delinquencies and
Defaults
General
. The
Bank’s collection procedures provide that when a real estate loan is
approximately 20 days past due, the borrower is contacted by mail and payment is
requested. If the delinquency continues for another 10 days,
subsequent efforts are made to contact the delinquent borrower and establish a
program to bring the loan current. In certain instances, the Bank may
modify the loan or grant a limited moratorium on loan payments to enable the
borrower to reorganize his financial affairs. If the loan continues
in a delinquent status for 60 days or more, the Bank generally initiates
foreclosure proceedings after the customer has been notified by certified
mail. The Bank institutes the same collection procedure for its
commercial real estate loans. At March 31, 2010, the Bank had
property acquired as the result of foreclosures and other property repossessed
classified as repossessed assets valued at $10.8 million.
10
Delinquent
Loans
. The following table sets forth information concerning
delinquent loans at March 31, 2010. The amounts presented represent
the total remaining principal balances of the delinquent loans (before specific
reserves for losses), rather than the actual payment amounts which are overdue.
|
Real
Estate
|
Non-Real
Estate
|
|||||||||||||||||||||||||||||||||||
|
Commercial
|
||||||||||||||||||||||||||||||||||||
|
Residential
|
Commercial
|
Consumer
|
Business
|
|||||||||||||||||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Number
|
Amount
|
Number
|
Amount
|
Total
|
||||||||||||||||||||||||||||
|
(Dollars
in Thousands, number of loans are actual)
|
||||||||||||||||||||||||||||||||||||
|
Loans
delinquent
for:
|
||||||||||||||||||||||||||||||||||||
|
30
- 59 days
|
17 | $ | 1,834 | 22 | $ | 14,735 | 63 | $ | 1,600 | 13 | $ | 283 | $ | 18,452 | ||||||||||||||||||||||
|
60
- 89 days
|
2 | 559 | 7 | 2.724 | 9 | 925 | 1 | 1 | 4,209 | |||||||||||||||||||||||||||
|
90
days and over
|
16 | 4,344 | 58 | 25,480 | 22 | 703 | 7 | 699 | 31,226 | |||||||||||||||||||||||||||
|
Total
delinquent loans
|
35 | $ | 6,737 | 87 | $ | 42,939 | 94 | $ | 3,228 | 21 | $ | 983 | $ | 53,887 | ||||||||||||||||||||||
Classified
Assets
. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered to be of
lesser quality as “substandard,” “doubtful” or “loss” assets. The
regulations require savings associations to classify their own assets and to
establish prudent general allowances for loan losses for assets classified
“substandard” or “doubtful.” For the portion of assets classified as
“loss,” an institution is required to either establish specific allowances of
100% of the amount classified or charge off such amount. In addition,
the Office of Thrift Supervision (“OTS”) may require the establishment of a
general allowance for losses based on assets classified as “substandard” and
“doubtful” or based on the general quality of the asset portfolio of an
association. See “Regulation – Federal Regulation of Savings
Institutions.”Assets which do not currently expose the savings association to
sufficient risk to warrant classification in one of the aforementioned
categories but possess potential weaknesses are designated “special mention” by
management.
At March 31, 2010, $65.1 million, or
11.1%, of the Bank’s loans were classified “substandard” compared to $49.6
million, or 7.9%, at March 31, 2009. At March 31, 2010, $16.6 million
were classified as “special mention” compared to $5.2 million at March 31,
2009. The Bank had no loans classified as “doubtful” or “loss” at
March 31, 2010.
As
of March 31, 2010, there were loans totaling $336,000 which were troubled debt
restructurings. The Bank’s policy is to classify all troubled debt
restructurings as substandard. The Bank’s classification of assets is
consistent with OTS regulatory classifications.
Non-performing
Assets
. Loans are placed on non-accrual status when the
collection of principal and/or interest becomes doubtful. In
addition, all loans are placed on non-accrual status when the loan becomes 90
days or more contractually delinquent. All consumer loans more than
90 days delinquent are charged against the consumer loan allowance for loan
losses unless there is adequate collateral which is in the process of being
repossessed or foreclosed on. At March 31, 2010, the Bank had
$336,000 in troubled debt restructurings which involve forgiving a portion of
interest or principal on any loans or making loans at a rate materially less
than market rate.
Other loans of concern
are those loans (not delinquent more than 60 days) that management has
determined need to be closely monitored as the potential exists for increased
risk on these loans in the future. Nonperforming loans are reviewed
monthly on a loan by loan basis. Charge-offs, whether partial or in
full, associated with these loans will vary based on estimates of recovery for
each loan.
11
The following table sets forth the
amounts and categories of risk elements in the Bank’s loan
portfolio.
|
At
March 31,
|
||||||||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||||||
|
Loans
Delinquent 60 to 89 Days:
|
||||||||||||||||||||
|
Residential
|
$ | 559 | $ | 621 | $ | 94 | $ | 621 | $ | 182 | ||||||||||
|
Consumer
|
925 | 124 | 54 | 97 | 5 | |||||||||||||||
|
Commercial
business
|
1 | 29 | 8 | 30 | 207 | |||||||||||||||
|
Commercial
real estate
|
2,724 | 3,560 | 1,031 | 1,001 | 213 | |||||||||||||||
|
Total
|
$ | 4,209 | $ | 4,334 | $ | 1,187 | $ | 1,749 | $ | 607 | ||||||||||
|
Total
as a percentage of total assets
|
0.44 | % | 0.44 | % | 0.14 | % | 0.24 | % | 0.09 | % | ||||||||||
|
Non-Accruing
Loans Delinquent 90 Days or More:
|
||||||||||||||||||||
|
Residential
|
$ | 4,344 | $ | 1,112 | $ | 609 | $ | 353 | $ | 412 | ||||||||||
|
Consumer
|
703 | 956 | 416 | 142 | 133 | |||||||||||||||
|
Commercial
business
|
699 | 2,808 | 3,826 | 13 | 58 | |||||||||||||||
|
Commercial
real estate
|
25,480 | 8,044 | 1,168 | 547 | 588 | |||||||||||||||
|
Total
|
$ | 31,226 | $ | 12,920 | $ | 6,019 | $ | 1,055 | $ | 1,191 | ||||||||||
|
Total
as a percentage of total assets
|
3.27 | % | 1.31 | % | 0.72 | % | 0.14 | % | 0.18 | % | ||||||||||
|
Troubled
debt restructurings
|
$ | 336 | $ | 652 | $ | 187 | $ | 204 | $ | 418 | ||||||||||
|
Repossessed
assets
|
$ | 10,773 | $ | 1,985 | $ | 767 | $ | 25 | $ | 91 | ||||||||||
|
Allowance
for loan losses
|
$ | 12,307 | $ | 10,182 | $ | 8,067 | $ | 7,297 | $ | 6,705 | ||||||||||
At March 31, 2010, there were no
accruing loans equal to or greater than 90 days delinquent.
A larger portion of the
non-accruing commercial real estate loan category, or $11.4 million,
consisted of 15 loans secured by commercial buildings to 12 separate
borrowers. Of this amount, eight loans totaling $4.0 million were
secured by buildings located in the Midlands area of South Carolina; three loans
totaling $356,000 were secured by buildings located in Aiken, South Carolina;
one loan for $5.5 million was secured by a building located in Charleston, South
Carolina; one loan for $622,000 was secured by a building in Florida; one loan
for $938,000 was secured by a building in Hardeeville, South Carolina; and one
loan for $11,000 was secured by a building in North Augusta, South
Carolina. At March 31, 2010, the largest loan relationship was one
loan for $5.5 million which was secured by a first mortgage on an event center
located in Charleston, South Carolina.
Of the remaining loans in the
non-accruing commercial real estate loan category, $9.3 million was concentrated
in construction loans and land acquisition and development type loans (“A&D
loans”). The balance consisted of $6.3 million in A&D loans to
three separate borrowers for the development of residential subdivisions in the
Midlands area of South Carolina and $3.0 million in loans to 14 separate
borrowers secured by builder lots or speculative houses in varying degrees of
completion throughout South Carolina. The remaining $4.8 million in
the commercial real estate loan category was secured by first mortgages on
one-to-four family principal residences or raw land.
For the fiscal year ended March 31,
2010, the interest income that was not recognized would have been recognized
with respect to non-accruing loans, had such loans been current in accordance
with their original terms and with respect to troubled debt restructurings, had
such loans been current in accordance with their original terms, totaled
$665,000 compared to $578,000 for the year ended March 31, 2009. For
the fiscal year ended March 31, 2010 actual interest recorded on these loans
amounted to $796,000 compared to $274,000 for the previous year.
Also included in non-accruing loans at
March 31, 2010 were 16 residential real estate loans totaling $4.3 million, 36
commercial loan relationships totaling $26.2 million
and 25 consumer loans
totaling $703,000. Of the 25 consumer loans on non-accrual status at
fiscal year end, no loan or total relationship exceeded $125,000.
Of the 36 commercial
loan relationships on non-accrual status at fiscal year end, no loan or total
relationship loan exceeded $5.6 million.
12
The Bank had five loans totaling
$336,000 at fiscal year end which were troubled debt restructurings compared to
seven loans of $652,000 at March 31, 2009. The five troubled debt
restructurings were four consumer loans totaling $163,000 secured by residential
dwellings and a $174,000 commercial loan. All troubled debt
restructurings were current at March 31, 2010.
At March 31, 2010, repossessed assets
had an outstanding carrying value of $10.8 million and consisted of 13 single
family dwellings, three residential lots, six mobile homes with approximately 15
acres of land, three commercial buildings, a condo development, approximately 35
acres of land and a 55 lot subdivision with an adjacent 17 acres of
land. The Bank is actively marketing the real estate owned. For
development properties, the Bank intends to finish the development and sell the
lot to a local builder.
Provision for Losses on
Loans and Repossessed Assets
. Security Federal recognizes that
it will experience credit losses during the course of making loans and that the
risk of loss will vary with, among other things, the type of loan being made,
the creditworthiness of the borrower over the term of the loan and, in the case
of a secured loan, the quality of the underlying security for the
loan. The Bank seeks to establish and maintain sufficient reserves
for estimated losses on specifically identified loans and real estate where such
losses can be estimated. Additionally, general reserves for estimated
possible losses are established on specified portions of the Bank’s portfolio
such as consumer loans and higher risk residential construction mortgage loans
based on management’s estimate of the potential loss for loans which normally
can be classified as higher risk. Specific and general reserves are
based on, among other criteria (1) the risk characteristics of the loan
portfolio, (2) current economic conditions on a local as well as a statewide
basis, (3) actual losses experienced historically and (4) the level of reserves
for possible losses in the future. Additionally, the Bank maintains a
reserve for uncollected interest on loans 90 days or more past due.
At March 31, 2010, total reserves
relating to loans were $12.3 million. In determining the adequacy of
the reserve for loan losses, management reviews past experience of loan
charge-offs, the level of past due and non-accrual loans, the size and mix of
the portfolio, general economic conditions in the market area, and individual
loans to identify potential credit problems. Commercial business,
commercial real estate and consumer loans have increased to $465.1 million, or
79.3% of the Bank’s total loan portfolio at March 31, 2010. Although
commercial and consumer loans carry a higher level of credit risk than
conventional residential mortgage loans, the level of reserves reflects
management’s continuing evaluation of this risk based on upon the Bank’s past
loss experience. At fiscal year end, the Bank’s ratio of loans
delinquent more than 60 days to total assets was 3.7%. A majority of
these delinquent loans are considered to be well secured and are in the process
of collection. Management uses four methods or calculations to
estimate the adequacy of the reserve using the factors mentioned
above. The reserve is management’s best estimate for the
reserve. There can be no guarantee that the estimate is adequate or
accurate. Management believes that reserves for loan losses are at a
level adequate to provide for inherent loan losses. Although
management believes that it has considered all relevant factors in its
estimation of future losses, future adjustments to reserves may be necessary if
conditions change substantially from the assumptions used in making the original
estimations. Regulators will from time to time evaluate the allowance
for loan losses which is subject to adjustment based upon the information
available to the regulators at the time of their examinations.
At March 31, 2010, the Bank had no
allowance for losses on real estate owned because at the time a property is
transferred to real estate owned, the Bank writes the property down to the
appraised value less estimated costs to sell the property. Because of
this practice, an allowance is not necessary.
13
The following table sets forth an
analysis of the Bank’s allowance for loan losses.
|
At
March 31,
|
||||||||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||||||
|
Balance
at beginning of
year
|
$ | 10,182 | $ | 8,067 | $ | 7,297 | $ | 6,705 | $ | 6,284 | ||||||||||
|
Allowance acquired in
acquisition
|
-- | -- | -- | 22 | -- | |||||||||||||||
|
Provision
for loan
losses
|
8,155 | 2,825 | 895 | 600 | 660 | |||||||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Residential
real
estate
|
283 | 37 | 15 | 9 | 25 | |||||||||||||||
|
Commercial
business and commercial real estate
|
5,380 | 370 | 146 | 16 | 159 | |||||||||||||||
|
Consumer
|
405 | 338 | 89 | 108 | 117 | |||||||||||||||
|
Total
charge-offs
|
6,068 | 745 | 250 | 133 | 301 | |||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Residential
real
estate
|
3 | -- | 1 | -- | 4 | |||||||||||||||
|
Commercial
business and commercial real estate
|
6 | 15 | 83 | 23 | 33 | |||||||||||||||
|
Consumer
|
29 | 20 | 41 | 80 | 25 | |||||||||||||||
|
Total
recoveries
|
38 | 35 | 125 | 103 | 62 | |||||||||||||||
|
Balance
at end of year
|
$ | 12,307 | $ | 10,182 | $ | 8,067 | $ | 7,297 | $ | 6,705 | ||||||||||
|
Ratio
of net charge-offs during the year to average loans
|
||||||||||||||||||||
|
outstanding
during the
year
|
1.01 | % | 0.12 | % | 0.03 | % | 0.01 | % | 0.07 | % | ||||||||||
The distribution of the Bank’s
allowance for loan losses at the dates indicated is summarized in the following
table. The entire allowance is available to absorb losses from all
loan categories.
|
At
March 31,
|
||||||||||||||||||||||||||||||||||||||||
|
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||||||||||||
|
Amount
|
%
of
Loans
in Each Cate-gory to Total
Loans
|
Amount
|
%
of
Loans
in Each Cate-gory to Total Loans
|
Amount
|
%
of
Loans
in Each Cate-gory to Total Loans
|
Amount
|
%
of
Loans
in Each Cate-gory to Total Loans
|
Amount
|
%
of
Loans
in Each Cate-gory to Total Loans
|
|||||||||||||||||||||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Residential
|
$ | 2,044 | 20.7 | % | $ | 712 | 21.2 | % | $ | 665 | 25.1 | % | $ | 619 | 28.2 | % | $ | 568 | 31.5 | % | ||||||||||||||||||||
|
Consumer
|
1,039 | 11.7 | 3,659 | 11.0 | 3,712 | 12.5 | 3,339 | 14.2 | 3,068 | 15.0 | ||||||||||||||||||||||||||||||
|
Commercial
business
|
714 | 3.0 | 1,571 | 3.3 | 244 | 4.1 | 307 | 5.3 | 319 | 5.6 | ||||||||||||||||||||||||||||||
|
Commercial
real estate
|
8,510 | 64.6 | 4,240 | 64.5 | 3,446 | 58.3 | 3,032 | 52.3 | 2,750 | 47.9 | ||||||||||||||||||||||||||||||
|
Total
|
$ | 12,307 | 100.0 | % | $ | 10,182 | 100.0 | % | $ | 8,067 | 100.0 | % | $ | 7,297 | 100.0 | % | $ | 6,705 | 100.0 | % | ||||||||||||||||||||
Service
Corporation
As a federally chartered savings bank,
Security Federal is permitted by OTS regulations to invest up to 3% of its
assets in the stock of service corporations, provided that any investment in
excess of 2% of its assets must be primarily for community, inner-city or
community development purposes. At March 31, 2010, Security Federal’s
net investment in its service corporations (including loans to service
corporations) totaled $1.9 million. In addition to investments in
service corporations, federal institutions are permitted to invest an unlimited
amount in operating subsidiaries engaged solely in activities which a federal
savings bank may engage in directly.
Security Federal Insurance,
Inc. (“SFINS”)
. SFINS, a wholly owned subsidiary of the Bank,
was formed during fiscal 2002 and began operating during the December 2001
quarter. SFINS is an insurance agency offering auto, business, health
and home insurance, and premium finance. The
operations of SFINS are included in the Company’s Consolidated Financial
Statements.
14
Collier Jennings Financial
Corporation
. Collier Jennings Financial Corporation is a
subsidiary of SFINS, a subsidiary of the Bank, which is described
above. The Company acquired the insurance and premium finance
businesses of Collier Jennings Financial Corporation and its subsidiaries,
Collier-Jennings, Inc., The Auto Insurance Store, Inc., and Collier-Jennings
Premium Pay Plans, Inc. (the “Collier-Jennings Companies”), effective as of June
30, 2006.
Investment
Activities
Investment
securities
. The Bank has authority to invest in various types
of liquid assets, including U.S. Treasury obligations and securities of various
federal agencies, certificates of deposit at insured institutions, bankers’
acceptances and federal funds. The Bank may also invest a portion of
its assets in certain commercial paper and corporate debt
securities. The Bank is also authorized to invest in mutual funds
whose assets conform to the investments that a federal thrift institution is
authorized to make directly. See “Regulation – Federal Regulation of
Savings Associations.”
As a member of the Federal Home Loan
Bank (“FHLB”) System, Security Federal must maintain minimum levels of
investments that are liquid assets as defined in Federal
regulations. See “Regulation – Federal Regulation of Savings
Institutions – Federal Home Loan Bank System.” Liquidity may increase
or decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans.
Historically, the Bank has maintained
its liquid assets at a level believed adequate to meet requirements of normal
daily activities, repayment of maturing debt and potential deposit
outflows. Management regularly reviews and updates cash flow
projections to assure that adequate liquidity is provided.
The following table sets forth the
composition of the Company’s portfolio of securities and other investments, not
including mortgage-backed securities.
|
At
March 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(In
Thousands)
|
||||||||||||
|
Interest
bearing deposit at
FHLB
|
$ | 167 | $ | 128 | $ | 1,846 | ||||||
|
Total
|
$ | 167 | $ | 128 | $ | 1,846 | ||||||
|
Investment
Securities:
|
||||||||||||
|
Available
for Sale:
|
||||||||||||
|
FHLB
securities
|
$ | 9,370 | $ | 15,812 | $ | 32,517 | ||||||
|
Federal
Farm Credit Bank
securities
|
4,209 | 14,634 | 15,173 | |||||||||
|
Fannie
Mae
bonds
|
4,965 | 2,008 | 3,006 | |||||||||
|
Freddie
Mac
bonds
|
998 | -- | -- | |||||||||
|
Small
Business Administration
bonds
|
37,186 | 3,367 | -- | |||||||||
|
Taxable
Municipal
bonds
|
3,226 | 1,047 | -- | |||||||||
|
Equity
securities
|
72 | 37 | 89 | |||||||||
|
Total
securities available for sale
|
60,026 | 36,905 | 50,785 | |||||||||
|
Held
to Maturity:
|
||||||||||||
|
FHLB
securities
|
4,000 | 7,000 | 18,000 | |||||||||
|
Federal
Farm Credit Bank
securities
|
-- | 1,000 | 2,000 | |||||||||
|
Small
Business Administration
bonds
|
4,482 | 5,355 | -- | |||||||||
|
Equity
securities
|
155 | 155 | 155 | |||||||||
|
Total
securities held to maturity
|
8,637 | 13,510 | 20,155 | |||||||||
|
|
||||||||||||
|
Total
securities
(1)
|
68,663 | 50,415 | 70,940 | |||||||||
|
FHLB
stock
|
12,624 | 12,663 | 9,497 | |||||||||
|
Total
securities and FHLB stock (1)
|
$ | 81,287 | $ | 63,078 | $ | 80,437 | ||||||
___________
(1) Does
not include mortgage-backed securities.
15
At March 31, 2010, the Company did not
have any investment securities (exclusive of obligations of the U.S. Government
and federal agencies) issued by any one entity with a total book value in excess
of 10% of its stockholders’ equity. Small Business Administration
(“SBA”) bonds increased $32.9 million during fiscal 2010. SBA bonds
are backed by the full faith and credit of the U.S. government and carry a zero
percent risk base when calculating risk based assets.
FHLB securities, Federal Farm Credit
Bank securities, Fannie Mae bonds and Freddie Mac bonds are all securities that
are issued by government sponsored enterprises (“GSEs”). GSE
securities are not backed by the full faith and credit of the United States
government.
The following table sets forth the
maturities or repricing of investment securities and FHLB stock at March 31,
2010, and the weighted average yields of such securities and FHLB stock
(calculated on the basis of the cost and effective yields weighted for the
scheduled maturity of each security). Callable securities are shown
at their likely call dates based on current interest rates. The table
was prepared using amortized cost. Small Business Administration
securities are based on maturity dates without the effect of scheduled payments
or anticipated prepayments.
|
Maturing
or Repricing
|
||||||||||||||||||||||||||||||||
|
After
One But
|
After
Five But
|
|||||||||||||||||||||||||||||||
|
Within
One Year
|
Within
Five Years
|
Within
Ten Years
|
After
Ten Years
|
|||||||||||||||||||||||||||||
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||||||||||||||||||
|
U.S.
Government sponsored
|
||||||||||||||||||||||||||||||||
|
enterprises
|
$ | 7,730 | 4.26 | % | $ | 11,759 | 3.83 | % | $ | 2,845 | 4.84 | % | $ | 1,042 | 4.40 | % | ||||||||||||||||
|
Small
Business Administration
|
||||||||||||||||||||||||||||||||
|
bonds
|
4,012 | 2.02 | 2,184 | 4.47 | 7,158 | 4.25 | 28,084 | 4.39 | ||||||||||||||||||||||||
|
Taxable
Municipal
bonds
|
-- | -- | -- | -- | 3,193 | 4.83 | -- | -- | ||||||||||||||||||||||||
|
FHLB
stock
(1)
|
12,624 | -- | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||||
|
Other
equity securities
|
258 | 2.74 | -- | -- | -- | -- | -- | -- | ||||||||||||||||||||||||
|
Total
(2)
|
$ | 24,624 | 1.69 | % | $ | 13,943 | 3.93 | % | $ | 13,196 | 4.52 | % | $ | 29,126 | 4.39 | % | ||||||||||||||||
___________
|
(1)
|
FHLB
stock has no stated maturity date.
|
|
(2)
|
Excludes
mortgage-backed securities totaling $235.4 million with a yield of
4.14%.
|
For information regarding the market
value of the Bank’s securities portfolios, see Notes 2 and 3 of the Notes to
Consolidated Financial Statements contained in the Annual Report.
Mortgage-backed
Securities
. Security Federal has a portfolio of
mortgage-backed securities which it holds in both an available for sale and a
held to maturity portfolio. Mortgage-backed securities can serve as
collateral for borrowings and, through repayments, as a source of
liquidity. Under the Bank’s risk-based capital requirement,
mortgage-backed securities have a risk weight of 20% (or 0% in the case of
Government National Mortgage Association (“Ginnie Mae”) securities) in contrast
to the 50% risk weight carried by residential loans. See
“Regulation.”
16
The following table sets forth the
composition of the mortgage-backed securities available for sale portfolio at
fair value and the held to maturity portfolio at amortized cost at the dates
indicated.
|
At
March 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(In
Thousands)
|
||||||||||||
|
Available
for Sale:
|
||||||||||||
|
Freddie
Mac
|
$ | 46,248 | $ | 52,621 | $ | 34,250 | ||||||
|
Fannie
Mae
|
53,576 | 83,067 | 84,965 | |||||||||
|
Ginnie
Mae
|
132,411 | 110,240 | 74,159 | |||||||||
|
Total
|
$ | 232,235 | $ | 245,928 | $ | 193,374 | ||||||
|
Held
to maturity:
|
||||||||||||
|
Freddie
Mac
|
$ | 4,168 | $ | 6,221 | $ | -- | ||||||
|
Fannie
Mae
|
388 | 726 | -- | |||||||||
|
Ginnie
Mae
|
5,593 | 10,809 | -- | |||||||||
|
Total
|
$ | 10,149 | $ | 17,756 | $ | -- | ||||||
|
|
||||||||||||
At March 31, 2010, the Company did not
have any mortgage-backed securities (exclusive of obligations of agencies of the
U.S. Government) issued by any one entity with a total book value in excess of
10% of stockholders equity.
Freddie Mac and Fannie Mae
mortgage-backed securities are GSE issued securities. GSE securities
are not backed by the full faith and credit of the United States
government. Ginnie Mae mortgage-backed securities are backed by the
full faith and credit of the United States government.
For information regarding the market
values of Security Federal’s mortgage-backed securities portfolio, see Notes 2
and 3 of the Notes to Consolidated Financial Statements contained in the Annual
Report.
The following table sets forth the
final maturities or initial repricings, whichever occurs first, and the weighted
average yields of the mortgage-backed securities at March 31,
2010. Not considered in the preparation of the table below is the
effect of scheduled payments or anticipated prepayments. The table is
prepared using amortized cost.
|
At
|
||||||||||||||||||||||||||||||||||||||||
|
The
Earliest of Maturing or Repricing
|
March
31, 2010
|
|||||||||||||||||||||||||||||||||||||||
|
Less
Than
|
1
to 5
|
5
to 10
|
Over
|
Balance
|
||||||||||||||||||||||||||||||||||||
|
1
Year
|
Years
|
Years
|
Ten
Years
|
Outstanding
|
||||||||||||||||||||||||||||||||||||
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||||||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Fannie
Mae
|
$ | 6,790 | 4.43 | % | $ | 13,562 | 4.90 | % | $ | 8,323 | 5.08 | % | $ | 23,130 | 4.74 | % | $ | 51,805 | 4.80 | % | ||||||||||||||||||||
|
Freddie
Mac
|
1,093 | 4.13 | 1,144 | 4.31 | 8,203 | 3.50 | 38,432 | 3.46 | 48,872 | 3.50 | ||||||||||||||||||||||||||||||
|
Ginnie
Mae
|
13,557 | 3.81 | 3,534 | 3.42 | 8,201 | 3.82 | 109,383 | 4.20 | 134,675 | 4.12 | ||||||||||||||||||||||||||||||
|
Total
|
$ | 21,440 | 4.03 | % | $ | 18,240 | 4.58 | % | $ | 24,727 | 4.14 | % | $ | 170,945 | 4.11 | % | $ | 235,352 | 4.14 | % | ||||||||||||||||||||
Sources of
Funds
Deposit accounts have traditionally
been a principal source of the Bank’s funds for use in lending and for other
general business purposes. In addition to deposits, the Bank derives
funds from loan repayments, cash flows generated from operations (including
interest credited to deposit accounts), FHLB of Atlanta advances, borrowings
from the Federal Reserve Bank of Atlanta (“Federal Reserve”), the sale of
securities under agreements to repurchase, and loan sales. See “–
Borrowings” below and Note 9 of the Notes to Consolidated
Financial Statements contained in the Annual Report. Scheduled loan
payments are a relatively stable source of funds while deposit inflows and
outflows and the related cost of such funds have varied widely. FHLB
of Atlanta advances, borrowings from the Federal Reserve Bank and the
sale of securities under agreements to repurchase may be used on a short-term
basis to compensate for seasonal
17
reductions
in deposits or deposit inflows at less than projected levels and may be used on
a longer term basis in support of expanded lending activities. The
availability of funds from loan sales is influenced by general interest
rates. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” contained in the Annual
Report.
Deposits
. The
Bank attracts both short-term and long-term deposits from the general public by
offering a wide assortment of account types and rates. The Bank offers regular
savings accounts, checking accounts, various money market accounts, fixed
interest rate certificates with varying maturities, negotiated rate $100,000 or
above jumbo certificates of deposit (“Jumbo CDs”) and individual retirement
accounts.
At March 31, 2010, the Bank had $34.4
million in brokered deposits. In addition, the Bank believes
that, based on its experience over the past several years, its savings and
transaction accounts are stable sources of deposits.
The following table sets forth the
dollar amount of savings deposits in the various types of deposit programs for
the periods indicated.
|
At
March 31,
|
||||||||||||||||||||||||||
|
2010
|
2009
|
2008
|
||||||||||||||||||||||||
|
Percent
|
Percent
|
Percent
|
||||||||||||||||||||||||
|
Amount
|
of
Total
|
Amount
|
of
Total
|
Amount
|
of
Total
|
|||||||||||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||||||||||||
|
Interest Rate Range for
2010:
|
||||||||||||||||||||||||||
|
Savings
accounts 0% - 0.50%
|
$ | 18,991 | 2.7 | % | $ | 17,187 | 2.6 | % | $ | 15,966 | 2.7 | % | ||||||||||||||
|
NOW
and other transaction
|
||||||||||||||||||||||||||
|
accounts
0% - 1.04%
|
109,086 | 15.7 | 104,663 | 15.8 | 100,586 | 17.0 | ||||||||||||||||||||
|
Money
market funds 0% - 1.39%
|
173,905 | 25.1 | 150,513 | 22.8 | 143,225 | 24.3 | ||||||||||||||||||||
|
Total non-certificates
|
$ | 301,982 | 43.5 | % | $ | 272,363 | 41.2 | % | $ | 259,777 | 44.0 | % | ||||||||||||||
|
Certificates:
|
||||||||||||||||||||||||||
| 0.00-1.99% | $ | 118,797 | 17.1 | % | $ | 21,143 | 3.2 | % | $ | -- | -- | % | ||||||||||||||
| 2.00-2.99% | 255,352 | 36.8 | 112,374 | 17.0 | 14,047 | 2.4 | ||||||||||||||||||||
| 3.00-3.99% | 4,572 | 0.7 | 76,088 | 11.5 | 59,527 | 10.1 | ||||||||||||||||||||
| 4.00-4.99% | 8,818 | 1.2 | 173,467 | 26.2 | 68,149 | 11.5 | ||||||||||||||||||||
| 5.00-5.99% | 4,731 | 0.7 | 6,279 | 0.9 | 189,350 | 32.0 | ||||||||||||||||||||
|
Total certificates
|
392,270 | 56.5 | 389,351 | 58.8 | 331,073 | 56.0 | ||||||||||||||||||||
|
Total deposits
|
$ | 694,252 | 100.0 | % | $ | 661,714 | 100.0 | % | $ | 590,850 | 100.0 | % | ||||||||||||||
The Bank relies to a limited extent
upon locally obtained Jumbo CDs to maintain its deposit levels. At
March 31, 2010, Jumbo CDs constituted $195.9 million or 28.2% of the Bank’s
total deposits. At March 31, 2010, the Bank held $16.7 in public
funds which consisted of $14.8 million in certificates of deposit and $1.9
million in demand deposit accounts.
18
The following table sets forth the
deposit flows at the Bank during the periods indicated.
|
Years
Ended March 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(Dollars
in Thousands)
|
||||||||||||
|
Opening
balance
|
$ | 661,714 | $ | 590,850 | $ | 523,738 | ||||||
|
Net
deposits
|
32,538 | 70,864 | 67,112 | |||||||||
|
Ending
balance
|
694,252 | 661,714 | 590,850 | |||||||||
|
Net
increase
|
$ | 32,538 | $ | 70,864 | $ | 67,112 | ||||||
|
Percent
increase
|
4.9 | % | 12.0 | % | 12.8 | % | ||||||
The following table shows rate and
maturity information for the Bank’s certificates of deposit as of March 31,
2010.
| 0- | 2.00- | 3.00- | 4.00- | 5.00- | ||||||||||||||||||||
| 1.99% | 2.99% | 3.99% | 4.99% | 5.99% |
Total
|
|||||||||||||||||||
|
Certificate
accounts maturing
|
(In Thousands) | |||||||||||||||||||||||
|
in
quarter ending:
|
||||||||||||||||||||||||
|
June
30, 2010
|
$ | 42,537 | $ | 29,254 | $ | 352 | $ | 766 | $ | -- | $ | 72,909 | ||||||||||||
|
September
30, 2010
|
44,708 | 61,971 | 428 | 1,081 | 290 | 108,478 | ||||||||||||||||||
|
December
31, 2010
|
15,512 | 61,697 | 435 | 338 | 100 | 78,082 | ||||||||||||||||||
|
March
31, 2011
|
6,657 | 41,757 | 89 | 47 | 1,294 | 49,844 | ||||||||||||||||||
|
June
30, 2011
|
1,554 | 20,944 | 23 | 1,128 | 44 | 23,693 | ||||||||||||||||||
|
September
30, 2011
|
2,829 | 8,591 | 57 | 1 | 714 | 12,192 | ||||||||||||||||||
|
December
31, 2011
|
-- | 1,023 | 134 | 334 | 1,171 | 2,662 | ||||||||||||||||||
|
March
31, 2012
|
2,500 | 6,102 | 40 | 559 | -- | 9,201 | ||||||||||||||||||
|
June
30, 2012
|
-- | 10,187 | 1 | 851 | 163 | 11,202 | ||||||||||||||||||
|
September
30, 2012
|
-- | 780 | 256 | 1,024 | 337 | 2,397 | ||||||||||||||||||
|
December
31, 2012
|
-- | 583 | 258 | 650 | 90 | 1,581 | ||||||||||||||||||
|
Thereafter
|
2,500 | 12,463 | 2,499 | 2,039 | 528 | 20,029 | ||||||||||||||||||
|
Total
|
$ | 118,797 | $ | 255,352 | $ | 4,572 | $ | 8,818 | $ | 4,731 | $ | 392,270 | ||||||||||||
The following table indicates the
amount of the Bank’s deposits of $100,000 or more by time remaining until
maturity at March 31, 2010.
|
Certificates
|
Savings,
NOW and Money Market
|
|||||||
|
of
Deposit
|
Accounts
|
|||||||
|
(In
Thousands)
|
||||||||
|
Maturity Period
|
||||||||
|
Three
months or
less
|
$ | 34,335 | $ | 157,406 | ||||
|
Over
three through six
months
|
54,773 | -- | ||||||
|
Over
six through twelve
months
|
54,758 | -- | ||||||
|
Over
twelve months
|
51,994 | -- | ||||||
|
Total
|
$ | 195,860 | $ | 157,406 | ||||
Borrowings
As a member of the FHLB of Atlanta, the
Bank is required to own capital stock in the FHLB of Atlanta and is authorized
to apply for advances from the FHLB of Atlanta. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The FHLB of Atlanta may prescribe the acceptable uses to
which these
19
advances
may be put, as well as limitations on the size of the advances and repayment
provisions. At March 31, 2010, the Bank $164.0 million in outstanding
advances from the FHLB of Atlanta. See Note 9 of the
Notes to Consolidated Financial Statements contained in the Annual Report for
information regarding the maturities and rate structure of the Bank’s FHLB
advances. Federal law contains certain collateral requirements for
FHLB advances. See “Regulation – Federal Regulation of Savings
Institutions – Federal Home Loan Bank System.”
At March 31, 2010, the Company had $5.2
million in junior subordinated debentures. Half of the debentures
have a fixed rate of 6.88%, which balloons in September 2011. The
other half of the debentures have a fixed rate that floats quarterly at 170
basis points over the three-month LIBOR rate, or 1.96% at March 31,
2010. The blended rate was 4.42% at March 31, 2010. The
debentures are callable by the Company in September 2011, and quarterly
thereafter, with a final maturity date of December 15, 2036. See Note
10 of the Notes to Consolidated Financial Statements contained in the Annual
Report for more information.
On December 1, 2009, the Company issued
$6.1 million in convertible senior debentures. The debentures will mature on
December 1, 2029 and accrue interest at the rate of 8.0% per annum until
maturity or earlier redemption or repayment. Interest on the debentures is
payable on June 1 and December 1 of each year, commencing June 1, 2010. The
debentures are convertible into the Company’s common stock at a conversion price
of $20 per share at the option of the holder at any time prior to
maturity.
The following table sets forth the
maximum month-end balance and average balance of FHLB advances, other borrowings
and junior subordinated debentures for the periods indicated.
|
Years
Ended March 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
(In
Thousands)
|
||||||||||||
|
Maximum
Balance:
|
||||||||||||
|
FHLB
advances
|
$ | 228,997 | $ | 244,621 | $ | 179,142 | ||||||
|
Other
borrowings
|
61,337 | 26,056 | 13,635 | |||||||||
|
Junior
subordinated
debentures
|
5,155 | 5,155 | 5,155 | |||||||||
|
Senior
convertible
debentures
|
6,084 | -- | -- | |||||||||
|
Average
Balance:
|
||||||||||||
|
FHLB
advances
|
$ | 185,499 | $ | 221,204 | $ | 170,606 | ||||||
|
Other
borrowings
|
41,749 | 14,758 | 10,171 | |||||||||
|
Junior
subordinated
debentures
|
5,155 | 5,155 | 5,155 | |||||||||
|
Senior
convertible
debentures
|
2,017 | -- | -- | |||||||||
At March 31, 2010, the Bank had $12.1
million in retail purchase agreements with an average rate of
0.80%. These repurchase agreements are included in "Other Borrowings"
in the Consolidated Financial Statements included in the Annual Report and in
the table above.
20
The following table sets forth
information as to the Bank’s borrowings and the weighted average interest rates
thereon at the dates indicated.
|
At
March 31,
|
||||||||||||
|
2010
|
2009
|
2008
|
||||||||||
|
|
(Dollars
in Thousands)
|
|||||||||||
|
Balance:
|
||||||||||||
|
FHLB
advances
|
$ | 164,004 | $ | 218,998 | $ | 178,234 | ||||||
|
Other
borrowings
|
12,060 | 26,056 | 12,784 | |||||||||
|
Junior
subordinated
debentures
|
5,155 | 5,155 | 5,155 | |||||||||
|
Senior
convertible
debentures
|
6,084 | -- | -- | |||||||||
|
Weighted
Average Interest Rate at Fiscal Year End:
|
||||||||||||
|
FHLB
advances
|
3.71 | % | 2.95 | % | 4.18 | % | ||||||
|
Other
borrowings
|
0.80 | 1.09 | 3.62 | |||||||||
|
Junior
subordinated
debentures
|
4.42 | 4.95 | 5.69 | |||||||||
|
Senior
convertible
debentures
|
8.00 | -- | -- | |||||||||
|
During
Fiscal Year:
|
||||||||||||
|
FHLB
advances
|
3.39 | % | 3.44 | % | 4.46 | % | ||||||
|
Other
borrowings
|
0.60 | 2.62 | 3.29 | |||||||||
|
Junior
subordinated
debentures
|
4.64 | 5.64 | 7.03 | |||||||||
|
Senior
convertible
debentures
|
7.98 | -- | -- | |||||||||
Competition
The Bank serves the counties of Aiken,
Richland, and Lexington, South Carolina, and Columbia County, Georgia through
its 13 full service branch offices located in Aiken, North Augusta,
Graniteville, Langley, Clearwater, Wagener, Lexington, Columbia, and West
Columbia, South Carolina, and a branch office in Columbia County, Evans, Georgia
which opened in December 2007.
Security Federal faces strong
competition both in originating loans and in attracting
deposits. Competition in originating loans comes primarily from other
thrift institutions, commercial banks, mortgage bankers and credit unions who
also make loans in the Bank’s market area. The Bank competes for
loans principally on the basis of the interest rates and loan fees it charges,
the types of loans it makes and the quality of services it provides to
borrowers.
The Bank faces substantial competition
in attracting deposits from other thrift institutions, commercial banks, money
market and mutual funds, credit unions and other investment
vehicles. The ability of the Bank to attract and retain deposits
depends on its ability to provide an investment opportunity that satisfies the
requirements of investors as to rate of return, liquidity, risk and other
factors. The Bank attracts a significant amount of deposits through
its branch offices primarily from the communities in which those branch offices
are located. Therefore, competition for those deposits is principally
from other thrift institutions and commercial banks located in the same
communities. The Bank competes for these deposits by offering a
variety of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges
at each.
The authority to offer money market
deposits, and expanded lending and other powers authorized for thrift
institutions by federal law, have resulted in increased competition for both
deposits and loans between thrift institutions and other financial institutions
such as commercial banks and credit unions.
Personnel
At March 31, 2010, the Bank employed
207 full-time and 34 part-time employees. The Bank employees are not
represented by any collective bargaining agreement. Management of the
Bank considers its relations with its employees to be good.
21
Executive
Officers
. The following table sets forth information regarding
the executive officers of the Company and the Bank.
|
Age
at
|
|||||||
|
March
31,
|
Position
|
||||||
|
Name
|
2010
|
Company
|
Bank
|
||||
|
Timothy
W. Simmons
|
64 |
President
and Chief Executive
Officer
|
Chairman
of the Board and Chief
Executive
Officer
|
||||
|
T.
Clifton Weeks
|
83 |
Chairman
of the Board
|
|||||
|
Roy
G. Lindburg
|
49 |
Chief
Financial Officer
|
Chief
Financial Officer
|
||||
|
J.
Chris Verenes
|
54 |
President
|
|||||
Biographical
Information
. The following is a description of the principal
occupation and employment of the executive officers of the Corporation and the
Bank during at least the past five years:
Timothy W. Simmons
has been
President of the Company since 1987 and Chief Executive Officer since June
1994. Mr. Simmons was elected President and Chief Operating Officer
of the Bank in January 1987 and served in these capacities from March 1987 to
December 2001. In May 1988, Mr. Simmons became Chief Executive
Officer of the Bank and in January 2002, he was elected Chairman of the Bank’s
Board of Directors.
T. Clifton Weeks
has been
Chairman of the Board of the Company since July 1987 and was Chief Executive
Officer of the Company from July 1987 until June 1994. Mr. Weeks
served as Chairman of the Board of the Bank from January 1987 until January 2002
and was Chief Executive Officer of the Bank from 1987 until May
1988. Prior thereto, he served as President and Managing Officer of
the Bank beginning in 1958.
Roy G. Lindburg
has been
Chief Financial Officer of the Company and the Bank since January
1995. He was named Executive Vice President in 2005.
J. Chris Verenes
was elected
President of the Bank effective January 26, 2004. Prior to that, he
held a variety of management positions with Washington Group International, an
engineering and construction company that manages and operates major government
sites throughout the United States for the Department of Energy. He
was Director of Planning and Administration from 2001 to January 2004, Chief of
Staff during 2001, Director of Strategic Programs for the business unit from
2000 to 2001 and Deputy Manager of Business from 1996 to 2000. Prior
to his employment by Washington Group International, Mr. Verenes served as
Controller for Riegel Textile Corporation, as Director of Control Data and
Business and Technology Center, and as Executive Director of the South Carolina
Democratic Party.
REGULATION
The following is a brief description of
certain laws and regulations which are applicable to the Company and the
Bank. The description of these laws and regulations, as well as
descriptions of laws and regulations contained elsewhere herein, does not
purport to be complete and is qualified in its entirety by reference to the
applicable laws and regulations.
Proposed Federal
Legislation
. Legislation is pending in Congress that would
implement sweeping changes to the current bank regulatory
structure. These changes could include eliminating the OTS, making
the Office of the Comptroller of the Currency the primary federal banking
regulator for the Bank, making the Board of Governors of the Federal Reserve
System the primary federal banking regulator for the Company, imposing capital
requirements on the Company, and implementing numerous other
changes. No assurances can be given as to whether or in what form
such changes may occur.
Legislation is introduced from time to
time in the United States Congress that may affect our operations. In
addition, the regulations governing us may be amended from time to
time. Any such legislation or regulatory changes in the future could
adversely affect us. We cannot predict whether any such changes may
occur.
22
General
The Bank, as a federally-chartered
savings institution, is subject to federal regulation and oversight by the OTS
extending to all aspects of its operations. The Bank also is subject to
regulation and examination by the FDIC, which insures the deposits of the Bank
to the maximum extent permitted by law, and requirements established by the
Federal Reserve Board. Federally chartered savings institutions are required to
file periodic reports with the OTS and are subject to periodic examinations by
the OTS and the FDIC. The investment and lending authority of federal savings
institutions is prescribed by federal laws and regulations, and these
institutions are prohibited from engaging in any activities not permitted by
these laws and regulations. This regulation and supervision primarily is
intended for the protection of depositors and not for the purpose of protecting
stockholders.
The OTS regularly examines the Bank and
prepares reports for the consideration of the Bank’s Board of Directors on any
deficiencies that it may find in the Bank’s operations. The FDIC also has the
authority to examine the Bank in its roles as the administrator of the Deposit
Insurance Fund. The Bank’s relationship with its depositors and borrowers also
is regulated to a great extent by both federal and state laws, especially in
matters such as the ownership of savings accounts and the form and content of
the Bank’s mortgage requirements. Any change in these regulations, whether by
the FDIC, the OTS or Congress, could have a material adverse impact on the Bank
as well as the Company and their operations. The Company, as a
savings and loan holding company, is required to file certain reports with, is
subject to examination by, and otherwise must comply with the rules and
regulations of the OTS. The Company is also subject to the rules and
regulations of the SEC under the federal securities laws. See “--
Savings and Loan Holding Company Regulations.”
Federal Regulation of
Savings Institutions
Office of Thrift
Supervision
. The OTS has extensive authority over the
operations of savings institutions. As part of this authority, the
Bank is required to file periodic reports with the OTS and is subject to
periodic examinations by the OTS and the FDIC. All savings
institutions are subject to a semi-annual assessment, based upon the
institution’s total assets, to fund the operations of the OTS. The OTS also has
extensive enforcement authority over all savings institutions and their holding
companies, including the Bank and the Company. This enforcement
authority includes, among other things, the ability to assess civil money
penalties, issue cease-and-desist or removal orders and initiate injunctive
actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the
OTS. Except under certain circumstances, public disclosure of final
enforcement actions by the OTS is required.
In addition, the investment, lending
and branching authority of the Bank is prescribed by federal laws and it is
prohibited from engaging in any activities not permitted by these
laws. For example, no savings institution may invest in
non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal institutions in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings institutions are also generally
authorized to branch nationwide. The Bank is in compliance with the
noted restrictions.
All savings institutions are required
to pay assessments to the OTS to fund the agency’s operations. The
general assessments, paid on a semi-annual basis, are determined based on the
savings institution’s total assets, including consolidated
subsidiaries. The Bank’s OTS assessment for the fiscal year ended
March 31, 2010 was $229,000.
The Bank’s general permissible lending
limit for loans-to-one-borrower is equal to the greater of $500,000 or 15% of
unimpaired capital and surplus (except for loans fully secured by certain
readily marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At March 31, 2010, the Bank’s
lending limit under this restriction was $12.1 million and, at that date, the
Bank’s largest single loan to one borrower, as a result of limited guarantees on
the loan, was $9.2 million, which was performing according to its original
terms. There are different methodologies in determining whether the limited
guarantees on the loan can be taken into consideration when calculating the
amount of the Bank’s loan to one borrower limitation. If the limited
guarantees cannot be considered in determining the amount of the Bank’s loan to
one borrower limit, the Bank would have three loans to one borrower
23
relationships
of $14.2 million, $12.4 million and $12.4 million that are in excess of its loan
to one borrower lending limit at March 31, 2010. These three lending
relationships are current in payment, performing according to their original
terms, and are, in management’s opinion, well collateralized. In
light of the different methodologies regarding limited guarantees taken on these
loans, the Bank is attempting to reduce its loan to one borrower amounts through
the sale of participations in these loans.
The OTS, as well as the other federal
banking agencies, has adopted guidelines establishing safety and soundness
standards on such matters as loan underwriting and documentation, asset quality,
earnings standards, internal controls and audit systems, interest rate risk
exposure and compensation and other employee benefits. Any
institution that fails to comply with these standards must submit a compliance
plan.
Federal Home Loan Bank
System
. The Bank is a member of the FHLB of Atlanta, which is
one of 12 regional FHLBs that administer the home financing credit function of
savings institutions. Each FHLB serves as a reserve or central bank
for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans or advances to members in accordance with
policies and procedures, established by the Board of Directors of the FHLB,
which are subject to the oversight of the Federal Housing Finance
Board. All advances from the FHLB are required to be fully secured by
sufficient collateral as determined by the FHLB. In addition, all
long-term advances are required to provide funds for residential home
financing. At March 31, 2010, the Bank had $164.0 million of
outstanding advances from the FHLB of Atlanta under an available credit facility
of $288.1 million, which is limited to available collateral. See
“Business – Sources of Funds – Borrowings.”
As a member, the Bank is required to
purchase and maintain stock in the FHLB of Atlanta. At March 31,
2010, the Bank had $12.6 million in FHLB stock, which was in compliance with
this requirement. In past years, the Bank has received substantial
dividends on its FHLB stock. Over the past two fiscal years these
dividends have averaged 1.30% and were 0.45% for the fiscal year ended March 31,
2010. The FHLB did not pay a dividend for the quarters ended December
31, 2008 and March 31, 2009. The FHLB resumed the payment of
dividends in the quarter ended June 30, 2009.
Contributions by the FHLBs to provide
funds for the resolution of troubled savings and loans association and to
contribute to low- and moderately-priced housing programs through direct loans
or interest subsidies have affected adversely the level of FHLB dividends paid
and could continue to do so in the future. These contributions could
also have an adverse effect on the value of FHLB stock in the
future. A reduction in value of the Bank’s FHLB stock may result in a
corresponding reduction in the Bank’s capital.
Federal Deposit Insurance
Corporation
. The Bank's deposits are insured up to applicable limits by
the Deposit Insurance Fund of the FDIC. Beginning in October 2008, FDIC deposit
insurance coverage per separately insured depositor increased to $250,000
through December 31, 2013. On January 1, 2014, the coverage limit is
scheduled to return to $100,000, except for certain retirement accounts which
will be insured up to $250,000.
The FDIC assesses deposit insurance
premiums on each FDIC-insured institution quarterly based on annualized rates
for four risk categories applied to its deposits, subject to certain
adjustments. Each institution is assigned to one of four risk categories based
on its capital, supervisory ratings and other factors. Well capitalized
institutions that are financially sound with only a few minor weaknesses are
assigned to Risk Category I. Risk Categories II, III and IV present
progressively greater risks to the DIF. Under FDIC’s current risk-based
assessment rules, effective April 1, 2009, the initial base assessment rates
prior to adjustments range from 12 to 16 basis points for Risk Category I,
and are 22 basis points for Risk Category II, 32 basis points for
Risk Category III, and 45 basis points for Risk Category IV. Initial
base assessment rates are subject to adjustments based on an institution’s
unsecured debt, secured liabilities and brokered deposits, such that the total
base assessment rates after adjustments range from 7 to 24 basis points for Risk
Category I, 17 to 43 basis points for Risk Category II, 27 to 58 basis points
for Risk Category III, and 40 to 77.5 basis points for Risk Category
IV. Rates increase uniformly by three basis points effective January
1, 2011.
In addition to the regular quarterly
assessments, due to losses and projected losses attributed to failed
institutions, the FDIC imposed on every insured institution a special assessment
of five basis points on the amount of
24
each
depository institution’s assets reduced by the amount of its Tier 1 capital (not
to exceed 10 basis points of its assessment base for regularly quarterly
premiums) as of June 30, 2009, which was collected on September 30,
2009. The Bank paid $453,000 for this special FDIC assessment in
September 2009.
As a result of a decline in the reserve
ratio (the ratio of the DIF to estimated insured deposits) and concerns about
expected failure costs and available liquid assets in the DIF, the FDIC adopted
a rule requiring each insured institution to prepay on December 30, 2009 the
estimated amount of its quarterly assessments for the fourth quarter of 2009 and
all quarters through the end of 2012 (in addition to the regular quarterly
assessment for the third quarter which was due on December 30, 2009). The
prepaid amount is recorded as an asset with a zero risk weight and the
institution will continue to record quarterly expenses for deposit insurance.
For purposes of calculating the prepaid amount, assessments were measured at the
institution’s assessment rate as of September 30, 2009, with a uniform increase
of 3 basis points effective January 1, 2011, and were based on the institution’s
assessment base for the third quarter of 2009, with growth assumed quarterly at
annual rate of 5%. If events cause actual assessments during the prepayment
period to vary from the prepaid amount, institutions will pay excess assessments
in cash or receive a rebate of prepaid amounts not exhausted after collection of
assessments due on June 30, 2013, as applicable. Collection of the prepayment
does not preclude the FDIC from changing assessment rates or revising the
risk-based assessment system in the future. The rule includes a process for
exemption from the prepayment for institutions whose safety and soundness would
be affected adversely. The Bank prepaid $5.4 million in FDIC assessments during
the fourth quarter of calendar year 2009, which will be expensed over the
calendar years of 2010, 2011 and 2012. The balance of the prepaid
assessment was $4.0 million at March 31, 2010.
In April 2010, the FDIC issued a
proposed rule modifying the way assessments are determined. Under the
proposed rule, for most institutions, assessment rates would be 10 to 14 basis
points for Risk Category I, 22 basis points for Risk Category II, 34 basis
points for Risk Category III, and 50 basis points for Risk Category
IV. After adjustments based on unsecured long-term debt, secured
liabilities and brokered deposits for all Risk Categories, the total base
assessment rates would be 5 to 21 basis points for Risk Category I, 17 to 43
basis points for Risk Category II, 29 to 61 basis points for Risk Category III,
and 45 to 85 basis points for Risk Category IV. However, for large
institutions (those with $10 billion or more of total assets for four
consecutive quarters), the Risk Categories would not apply and new scorecard
methods would be employed, under which the initial base assessment rates would
be 10 to 50 basis points and, after certain adjustments based on unsecured
long-term debt, secured liabilities and brokered deposits, total base assessment
rates would be 5 to 85 basis points. Rate for all institutions would increase by
3 basis points effective January 1, 2011.
In October 2008, the FDIC introduced
the Temporary Liquidity Guarantee Program (the “TLGP”), a program designed to
improve the functioning of the credit markets and to strengthen capital in the
financial system during this period of economic distress. The TLGP
has two components: 1) a Debt Guarantee Program (“DGP”), guaranteeing newly
issued senior unsecured debt, and 2) a Transaction Account Guarantee Program
(“TAGP”), providing a full guarantee of non-interest bearing deposit transaction
accounts, Negotiable Order of Withdrawal (“NOW”) accounts paying less than 0.5%
annual interest, and interest on lawyers trust accounts, regardless of the
amount. The Bank and the Company elected not to participate in the
DGP. The Bank is presently participating in the TAGP during the
extension period ending December 31, 2010. The fees for this program range from
15 to 25 basis points (annualized), depending on the institutions risk category
for deposit insurance assessment purposes, assessed on amounts in covered
accounts exceeding $250,000.
In addition to the assessment for
deposit insurance, institutions are required to make payments to cover interest
on bonds issued in the late 1980s by the Financing Corporation to recapitalize a
predecessor deposit insurance fund. This payment is established quarterly and
during the fiscal year ending March 31, 2010 averaged 1.04 basis points of
assessable deposits. The Financing Corporation was chartered in 1987, by the
OTS’s predecessor, the Federal Home Loan Bank Board, solely for the purpose of
functioning as a vehicle for the recapitalization of the deposit insurance
system.
The FDIC may terminate the deposit
insurance of any insured depository institution if it determines after a hearing
that the institution has engaged or is engaging in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an
25
a
greement
with the FDIC. It also may suspend deposit insurance temporarily during the
hearing process for the permanent termination of insurance if the institution
has no tangible capital. If insurance of accounts is terminated, the accounts at
the institution at the time of the termination, less subsequent withdrawals,
shall continue to be insured for a period of six months to two years, as
determined by the FDIC. Management is aware of no existing circumstances which
would result in termination of the deposit insurance of the Bank.
Capital Requirements and
Prompt Corrective Action
. Federally insured savings institutions, such as
the Bank, are required by the OTS to maintain minimum levels of regulatory
capital and are subject to various regulatory actions if they do not meet the
requirements to be “adequately capitalized.” These minimum capital
standards include: a 1.5% tangible capital to total assets ratio, a 4% leverage
ratio (3% for institutions receiving the highest rating on the CAMELS
examination rating system) and an 8% risk-based capital ratio. In addition, the
prompt corrective action standards, discussed below, also establish, in effect,
a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS system) and, together with the
risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The
OTS regulations also require that, in meeting the tangible, leverage and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank. The OTS is also authorized to impose
capital requirements in excess of these standards on individual institutions on
a case-by-case basis.
Under the OTS capital regulations,
tangible capital generally includes common stockholders’ equity and retained
income, and certain noncumulative perpetual preferred stock and related
income. In addition, all intangible assets must be deducted from
tangible capital for calculating compliance with the requirement. At
March 31, 2010, the Bank had tangible capital of $70.3 million, or 7.4% of
adjusted total assets, which is $51.3 million above the minimum requirement of
2.0% of adjusted total assets in effect on that date.
Core capital generally consists of
tangible capital plus certain intangible assets. At March 31, 2010,
the Bank had core capital equal to $70.3 million, or 7.4% of adjusted total
assets, which is $32.3 million above the minimum requirement of 4% in effect on
that date.
The risk-based capital standard
requires federal savings institutions to maintain Tier 1 (core) and total
capital (which is defined as core capital and supplementary capital) to
risk-weighted assets of at least 4% and 8%, respectively. At March 31, 2010, the
Bank had Tier 1 risk-based capital of $70.3 million, or 12.1% of risk-weighted
assets, which is $47.0 million above the minimum requirement of 4% in
effect on that date. The Bank’s total risk-based capital at
March 31, 2010 was $77.6 million with risk-weighted assets of $582.0 million, or
total capital of 13.3% of risk-weighted assets, which was $31.0 million above
the 8% requirement in effect on that date. In determining the amount
of risk-weighted assets, all assets, including certain off-balance sheet assets,
recourse obligations, residual interests and direct credit substitutes, are
multiplied by a risk-weight factor of 0% to 100%, assigned by the OTS capital
regulation based on the risks believed inherent in the type of asset. Tier 1
(core) capital is defined as common stockholders’ equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus
and minority interests in equity accounts of consolidated subsidiaries, less
intangibles other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets and up to 45% of unrealized gains on available-for-sale
equity securities with readily determinable fair market values. Overall, the
amount of supplementary capital included as part of total capital cannot exceed
100% of core capital.
The OTS and the FDIC are authorized
and, under certain circumstances, required to take certain actions against
savings institutions that fail to meet their capital
requirements. The OTS is generally required to take action to
restrict the activities of an “undercapitalized institution,” which is an
institution with less than either a 4.0% core capital ratio, a 4.0% Tier 1
risk-based capital ratio, or an 8.0% risk-based capital ratio. Any
such institution must submit a capital restoration plan and until the plan is
approved by the OTS, may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized
institutions. As a condition to the approval of the capital
restoration plan, any company controlling an undercapitalized institution must
26
agree
that it will enter into a limited capital maintenance guarantee with respect to
the institution’s achievement of its capital requirements.
Any savings institution that fails to
comply with its capital plan or has Tier 1 risk-based or core capital ratios of
less than 3.0% or a risk-based capital ratio of less than 6.0% and is considered
“significantly undercapitalized” will be made subject to one or more additional
specified actions and operating restrictions which may cover all aspects of its
operations and may include a forced merger or acquisition of the
institution. An institution that becomes “critically
undercapitalized” because it has a tangible capital ratio of 2.0% or less is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized institutions. In
addition, the OTS must appoint a receiver, or conservator with the concurrence
of the FDIC, for a savings institution, with certain limited exceptions, within
90 days after it becomes critically undercapitalized. Any
undercapitalized institution is also subject to the general enforcement
authority of the OTS and the FDIC, including the appointment of a conservator or
a receiver.
Under various circumstances, if an
institution fails to meet the minimum capital requirements or to meet the
requirements to be at least “adequately capitalized,” the OTS also can take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors. The OTS is also generally authorized to reclassify an institution
into a lower capital category and impose the restrictions applicable to such
category if the institution is engaged in unsafe or unsound practices or is in
an unsafe or unsound condition. The imposition by the OTS or the FDIC
of any of these measures on the Bank may have a substantial adverse effect on
its operations and profitability. To be “well capitalized,” a
savings institution must have a Tier I capital ratio of at least 5.0%, a Tier 1
risk-based capital ratio of at least 6.0%, a total capital ratio of at least
10.0%, and not be subject to any agreement, order or directive of the OTS to
meet and maintain any specific capital level. At March 31, 2010, the Bank was
categorized as “well capitalized” under the prompt corrective action regulations
of the OTS. For additional information, see Note 14 of the Notes to
Consolidated Financial Statements included in the Annual Report.
Emergency Economic
Stabilization Act of 2008 ("EESA")
.
In October 2008, the
EESA was enacted. The EESA authorizes the Treasury Department to
purchase from financial institutions and their holding companies up to $700
billion in mortgage loans, mortgage-related securities and certain other
financial instruments, including debt and equity securities issued by financial
institutions and their holding companies in a troubled asset relief program
("TARP"). The purpose of TARP is to restore confidence and stability
to the U.S. banking system and to encourage financial institutions to increase
their lending to customers and to each other. Under
the TARP Capital Purchase Program ("CPP"), the Treasury will purchase
debt or equity securities from participating institutions. The TARP
also will include direct purchases or guarantees of troubled assets of financial
institutions. Participants in the CPP are subject to executive
compensation limits and are encouraged to expand their lending and mortgage loan
modifications. The Company completed its TARP CPP transaction on
December 19, 2008, receiving $18.0 million in funding. For additional
information regarding the TARP CPP transaction, see Item 1A, “Risk Factors –
Risks Related to Recent Economic Conditions and Governmental Response Efforts –
Risks specific to our participation in TARP.”
The American Recovery and
Reinvestment Act of 2009
. On February 17, 2009, President
Obama signed The American Recovery and Reinvestment Act of 2009 ("ARRA") into
law. The ARRA is intended to revive the US economy by creating
millions of new jobs and stemming home foreclosures. For financial
institutions that have received or will receive financial assistance under TARP
or related programs, the ARRA significantly rewrites the original executive
compensation and corporate governance provisions of Section 111 of the
EESA. Among the most important changes instituted by the ARRA are new
limits on the ability of TARP recipients to pay incentive compensation to up to
20 of the next most highly-compensated employees in addition to the "senior
executive officers," a restriction on termination of employment payments to
senior executive officers and the five next most highly-compensated employees
and a requirement that TARP recipients implement "say on pay" shareholder
votes.
Qualified Thrift Lender
Test
. All savings institutions, including the Bank, are
required to meet a qualified thrift lender (“QTL”) test to avoid certain
restrictions on their operations. This test requires a savings
institution to have at least 65% of its total assets, as defined by regulation,
in qualified thrift investments on a monthly average for nine out of every 12
months on a rolling basis. As an alternative, the savings institution
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets
primarily consist
27
of
residential housing related loans and investments. As of March 31,
2010, the Bank maintained 90.9% of its portfolio assets in qualified thrift
investments and, therefore, met the qualified thrift lender test.
Any savings institution that fails to
meet the QTL test must convert to a national bank charter, unless it requalifies
as a QTL within one year of failure and thereafter remains a QTL. If such an
association has not yet requalified or converted to a national bank, its new
investments and activities are limited to those permissible for both a savings
institution and a national bank, and it is limited to national bank branching
rights in its home state. In addition, the association is immediately ineligible
to receive any new FHLB borrowings and is subject to national bank limits for
payment of dividends. If such an institution has not requalified or converted to
a national bank within three years after the failure, it must divest of all
investments and cease all activities not permissible for a national bank. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure (unless the institution requalifies in a
timely manner after first failing the test), the holding company must register
as a bank holding company and become subject to all restrictions on bank holding
companies. See “ - Savings and Loan Holding Company
Regulations.”
Limitations on Capital
Distributions
. OTS regulations impose various restrictions on
savings institutions with respect to their ability to make distributions of
capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital
account. Generally, savings institutions, such as the Bank, that
before and after the proposed distribution are well-capitalized, may make
capital distributions during any calendar year equal to up to 100% of net income
for the year-to-date plus retained net income for the two preceding
years. However, an institution deemed to be in need of more than
normal supervision by the OTS may have its dividend authority restricted by the
OTS. The Bank may pay dividends to the Company in accordance with
this general authority.
Savings institutions proposing to make
any capital distribution need not submit written notice to the OTS prior to such
distribution unless they are a subsidiary of a holding company or would not
remain well-capitalized following the distribution. Savings
institutions that do not, or would not be at least adequately capitalized
following a proposed capital distribution or propose to exceed these net income
limitations, must obtain OTS approval prior to making such
distribution. The OTS may object to the distribution during that
30-day period based on safety and soundness concerns. See “– Capital
Requirements.”
Activities of Savings
Institutions and their Subsidiaries
. When a savings
institution establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that it controls, the savings institution must
notify the FDIC and the OTS 30 days in advance and provide the information each
agency may, by regulation, require. Savings institutions also must
conduct the activities of subsidiaries in accordance with existing regulations
and orders.
The OTS may determine that the
continuation by a savings institution of its ownership control of, or its
relationship to, the subsidiary constitutes a serious risk to the safety,
soundness or stability of the institution or is inconsistent with sound banking
practices or with the purposes of the Federal Deposit Insurance
Act. Based upon that determination, the FDIC or the OTS has the
authority to order the savings institution to divest itself of control of the
subsidiary. The FDIC also may determine by regulation or order that
any specific activity poses a serious threat to the Deposit Insurance
Fund. If so, it may require that no member of the Deposit Insurance
Fund engage in that activity directly.
Transactions with
Affiliates
. The Bank’s authority to engage in transactions
with “affiliates” is limited by OTS regulations and by Sections 23A and 23B of
the Federal Reserve Act as implemented by the Federal Reserve Board’s Regulation
W. The term “affiliates” for these purposes generally means any
company that controls or is under common control with an
institution. The Company and its non-savings institution subsidiaries
are affiliates of the Bank. In general, transactions with affiliates
must be on terms that are as favorable to the institution as comparable
transactions with non-affiliates. In addition, certain types of
transactions are generally limited to 10% of the Bank’s capital and
surplus for transaction with any single affiliate and to 20% of the Bank’s
capital and surplus for transactions with all affiliates. Collateral in
specified amounts must usually be provided by affiliates in order to receive
loans from an institution. In addition, savings institutions are
prohibited from lending to any affiliate that is engaged in activities that are
not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
28
The Sarbanes-Oxley Act of 2002
generally prohibits a company from making loans to its executive officers and
directors. However, there is a specific exception for loans by a
depository institution to its executive officers and directors in compliance
with federal banking laws. Under such laws, the Bank’s authority to
extend credit to executive officers, directors and 10% stockholders
(“insiders”), as well as entities such persons control, is
limited. The law restricts both the individual and aggregate amount
of loans the Bank may make to insiders based, in part, on the Bank’s capital
position and requires certain Board approval procedures to be
followed. Such loans must be made on terms substantially the same as
those offered to unaffiliated individuals and not involve more than the normal
risk of repayment. There is an exception for loans made pursuant to a
benefit or compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other
employees. There are additional restrictions applicable to loans to
executive officers.
Community Reinvestment
Act
. Under the Community Reinvestment Act, every FDIC-insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The Community
Reinvestment Act does not establish specific lending requirements or programs
for financial institutions nor does it limit an institution’s discretion to
develop the types of products and services that it believes are best suited to
its particular community, consistent with the Community Reinvestment
Act. The Community Reinvestment Act requires the OTS, in connection
with its examination of the Bank, to assess the institution’s record of meeting
the credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the
basis for the denial of an application by the OTS. Due to the
heightened attention being given to the Community Reinvestment Act in the past
few years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was examined in 2009 for
Community Reinvestment Act compliance and received a rating of satisfactory in
its latest examination.
Federally insured savings institutions
are subject, with certain exceptions, to certain restrictions on extensions of
credit to their parent holding companies or other affiliates, on investments in
the stock or other securities of affiliates and on the taking of such stock or
securities as collateral from any borrower. In addition, these
institutions are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit or the providing of any property or
service.
Enforcement
. The
OTS has primary enforcement responsibility over savings institutions and has the
authority to bring action against all “institution-affiliated parties,”
including shareholders, and any attorneys, appraisers and accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution. Formal enforcement action may range
from the issuance of a capital directive or cease and desist order to removal of
officers or directors, receivership, conservatorship or termination of deposit
insurance. Civil penalties cover a wide range of violations and can
amount up to $1.375 million per day. The FDIC has the authority to
recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for
certain violations.
Standards for Safety and
Soundness
. As required by statute, the federal banking
agencies have adopted Interagency Guidelines prescribing Standards for Safety
and Soundness. The guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes
impaired. If the OTS determines that a savings institution fails to
meet any standard prescribed by the guidelines, it may require the institution
to submit an acceptable plan to achieve compliance with the
standard.
Environmental Issues
Associated with Real Estate Lending
. The Comprehensive
Environmental Response, Compensation and Liability Act (“CERCLA”), a federal
statute, generally imposes strict liability on all prior and present “owners and
operators” of sites containing hazardous waste. However, Congress
asked to protect secured creditors by providing that the term “owner and
operator” excludes a person whose ownership is limited to protecting its
security interest in the site. Since the enactment of the CERCLA,
this “secured creditor exemption” has been the subject of judicial
interpretations which have left open the possibility that lenders could be
liable for cleanup costs on contaminated property that they hold as collateral
for a loan.
29
To the extent that legal uncertainty
exists in this area, all creditors, including the Bank, that have made loans
secured by properties with potential hazardous waste contamination (such as
petroleum contamination) could be subject to liability for cleanup costs, which
costs often substantially exceed the value of the collateral
property.
Privacy
Standards
. The Gramm-Leach-Bliley Financial Services
Modernization Act of 1999 (“GLBA”), modernized the financial services industry
by establishing a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms and other financial
service providers. The Bank is subject to OTS regulations
implementing the privacy protection provisions of the GLBA. These
regulations require the Bank to disclose its privacy policy, including
identifying with whom it shares “non-public personal information,” to customers
at the time of establishing the customer relationship and annually
thereafter.
Anti-Money Laundering and
Customer Identification
. Congress enacted the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) in response to the
terrorist events of September 11, 2001. The USA Patriot Act gives the
federal government new powers to address terrorist threats through enhanced
domestic security measures, expanded surveillance powers, increased information
sharing, and broadened anti-money laundering requirements. In March
2006, Congress re-enacted certain expiring provisions of the USA Patriot
Act.
Savings and Loan Holding
Company Regulation
General
. The
Company is a unitary savings and loan holding company subject to regulatory
oversight of the OTS. Accordingly, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings institution subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
present a serious risk to the Bank.
Mergers and
Acquisitions
. The Company must obtain approval from the OTS
before acquiring more than 5% of the voting stock of another savings institution
or savings and loan holding company or acquiring such an institution or holding
company by merger, consolidation or purchase of its assets. In
evaluating an application for the Company to acquire control of a savings
institution, the OTS would consider the financial and managerial resources and
future prospects of the Company and the target institution, the effect of the
acquisition on the risk to the insurance fund, the convenience and the needs of
the community and competitive factors.
Activities
Restrictions
. The GLBA provides that no company may acquire control of a
savings association after May 4, 1999 unless it engages only in the financial
activities permitted for financial holding companies under the law or for
multiple savings and loan holding companies as described below. Further, the
GLBA specifies that, subject to a grandfather provision, existing savings and
loan holding companies may only engage in such activities. The Company qualifies
for the grandfathering and is therefore not restricted in terms of its
activities. Upon any non-supervisory acquisition by the Company of another
savings association as a separate subsidiary, the Company would become a
multiple savings and loan holding company and would be limited to activities
permitted multiple holding companies by OTS regulation. OTS has issued an
interpretation concluding that multiple savings holding companies may also
engage in activities permitted for financial holding companies, including
lending, trust services, insurance activities and underwriting, investment
banking and real estate investments.
If the Bank fails the QTL test, the
Company must, within one year of that failure, register as, and will become
subject to, the restrictions applicable to bank holding
companies. See “– Federal Regulation of Savings Institutions –
Qualified Thrift Lender Test.”
Dividend Payments and Common
Stock Repurchases
. As a South Carolina corporation, the Company is
subject to restrictions on the payment of dividends under South Carolina law. In
addition, as a savings and loan holding company, the Company’s ability to
declare and pay dividends is dependent on certain federal regulatory
considerations. The Company is an entity separate and distinct from its
principal subsidiary, Security Federal, and derives substantially all of its
revenue in the form of dividends from this subsidiary. Accordingly, the Company
is, and will be, dependent upon dividends from the Bank to pay the principal of
and interest on its indebtedness, to satisfy its other cash needs and
30
to pay
dividends on its common stock. The Bank’s ability to pay dividends is subject to
their ability to earn net income and to meet certain regulatory requirements.
See “— Federal Regulation of Savings Institutions - Limitations on Capital
Distributions.”
As a result of our participation in the
TARP CPP, we are subject to certain limitations regarding the payment of
dividends on and the repurchase of our common stock. Without the consent of the
U.S. Treasury, we may not increase the cash dividend on our common stock or, pay
any dividends on our common stock unless we are current in our dividend payments
to the U.S. Treasury on the Series A Preferred Stock. In addition and subject to
limited exceptions, with the consent of the U.S. Treasury, we also may not
redeem, repurchase or otherwise acquire shares of our common stock or preferred
stock other than the Series A Preferred Stock or trust preferred
securities.
Sarbanes-Oxley Act of
2002
. The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”)
was signed into law in response to public concerns regarding corporate
accountability in connection with several accounting scandals. The
stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility,
to provide for enhanced penalties for accounting and auditing improprieties at
publicly traded companies and to protect investors by improving the accuracy and
reliability of corporate disclosures pursuant to the securities
laws. The Sarbanes-Oxley Act generally applies to all companies, both
U.S. and non-U.S., that file or are required to file periodic reports with the
Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of
1934, including the Company.
The Sarbanes-Oxley Act includes very
specific additional disclosure requirements and new corporate governance rules,
and required the SEC and securities exchanges to adopt extensive additional
disclosure, corporate governance and related rules. The
Sarbanes-Oxley Act represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees.
TAXATION
Federal
Taxation
General
. The
Company and the Bank report their income on a fiscal year basis using the
accrual method of accounting and are subject to federal income taxation in the
same manner as other corporations with some exceptions, including particularly
the Bank’s reserve for bad debts discussed below. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Bank or the
Company.
Bad Debt
Reserve
. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business (“qualifying thrift”) were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. The Bank’s deductions
with respect to “qualifying real property loans,” which are generally loans
secured by certain interest in real property, were computed using an amount
based on the Bank’s actual loss experience, or a percentage equal to 8% of the
Bank’s taxable income, computed with certain modifications and reduced by the
amount of any permitted additions to the non-qualifying reserve. Due
to the Bank’s loss experience, the Bank generally recognized a bad debt
deduction equal to 8% of taxable income.
The thrift bad debt rules were revised
by Congress in 1996. The new rules eliminated the 8% of taxable
income method for deducting additions to the tax bad debt reserves for all
thrifts for tax years beginning after December 31, 1995. These rules
also required that all institutions recapture all or a portion of their bad debt
reserves added since the base year (last taxable year beginning before January
1, 1988). The Bank has no post-1987 reserves subject to
recapture. For taxable years beginning after December 31, 1995, the
Bank’s bad debt deduction has been determined under the experience method using
a formula based on actual bad debt experience over a period of
years. The unrecaptured base year reserves will not be subject to
recapture as long as the Bank continues to carry on the business of
banking. In addition, the balance of the pre-1988 bad debt reserves
continue to be subject to provisions of present law referred to below that
require recapture in the case of certain excess distributions to
shareholders.
31
Distributions
. To
the extent that the Bank makes “nondividend distributions” to the Company, these
distributions will be considered to result in distributions from the balance of
its bad debt reserve as of December 31, 1987 (or a lesser amount if the Bank’s
loan portfolio decreased since December 31, 1987) and then from the supplemental
reserve for losses on loans (“Excess Distributions”), and an amount based on the
Excess Distributions will be included in the Bank’s taxable
income. Nondividend distributions include distributions in excess of
the Bank’s current and accumulated earnings and profits, distributions in
redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of the Bank’s current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not be considered to result in a distribution from the Bank’s bad debt
reserve. The amount of additional taxable income created from an
Excess Distribution is an amount that, when reduced by the tax attributable to
the income, is equal to the amount of the distribution. Thus, if,
after the Conversion, the Bank makes a “nondividend distribution,” then
approximately one and one-half times the Excess Distribution would be includable
in gross income for federal income tax purposes, assuming a 34% corporate income
tax rate (exclusive of state and local taxes). See “Regulation –
Federal Regulation of Savings Institutions – Limitations on Capital
Distributions” for limits on the payment of dividends by the
Bank. The Bank does not intend to pay dividends that would result in
a recapture of any portion of its tax bad debt reserve.
Corporate Alternative
Minimum Tax
. The Code imposes a tax on alternative minimum
taxable income (“AMTI”) at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is treated
as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI
is increased by an amount equal to 75% of the amount by which the Bank’s
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For
taxable years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of 0.12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Bank, whether or not
an Alternative Minimum Tax is paid.
Dividends-Received
Deduction
. The Company may exclude from its income 100% of
dividends received from the Bank as a member of the same affiliated group of
corporations. The corporate dividends-received deduction is generally
70% in the case of dividends received from unaffiliated corporations with which
the Company and the Bank will not file a consolidated tax return, except that if
the Company or the Bank owns more than 20% of the stock of a corporation
distributing a dividend, then 80% of any dividends received may be
deducted.
Audits
. The
Company, the Bank and its consolidated subsidiaries have been audited or their
books closed without audit by the IRS with respect to consolidated federal
income tax returns through March 31, 1999. See Note 13 of the Notes
to Consolidated Financial Statements contained in the Annual Report for
additional information regarding income taxes.
State
Taxation
South Carolina has adopted the Internal
Revenue Code as it relates to savings banks, effective for taxable years
beginning after December 31, 1986. The Bank is subject to South
Carolina income tax at the rate of 6%. The Bank has not been audited
by the State of South Carolina during the past five years.
The Company’s income tax returns have
not been audited by federal or state authorities within the last five
years. For additional information regarding income taxes, see Note 13
of the Notes to Consolidated Financial Statements contained in the Annual
Report.
An investment in our common stock
involves various risks which are particular to Security Federal Corporation, our
industry, and our market area. Before making an investment decision,
you should carefully consider the risks and uncertainties described below,
together with all of the other information included in this
report. In addition to the risks and uncertainties described below,
other risks and uncertainties not currently known to us or that we currently
deem to be immaterial also may materially and adversely affect our business,
32
financial
condition and results of operations. The value or market price of our
common stock could decline due to any of these identified or other risks, and
you could lose all or part of your investment.
Risks
Related to the U.S. Financial Industry
Difficult
market conditions have adversely affected our industry.
We are particularly exposed to
downturns in the U.S. housing market. Dramatic declines in the housing market
over the past two years, with falling home prices and increasing in
foreclosures, unemployment and under-employment, have negatively impacted the
credit performance of mortgage loans and resulted in significant write-downs of
asset values by financial institutions, including government-sponsored entities,
major commercial and investment banks, and regional financial institutions such
as our Company. Reflecting concerns about the stability of the financial markets
and the strength of counterparties, many lenders and institutional investors
have reduced or ceased providing funding to borrowers, including funding to
other financial institutions. This market turmoil and tightening of credit have
led to an increased level of commercial and consumer delinquencies, lack of
consumer confidence, increased market volatility, and widespread reduction of
business activity generally. The resulting economic pressures on consumers and
lack of confidence in the financial markets have adversely affected our
business, financial condition and results of operations. We do not expect that
the difficult conditions in the financial markets are likely to improve in the
near future. A worsening of these conditions would likely exacerbate the adverse
effects of these difficult market conditions on us and others in the financial
institutions industry. In particular, we may face the following risks in
connection with these events:
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We
potentially face increased regulation of our industry and a change in
regulators for Security Federal Corporation and Security Federal Bank.
Compliance with such regulation and the requirements of different
regulators may increase our costs and limit our ability to pursue business
opportunities.
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Our
ability to assess the creditworthiness of our customers may be impaired if
the models and approaches we use to select, manage and underwrite our
customers become less predictive of future
behaviors.
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The
process we use to estimate losses inherent in our loan and investment
portfolios requires difficult, subjective and complex judgments, including
forecasts of economic conditions, particularly with respect to how these
economic conditions might impair the ability of our borrowers and trust
preferred securities issuers to repay their debts. The level of
uncertainty concerning economic conditions may adversely affect the
accuracy of our estimates which may, in turn, impact the reliability of
the process.
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Competition
in our industry could intensify as a result of the increasing
consolidation of financial services companies in connection with current
market conditions.
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We
may be required to pay significantly higher FDIC premiums because market
developments have significantly depleted the FDIC insurance fund and the
ratio of reserves to insured deposits has
declined.
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Legislative
is pending in Congress that would eliminate the Office of Thrift Supervision and
would require Security Federal Corporation and Security Federal Bank to become
regulated by other federal regulatory agencies.
Legislation is pending in Congress that
would implement sweeping changes to the current bank regulatory
structure. These changes could include eliminating the Office of
Thrift Supervision, making the Office of the Comptroller of the Currency the
primary federal banking regulator for Security Federal Bank, making the Board of
Governors of the Federal Reserve System the primary federal banking regulator
for Security Federal Corporation, imposing capital requirements on Security
Federal Corporation, and implementing numerous other changes. No
assurances can be given as to whether or in what form such changes may
occur.
33
Under the legislation being considered,
new government entities would be established to write consumer protection rules,
and in certain cases, to conduct examinations and to implement
enforcement actions relating to consumer protection. Compliance with new
regulations and being supervised by one or more new regulatory agencies would
likely increase our operating expenses.
Risks
Related to our Business
Our
provision for loan losses and net loan charge offs have increased significantly
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.
For the year ended March 31, 2010, we
recorded a provision for loan losses of $8.2 million compared to $2.8 million
for the year ended March 31, 2009. We also recorded net loan
charge-offs of $6.0 million for the year ended March 31, 2010 compared to
$710,000 for the year ended March 31, 2009. We are experiencing
elevated levels of loan delinquencies and credit losses. Slower
sales, excess inventory and declining prices have been the primary causes of the
increase in delinquencies and foreclosures for A&D loans and commercial real
estate loans. At March 31, 2010, our total non-performing assets had
increased to $42.0 million compared to $14.9 million at March 31,
2009. Further, our portfolio is concentrated in acquisition and
development loans, commercial business and commercial real estate loans, all of
which generally have a higher risk of loss than residential mortgage
loans. If current weak conditions in the housing and real estate
markets continue, we expect that we will continue to experience higher than
normal delinquencies and credit losses. Moreover, if the recession is
prolonged, we expect that it could severely impact economic conditions in our
market areas and that we could experience significantly higher delinquencies and
credit losses. As a result, we may be required to make further
increases in our provision for loan losses and to charge off additional loans in
the future, which could materially adversely affect our financial condition and
results of operations.
Changes
in laws and regulations and the cost of regulatory compliance with new laws and
regulations may adversely affect our operations and our income.
We are subject to extensive regulation,
supervision and examination by the Office of Thrift Supervision and the Federal
Deposit Insurance Corporation. These regulatory authorities have
extensive discretion in connection with their supervisory and enforcement
activities, including the ability to impose restrictions on a bank’s operations,
reclassify assets, determine the adequacy of a bank’s allowance for loan losses
and determine the level of deposit insurance premiums
assessed. Because our business is highly regulated, the laws and
applicable regulations are subject to frequent change. Any change in
these regulations and oversight, whether in the form of regulatory policy, new
regulations or legislation or additional deposit insurance premiums could have a
material impact on our operations.
In response to the financial crisis of
2008 and early 2009, Congress has taken actions that are intended to strengthen
confidence and encourage liquidity in financial institutions, and the Federal
Deposit Insurance Corporation has taken actions to increase insurance coverage
on deposit accounts. In addition, there have been proposals made by
members of Congress and others that would reduce the amount delinquent borrowers
are otherwise contractually obligated to pay under their mortgage loans and
limit an institution’s ability to foreclose on mortgage collateral.
The potential exists for additional
federal or state laws and regulations, or changes in policy, affecting lending
and funding practices and liquidity standards. Moreover, bank
regulatory agencies have been active in responding to concerns and trends
identified in examinations, and have issued many formal enforcement orders
requiring capital ratios in excess of regulatory requirements. Bank
regulatory agencies, such as the Office of Thrift Supervision and the Federal
Deposit Insurance Corporation, govern the activities in which we may engage,
primarily for the protection of depositors, and not for the protection or
benefit of potential investors. In addition, new laws and regulations
may increase our costs of regulatory compliance and of doing business, and
otherwise affect our operations. New laws and regulations may
significantly affect the markets in which we do business, the markets for and
value of our loans and investments, the fees we can charge and our ongoing
operations, costs and profitability.
34
Our
allowance for loan losses may prove to be insufficient to absorb losses in our
loan portfolio.
Lending money is a substantial part of
our business and each loan carries a certain risk that it will not be repaid in
accordance with its terms or that any underlying collateral will not be
sufficient to assure repayment. This risk is affected by, among other
things:
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cash
flow of the borrower and/or the project being
financed;
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the
changes and uncertainties as to the future value of the collateral, in the
case of a collateralized loan;
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the
duration of the loan;
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the
character and creditworthiness of a particular borrower;
and
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changes
in economic and industry
conditions.
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We maintain an allowance for loan
losses, which is a reserve established through a provision for loan losses
charged to expense, which we believe is appropriate to provide for probable
losses in our loan portfolio. The amount of this allowance is determined by our
management through periodic reviews and consideration of several factors,
including, but not limited to:
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our
general reserve, based on our historical default and loss experience and
certain macroeconomic factors based on management’s expectations of future
events; and
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our
specific reserve, based on our evaluation of non-performing loans and
their underlying collateral
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The determination of the appropriate
level of the allowance for loan losses inherently involves a high degree of
subjectivity and requires us to make significant estimates of current credit
risks and future trends, all of which may undergo material changes. Continuing
deterioration in economic conditions affecting borrowers, new information
regarding existing loans, identification of additional problem loans and other
factors, both within and outside of our control, may require an increase in the
allowance for loan losses. Our allowance for loan losses was 2.13% of total
loans outstanding and 39.4% of non-performing loans at March 31, 2010. In
addition, bank regulatory agencies periodically review our allowance for loan
losses and may require an increase in the provision for possible loan losses or
the recognition of further loan charge-offs, based on judgments different than
those of management. In addition, if charge-offs in future periods exceed the
allowance for loan losses, we will need additional provisions to increase the
allowance for loan losses. Any increases in the allowance for loan losses will
result in a decrease in net income and, possibly, capital, and may have a
material adverse effect on our financial condition and results of
operations.
The
current economic recession in the market areas we serve may continue to
adversely impact our results of operations and financial condition.
Our success depends primarily on the
general economic conditions of the states of South Carolina and Georgia and the
specific local markets in which we operate. Unlike larger national or other
regional banks that are more geographically diversified, we provide banking and
financial services to customers located primarily in Aiken, Richland, and
Lexington Counties in South Carolina and Columbia County in Georgia. As of March
31, 2010, substantially our entire real estate portfolio consisted of loans
secured by properties located in these four counties. The local economic
conditions in our market areas have a significant impact on the demand for our
products and services as well as the ability of our customers to repay loans,
the value of the collateral securing loans and the stability of our deposit
funding sources.
Adverse economic conditions unique to
these markets could have a materially adverse effect on our financial condition
and results of operations. A further deterioration in economic
conditions in the market areas we serve could
35
result in
the following consequences, any of which could have a materially adverse impact
on our business, financial condition and results of operations:
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loan
delinquencies, problem assets and foreclosures may increase;
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demand
for our products and services may
decline;
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collateral
for loans made may decline further in value, in turn reducing customers’
borrowing power, reducing the value of assets and collateral associated
with existing loans; and
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the
amount of our low-cost or non-interest bearing deposits may
decrease.
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Our
loan portfolio includes commercial real estate loans with a higher risk of
loss.
At March 31, 2010, commercial real
estate loans were $366.0 million or 62.4% of our total loan portfolio. These
loans typically involve higher principal amounts than other types of
loans. Repayment is dependent upon income being generated from the
property securing the loan in amounts sufficient to cover operating expenses and
debt service, which may be adversely affected by changes in the economy or local
market conditions. Commercial real estate loans may expose a lender
to greater credit risk than loans secured by residential real estate because the
collateral securing these loans may not be sold as easily as residential real
estate. Included within this category are acquisition and development
(“A&D”) loans. At March 31, 2010, A&D loans were $22.2 million or 3.8%
of our total loan portfolio. This type of lending contains the
inherent difficulty in estimating both a property’s value at completion of the
project and the estimated cost (including interest) of the
project. If the estimate of construction cost proves to be
inaccurate, we may be required to advance funds beyond the amount originally
committed to permit completion of the project. If the estimate of
value upon completion proves to be inaccurate, we may be confronted at, or prior
to, the maturity of the loan with a project the value of which is insufficient
to assure full repayment. In addition, speculative construction loans
to a builder are often associated with homes that are not pre-sold, and thus
pose a greater potential risk to us than construction loans to individuals on
their personal residences. Loans on land under development or held
for future construction also poses additional risk because of the lack of income
being produced by the property and the potential illiquid nature of the
collateral. These risks can be significantly impacted by supply and
demand conditions. As a result, this type of lending often involves
the disbursement of substantial funds with repayment dependent on the success of
the ultimate project and the ability of the borrower to sell or lease the
property, rather than the ability of the borrower or guarantor to independently
repay principal and interest. While our origination of
A&D loans have decreased significantly in the last two years, we
continue to have significant levels of construction loan
balances. Most of our construction loans are for the construction of
single family residences. Reflecting the current slowdown in the
residential market, the secondary market for land and construction loans is not
readily liquid, so we have less opportunity to mitigate our credit risk by
selling part or all of our interest in these loans. If we foreclose
on a construction loan, our holding period for the collateral typically may be
longer than we have historically experienced because there are fewer potential
purchasers of the collateral. The decline in the number of potential
purchasers has contributed to the decline in the value of these loans.
Accordingly, charge-offs on construction and land loans may be larger than those
incurred by other segments of our loan portfolio.
Repayment
of our commercial business loans is often dependent on the cash flows of the
borrower, which may be unpredictable, and the collateral securing these loans
may fluctuate in value.
Commercial business lending involves
risks that are different from those associated with residential and commercial
real estate lending. Real estate lending is generally considered to be
collateral based lending with loan amounts based on predetermined loan to
collateral values and liquidation of the underlying real estate collateral being
viewed as the primary source of repayment in the event of borrower default. Our
commercial business loans are primarily made based on the cash flow of the
borrower and secondarily on the underlying collateral provided by the borrower.
The borrowers' cash flow may be unpredictable, and collateral securing these
loans may fluctuate in value. Although commercial business loans are often
collateralized by equipment, inventory, accounts receivable, or other business
assets, the liquidation of collateral in the event of default is often an
insufficient source of repayment because accounts receivable may be
uncollectible and inventories may be obsolete or of limited use, among other
things. Accordingly,
36
the
repayment of commercial business loans depends primarily on the cash flow and
credit worthiness of the borrower and secondarily on the underlying collateral
provided by the borrower.
The
level of our commercial real estate loan portfolio may subject us to additional
regulatory scrutiny.
The FDIC, the Federal Reserve, the
Office of Thrift Supervision and the Office of the Comptroller of the Currency,
have promulgated joint guidance on sound risk management practices for financial
institutions with concentrations in commercial real estate
lending. Under the guidance, a financial institution that, like us,
is actively involved in commercial real estate lending should perform a risk
assessment to identify concentrations. A financial institution may have a
concentration in commercial real estate lending if, among other
factors, (i) total reported loans for construction, land acquisition
and development, and other land represent 100% or more of total capital or (ii)
total reported loans secured by multi-family and non-farm residential
properties, loans for construction, land acquisition and development and other
land, and loans otherwise sensitive to the general commercial real estate
market, including loans to commercial real estate related entities,
represent 300% or more of total capital. Management should also employ
heightened risk management practices including board and management oversight
and strategic planning, development of underwriting standards, risk assessment
and monitoring through market analysis and stress testing. We have
concluded that we have a concentration in commercial real estate lending under
the foregoing standards. While we believe we have implemented
policies and procedures with respect to our commercial real estate loan
portfolio consistent with this guidance, bank regulators could require us to
implement additional policies and procedures consistent with their
interpretation of the guidance which could result in additional costs to
us.
Our
real estate lending also exposes us to the risk of environmental
liabilities.
In the course of our business, we may
foreclose and take title to real estate, and we could be subject to
environmental liabilities with respect to these properties. We may be held
liable to a governmental entity or to third persons for property damage,
personal injury, investigation, and clean-up costs incurred by these parties in
connection with environmental contamination, or may be required to investigate
or clean up hazardous or toxic substances, or chemical releases at a property.
The costs associated with investigation or remediation activities could be
substantial. In addition, as the owner or former owner of a contaminated site,
we may be subject to common law claims by third parties based on damages and
costs resulting from environmental contamination emanating from the property. If
we ever become subject to significant environmental liabilities, our business,
financial condition and results of operations could be materially and adversely
affected.
Fluctuating
interest rates can adversely affect our profitability.
Our profitability is dependent to a
large extent upon net interest income, which is the difference, or spread,
between the interest earned on loans, securities and other interest-earning
assets and the interest paid on deposits, borrowings, and other interest-bearing
liabilities. Because of the differences in maturities and repricing
characteristics of our interest-earning assets and interest-bearing liabilities,
changes in interest rates do not produce equivalent changes in interest income
earned on interest-earning assets and interest paid on interest-bearing
liabilities. We principally manage interest rate risk by managing our
volume and mix of our earning assets and funding liabilities. In a changing
interest rate environment, we may not be able to manage this risk
effectively. Changes in interest rates also can affect: (1) our
ability to originate and/or sell loans; (2) the value of our interest-earning
assets, which would negatively impact shareholders’ equity, and our ability to
realize gains from the sale of such assets; (3) our ability to obtain and retain
deposits in competition with other available investment alternatives; and (4)
the ability of our borrowers to repay adjustable or variable rate
loans. Interest rates are highly sensitive to many factors, including
government monetary policies, domestic and international economic and political
conditions and other factors beyond our control. If we are unable to
manage interest rate risk effectively, our business, financial condition and
results of operations could be materially harmed.
37
Liquidity
risk could impair our ability to fund operations and jeopardize our financial
condition, growth and prospects.
Liquidity is essential to our business.
An inability to raise funds through deposits, borrowings, the sale of loans and
other sources could have a substantial negative effect on our liquidity. We rely
on customer deposits and advances from the FHLB,
the Federal Reserve Bank
of Atlanta ("FRB") and other borrowings
to fund our operations.
Although we have historically been able to replace maturing deposits and
advances if desired, we may not be able to replace such funds in the future if,
among other things, our financial condition, the financial condition of the FHLB
or FRB, or market conditions change. Our access to funding sources in
amounts adequate to finance our activities or the terms of which are acceptable
could be impaired by factors that affect us specifically or the financial
services industry or economy in general -- such as a disruption in the financial
markets or negative views and expectations about the prospects for the financial
services industry in light of the recent turmoil faced by banking organizations
and the continued deterioration in credit markets. Factors that could
detrimentally impact our access to liquidity sources include a decrease in the
level of our business activity as a result of a downturn in the markets in which
our loans are concentrated or adverse regulatory action against us.
Our financial flexibility will be
severely constrained if we are unable to maintain our access to funding or if
adequate financing is not available to accommodate future growth at acceptable
interest rates. Although we consider our sources of funds adequate for our
liquidity needs, we may seek additional debt in the future to achieve our
long-term business objectives. Additional borrowings, if sought, may not be
available to us or, if available, may not be available on reasonable terms. If
additional financing sources are unavailable, or are not available on reasonable
terms, our financial condition, results of operations, growth and future
prospects could be materially adversely affected. Finally, if we are required to
rely more heavily on more expensive funding sources to support future growth,
our revenues may not increase proportionately to cover our costs.
In addition, if we are unable to redeem
the Series A Preferred Stock prior to December 19, 2014, the cost of this
capital to us will increase substantially on that date, from 5.0% per annum
(approximately $900,000 annually) to 9.0% per annum (approximately $1.6 million
annually). Depending on our financial condition at the time, this
increase in the annual dividend rate on the Series A Preferred Stock could have
a material negative effect on our liquidity.
Higher
Federal Deposit Insurance Corporation insurance premiums and special assessments
will adversely affect our earnings.
In 2009, the Federal Deposit Insurance
Corporation levied a five basis point special assessment on each insured
depository institution’s assets minus Tier 1 capital as of June 30,
2009. We recorded an expense of $453,000 during the quarter ended
June 30, 2009, to reflect the special assessment. In addition, the
Federal Deposit Insurance Corporation increased the base assessment rate by 7
basis points effective January 1, 2009, and effective April 1, 2009, included
additional factors to be used in calculating a financial institution’s total
assessment rate. This has resulted in our annual assessment rate
increasing from 5 basis points prior to January 1, 2009 to a current rate of
approximately 16 basis points and, therefore, our Federal Deposit Insurance
Corporation insurance premium expense increasing compared to prior periods.
The Federal Deposit Insurance
Corporation also required all insured institutions to prepay their estimated
assessments for the fourth quarter of 2009, and for all of 2010, 2011 and
2012. This pre-payment was due on December 30, 2009. The
assessment rate for the fourth quarter of 2009 and for 2010 was based on each
institution’s total base assessment rate for the third quarter of 2009, modified
to assume that the assessment rate in effect on September 30, 2009 had been in
effect for the entire third quarter, and the assessment rate for 2011 and 2012
was calculated as the modified third quarter assessment rate plus an additional
three basis points. In addition, every institution’s base assessment
rate for each period was calculated using its third quarter assessment base,
adjusted quarterly for an estimated 5% annual growth rate in the assessment base
through the end of 2012. We recorded the pre-payment as a prepaid
expense, which will be amortized to expense over three years based upon actual
balances insured. We prepaid $5.4 million in FDIC assessments during the fourth
quarter of calendar year 2009, which will be expensed over calendar years 2010,
2011 and 2012. Future increases in our assessment rate or special assessments
would decrease our earnings.
38
Changes
in accounting standards may affect our performance.
Our accounting policies and methods are
fundamental to how we record and report our financial condition and results of
operations. From time to time there are changes in the financial
accounting and reporting standards that govern the preparation of our financial
statements. These changes can be difficult to predict and can
materially impact how we report and record our financial condition and results
of operations. In some cases, we could be required to apply a new or
revised standard retroactively, resulting in restating prior period financial
statements.
Our
growth or future losses may require us to raise additional capital in the
future, but that capital may not be available when it is needed or the cost of
that capital may be very high.
We are required by federal regulatory
authorities to maintain adequate levels of capital to support our
operations. We anticipate that our capital resources will satisfy our
capital requirements for the foreseeable future. Nonetheless, we may at some
point need to raise additional capital to support continued growth.
Our ability to raise additional
capital, if needed, will depend on conditions in the capital markets at that
time, which are outside our control, and on our financial condition and
performance. Accordingly, we cannot make assurances that we will be able to
raise additional capital if needed on terms that are acceptable to us, or at
all. If we cannot raise additional capital when needed,
our operations could be materially impaired and our financial
condition and liquidity could be materially and adversely affected. In addition,
if we are unable to raise additional capital when required by the OTS, we may be
subject to additional adverse regulatory action.
Strong
competition within our market areas may limit our growth and may adversely
affect our profitability.
The banking and financial services
industry is very competitive. Legal and regulatory developments have
made it easier for new and sometimes unregulated competitors to compete with
us. Consolidation among financial service providers has resulted in
fewer very large national and regional banking and financial institutions
holding a large accumulation of assets. These institutions generally
have significantly greater resources, a wider geographic presence or greater
accessibility. Our competitors sometimes are also able to offer more
services, more favorable pricing for loans and deposits or greater customer
convenience than us. In addition, our competition has grown and
includes new banks and other financial services providers that target
our existing or potential customers. As consolidation continues, we
expect additional institutions to try to exploit our market. Our
results of operations depend upon our continued ability to successfully compete
in our market areas. The greater resources and deposit and loan products offered
by some of our competitors may limit our ability to increase our
interest-earning assets.
Technological developments have allowed
competitors, including some non-depository institutions, to compete more
effectively in local markets and have expanded the range of financial products,
services and capital available to our target customers. If we are
unable to implement, maintain and use such technologies effectively, we may not
be able to offer products or achieve cost-efficiencies necessary to compete in
our industry. In addition, some of these competitors have fewer
regulatory constraints and lower cost structures.
We
rely heavily on the proper functioning of our technology.
We rely heavily on communications and
information systems to conduct our business. Any failure, interruption, or
breach in security of these systems could result in failures or disruptions in
our customer relationship management, general ledger, deposit, loan, and other
systems. While we have policies and procedures designed to prevent or limit the
effect of the failure, interruption, or security breach of our information
systems, there can be no assurance that any such failures, interruptions or
security breaches will not occur or, if they do occur, that they will be
adequately addressed. The occurrence of any failures, interruptions or security
breaches of our information systems could damage our reputation, result in a
loss of customer business, subject us to additional regulatory scrutiny, or
expose us to civil litigation and possible financial liability, any of which
could have a material adverse effect on our financial condition and results of
operations.
39
We rely on third-party service
providers for much of our communications, information, operating and financial
control systems technology. If any of our third-party service
providers experience financial, operational or technological difficulties, or if
there is any other disruption in our relationships with them, we may be required
to locate alternative sources for these services. We may not be able to
negotiate terms that are as favorable to us, or obtain services with similar
functionality, as found in our existing systems, without the need to expend
substantial resources, if at all. Any of these circumstances could
have an adverse effect on our business.
We
rely on dividends from subsidiaries for most of our revenue.
Security Federal Corporation is a
separate and distinct legal entity from its subsidiaries, and receives
substantially all of its revenue from dividends from its subsidiaries. These
dividends are the principal source of funds to pay dividends on Security Federal
Corporation's capital stock and interest and principal on its debt. Various
federal and/or state laws and regulations limit the amount of dividends that
Security Federal Bank may pay to Security Federal Corporation. Also, its right
to participate in a distribution of assets upon a subsidiary's liquidation or
reorganization is subject to the prior claims of the subsidiary's creditors. In
the event Security Federal Bank is unable to pay dividends, Security Federal
Corporation may not be able to service its debt, pay obligations or pay
dividends on its capital stock. The inability to receive dividends from Security
Federal Bank could have a material adverse effect on our business, financial
condition and results of operations.
We
are dependent on key personnel and the loss of one or more of those key
personnel may materially and adversely affect our prospects.
Competition for qualified employees and
personnel in the banking industry is intense and there are a limited number of
qualified persons with knowledge of, and experience in, the community banking
industry where Security Federal Bank conducts its business. The
process of recruiting personnel with the combination of skills and attributes
required to carry out our strategies is often lengthy. In addition, the American
Recovery and Reinvestment Act has imposed significant limitations on executive
compensation for recipients, such as us, of funds under the TARP Capital
Purchase Program, which may make it more difficult for us to retain and recruit
key personnel. Our success depends to a significant degree upon our
ability to attract and retain qualified management, loan origination, finance,
administrative, marketing and technical personnel and upon the continued
contributions of our management and personnel. In particular, our
success has been and continues to be highly dependent upon the abilities of key
executives, including our Chief Executive Officer, Timothy W. Simmons, and
certain other employees. In addition, our success has been and
continues to be highly dependent upon the services of our directors, many of
whom are at or nearing retirement age, and we may not be able to identify and
attract suitable candidates to replace such directors.
Our
recent results may not be indicative of future results, and may not be an
adequate measure of the risk of investing in our stock.
We may not be able to sustain our
historical growth rate or our recent growth rates in loans and
deposits. If we are unable to sustain our growth, this would
negatively affect risks related to our earnings and the value of our common
stock.
At March 31, 2010, Security Federal
owned the buildings and land for eight of its branch offices and the operations
center, leased the land and owned the improvements thereon for one of its
offices, and leased the remaining five offices, including its main
office. The Company also leased an office for the Investment and
Trust Department and leased an operation center for Security Federal
Insurance. The property related to the offices owned by Security
Federal had a depreciated cost (including land) of approximately $11.9 million
at March 31, 2010. At March 31, 2010, the aggregate net book value of
leasehold improvements (excluding furniture and equipment) associated with
leased premises was $2.8 million. In addition to the properties
related to current Company offices, Security Federal owned five other properties
at March 31, 2010. Three lots owned for future branch sites include
one in Aiken County, South Carolina and two in Richland County, South Carolina,
which had a combined book value of $2.2 million at March 31,
2010. Another lot in Aiken County, to be used for a possible
new Operations Center, had a book value of $236,000. The other
property
40
consisting
of land and a building, located adjacent to the 1705 Whiskey Road office, is
currently leased and had a book value of approximately $289,000 at March 31,
2010. See Note 5 of the Notes to Consolidated Financial Statements
contained in the Annual Report.
The following table sets forth the net
book value of the offices owned (including land) and leasehold improvements on
properties leased by Security Federal at March 31, 2010.
|
Location
|
Owned
or
Leased
|
Lease
Expiration
Date
|
Date
Facility
Opened
/
Acquired
|
Gross
Square
Footage
|
Net
Book
Value
|
|||||
|
Main
Office:
|
||||||||||
|
238
Richland Avenue, W.
Aiken,
South Carolina
|
Leased
|
2016
|
2006
|
3,840
|
$ 749,000
|
|||||
|
|
||||||||||
|
Full
Service Branch Offices
|
||||||||||
|
100
Laurens Street, N.W.
Aiken,
South Carolina
|
Leased
|
2016
|
1959
|
3,840
|
751,000
|
|||||
|
1705
Whiskey Road S.
Aiken,
South Carolina
|
Owned
|
N/A
|
1980
|
10,000
|
1,071,000
|
|||||
|
313
East Martintown Road
North
Augusta, South Carolina
|
Owned
|
N/A
|
1973
|
4,356
|
821,000
|
|||||
|
1665
Richland Avenue, W.
Aiken,
South Carolina
|
Owned
|
N/A
|
1984
|
1,942
|
212,000
|
|||||
|
Montgomery
& Canal Streets
Masonic
Shopping Center
Graniteville,
South Carolina
|
Leased
|
2007
|
1993
(1)
|
3,576
|
155,000
|
|||||
|
2812
Augusta Road
Langley,
South Carolina
|
Owned
|
N/A
|
1993
(1)
|
2,509
|
72,000
|
|||||
|
4568
Jefferson Davis Highway
Clearwater,
South Carolina
|
Owned
|
N/A
|
2008
|
2,287
|
1,522,000
|
|||||
|
118
Main Street North
Wagener,
South Carolina
|
Owned
|
N/A
|
1993
(1)
|
3,600
|
165,000
|
|||||
|
1185
Sunset Boulevard
West
Columbia, South Carolina
|
Leased
|
2015
|
2000
|
10,000
|
376,000
|
|||||
|
2587
Whiskey Road
Aiken,
South Carolina
|
Owned
|
N/A
|
2006
|
4,000
|
1,439,000
|
|||||
|
5446
Sunset Boulevard
Lexington,
South Carolina
|
Owned (2)
|
N/A
|
2003
|
9,200
|
1,272,000
|
|
1900
Assembly Street
Columbia, South
Carolina
|
Leased (3)
|
N/A
|
2007
|
6,000
|
452,000
|
|||||
|
|
41
|
Location
|
Owned
or
Leased
|
Lease
Expiration
Date
|
Date
Facility
Opened/
Acquired
|
Gross
Square
Footage
|
Net
Book
Value
|
|||||
|
7004
Evans Town Center
Evans,
Georgia
|
Owned
|
N/A
|
2007
|
18,000
|
$4,081,000
|
|||||
|
|
||||||||||
|
Operations
Center:
|
||||||||||
|
871
East Pine Log Road
Aiken,
South Carolina
|
Owned
|
N/A
|
1988
|
10,000
|
1,202,000
|
|||||
|
Investments
& Trust Offices
234
Richland Avenue, West
Aiken,
South Carolina
|
Leased
|
2016
|
2006
|
1,948
|
302,000
|
|||||
|
Insurance
Operations Center
517-521
Belvedere Clearwater Road
North
Augusta, South Carolina
|
Leased
|
2011
|
2006
|
4,600
|
27,000
|
____________
|
(1)
|
Represents
acquisition date.
|
|
(2)
|
Security
Federal has a lease on the land for this office which expires in 2018, but
has options through 2063.
|
|
(3)
|
Security
Federal has a lease on the land for this office which expires in 2027, but
has options through 2047.
|
The Company is involved as plaintiff or
defendant in various legal actions arising in the course of its
business. It is the opinion of management, after consultation with
counsel, that the resolution of these legal actions will not have a material
adverse effect on the Company’s financial condition and results of
operations.
|
Item
5.
|
Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities
|
The information contained in the
section captioned “Shareholders Information – Price Range of Common Stock” and
“– Dividends” in the Annual Report which is incorporated herein by
reference.
Stock
Repurchases
. The Company had not stock repurchases of its
outstanding common stock during the fourth quarter of the year ended March 31,
2010.
The Company is subject to restrictions
on its ability to repurchase its common stock pursuant to the terms of the
securities purchase agreement between the Company and the U.S.
Treasury. Accordingly, no shares were repurchased during the year
ended March 31, 2010.
Equity Compensation Plan
Information
. The equity compensation plan information
presented under subparagraph (d) in Part III, Item 12 of this report is
incorporated herein by reference.
42
Performance
Graph
. The following graph compares the cumulative total
shareholder return on the Company’s Common Stock with the cumulative total
return on the NASDAQ Composite Index and a peer group of the SNL All Thrift
Index. Total return assumes the reinvestment of all dividends and
that the value of Common Stock and each index was $100 on March 31,
2005.
|
Period
Ending
|
||||||||||||
|
Index
|
3/31/05
|
3/31/06
|
3/31/07
|
3/31/08
|
3/31/09
|
3/31/10
|
||||||
|
Security
Federal Corporation
|
$100.00
|
106.16
|
109.46
|
102.92
|
70.52
|
46.12
|
||||||
|
NASDAQ
Composite
|
100.00
|
117.03
|
121.13
|
114.00
|
76.46
|
119.94
|
||||||
|
SNL
Thrift Index
|
100.00
|
112.64
|
119.10
|
72.59
|
40.59
|
48.64
|
||||||
43
|
Item
6.
|
Selected Financial
Data
|
The information contained in the
section captioned “Selected Consolidated Financial and Other Data” in the Annual
Report is incorporated herein by reference.
The information contained in the
section captioned “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in the Annual Report is incorporated herein by
reference.
|
Item
7A.
|
Quantitative and
Qualitative Disclosures About Market
Risk
|
Market risk is the risk of loss from
adverse changes in market prices and rates. Our market risk arises
principally from interest rate risk inherent in our lending, investing, deposit
and borrowings activities. Management actively monitors and manages
its interest rate risk exposure. In addition to other risks that we
manage in the normal course of business, such as credit quality and liquidity,
management considers interest rate risk to be a significant market risk that
could have a potentially have a material effect on our financial condition and
result of operations. The information contained in the section
captioned “Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Asset and Liability Management” in the Annual Report is
incorporated herein by reference.
Report of Independent and Registered
Accounting Firm*
Consolidated Balance Sheets, March 31,
2010 and 2009*
Consolidated
Statements of Income For the Years Ended March 31, 2010, 2009 and
2008*
Consolidated
Statements of Changes in Shareholders’ Equity and Comprehensive Income
For
the
Years Ended March 31, 2010, 2009 and 2008*
Consolidated
Statements of Cash Flows For the Years Ended March 31, 2010, 2009 and
2008*
Notes to
Consolidated Financial Statements*
Quarterly Financial Data
(unaudited)*
*
Contained in the Annual Report filed as an exhibit hereto and incorporated
herein by reference.
None.
(a)
Evaluation of Disclosure
Controls and Procedures
: An evaluation of the Company’s disclosure
controls and procedures (as defined in Section 13a-15(e) of the Securities
Exchange Act of 1934 (the “Act”)) was carried out under the supervision and with
the participation of the Company’s Chief Executive Officer, Chief Financial
Officer and several other members of the Company’s senior management as of the
end of the period covered by this report. The Company’s Chief
Executive Officer and Chief Financial Officer concluded that the Company’s
disclosure controls and procedures as currently in effect are effective in
ensuring that the information required to be disclosed by the Company in the
reports it files or submits under the Act is (i) accumulated and communicated to
the Company’s management (including the Chief Executive Officer and Chief
Financial Officer) in a timely manner, and (ii) recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and
forms.
(b)
Report of Management on
Internal Control over Financial Reporting
: The management of
the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The internal control process has been designed
under our supervision to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of the Company’s financial statements
for external reporting purposes in accordance with accounting principles
generally accepted in the United States of America.
44
Management conducted an assessment of
the effectiveness of the Company’s internal control over financial reporting as
of March 31, 2010, utilizing the framework established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this assessment, management has determined
that the Company’s internal control over financial reporting as of March 31,
2010 is effective.
Our internal control over financial
reporting includes policies and procedures that pertain to the maintenance of
records that accurately and fairly reflect, in reasonable detail, transactions
and dispositions of assets; and provide reasonable assurances that: (1)
transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the
United States; (2) receipts and expenditures are being made only in accordance
with authorizations of management and the directors of the Company; and (3)
unauthorized acquisition, use, or disposition of the Company’s assets that could
have a material effect on the Company’s financial statements are prevented or
timely detected.
All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
This annual report does not include an
attestation report of the Company’s independent registered public accounting
firm regarding internal control over financial reporting. Management’s report
was not subject to attestation by the Company’s independent registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this
annual report.
(c)
Changes in Internal
Controls
: There have been no changes
in the Company’s internal control over financial reporting during the quarter
ended March 31, 2010 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.
None.
|
Item
10.
|
Directors, Executive
Officers and Corporate
Governance
|
The information contained under the
section captioned “ Proposal 1 – Election of Directors” in the Proxy Statement
is incorporated herein by reference.
For information regarding the executive
officers of the Company and the Bank, see the information contained herein under
the section captioned “Item 1. Business – Personnel –
Executive Officers of the Registrant.”
Audit Committee Financial
Expert
. The Audit Committee of the Company is composed of
Directors Moore (Chairperson), Alexander and Clyburn.
Each member of the Audit
Committee is “independent” as defined in the Nasdaq Stock Market listing
standards. The Board of Directors has determined there is no “audit
committee financial expert” as defined by the SEC. The Board believes
that the current members of the Audit Committee are qualified to serve based on
their collective experience and background. Each member of the Audit
Committee is independent as that term is used in Rule 10A-3 of the Exchange
Act.
Code of
Ethics.
The Board of Directors has adopted a Code of Ethics
for the Company’s officers (including its senior financial officers), directors
and employees. The Code is applicable to the Company’s principal
executive officer and senior financial officers. The Company has
posted its Code of Ethics on its website
www.securityfederalbank.com.
45
Compliance with Section 16(a) of the
Exchange Act
. The information contained under the section
captioned “Section 16(a) Beneficial Ownership Reporting Compliance” is included
in the Company’s Proxy Statement and is incorporated herein by
reference.
|
Item
11.
|
Executive
Compensation
|
The information contained in the
section captioned “Executive Compensation” in the Proxy Statement is
incorporated herein by reference.
|
|
(a)
|
Security
Ownership of Certain Beneficial
Owners.
|
The information contained in the
section captioned “Security Ownership of Certain Beneficial Owners and
Management” in the Proxy Statement is incorporated herein by
reference.
|
|
(b)
|
Security
Ownership of Management.
|
The information contained in the
section captioned “Security Ownership of Certain Beneficial Owners and
Management” in the Proxy Statement is incorporated herein by
reference.
(c) Changes
In Control
The Company is not aware of any
arrangements, including any pledge by any person of securities of the Company,
the operation of which may at a subsequent date result in a change in control of
the Company.
(d) Equity
Compensation Plan Information
The following table sets forth certain
information with respect to securities to be issued under the Company’s equity
compensation plans as of March 31, 2010.
|
Plan
category
|
(a)
Number
of securities
to
be issued upon
exercise
of
outstanding
options,
warrants
and rights
|
(b)
Weighted-average
exercise
price
of
outstanding
options,
warrants
and
rights
|
(c)
Number
of securities
remaining
available
for
future issuance
under
equity
compensation
plans
(excluding
securities
reflected
in column (a))
|
|||||||||
|
Equity
compensation plans approved
|
||||||||||||
|
by
security holders:
|
||||||||||||
|
1999
Stock Option Plan
|
49,400 | 22.96 | -- | |||||||||
|
2002
Stock Option Plan
|
23,000 | 21.39 | -- | |||||||||
|
2006
Stock Option Plan
|
18,500 | 23.00 | -- | |||||||||
|
2008
Equity Incentive Plan
|
-- | -- | 50,000 | |||||||||
|
Equity
compensation plans not
|
||||||||||||
|
approved
by security holders
|
-- | -- | -- | |||||||||
| Total | 90,900 | 22.57 | 50,000 | |||||||||
46
|
Item
13.
|
Certain Relationships
and Related Transactions, and Director
Independence
|
Related
Transactions
. The information contained in the section
captioned “Meetings and Committees of the Board of Directors and Corporate
Governance Matters – Corporate Governance – Related Party Transactions” in the
Proxy Statement is incorporated herein by reference.
Director
Independence
. The information contained in the section
captioned “Meetings and Committees of the Board of Directors and Corporate
Governance Matters – Corporate Governance – Director Independence” in the Proxy
Statement is incorporated herein by reference.
The information contained under the
section captioned “Auditor ” is included in the Company’s Proxy Statement and is
incorporated herein by reference.
|
Item
15.
|
Exhibits and Financial
Statement Schedules
|
|
|
(a)
|
1.
|
Financial
Statements
.
|
For a list of the financial statements
filed as part of this report see Part II – Item 8.
2.
Financial Statement
Schedules
.
All
schedules have been omitted as the required information is either inapplicable
or contained in the Consolidated Financial Statements or related Notes contained
in the Annual Report filed as an exhibit hereto.
|
3.
|
Exhibits | |
| 3.1 | Articles of Incorporation, as amended (1) | |
|
3.2
|
Articles
of Amendment, including Certificate of Designation relating to the
Company’s Fixed Rate Cumulative Perpetual Preferred Stock Series A
(2)
|
|
| 3.3 | Bylaws (3) | |
| 4.1 | Form of Stock Certificate of the Company and other instruments defining the rights of security holders, including indentures (4) | |
|
4.2
|
Form
Preferred Stock Certificate of the Company (2)
|
|
| 4.3 |
Warrant
to purchase shares of the Company’s common stock dated December 19, 2008
(2)
|
|
| 4.4 |
Letter
Agreement (including Securities Purchase Agreement – Standard Terms,
attached as Exhibit A) dated December 19, 2008 between the Company and the
United States Department of the Treasury (2)
|
|
| 4.5 | Form of Indenture with respect to the Company’s 8.0% Convertible Senior Debentures Due 2029 (5) | |
|
4.6
|
Specimen
Convertible Senior Debenture Due 2029 (5)
|
|
| 10.1 | 1993 Salary Continuation Agreements (6) | |
| 10.2 | Amendment One to 1993 Salary Continuation Agreements (7) | |
| 10.3 |
Form
of 2006 Salary Continuation Agreement (8)
|
|
| 10.4 | 1999 Stock Option Plan (3) | |
| 10.5 | 2002 Stock Option Plan (9) | |
| 10.6 | 2006 Stock Option Plan (10) | |
| 10.7 |
2008
Equity Incentive Plan (11)
|
|
| 10.8 |
Form
of incentive stock option agreement and non-qualified stock option
agreement pursuant to the 2006 Stock Option Plan (10)
|
|
| 10.9 | 2004 Employee Stock Purchase Plan (12) |
47
| 10.10 | Incentive Compensation Plan (6) | |
| 10.11 | Form of Security Federal Bank Salary Continuation Agreement (13) | |
| 10.12 | Form of Security Federal Split Dollar Agreement (13) | |
| 10.13 | Form of Compensation Modification Agreement (2) | |
| 13 |
Annual
Report to Stockholders
|
|
| 14 |
Code
of Ethics (14)
|
|
| 21 | Subsidiaries of Registrant | |
| 23 | Consent of Elliott Davis, LLC | |
| 31.1 |
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
|
| 31.2 |
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
|
| 32 |
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act
|
|
| 99.1 |
Certification
of Principal Executive Officer of Security Federal Corporation To Chief
Compliance Officer Of The Troubled Asset Relief Program Pursuant to 31 CFR
§ 30.15
|
|
| 99.2 |
Certification
of Principal Financial Officer of Security Federal Corporation To Chief
Compliance Officer Of The Troubled Asset Relief Program Pursuant to 31 CFR
§ 30.15
|
___________
|
|
(1)
|
Filed
on June 26, 1998, as an exhibit to the Company’s Proxy Statement and
incorporated herein by reference.
|
(2) Incorporated
by reference to the Registrant’s Current Report on Form 8-K on December 23,
2008.
|
|
(3)
|
Filed
on March 2, 2000, as an exhibit to the Company’s Registration Statement on
Form S-8 and incorporated herein by
reference.
|
|
|
(4)
|
Filed
on August 12, 1987, as an exhibit to the Company’s Registration Statement
on Form 8-A and incorporated herein by
reference.
|
|
|
(5)
|
Filed
on July 13, 2009 as an exhibit to the Company’s Registration Statement on
Form S-1 (File No. 333-160553) and incorporated herein by
reference.
|
|
|
(6)
|
Filed
on June 28, 1993, as an exhibit to the Company’s Annual Report on Form
10-KSB and incorporated herein by
reference.
|
|
|
(7)
|
Filed
as an exhibit to the Company’s Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1993 and incorporated herein by
reference.
|
|
|
(8)
|
Filed
on May 24, 2006 as an exhibit to the Company’s Current Report on Form 8-K
dated May 18, 2006 and incorporated herein by
reference.
|
|
|
(9)
|
Filed
on June 19, 2002, as an exhibit to the Company’s Proxy Statement and
incorporated herein by reference.
|
|
|
(10)
|
Filed
on August 22, 2006, as an exhibit to the Company’s Registration Statement
on Form S-8 (Registration Statement No. 333-136813) and incorporated
herein by reference.
|
|
|
(11)
|
Filed
on June 20, 2008, as an exhibit to the Company’s Proxy Statement and
incorporated herein by reference.
|
|
|
(12)
|
Filed
on June 18, 2004, as an exhibit to the Company’s Proxy Statement and
incorporated herein by reference.
|
|
|
(13)
|
Filed
on May 24, 2006 as an exhibit to the Current Report on Form 8-K and
incorporated herein by reference.
|
|
|
(14)
|
Filed
on June 27, 2007, as an exhibit to the Company’s Annual Report on Form
10-K and incorporated herein by
reference.
|
48
SIGNATURES
Pursuant to the requirements of section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
| SECURITY FEDERAL CORPORATION | |
|
Date: June
25, 2010
|
By:
/s/Timothy W.
Simmons
|
|
Timothy W. Simmons
|
|
|
President, Chief Executive Officer and Director
|
|
| (Duly Authorized Representative) |
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
By:
|
/s/Timothy W. Simmons |
June
25, 2010
|
Timothy W. Simmons
President, Chief Executive
Officer and Director
(Principal Executive
Officer)
|
By:
|
/s/Roy G. Lindburg |
June
25, 2010
|
Roy G. Lindburg
Chief Financial Officer and
Director
(Principal Financial and Accounting
Officer)
|
By:
|
____________________________________ |
June
__, 2010
|
T. Clifton Weeks
Chairman of the Board and
Director
|
By:
|
/s/J. Chris Verenes |
June
25, 2010
|
J. Chris Verenes
President of the Bank and Director
of
the Company and the Bank
|
By:
|
/s/Gasper L. Toole III |
June
25, 2010
|
Gasper L. Toole III
Director
|
By:
|
/s/Robert E. Alexander |
June
25, 2010
|
Robert E. Alexander
Director
|
By:
|
____________________________________ |
June
__, 2010
|
Thomas L. Moore
Director
|
By:
|
/s/William Clyburn |
June
25, 2010
|
William Clyburn
Director
|
By:
|
/s/Frank M. Thomas, Jr. |
June
25, 2010
|
Frank M. Thomas, Jr.
Director
49
INDEX
TO EXHIBITS
Exhibit
Number
| 13 | Annual Report to Stockholders | |
| 21 | Subsidiaries of the Registrant | |
| 23 | Consent of Elliott Davis, LLC | |
| 31.1 |
Certification
of Chief Executive Officer of Security Federal Corporation Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
| 31.2 |
Certification
of Chief Financial Officer of Security Federal Corporation Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
| 32 |
Certification
of Chief Executive Officer and Chief Financial Officer of Security Federal
Corporation Pursuant to Section 906 of the Sarbanes-Oxley
Act
|
|
| 99.1 |
Certification
of Principal Executive Officer of Security Federal Corporation To Chief
Compliance Officer Of The Troubled Asset Relief Program Pursuant to 31 CFR
§ 30.15
|
|
| 99.2 |
Certification
of Principal Financial Officer of Security Federal Corporation To Chief
Compliance Officer Of The Troubled Asset Relief Program Pursuant to 31 CFR
§ 30.15
|
|
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. [removed and Reserved]Part IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9a(t). Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules