UNITED
STATES
  SECURITIES
AND EXCHANGE COMMISSION
  WASHINGTON,
DC  20549
   Form
10-Q-(Mark one)
  (X)    
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
  FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
 
 TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  FOR THE TRANSITION PERIOD:
    COMMISSION
FILE NUMBER:  0-16120
   SECURITY
FEDERAL CORPORATION
  South Carolina
              57-0858504(State or other jurisdiction of
                incorporation or organization)
              (IRS
      Employer Identification No.)
  238
RICHLAND AVENUE, WEST, AIKEN, SOUTH CAROLINA 29801
 (Address
of Principal Executive Office And Zip code)
   (803)
641-3000
 (Registrant’s
telephone number, including area code)
   Indicate
by check mark whether the registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
  [X] [ 
]
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files.)  Yes [  ] No [X ] (Not yet applicable
to Registrant)
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, smaller reporting company, or a non-accelerated
filer.  See definition of “large accelerated filer” and “accelerated
filer” in Rule 12b-2 of the Exchange Act.
 Large accelerated
      filed          [  
      ]
              
              Accelerated
      filer                    
      [     ]Non-accelerated
      filer             [ 
       ]
              
              Smaller reporting
      company   [ X ]
  Indicate
by check mark whether the registrant is a shell company (defined in Rule 12b-2
of the Exchange Act).
  [  
] [X]
  Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practical date.
  CLASS:
                
                OUTSTANDING
      SHARES AT:
                
                SHARES:Common
      Stock, par
                  value
      $0.01 per share
                
                October 31,
      2009
                
                2,461,095
 
 
  INDEX
  PART
      I.
              FINANCIAL
      INFORMATION (UNAUDITED)
              
              PAGE
      NO.Item
      1.
              Financial
      Statements (Unaudited):Consolidated
      Balance Sheets at September 30, 2009 and March 31, 2009
              
              1Consolidated
      Statements of Income for the Three and Six Months Ended September 30, 2009
      and 2008
              
              2Consolidated
      Statements of Shareholders’ Equity and Comprehensive Income (Loss) at
      September 30, 2009 and 2008
              
              4Consolidated
      Statements of Cash Flows for the Six Months Ended September 30, 2009 and
      2008
              
              5Notes
      to Consolidated Financial Statements
              
              7Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              23Item
      3.
              Quantitative
      and Qualitative Disclosures about Market Risk
              
              37Item
      4.
              Controls
      and Procedures
              
              37PART
      II.
              OTHER
      INFORMATIONItem
      1.
              Legal
      Proceedings
              
              37Item
      1A.
              Risk
      Factors
              
              38Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              
              39Item
      3.
              Defaults
      Upon Senior Securities
              
              39Item
      4T.
              Submission
      of Matters to Vote of Security Holders
              
              39Item
      5.
              Other
      Information
              
              39Item
      6.
              Exhibits
              
              40Signatures
              
              41
  
   SCHEDULES
OMITTED
   All
schedules other than those indicated above are omitted because of the absence of
the conditions under which they are required or because the information is
included in the consolidated financial statements and related
notes.
   
  Part
I.  Financial Information
 Item
1.  Financial Statements
 Security
Federal Corporation and Subsidiaries
 Consolidated
Balance Sheets
 September
      30, 2009
              
              March
      31, 2009Assets:
              
              (Unaudited)
              
              (Audited)Cash
      And Cash Equivalents
              $
              7,838,722
              $
              6,562,394Investment
      And Mortgage-Backed Securities:Available
      For Sale:   (Amortizedcost of $287,693,825
      atSeptember 30, 2009and
                $276,687,428 atMarch 31, 2009)
              
              295,376,106
              
              282,832,735Held
      To Maturity:     (Fair valueof$25,865,769atSeptember 30, 2009and $32,492,407 at
                March 31, 2009)
              
              24,682,628
              
              31,265,866Total
      Investment And Mortgage-Backed Securities
              
              320,058,734
              
              314,098,601Loans
      Receivable, Net:Held
      For Sale
              
              5,834,107
              
              5,711,807Held
      For Investment: (Net of
      allowanceof
      $12,723,921atSeptember 30, 2009and
                $10,181,599 atMarch
      31, 2009)
              
              593,823,253
              
              605,378,066Total
      Loans Receivable, Net
              
              599,657,360
              
              611,089,873Accrued
      Interest Receivable:Loans
              
              1,797,877
              
              2,011,967Mortgage-Backed
      Securities
              
              1,023,231
              
              1,138,911Investments
              
              595,483
              
              363,707Premises
      And Equipment, Net
              
              21,301,694
              
              21,675,434Federal
      Home Loan Bank Stock, At Cost
              
              12,624,400
              
              12,662,700Bank
      Owned Life Insurance
              
              9,821,305
              
              9,641,305Repossessed
      Assets Acquired In Settlement Of Loans
              
              2,647,280
              
              1,985,172Intangible
      Assets, Net
              
              294,500
              
              352,500Goodwill
              
              1,199,754
              
              1,421,754Other
      Assets
              
              3,098,436
              
              1,657,189Total
      Assets
              $
              981,958,776
              $
              984,661,507Liabilities
      And Shareholders’ EquityLiabilities:Deposit
      Accounts
              $
              662,414,786
              $
              661,713,575Advances
      From Federal Home Loan Bank (“FHLB”)
              
              199,410,529
              
              218,998,434Term
      Auction Facility  Advances (“TAF”)
              
              25,000,000
              
              10,000,000Other
      Borrowed Money
              
              15,583,483
              
              16,055,966Advance
      Payments By Borrowers For Taxes And Insurance
              
              581,909
              
              421,461Mandatorily
      Redeemable Financial Instrument
              
              1,644,312
              
              1,600,312Junior
      Subordinated Debentures
              
              5,155,000
              
              5,155,000Other
      Liabilities
              
              3,975,195
              
              3,624,461Total
      Liabilities
              
              913,765,214
              
              917,569,209Shareholders'
      Equity:Serial
      Preferred Stock, $.01 Par Value; Authorized Shares – 200,000; Issued
                And Outstanding Shares,18,000 At September 30, 2009 And At March 31,
                2009
              
              17,656,421
              
              17,620,065Common
      Stock, $.01 Par Value; Authorized Shares – 5,000,000; Issued And
                Outstanding Shares -2,662,028 And
      2,461,095 Respectively, At September
                30, 2009; And 2,660,528 And 2,459,595, Respectively, At March 31,
      2009
              
              26,055
              
              26,040Warrants
      Issued In Conjunction With Serial Preferred Stock
              
              400,000
              
              400,000Additional
      Paid-In Capital
              
              5,335,582
              
              5,299,235Treasury
      Stock, (At Cost, 200,933 Shares, At September 30, 2009 And At March
      31, 2009)
              
              (4,330,712)
              
              (4,330,712)Accumulated
      Other Comprehensive Income
              
              4,764,364
              
              3,809,934Retained
      Earnings, Substantially Restricted
              
              44,341,852
              
              44,267,736Total
      Shareholders' Equity
              
              68,193,562
              
              67,092,298Total
      Liabilities And Shareholders' Equity
              $
              981,958,776
              $
              984,661,507
 See
accompanying notes to consolidated financial statements.
   1
  Security
Federal Corporation and Subsidiaries
 Consolidated
Statements of Income (Unaudited)
 Three
      Months Ended September 30,2009
              
              2008Interest
      Income:Loans
              $
              8,496,286
              $
              8,941,511Mortgage-Backed
      Securities
              
              2,529,990
              
              2,621,098Investment
      Securities
              
              745,910
              
              777,828Other
              
              116
              
              3,899Total
      Interest Income
              
              11,772,302
              
              12,344,336Interest
      Expense:NOW
      And Money Market Accounts
              
              638,562
              
              966,696Statement
      Savings Accounts
              
              19,334
              
              30,059Certificate
      Accounts
              
              2,806,781
              
              3,569,709Advances
      And Other Borrowed Money
              
              1,642,721
              
              2,240,394Junior
      Subordinated Debentures
              
              60,283
              
              74,852Total
      Interest Expense
              
              5,167,681
              
              6,881,710Net
      Interest Income
              
              6,604,621
              
              5,462,626Provision
      For Loan Losses
              
              1,600,000
              
              275,000Net
      Interest Income After Provision For Loan Losses
              
              5,004,621
              
              5,187,626Non-Interest
      Income:Gain
      On Sale Of Investments
              
              323,234
              
              25,035Gain
      On Sale Of Loans
              
              162,858
              
              109,035Service
      Fees On Deposit Accounts
              
              312,300
              
              276,240Income
      From Cash Value Of Life Insurance
              
              90,000
              
              92,746Commissions
      From Insurance Agency
              
              108,076
              
              164,138Other
      Agency Income
              
              119,044
              
              76,081Trust
      Income
              
              105,000
              
              105,000Other
              
              200,635
              
              212,328Total
      Non-Interest Income
              
              1,421,147
              
              1,060,603General
      And Administrative Expenses:Salaries
      And Employee Benefits
              
              2,876,830
              
              2,831,272Occupancy
              
              499,819
              
              493,366Advertising
              
              81,375
              
              106,856Depreciation
      And Maintenance Of Equipment
              
              440,369
              
              414,910FDIC
      Insurance Premiums
              
              351,000
              
              191,535Amortization
      of Intangibles
              
              22,500
              
              22,500Mandatorily
      Redeemable Financial Instrument Valuation Expense
              
              122,000
              
              60,000Loss
      On Sale Of Repossessed Assets Acquired In Settlement Of
    Loans
              
              37,921
              
              -Other
              
              980,265
              
              954,950Total
      General And Administrative Expenses
              
              5,412,079
              
              5,075,389Income
      Before Income Taxes
              
              1,013,689
              
              1,172,840Provision
      For Income Taxes
              
              431,609
              
              388,002Net
      Income
              
              582,080
              
              784,838Preferred
      Stock Dividends
              
              225,000
              
              -Accretion
      Of Preferred Stock To Redemption Value
              
              18,277
              
              -Net
      Income Available To Common Shareholders
              $
              338,803
              $
              784,838Basic
      Net Income Per Common Share
              $
              0.14
              $
              0.31Diluted
      Net Income Per Common Share
              $
              0.13
              $
              0.31Cash
      Dividend Per Share On Common Stock
              $
              0.08
              $
              0.08Basic
      Weighted Average Shares Outstanding
              
              2,461,092
              
              2,524,758Diluted
      Weighted Average Shares Outstanding
              
              2,521,157
              
              2,539,756
  See
accompanying notes to consolidated financial statements.
  2
  Security
Federal Corporation and Subsidiaries
 Consolidated
Statements of Income (Unaudited)
 Six
      Months Ended September 30,2009
              
              2008Interest
      Income:Loans
              $
              17,196,423
              $
              17,483,246Mortgage-Backed
      Securities
              
              5,377,260
              
              5,016,481Investment
      Securities
              
              1,262,907
              
              1,666,729Other
              
              330
              
              9,077Total
      Interest Income
              
              23,836,920
              
              24,175,533Interest
      Expense:NOW
      And Money Market Accounts
              
              1,323,158
              
              1,890,787Statement
      Savings Accounts
              
              39,452
              
              63,562Certificate
      Accounts
              
              6,081,486
              
              7,232,635Advances
      And Other Borrowed Money
              
              3,335,335
              
              4,252,158Junior
      Subordinated Debentures
              
              124,043
              
              148,971Total
      Interest Expense
              
              10,903,474
              
              13,588,113Net
      Interest Income
              
              12,933,446
              
              10,587,420Provision
      For Loan Losses
              
              3,000,000
              
              500,000Net
      Interest Income After Provision For Loan Losses
              
              9,933,446
              
              10,087,420Non-Interest
      Income:Gain
      On Sale Of Investments
              
              374,125
              
              126,440Gain
      On Sale Of Loans
              
              596,465
              
              227,718Service
      Fees On Deposit Accounts
              
              588,682
              
              557,393Income
      From Cash Value Of Life Insurance
              
              180,000
              
              178,492Commissions
      From Insurance Agency
              
              247,330
              
              333,130Other
      Agency Income
              
              241,511
              
              123,018Trust
      Income
              
              210,000
              
              210,000Other
              
              409,221
              
              425,619Total
      Non-Interest Income
              
              2,847,334
              
              2,181,810General
      And Administrative Expenses:Salaries
      And Employee Benefits
              
              5,821,265
              
              5,615,507Occupancy
              
              993,164
              
              990,686Advertising
              
              215,929
              
              247,677Depreciation
      And Maintenance Of Equipment
              
              882,396
              
              841,834FDIC
      Insurance Premiums
              
              1,107,000
              
              347,345Amortization
      of Intangibles
              
              45,000
              
              45,000Mandatorily
      Redeemable Financial Instrument Valuation Expense
              
              44,000
              
              60,000Loss
      (Gain) On Sale Of Repossessed Assets Acquired In Settlement Of
      Loans
              
              61,104
              
              (13,694)Other
              
              2,002,135
              
              1,763,024Total
      General And Administrative Expenses
              
              11,171,993
              
              9,897,379Income
      Before Income Taxes
              
              1,608,787
              
              2,371,851Provision
      For Income Taxes
              
              654,540
              
              785,108Net
      Income
              
              954,247
              
              1,586,743Preferred
      Stock Dividends
              
              450,000
              
              -Accretion
      Of Preferred Stock To Redemption Value
              
              36,356
              
              -Net
      Income Available To Common Shareholders
              $
              467,891
              $
              1,586,743Basic
      Net Income Per Common Share
              $
              0.19
              $
              0.63Diluted
      Net Income Per Common Share
              $
              0.19
              $
              0.62Cash
      Dividend Per Share On Common Stock
              $
              0.16
              $
              0.16Basic
      Weighted Average Shares Outstanding
              
              2,460,614
              
              2,528,122Diluted
      Weighted Average Shares Outstanding
              
              2,511,872
              
              2,539,135
  See
accompanying notes to consolidated financial statements.
   3
  Security
Federal Corporation and Subsidiaries
 Consolidated
Statements of Shareholders’ Equity and Comprehensive Income (Loss)
(Unaudited)
  
  Common
      Stock
              
              Additional
                Paid
      – In
                Capital
              
              Treasury
                Stock
              
              Accumulated
                Other
                Comprehensive
                Income
      (Loss)
              
              Retained
                Earnings
              
              TotalBalance
      At March 31, 2008
              $
              25,925
              $
              5,072,086
              $
              (2,769,446)
              $
              2,395,537
              $
              42,772,311
              $
              47,496,413Net
      Income
              
              -
              
              -
              
              -
              
              -
              
              1,586,743
              
              1,586,743Other
      Comprehensive Income,
                Net
      Of Tax:Unrealized
      Holding Losses
                On
      Securities Available
                For
      Sale, Net Of Taxes
              
              -
              
              -
              
              -
              
              (2,614,818)
              
              -
              
              (2,614,818)Reclassification
      Adjustment
                For
      Gains Included In Net
                Income,
      Net Of Taxes
              
              -
              
              -
              
              -
              
              (78,393)
              
              -
              
              (78,393)Comprehensive
      Loss
              
              -
              
              -
              
              -
              
              -
              
              -
              
              (1,106,468)Purchase Of Treasury Stock
                At Cost, 13,050 shares
              
              -
              
              -
              
              (277,326)
              
              -
              
              -
              
              (277,326)Employee Stock Purchase Plan
                Purchases
              
              26
              
              49,948
              
              -
              
              -
              
              -
              
              49,974Exercise Of Stock Options
              
              60
              
              99,960
              
              -
              
              -
              
              -
              
              100,020Stock Compensation Expense
              
              -
              
              16,129
              
              -
              
              -
              
              -
              
              16,129Cash
      Dividends
              
              -
              
              -
              
              -
              
              -
              
              (404,447)
              
              (404,447)Balance
      At September 30, 2008
              $
              26,011
              $
              5,238,123
              $
              (3,046,772)
              $
              (297,674)
              $
              43,954,607
              $
              45,874,295
  Preferred
                Stock
              
              Warrants
              
              Common
                Stock
              
              Additional
                Paid
      – In
                Capital
              
              Treasury
                Stock
              
              Accumulated
                Other
                Comprehensive
      Income
              
              Retained
                Earnings
              
              TotalBalance
      At March 31, 2009
              $
              17,620,065
              $
              400,000
              $
              26,040
              $
              5,299,235
              $
              (4,330,712)
              $
              3,809,934
              $
              44,267,736
              $
              67,092,298Net
      Income
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              954,247
              
              954,247Other
      Comprehensive Income,
                Net
      Of Tax:Unrealized
      Holding Gains
                On
      Securities Available
                For
      Sale, Net Of Taxes
              
              -
              
              -
              
              -
              
              -
              
              -
              
              1,186,388
              
              -
              
              1,186,388Reclassification
      Adjustment
                For
      Gains Included In Net
                Income,
      Net Of Taxes
              
              -
              
              -
              
              -
              
              -
              
              -
              
              (231,958)
              
              -
              
              (231,958)Comprehensive
      Income
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              1,908,677Accretion Of Preferred Stock To Redemption Value
              
              36,356
              
              -
              
              -
              
              -
              
              -
              
              -
              
              (36,356)
              
              -Employee Stock Purchase Plan Purchases
              
              -
              
              -
              
              15
              
              19,785
              
              -
              
              -
              
              -
              
              19,800Stock
      Compensation Expense
              
              -
              
              -
              
              -
              
              16,562
              
              -
              
              -
              
              -
              
              16,562Cash
      Dividends On Preferred
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              (450,000)
              
              (450,000)Cash
      Dividends On Common
              
              -
              
              -
              
              -
              
              -
              
              -
              
              -
              
              (393,775)
              
              (393,775)Balance
      At September 30, 2009
              $
              17,656,421
              $
              400,000
              $
              26,055
              $
              5,335,582
              $
              (4,330,712)
              $
              4,764,364
              $
              44,341,852
              $
              68,193,562
  
   See
accompanying notes to consolidated financial statements.
   4
  Security
Federal Corporation and Subsidiaries
 Consolidated
Statements of Cash Flows (Unaudited)
 
 Six
      Months Ended September 30,2009
              
              2008Cash
      Flows From Operating Activities:Net
      Income
              $
              954,247
              $
              1,586,743Adjustments
      To Reconcile Net Income To Net Cash Provided By Operating
      Activities:Depreciation Expense
              
              763,450
              
              742,265Amortization Of Intangible Assets
              
              45,000
              
              45,000Stock Option Compensation Expense
              
              16,562
              
              16,129Discount Accretion And Premium Amortization
              
              831,551
              
              192,595Provisions For Losses On Loans And Real Estate
              
              3,000,000
              
              500,000Write Down Of Goodwill
              
              222,000
              
              -Mandatorily Redeemable Financial Instrument Valuation
    Expense
              
              44,000
              
              60,000Loss (Gain) On Sale Of Mortgage-Backed Securities Available For
      Sale
              
              (107,373)
              
              22,204Gain On Sale Of Investment Securities Available For Sale
              
              (266,752)
              
              (148,644)Gain On Sale Of Loans
              
              (596,465)
              
              (227,718)(Gain) Loss On Sale Of Repossessed Assets Acquired In Settlement Of
      Loans
              
              61,104
              
              (13,694)Amortization Of Deferred Fees On Loans
              
              (70,139)
              
              (49,285)Proceeds From Sale Of Loans Held For Sale
              
              40,682,117
              
              17,669,670Origination Of Loans For Sale
              
              (40,207,952)
              
              (16,714,920)(Increase) Decrease In Accrued Interest Receivable:Loans
              
              214,090
              
              122,504Mortgage-Backed Securities
              
              115,680
              
              (71,713)Investments
              
              (231,776)
              
              266,526Increase In Advance Payments By Borrowers
              
              160,448
              
              178,466Other, Net
              
              (1,840,083)
              
              (805,278)Net
      Cash Provided By Operating Activities
              
              3,789,709
              
              3,325,850Cash
      Flows From Investing Activities:Principal Repayments On Mortgage-Backed Securities Held To
      Maturity
              
              4,246,498
              
              -Principal Repayments On Mortgage-Backed Securities Available For
      Sale
              
              33,791,297
              
              23,333,383Purchase
      Of Investment Securities Available For Sale
              
              (33,813,777)
              
              (8,184,620)Purchase
      Of Mortgage-Backed Securities Available For Sale
              
              (37,755,206)
              
              (48,075,466)Maturities
      Of Investment Securities Available For Sale
              
              8,496,907
              
              10,442,949Maturities
      Of Investment Securities Held To Maturity
              
              2,258,066
              
              9,000,000Proceeds
      From Sale Of Mortgage-Backed Securities Available For Sale
              
              10,209,062
              
              2,993,520Proceeds
      From Sale Of Investment Securities Available For Sale
              
              7,686,569
              
              7,135,335Purchase
      Of FHLB Stock
              
              -
              
              (5,800,200)Redemption
      Of FHLB Stock
              
              38,300
              
              3,361,600Decrease
      (Increase) In Loans To Customers
              
              7,662,060
              
              (62,580,669)Proceeds
      From Sale Of Repossessed Assets
              
              239,680
              
              346,000Purchase
      And Improvement Of Premises And Equipment
              
              (389,685)
              
              (1,286,870)Purchase Of Bank Owned Life Insurance
              
              -
              
              (1,150,492)Net
      Cash Provided (Used) By Investing Activities
              
              2,669,771
              
              (70,465,530)
 
 (Continued)
  5
  Security
Federal Corporation and Subsidiaries
 Consolidated
Statements of Cash Flows (Unaudited)
 
 Six
      Months Ended September 30,2009
              
              2008Cash
      Flows From Financing Activities:Increase
      In Deposit Accounts
              
              701,211
              
              14,313,384Proceeds
      From FHLB Advances
              
              157,120,000
              
              173,800,000Repayment
      Of FHLB Advances
              
              (176,707,905)
              
              (121,407,748)Proceeds
      From TAF Advances
              
              52,000,000
              
              -Repayment
      Of TAF Advances
              
              (37,000,000)
              
              -Net
      Proceeds (Repayment) Of Other Borrowings
              
              (472,483)
              
              805,119Dividends
      To Preferred Shareholders
              
              (450,000)
              
              -Dividends
      To Common Shareholders
              
              (393,775)
              
              (404,447)Purchase
      Of Treasury Stock
              
              -
              
              (277,326)Proceeds
      From Employee Stock Purchases
              
              19,800
              
              49,974Proceeds
      From Exercise of Stock Options
              
              -
              
              100,020Net
      Cash Provided (Used) By Financing Activities
              
              (5,183,152)
              
              66,978,976Net
      Increase (Decrease) In Cash And Cash Equivalents
              
              1,276,328
              
              (160,704)Cash
      And Cash Equivalents At Beginning Of Period
              
              6,562,394
              
              10,539,054Cash
      And Cash Equivalents At End Of Period
              $
              7,838,722
              $
              10,378,350Supplemental
      Disclosure Of Cash Flows Information:Cash
      Paid During The Period For Interest
              $
              11,094,059
              $
              13,886,219Cash
      Paid During The Period For Income Taxes
              $
              1,539,002
              $
              1,232,822Additions
      To Repossessed Acquired Through Foreclosure
              $
              962,892
              $
              222,450Increase
      (Decrease) In Unrealized Gain On Securities Available For
      Sale,
                Net
      Of Taxes
              $
              954,430
              $
              (2,693,211)
  See
accompanying notes to consolidated financial statements.
   6
  Security
Federal Corporation and Subsidiaries
 Notes
to Consolidated Financial Statements (Unaudited)
 
 1.
              Basis
      of Presentation
 
 The
accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and accounting principles generally
accepted in the United States of America; therefore, they do not include all
disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows.  Such statements are unaudited
but, in the opinion of management, reflect all adjustments, which are of a
normal recurring nature and necessary for a fair presentation of results for the
selected interim periods.  Users of financial information produced for
interim periods are encouraged to refer to the footnotes contained in the
audited financial statements appearing in Security Federal Corporation’s 2009
Annual Report to Shareholders, which was filed as an exhibit to the Annual
Report on Form 10-K for the year ended March 31, 2009, when reviewing interim
financial statements.  The results of operations for the six-month
period ended September 30, 2009 are not necessarily indicative of the results
that may be expected for the entire fiscal year.  This Quarterly
Report on Form 10-Q contains certain forward-looking statements with respect to
the financial condition, results of operations, and business of the
Company.  These forward-looking statements involve certain risks and
uncertainties.  Factors that may cause actual results to differ
materially from those anticipated by such forward-looking statements include,
but are not limited to, the general business environment, interest rates, the
South Carolina real estate market, the demand for loans, competitive conditions
between banks and non-bank financial services providers, regulatory changes, and
other factors and risks detailed in the Company’s reports filed with the
Securities and Exchange Commission, including the Annual Report on Form 10-K for
the fiscal year ended March 31, 2009.  Management cautions readers of
this Form 10-Q not to place undue reliance on the forward-looking statements
contained herein.
 
 2.
              Principles
      of Consolidation
 
 The
accompanying consolidated financial statements include the accounts of Security
Federal Corporation (the “Company”) and its wholly owned subsidiary, Security
Federal Bank (the “Bank”) and the Bank’s wholly owned subsidiaries, Security
Federal Insurance, Inc. (“SFINS”) and Security Financial Services Corporation
(“SFSC”).  The Bank is primarily engaged in the business of accepting
savings and demand deposits and originating mortgage loans and other loans to
individuals and small businesses for various personal and commercial purposes.
SFINS 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.  SFINS has a wholly owned subsidiary,
Collier Jennings Financial Corporation which has as subsidiaries Collier
Jennings Inc., The Auto Insurance Store Inc., and Security Federal Premium Pay
Plans Inc (the “Collier-Jennings Companies”). SFSC is currently an inactive
subsidiary.
 
 Prior to
April 1, 2009, the Bank had two additional subsidiaries: Security Federal
Investments, Inc. (“SFINV”) and Security Federal Trust Inc. (“SFT”). SFINV
provided primarily investment brokerage services.  SFT offered trust,
financial planning and financial management services. On April 1, 2009, the
assets and operations of SFINV and SFT were dissolved into the Bank. The
services of these two entities are now offered through the trust and investment
divisions of the Bank.
 
 Security
Federal Corporation has a wholly owned subsidiary, Security Federal Statutory
Trust (the “Trust”), which issued and sold fixed and floating rate capital
securities of the Trust.  However, under current accounting guidance,
the Trust is not consolidated in the Company’s financial
statements.
  3.  Critical
Accounting Policies
 
 The
Company has adopted various accounting policies, which govern the application of
accounting principles generally accepted in the United States in the preparation
of the financial statements.  The Company’s significant accounting
policies are described in the footnotes to the audited consolidated financial
statements at March 31, 2009 included in its 2009 Annual Report to Stockholders,
which was filed as an exhibit to the Annual Report on Form 10-K for the year
ended March 31, 2009.  Certain accounting policies involve significant
judgments and assumptions by management, which have a material impact on the
carrying value of certain assets and liabilities.  The Company
considers these accounting policies to be critical accounting
policies.  The judgments and assumptions the Company uses are based on
historical experience and other factors, which the Company believes to be
reasonable under the circumstances.  Because of the nature of the
judgments and assumptions we make, actual results could differ from these
judgments and estimates which could have a material impact on the carrying
values of assets and liabilities and the results of operations.
 
 The
Company believes the allowance for loan losses is a critical accounting policy
that requires the most significant judgments and estimates used in preparation
of the consolidated financial statements.  The Company provides for
loan losses using the allowance method.  Accordingly, all loan losses
are charged to the related allowance and all recoveries are credited to the
allowance for loan losses.  Additions to the allowance for loan losses
are provided by charges to operations based on various factors, which, in
management’s judgment, deserve current recognition in estimating possible
losses.
  7
  Security
Federal Corporation and Subsidiaries
 Notes
to Consolidated Financial Statements (Unaudited)
 
 3.
              Critical
      Accounting Policies, Continued
 
 While
management uses the best information available to make evaluations, future
adjustments may be necessary if economic conditions differ substantially from
the assumptions used in making these evaluations.  Allowance for loan
losses are subject to periodic evaluations by various authorities and may be
subject to adjustments based upon the information that is available at the time
of their examination.
 
 The
Company values impaired loans at the loan’s fair value if it is probable that
the Company will be unable to collect all amounts due according to the terms of
the loan agreement at the present value of expected cash flows, the market price
of the loan, if available, or the value of the underlying
collateral.  Expected cash flows are required to be discounted at the
loan’s effective interest rate.  When the ultimate collectibility of
an impaired loan’s principal is in doubt, wholly or partially, all cash receipts
are applied to principal.  When this doubt does not exist, cash
receipts are applied under the contractual terms of the loan agreement first to
interest and then to principal.  Once the recorded principal balance
has been reduced to zero, future cash receipts are applied to interest income to
the extent that any interest has been foregone.  Further cash receipts
are recorded as recoveries of any amounts previously charged off.
  4. Earnings
Per  Common Share
 
 The
Company calculates earnings per common share (“EPS”) in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share" (FASB ASC 260).  SFAS No. 128 specifies the computation,
presentation and disclosure requirements for EPS for entities with publicly held
common stock or potential common stock such as options, warrants, convertible
securities or contingent stock agreements if those securities trade in a public
market.
 
 This
standard specifies computation and presentation requirements for both basic EPS
and, for entities with complex capital structures, diluted EPS.  Basic
EPS is computed by dividing net income available to common shareholders by the
weighted average number of common shares outstanding.  Diluted EPS is
similar to the computation of basic EPS except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been
issued.  The dilutive effect of options and warrants outstanding is
reflected in diluted earnings per share by application of the treasury stock
method. The reverse treasury stock method is used to determine the dilutive
effect of the mandatorily redeemable shares outstanding, which were issued by
the Company in connection with the acquisition of the Collier-Jennings
Companies.
 
 Net
income available to common shareholders represents consolidated net income
adjusted for preferred dividends declared, accretion of discounts and
amortization of premiums on preferred stock issuances and cumulative dividends
related to the current dividend period that have not been declared as of period
end. The following tables provide a reconciliation of net income to net income
available to common shareholders for the periods presented:
 
 For the Quarter Ended:
              
              September
      30,2009
              
              2008Earnings
      Available to Common Shareholders:Net Income
              $
              582,080
              $
              784,838Preferred
      Stock Dividends
              
              225,000
              
              -Deemed
      Dividends On Preferred Stock From Net
                Accretion
      of Preferred Stock
              
              18,277
              
              -Net
      Income Available To Common Shareholders
              $
              338,803
              $
              784,838
 
 For the Six Months Ended:
              
              September
      30,2009
              
              2008Earnings
      Available to Common Shareholders:Net Income
              $
              954,247
              $
              1,586,743Preferred
      Stock Dividends
              
              450,000
              
              -Deemed
      Dividends On Preferred Stock From Net
                Accretion
      of Preferred Stock
              
              36,356
              
              -Net
      Income Available To Common Shareholders
              $
              467,891
              $
              1,586,743
  8
  Security
Federal Corporation and Subsidiaries
 Notes
to Consolidated Financial Statements (Unaudited), Continued
 
 4.   Earnings
Per Common Share, Continued
 
 The
following table provides a reconciliation of the numerators and denominators of
the basic and diluted EPS computations:
 
 For
      the Quarter EndedSeptember
      30, 2009Income
      (Numerator) Amount
              
              Shares
      (Denominator)
              
              Per
      ShareBasic
      EPS
              $                                   338,803
              
              2,461,092
              $
              0.14Effect
      of Diluted Securities:Mandatorily
      Redeemable
                Shares
              -
              
              60,065
              
              (0.01)Stock Options &
      Warrants
              -
              
              -
              
              -Diluted
      EPS
              $                                    338,803
              
              2,521,157
              $
              0.13
 
 For
      the Quarter EndedSeptember
      30, 2008Income
      (Numerator) Amount
              
              Shares
      (Denominator)
              
              Per
      ShareBasic
      EPS
              $                                   784,838
              
              2,524,758
              $
              0.31Effect
      of Diluted Securities:Mandatorily
      Redeemable
                Shares
              -
              
              14,998
              
              -Stock Options
              -
              
              -
              
              -Diluted
      EPS
              $                                    784,838
              
              2,539,756
              $
              0.31
 
 For
      the Six Months EndedSeptember
      30, 2009Income
      (Numerator) Amount
              
              Shares
      (Denominator)
              
              Per
      ShareBasic
      EPS
              $        
                                 467,891
              
              2,460,614
              $
              0.19Effect
      of Diluted Securities:Mandatorily
      Redeemable
                Shares
              -
              
              51,258
              
              -Stock Options &
      Warrants
              -
              
              -
              
              -Diluted
      EPS
              $                                    467,891
              
              2,511,872
              $
              0.19
 
  9
  Security
Federal Corporation and Subsidiaries
 Notes
to Consolidated Financial Statements (Unaudited), Continued
 
 4.   Earnings
Per Common Share, Continued
 
 For
      the Six Months EndedSeptember
      30, 2008Income
      (Numerator) Amount
              
              Shares
      (Denominator)
              
              Per
      ShareBasic
      EPS
              $                                1,586,743
              
              2,528,122
              $
              0.63Effect
      of Diluted Securities:Mandatorily
      Redeemable
                Shares
              -
              
              11,013
              
              (0.01)Stock
      Options
              -
              
              -
              
              -Diluted
      EPS
              $                               1,586,743
              
              2,539,135
              $
              0.62
 
 5. Stock-Based
Compensation
 
 Certain
officers of the Company participate in an incentive and non-qualified stock
option plan. Options are granted at exercise prices not less than the fair value
of the Company’s common stock on the date of the grant. The following is a
summary of the activity under the Company’s incentive stock option plan for the
three months and six months ended September 30, 2009 and 2008:
 
 Three
      Months Ended
                September
      30, 2009
              
              Six
      Months Ended
                September
      30, 2009Shares
              Weighted
                Average
                Exercise
      Price
              
              Shares
              Weighted
                Average
                Exercise
      PriceBalance,
      Beginning of
                Period/Year
              100,500
              $22.01
              
              100,500
              $22.01Options
      granted
              -
              -
              
              -
              -Options
      exercised
              -
              -
              
              -
              -Options
      forfeited
              (9,600)
              16.67
              
              (9,600)
              16.67Balance,
      September 30, 2009
              90,900
              $22.57
              
              90,900
              $22.57Options
      Exercisable
              50,400
              
              
              50,400Options
      Available For Grant
              50,000
              
              
              50,000
 
 
 Three
      Months Ended
                September
      30, 2008
              
              Six
      Months Ended
                September
      30, 2008Shares
              Weighted
                Average
                Exercise
      Price
              
              Shares
              Weighted
                Average
                Exercise
      PriceBalance,
      Beginning of
                Period/Year
              113,600
              $21.58
              
              111,100
              $21.55Options
      granted
              2,000
              22.91
              
              4,500
              22.91Options
      exercised
              (6,000)
              16.67
              
              (6,000)
              16.67Options
      forfeited
              (9,100)
              20.32
              
              (9,100)
              20.32Balance,
      September 30, 2008
              100,500
              $22.01
              
              100,500
              $22.01Options
      Exercisable
              60,000
              
              
              60,000Options
      Available For Grant
              50,000
              
              
              50,000
   
 10
 Security
Federal Corporation and Subsidiaries
 Notes
to Consolidated Financial Statements (Unaudited), Continued
 
 5.    Stock-Based
Compensation, Continued
 
 The
following table summarizes the stock option awards granted by the Company, the
fair market value of each award granted as estimated on the date of grant using
the Black-Scholes option-pricing model, and the weighted average assumptions
used for such grants for the periods indicated:
 
 For
      Awards Granted During
                The
      Three Month Period Ended
                September
      30,
              
              For
      Awards Granted DuringThe
                Six
      Month Period Ended
                September
      30,2009
              
              2008
              
              2009
              
              2008Awards
      granted
              -
              
              2,000
              
              -
              
              4,500Dividend
      Yield
              -
              
              1.79%
              
              -
              
              1.76-1.79%Expected
      Volatility
              -
              
              17.62%
              
              -
              
              17.62
      -18.10%Risk-free
      interest rate
              -
              
              3.88%
              
              -
              
              3.69-3.88%Expected
      life
              -
              
              9.00
              
              -
              
              9.00
 
 At
September 30, 2009, the Company had the following options
outstanding:
 
 Grant
      Date
              
              Outstanding
                Options
              
              Option
      Price
              
              Expiration
      Date09/01/03
              
              2,400
              
              $24.00
              
              08/31/1312/01/03
              
              3,000
              
              $23.65
              
              11/30/1301/01/04
              
              5,500
              
              $24.22
              
              12/31/1303/08/04
              
              13,000
              
              $21.43
              
              03/08/1406/07/04
              
              2,000
              
              $24.00
              
              06/07/1401/01/05
              
              20,500
              
              $20.55
              
              12/31/1401/01/06
              
              4,000
              
              $23.91
              
              01/01/1608/24/06
              
              14,000
              
              $23.03
              
              08/24/1605/24/07
              
              2,000
              
              $24.34
              
              05/24/1707/09/07
              
              1,000
              
              $24.61
              
              07/09/1710/01/07
              
              2,000
              
              $24.28
              
              10/01/1701/01/08
              
              17,000
              
              $23.49
              
              01/01/1805/19/08
              
              2,500
              
              $22.91
              
              05/19/1807/01/08
              
              2,000
              
              $22.91
              
              07/01/18
 
  11
  Security
Federal Corporation and Subsidiaries
 Notes
to Consolidated Financial Statements (Unaudited), Continued
 
 6. Stock
Warrants
 
 In
conjunction with its participation in the U.S. Treasury’s Capital Purchase
Program, the Company sold warrants to the U.S. Treasury to purchase 137,966
shares of the Company’s common stock at $19.57 per share. For more information,
see Note 7 Preferred Stock
Issuance. These
warrants are considered additional paid in capital and have a 10-year term. They
were immediately exercisable upon issuance. The shares issuable upon exercise of
the warrants are common stock equivalents and therefore increase the number of
shares in the computation of diluted earnings per share in periods where the
effect is dilutive.
 
 At
September 30, 2009, these warrants were anti-dilutive.  The following
tables show a summary of the status of the Company’s stock warrants and changes
during the periods presented.
 
 For
      the Quarter Ended September 30, 2009Shares
              
              Weighted-
      Average
                Exercise
      PriceBalance,
      Beginning of the Period
              137,966
              $
              19.57Granted
              -
              
              -Exercised
              -
              
              -Forfeited
              -
              
              -Balance,
      End of Year
              137,966
              $
              19.57
 
 For
      the Six Months Ended
                September
      30, 2009Shares
              
              Weighted-
      Average
                Exercise
      PriceBalance,
      Beginning of the Period
              137,966
              $
              19.57Granted
              -
              
              -Exercised
              -
              
              -Forfeited
              -
              
              -Balance,
      End of Year
              137,966
              $
              19.57
 
 There
were no stock warrants outstanding at September 30, 2008.
 
 7.    Preferred
Stock Issuance
 
 On
December 19, 2008, as part of the Troubled Asset Relief Capital Purchase Program
(“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.  In accordance with Generally Accepted Accounting Principles,
the value of the preferred stock was discounted upon issuance by the amount
allocated to the warrants to reflect that the warrants were granted in exchange
for the below market rate on the preferred stock. The allocation of the proceeds
between the preferred stock and warrants was determined based on the relative
individual fair value of the warrants as compared to the relative individual
fair value of the preferred stock.
 
 The fair
value of the warrants was determined using a Black-Scholes model. Key
assumptions were: stock price volatility of 21.70%, a dividend yield of 3.35%,
and an expected life of eight years. The fair value of the preferred shares was
determined based on a discounted cash flow model using an estimated life of five
years and a discount rate of 12%. Based on the resulting fair values, the
preferred stock represented 97.8% of the total fair value and the warrants
represented 2.2% of the total fair value. As a result, $17.6 million was
allocated to preferred stock and $400,000 was allocated to the
warrants.
 
 The
resulting discount on the preferred shares will be accreted through retained
earnings over the five year estimated life using the effective interest method,
with a corresponding increase to the carrying value of the preferred stock. For
the six months ended September 30, 2009, accretion of the preferred stock
discount totaled $36,000 and was treated as a deemed, non-cash dividend to
preferred stockholders in the computation of earnings per share.
   12
 
 Security
Federal Corporation and Subsidiaries
 Notes
to Consolidated Financial Statements (Unaudited), Continued
 
 7.    Preferred
Stock Issuance, Continued
 
 The
preferred stock requires cumulative dividends at a rate of 5% per annum for the
first five years, and 9% per annum thereafter. The Company, subject to the prior
regulatory approval, may redeem the Series A preferred stock at any time at its
option, in whole or in part, at a redemption price of 100% of the liquidation
preference amount plus any accrued and unpaid dividends. The warrant has a
10-year term and is currently exercisable with an exercise price equal to $19.57
per share of common stock. This price was based on the trailing 20-day average
common stock price as of the date of Treasury approval. The Treasury has agreed
not to exercise voting power with respect to any shares of common stock issued
upon exercise of the warrant that it holds.
 
 In
conjunction with participation in the CPP, the Company is subject to certain
limitations. The agreement subjects the Company to certain executive
compensation limitations included in the EESA and restricts the Company from
increasing dividends from the last quarterly cash dividend per share ($0.08)
declared on its common stock prior to December 19, 2008. These restrictions will
terminate on the earlier of December 19, 2011 or the date on which the preferred
stock is redeemed in whole or transferred fully by the Treasury to a third
party.
 
 8.    Carrying
Amounts and Fair Value of Financial Instruments
 
 Effective
April 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (FASB
ASC 820) (“SFAS 157”), which defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value under generally
accepted accounting principles. SFAS 157 applies to reported balances that are
required or permitted to be measured at fair value under existing accounting
pronouncements; accordingly, the standard does not require any new fair value
measurements of reported balances.
 
 SFAS 157
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be determined based on
the assumptions that market participants would use in pricing the asset or
liability. As a basis for considering market participant assumptions in fair
value measurements, SFAS 157 establishes a fair value hierarchy that
distinguishes between market participant assumptions based on market data
obtained from sources independent of the reporting entity (observable inputs
that are classified within Levels 1 and 2 of the hierarchy) and the reporting
entity’s own assumptions about market participant assumptions (unobservable
inputs classified within Level 3 of the hierarchy).
 
 Level
      1
              Valuation
      is based upon quoted prices (unadjusted) in active markets for identical
      assets or liabilities that the Company has the ability to access. Level 1
      assets and liabilities include debt and equity securities and derivative
      contracts that are traded in an active exchange market, as well as U.S.
      Treasuries and money market funds.Level
      2
              Valuation
      is based upon quoted prices for similar assets and liabilities in active
      markets, as well as inputs that are observable for the asset or liability
      (other than quoted prices), such as interest rates, foreign exchange
      rates, and yield curves that are observable at commonly quoted intervals.
      Level 2 assets and liabilities include debt securities with quoted prices
      that are traded less frequently than exchange-traded instruments,
      mortgage-backed securities, municipal bonds, corporate debt securities and
      derivative contracts whose value is determined using a pricing model with
      inputs that are observable in the market or can be derived principally
      from or corroborated by observable market data. This category generally
      includes certain derivative contracts and impaired
  loans.Level
      3
              Valuation
      is generated from model-based techniques that use at least one significant
      assumption based on unobservable inputs for the asset or liability, which
      are typically based on an entity’s own assumptions, as there is little, if
      any, related market activity. In instances where the determination of the
      fair value measurement is based on inputs from different levels of the
      fair value hierarchy, the level in the fair value hierarchy within which
      the entire fair value measurement falls is based on the lowest level input
      that is significant to the fair value measurement in its entirety. The
      assessment of the significance of a particular input to the fair value
      measurement in its entirety requires judgment, and considers factors
      specific to the asset or liability.
 
  13
  Security
Federal Corporation and Subsidiaries
 Notes
to Consolidated Financial Statements (Unaudited), Continued
 
 8.    Carrying
Amounts and Fair Value of Financial Instruments, Continued
 
 The
following is a description of the valuation methodologies used for assets and
liabilities recorded at fair value.
 
 Investment Securities
Available for Sale
 
 Investment
securities available-for-sale are recorded at fair value on a recurring basis.
At September 30, 2009, the Company’s investment portfolio was comprised of
government and agency bonds, mortgage-backed securities issued by government
agencies or government sponsored enterprises, five municipals and one equity
investment. The portfolio did not contain any private label mortgage-backed
securities. Fair value measurement is based upon prices obtained from third
party pricing services who use independent pricing models which rely on a
variety of factors including reported trades, broker/dealer quotes, benchmark
yields, economic and industry events and other relevant market information. As
such, these securities are classified as Level 2.
 
 Mortgage Loans Held forSale
 
 The
Company originates fixed rate residential loans on a servicing released basis in
the secondary market. Loans closed but not yet settled with Freddie Mac or other
investors, are carried in the Company’s loans held for sale
portfolio.  These loans are fixed rate residential loans that have
been originated in the Company’s name and have closed.  Virtually all
of these loans have commitments to be purchased by investors and the majority of
these loans were locked in by price with the investors on the same day or
shortly thereafter that the loan was locked in with the Company’s
customers.  Therefore, these loans present very little market risk for
the Company.  The Company, usually delivers to, and receives funding
from, the investor within 30 days.  Commitments to sell these loans to
the investor are considered derivative contracts and are sold to investors on a
“best efforts" basis. The Company is not obligated to deliver a loan or pay a
penalty if a loan is not delivered to the investor. Due to the short-term nature
of these derivative contracts, the fair value of the mortgage loans held for
sale in most cases is the same as the value of the loan amount at its
origination.These
loans are classified as Level 2.
 
 Impaired
Loans
 
 The
Company does not record loans at fair value on a recurring basis. However, from
time to time, a loan is considered impaired and an allowance for loan losses is
established. Loans for which it is probable that payment of interest and
principal will not be made in accordance with the contractual terms of the loan
agreement are considered impaired. Once a loan is identified as individually
impaired, management measures impairment in accordance with SFAS No. 114,
“Accounting by Creditors for Impairment of a Loan” (FASB ASC 310-10-35) (“SFAS
114”).
 
 In
accordance with this standard, the fair value is estimated using one of the
following methods: fair value of the collateral less estimated costs to sale,
discounted cash flows, or market value of the loan based on similar debt. The
fair value of the collateral less estimated costs to sell is the most frequently
used method. Typically, the Company reviews the most recent appraisal and if it
is over 24 months old will request a new third party appraisal. Depending on the
particular circumstances surrounding the loan, including the location of the
collateral, the date of the most recent appraisal and the value of the
collateral relative to the recorded investment in the loan, management may order
an independent appraisal immediately or, in some instances, may elect to perform
an internal analysis. Specifically as an example, in situations where the
collateral on a nonperforming commercial real estate loan is out of the
Company’s primary market area, management would typically order an independent
appraisal immediately, at the earlier of the date the loan becomes nonperforming
or immediately following the determination that the loan is impaired. However,
as a second example, on a nonperforming commercial real estate loan where
management is familiar with the property and surrounding areas and where the
original appraisal value far exceeds the recorded investment in the loan,
management may perform an internal analysis whereby the previous appraisal value
would be reviewed and adjusted for recent conditions including recent sales of
similar properties in the area and any other relevant economic trends. These
valuations are reviewed at a minimum on a quarterly basis.
 
 Those
impaired loans not requiring an allowance represent loans for which the fair
value of the expected repayments or collateral exceed the recorded investments
in such loans. At September 30, 2009, substantially all of the total impaired
loans were evaluated based on the fair value of the collateral. In accordance
with SFAS 157, impaired loans where an allowance is established based on the
fair value of collateral require classification in the fair value hierarchy.
When the fair value of the collateral is based on an observable market price or
a current appraised value, the Company records the impaired loan as nonrecurring
Level 2. When an appraised value is not available or management determines the
fair value of the collateral is further impaired below the appraised value and
there is no observable market price, the Company records the impaired loan as
nonrecurring Level 3.
   14
 
 Security
Federal Corporation and Subsidiaries
 Notes
to Consolidated Financial Statements (Unaudited), Continued
 
 8.    Carrying
Amounts and Fair Value of Financial Instruments, Continued
 
 Foreclosed
Assets
 
 Foreclosed
assets are adjusted to fair value upon transfer of the loans to foreclosed
assets. Subsequently, foreclosed assets are carried at the lower of carrying
value or fair value. Fair value is based upon independent market prices,
appraised values of the collateral or management’s estimation of the value of
the collateral. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company records the foreclosed
asset as nonrecurring Level 2. When an appraised value is not available or
management determines the fair value of the collateral is further impaired below
the appraised value and there is no observable market price, the Company records
the foreclosed asset as nonrecurring Level 3.
 
 Goodwill and Other
Intangible
Assets
 
 Goodwill
and identified intangible assets are subject to impairment testing. The
Company’s approach to testing for impairment is to compare the business unit’s
carrying value to the implied fair value based on a multiple of revenue
approach. Impairment testing is performed annually as of September 30th or when
events or circumstances occur indicating that goodwill of the reporting unit
might be impaired.  In the event the fair value is determined to be
less than the carrying value, the asset is recorded at fair value as determined
by the valuation model. As such, goodwill and other intangible assets subjected
to nonrecurring fair value adjustments are classified as Level 3.
 
 Mandatorily Redeemable
Financial Instrument
 
 The fair
value is determined, in accordance with the underlying agreement at the
instrument’s redemption value, as the number of shares issuable pursuant to the
agreement at a price per share determined as the greater of a) $26 per share or
b) 1.5 times the book value per share of the Company. This instrument is
classified as Level 2.
 
 The table
below presents assets and liabilities measured at fair value on a recurring
basis as of September 30, 2009, aggregated by the level in the fair value
hierarchy within which those measurements fall.
 
 Assets:
              Level
      1
              Level
      2
              Level
      3
              Balance
      At
                September,
      30 2009Investment
      Securities
                Available-For-Sale-
              -
              $     295,376,106
              -
              $           295,376,106Mortgage
      Loans Held For Sale
              -
              5,834,107
              -
              5,834,107Total
              -
              $     301,210,213
              -
              $           301,210,213Liabilities:Mandatorily
      Redeemable
                Financial
      Instrument
              -
              $         1,644,312
              -
              $               1,644,312Total
              -
              $         1,644,312
              -
              $               1,644,312
 
 The
Company may be required, from time to time, to measure certain assets at fair
value on a nonrecurring basis. These include assets that are measured at the
lower of cost or market that were recognized at fair value below cost at the end
of the period. The table below presents assets and liabilities measured at fair
value on a nonrecurring basis as of September 30, 2009, aggregated by the level
in the fair value hierarchy within which those measurements fall.
  Assets:
              Level
      1
              Level
      2
              Level
      3
              Balance
      At
                September,
      30 2009Goodwill
              -
              $                      -
              $         1,199,754
              $               1,199,754Intangible
      Assets
              -
              -
              294,500
              294,500Impaired
      Loans
              -
              31,084,911
              6,199,389
              37,284,300Foreclosed
      Assets
              -
              2,647,280
              -
              2,647,280Total
              -
              $      33,732,191
              $         7,693,643
              $             41,425,834
 
  15
  Security
Federal Corporation and Subsidiaries
 Notes
to Consolidated Financial Statements (Unaudited), Continued
 
 8.    Carrying
Amounts and Fair Value of Financial Instruments, Continued
 
 For assets and liabilities that are not
presented on the balance sheet at fair value, the following methods are used to
determine fair value:
  Cash and cash
equivalents
  The
carrying amount of these financial instruments approximates fair value. All
mature within 90 days and do not present unanticipated credit
concerns.
  Loans
  The fair
value of loans are estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities. As discount rates are
based on current loan rates as well as management estimates, the fair values
presented may not be indicative of the value negotiated in an actual
sale.
  FHLB
Stock
  The fair
value approximates the carrying value.
  Deposits
  The fair
value of demand deposits, savings accounts, and money market accounts is the
amount payable on demand at the reporting date. The fair value of fixed-maturity
certificates of deposits is estimated by discounting the future cash flows using
rates currently offered for deposits of similar remaining
maturities.
  FHLB
Advances
  Fair
value is estimated based on discounted cash flows using current market rates for
borrowings with similar terms.
  TAF Borrowings and Other
Borrowed Money
  The
carrying value of these short term borrowings approximates fair
value.
  Junior Subordinated
Debentures
  The
carrying value of junior subordinated debentures approximates fair
value.
  The
following table is a summary of the carrying value and estimated fair value of
the Company’s financial instruments as of the periods presented as defined by
SFAS No. 107, Disclosures
about Fair Value of Financial Instruments(FASB ASC 825-10-50):
 
 September
      30, 2009
              
              March
      31, 2009Carrying
                Amount
              
              Estimated
                Fair
      Value
              
              Carrying
                Amount
              
              Estimated
                Fair
      Value(In
      Thousands)Financial
      Assets:Cash
      And Cash Equivalents
              $
              7,839
              $
              7,839
              $
              6,562
              $
              6,562Investment
      And Mortgage-Back Securities
              
              320,059
              
              321,242
              
              314,099
              
              315,325Loans
      Receivable, Net
              
              599,657
              
              598,824
              
              611,090
              
              623,362FHLB
      Stock
              
              12,624
              
              12,624
              
              12,663
              
              12,663Financial
      Liabilities:Deposits:Checking,
      Savings, And Money Market Accounts
              $
              284,625
              $
              284,625
              $
              272,363
              $
              272,363Certificate
      Accounts
              
              377,790
              
              385,021
              
              389,351
              
              395,647Advances
      From FHLB
              
              199,411
              
              208,950
              
              218,998
              
              225,852Term
      Auction Facility Borrowings
              
              25,000
              
              25,000
              
              10,000
              
              10,000Other
      Borrowed Money
              
              15,583
              
              15,583
              
              16,056
              
              16,056Junior
      Subordinated Debentures
              
              5,155
              
              5,155
              
              5,155
              
              5,155Mandatorily
      Redeemable Financial Instrument
              
              1,644
              
              1,644
              
              1,600
              
              1,600
   16
  Security
Federal Corporation and Subsidiaries
 Notes
to Consolidated Financial Statements (Unaudited), Continued
 
 8.    Carrying
Amounts and Fair Value of Financial Instruments, Continued
 
 At
September 30, 2009, the Bank had $67.9 million of off-balance sheet financial
commitments.  These commitments are to originate loans and unused
consumer lines of credit and credit card lines.  Because these
obligations are based on current market rates, if funded, the original principal
is considered to be a reasonable estimate of fair value.
 
 Fair
value estimates are made on a specific date, based on relevant market data and
information about the financial instrument.  These estimates do not
reflect any premium or discount that could result from offering for sale the
Bank’s entire holdings of a particular financial instrument.  Because
no active market exists for a significant portion of the Bank’s financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, current interest rates
and prepayment trends, risk characteristics of various financial instruments and
other factors.  These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision.  Changes in any of these assumptions used
in calculating fair value would also significantly affect the estimates. Fair
value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments.  For example, the Bank has significant assets
and liabilities that are not considered financial assets or liabilities
including deposit franchise values, loan servicing portfolios, deferred tax
liabilities, and premises and equipment.
 
 In
addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in any of these estimates. The Company has used management’s
best estimate of fair value on the above assumptions.  Thus, the fair
values presented may not be the amounts, which could be realized, in an
immediate sale or settlement of the instrument.  In addition, any
income taxes or other expenses that would be incurred in an actual sale or
settlement are not taken into consideration in the fair value
presented.
 
 9.      Accounting
and Reporting Changes
 
 The
following is a summary of recent authoritative pronouncements that could impact
the accounting, reporting, and/or disclosure of financial information by the
Company.
 
 In June
2009, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards
Codification TM and the
Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB
Statement No. 162,” (“SFAS 168”).  SFAS 168 establishes the FASB Accounting Standards
Codification TM(“Codification”) as the source of authoritative generally accepted
accounting principles (“GAAP”) for nongovernmental entities.  The
Codification does not change GAAP. Instead, it takes the thousands of individual
pronouncements that currently comprise GAAP and reorganizes them into
approximately 90 accounting Topics, and displays all Topics using a consistent
structure.  Contents in each Topic are further organized first by
Subtopic, then Section and finally Paragraph. The Paragraph level is the only
level that contains substantive content.Citing
particular content in theCodification
involves specifying the unique numeric path to the content through the Topic,
Subtopic, Section and Paragraph structure. FASB suggests that all citations
begin with “FASB ASC,” where ASC stands for Accounting Standards
Codification.Changes to
the ASC subsequent to June 30, 2009 are referred to as Accounting Standards
Updates (“ASU”).
 
 In
conjunction with the issuance of SFAS 168, the FASB also issued its first
Accounting Standards Update No. 2009-1, “Topic 105 –Generally Accepted
Accounting Principles” (“ASU 2009-1”) which includes SFAS 168 in its entirety as
a transition to the ASC.    ASU 2009-1 is effective for
interim and annual periods ending after September 15, 2009 and will not have an
impact on the Company’s financial position or results of operations but will
change the referencing system for accounting standards.  Certain of
the following pronouncements were issued prior to the issuance of the ASC and
adoption of the ASUs. For such pronouncements, citations to the applicable
Codification by Topic, Subtopic and Section are provided where applicable in
addition to the original standard type and number.
  17
  Security
Federal Corporation and Subsidiaries
 Notes
to Consolidated Financial Statements (Unaudited), Continued
 
 9.      Accounting
and Reporting Changes, Continued
 
 SFAS 167
(not yet reflected in FASB ASC), “Amendments to FASB Interpretation No. 46(R),”
(“SFAS 167”) was also issued in June 2009.  The standard amends FIN
46(R) to require a company to analyze whether its interest in a variable
interest entity (“VIE”) gives it a controlling financial interest.  A
company must assess whether it has an implicit financial responsibility to
ensure that the VIE operates as designed when determining whether it has the
power to direct the activities of the VIE that significantly impact its economic
performance.  Ongoing reassessments of whether a company is the
primary beneficiary are also required by the standard.  SFAS 167
amends the criteria to qualify as a primary beneficiary as well as how to
determine the existence of a VIE.  The standard also eliminates
certain exceptions that were available under FIN 46(R).  SFAS 167 is
effective as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter.  Earlier application is prohibited.  Comparative
disclosures will be required for periods after the effective
date.  The Company does not expect the standard to have any impact on
the Company’s financial position.
 
 The FASB
issued ASU 2009–05, “Fair Value Measurements and Disclosures (Topic 820) –
Measuring Liabilities at Fair Value” in August, 2009 to provide guidance when
estimating the fair value of a liability.  When a quoted price in an
active market for the identical liability is not available, fair value should be
measured using (a) the quoted price of an identical liability when traded as an
asset; (b) quoted prices for similar liabilities or similar liabilities when
traded as assets; or (c) another valuation technique consistent with the
principles of Topic 820 such as an income approach or a market
approach.  If a restriction exists that prevents the transfer of the
liability, a separate adjustment related to the restriction is not required when
estimating fair value.  The ASU was effective October 1, 2009 for the
Company and will have no impact on financial position or
operations.
 
 ASU
2009-12, “Fair Value Measurements and Disclosures (Topic 820) - Investments in
Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent),”
issued in September, 2009, allows a company to measure the fair value of an
investment that has no readily determinable fair market value on the basis of
the investee’s net asset value per share as provided by the investee. This
allowance assumes that the investee has calculated net asset value in accordance
with the GAAP measurement principles of Topic 946 as of the reporting entity’s
measurement date.   Examples of such investments include
investments in hedge funds, private equity funds, real estate funds and venture
capital funds. The update also provides guidance on how the investment should be
classified within the fair value hierarchy based on the value for which the
investment can be redeemed.  The amendment is effective for interim
and annual periods ending after December 15, 2009 with early adoption
permitted.  The Company does not have investments in such entities
and, therefore, there will be no impact to our financial
statements.
 
 ASU
2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements – a consensus of the FASB Emerging Issues Task Force” was issued in
October, 2009 and provides guidance on accounting for products or services
(deliverables) separately rather than as a combined unit utilizing a selling
price hierarchy to determine the selling price of a deliverable.  The
selling price is based on vendor-specific evidence, third-party evidence or
estimated selling price.  The amendments in the Update are effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010 with early adoption
permitted.  The Company does not expect the update to have an impact
on its financial statements.
 
 Issued
October, 2009, ASU 2009-15, “Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance or Other Financing” amends ASC Topic
470 and provides guidance for accounting and reporting for own-share lending
arrangements issued in contemplation of a convertible debt
issuance.  At the date of issuance, a share-lending arrangement
entered into on an entity’s own shares should be measured at fair value in
accordance with Topic 820 and recognized as an issuance cost, with an offset to
additional paid-in capital.  Loaned shares are excluded from basic and
diluted earnings per share unless default of the share-lending arrangement
occurs.  The amendments also require several disclosures including a
description and the terms of the arrangement and the reason for entering into
the arrangement.  The effective dates of the amendments are dependent
upon the date the share-lending arrangement was entered into and include
retrospective application for arrangements outstanding as of the beginning of
fiscal years beginning on or after December 15, 2009.   The
Company is currently analyzing the effect, if any, the update will have on its
financial statements.
 
 Other
accounting standards that have been issued or proposed by the FASB or other
standards-setting bodies are not expected to have a material impact on the
Company’s financial position, results of operations and cash flows.
 
  18
  Security
Federal Corporation and Subsidiaries
 Notes
to Consolidated Financial Statements (Unaudited), Continued
 
 10.   Securities
 
 Investment And
Mortgage-Backed Securities, Available For Sale
  The
amortized cost, gross unrealized gains, gross unrealized losses, and fair values
of investment and mortgage-backed securities available for sale are as
follows:
  September 30,
      2009
              
              Amortized
                Cost
              
              Gross
                Unrealized
                Gains
              
              Gross
                Unrealized
                Losses
              
              Fair
      ValueFHLB
      Securities
              $
              20,735,001
              $
              320,520
              $
              51,339
              $
              21,004,182Federal
      Farm Credit Securities
              
              9,842,230
              
              100,176
              
              -
              
              9,942,406FNMA
      Bonds
              
              3,998,500
              
              8,130
              
              870
              
              4,005,760Small
      Business Administration (“SBA”) Bonds
              
              14,187,770
              
              165,290
              
              54,627
              
              14,298,433Taxable
      Municipal Bonds
              
              5,241,407
              
              92,930
              
              -
              
              5,334,337Mortgage-Backed
      Securities
              
              233,585,979
              
              7,313,698
              
              168,689
              
              240,730,988Equity
      Securities
              
              102,938
              
              -
              
              42,938
              
              60,000Total
              $
              287,693,825
              $
              8,000,744
              $
              318,463
              $
              295,376,106
 
 March 31,
      2009
              
              Amortized
                Cost
              
              Gross
                Unrealized
                Gains
              
              Gross
                Unrealized
                Losses
              
              Fair
      valueFHLB
      Securities
              $
              15,401,116
              $
              428,886
              $
              18,450
              $
              15,811,552Federal
      Farm Credit Securities
              
              14,521,626
              
              121,699
              
              8,855
              
              14,634,470FNMA
      Bonds
              
              2,000,000
              
              7,810
              
              -
              
              2,007,810SBA
      Bonds
              
              3,319,651
              
              65,119
              
              18,201
              
              3,366,569Taxable
      Municipal Bond
              
              1,019,781
              
              26,818
              
              -
              
              1,046,599Mortgage-Backed
      Securities
              
              240,322,316
              
              5,718,587
              
              112,668
              
              245,928,235Equity
      Securities
              
              102,938
              
              -
              
              65,438
              
              37,500$
              276,687,428
              $
              6,368,919
              $
              223,612
              $
              282,832,735
 
 FHLB
securities, Federal Farm Credit securities, FNMA bonds, and FNMA and FHLMC
mortgage-backed securities are issued by government-sponsored enterprises
(“GSEs”).  GSEs are not backed by the full faith and credit of the
United States government.  SBA bonds are backed by the full faith and
credit of the United States government. Included in the tables above in
mortgage-backed securities are GNMA mortgage-backed securities, which are also
backed by the full faith and credit of the United States government. At
September 30, 2009 and March 31, 2009, the Company held an amortized cost and
fair value of $121.1 million and $124.5 million and $107.3 million and $110.2
million, respectively in GNMA mortgage-backed securities included in
mortgage-backed securities listed above. All mortgage-backed securities in the
Company’s portfolio are either GSEs or GNMA mortgage-backed securities. The
balance does not include any private label mortgage-backed
securities.
 
 The Bank
received approximately $17.9 million and $10.1 million, respectively in proceeds
from sales of available for sale securities during the six months ended
September 30, 2009 and 2008 and recognized approximately $374,000 in gross gains
in 2009 and $146,000 in gross gains and $20,000 in gross losses in
2008.
  19
  Security
Federal Corporation and Subsidiaries
 Notes
to Consolidated Financial Statements (Unaudited), Continued
 
 10.    Securities,
Continued
 
 The
amortized cost and fair value of investment and mortgage-backed securities
available for sale at September 30, 2009 are shown below by contractual
maturity.  Expected maturities will differ from contractual maturities
because borrowers have the right to prepay obligations with or without call or
prepayment penalties.
  Amortized
      Cost
              
              Fair
      ValueLess
      Than One Year
              $
              -
              $
              -One
      – Five Years
              
              4,891,535
              
              5,029,663Over
      Five – Ten Years
              
              23,321,223
              
              23,445,679After
      Ten Years
              
              25,895,088
              
              26,169,776Mortgage-Backed
      Securities
              
              233,585,979
              
              240,730,988$
              287,693,825
              $
              295,376,106
 
 The
following table shows gross unrealized losses and fair value, aggregated by
investment category, and length of time that individual available for sale
securities have been in a continuous unrealized loss position, at September 30,
2009.
  Less
      than 12 Months
              
              12
      Months or More
              
              TotalFair
                Value
              
              Unrealized
                Losses
              
              Fair
                Value
              
              Unrealized
                Losses
              
              Fair
                Value
              
              Unrealized
                LossesFHLB
      Securities
              $
              7,497,153
              $
              51,339
              $
              -
              $
              -
              $
              7,497,153
              $
              51,339Mortgage-Backed
      Securities
              
              21,838,315
              
              166,601
              
              458,000
              
              2,088
              
              22,296,315
              
              168,689SBA
      Bonds
              
              2,988,547
              
              54,627
              
              -
              
              -
              
              2,988,547
              
              54,627FNMA
      Bonds
              
              998,130
              
              870
              
              -
              
              -
              
              998,130
              
              870Equity
      Securities
              
              -
              
              -
              
              60,000
              
              42,938
              
              60,000
              
              42,938$
              33,322,145
              $
              273,437
              $
              518,000
              $
              45,026
              $
              33,840,145
              $
              318,463
  Securities
classified as available for sale are recorded at fair market value.
Approximately 14.1% of the unrealized losses, or two individual securities,
consisted of securities in a continuous loss position for 12 months or
more.  The Company has the ability and intent to hold these securities
until such time as the value recovers or the securities mature.  The
Company believes, based on industry analyst reports and credit ratings, that the
deterioration in value is attributable to changes in market interest rates and
is not in the credit quality of the issuer and therefore, these losses are not
considered other-than-temporary.  The Company reviews its investment
securities portfolio at least quarterly and more frequently when economic
conditions warrant, assessing whether there is any indication of
other-than-temporary impairment ("OTTI"). Factors considered in the review
include estimated future cash flows, length of time and extent to which market
value has been less than cost, the financial condition and near term prospectus
of the issuer, and our intent and ability to retain the security to allow for an
anticipated recovery in market value.
   
 Investment and
Mortgage-Backed Securities, Held to Maturity
  The
amortized cost, gross unrealized gains, gross unrealized losses, and fair values
of investment and mortgage-backed securities held to maturity are as
follows:
  September 30,
      2009
              
              Amortized
                Cost
              
              Gross
                Unrealized
                Gains
              
              Gross
                Unrealized
                Losses
              
              Fair
      ValueFHLB
      Securities
              $
              5,000,000
              $
              326,250
              $
              5,940
              $
              5,320,310Federal
      Farm Credit Securities
              
              1,000,000
              
              5,310
              
              -
              
              1,005,310SBA
      Bonds
              
              5,099,754
              
              271,742
              
              -
              
              5,371,496Mortgage-Backed
      Securities
              
              13,427,874
              
              585,779
              
              -
              
              14,013,653Equity
      Securities
              
              155,000
              
              -
              
              -
              
              155,000Total
              $
              24,682,628
              $
              1,189,081
              $
              5,940
              $
              25,865,769March 31,
      2009
              
              Amortized
                Cost
              
              Gross
                Unrealized
                Gains
              
              Gross
                Unrealized
                Losses
              
              Fair
      ValueFHLB
      Securities
              $
              7,000,000
              $
              371,260
              $
              8,750
              $
              7,362,510Federal
      Farm Credit Securities
              
              1,000,000
              
              19,060
              
              -
              
              1,019,060SBA
      Bonds
              
              5,355,028
              
              336,242
              
              -
              
              5,691,270Mortgage-Backed
      Securities
              
              17,755,838
              
              508,729
              
              -
              
              18,264,567Equity
      Securities
              
              155,000
              
              -
              
              -
              
              155,000Total
              $
              31,265,866
              $
              1,235,291
              $
              8,750
              $
              32,492,407
  20
  Security
Federal Corporation and Subsidiaries
 Notes
to Consolidated Financial Statements (Unaudited), Continued
 
 10.    Securities,
Continued
 
 FHLB
securities, Federal Farm Credit securities, and FNMA and FHLMC mortgage-backed
securities are issued by GSEs.  GSEs are not backed by the full faith
and credit of the United States government.  SBA bonds are backed by
the full faith and credit of the United States government. Included in the
tables above in mortgage-backed securities are GNMA mortgage-backed securities,
which are also backed by the full faith and credit of the United States
government.  At September 30, 2009, the Company held an amortized cost
and fair value of $7.8 million and $8.1 million, respectively in GNMA
mortgage-backed securities included in mortgage-backed securities listed above.
At March 31, 2009, the Company held an amortized cost and fair value of $10.8
million and $11.1 million, respectively in GNMA mortgage-backed securities
included in mortgage-backed securities listed above. All mortgage-backed
securities in the Company’s portfolio above are either GSEs or GNMA
mortgage-backed securities. The balance does not include any private label
mortgage-backed securities.
 
 The
amortized cost and fair value of investment and mortgage-backed securities held
to maturity at September 30, 2009, by contractual maturity, are shown
below.  Expected maturities will differ from contractual maturities
resulting from call features on certain investments.
 
 Amortized
      Cost
              
              Fair
      ValueLess
      Than One Year
              $
              2,000,000
              $
              2,045,310One
      – Five Years
              
              4,523,679
              
              4,867,446Over
      Five – Ten Years
              
              -
              
              -More
      Than Ten Years
              
              4,731,075
              
              4,939,360Mortgage-Backed
      Securities
              
              13,427,874
              
              14,013,653$
              24,682,628
              $
              25,865,769
 
 The
Company only had one held to maturity security that was in an unrealized loss
position at September 30, 2009. The fair value of this FHLB security was
$994,060 and the unrealized loss was $5,940. The security had been in an
unrealized loss position for less than 12 months. The Company did not have any
held to maturity securities that had been in an unrealized loss position for
over 12 months as of September 30, 2009. The Company’s held to maturity
portfolio is recorded at amortized cost.  The Company believes, based
on industry analyst reports and credit ratings, that the deterioration in value
is attributable to changes in market interest rates and is not, in the credit
quality of the issuer and therefore, these losses are not considered
other-than-temporary. There were no sales of securities held to maturity during
the quarter or six month period ended September 30, 2009.
 
 11.   Loans
Receivable, Net
 
 Loans
receivable, net, at September 30, 2009 and March 31, 2009 consisted of the
following:
 
 September
      30, 2009
              
              March
      31, 2009Residential
      Real Estate
              $
              118,771,235
              $
              126,980,894Consumer
              
              69,493,528
              
              69,025,082Commercial
      Business
              
              21,434,612
              
              21,032,000Commercial
      Real Estate
              
              401,249,166
              
              404,403,186Loans
      Held For Sale
              
              5,834,107
              
              5,711,807616,782,648
              
              627,152,969Less:Allowance
      For Possible Loan Loss
              
              12,723,921
              
              10,181,599Loans
      In Process
              
              4,189,938
              
              5,602,248Deferred
      Loan Fees
              
              211,429
              
              279,24917,125,288
              
              16,063,096$
              599,657,360
              $
              611,089,873
 
 
 
 21
 
 Security
Federal Corporation and Subsidiaries
 Notes
to Consolidated Financial Statements (Unaudited), Continued
 
 12.    Senior
Convertible Debentures Offering
 
 Effective
September 8, 2009, the Company began an offering to sell a maximum of $15.0
million, minimum of $5.0 million, in 8.0% convertible senior debentures to be
due December 1, 2029. 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 at the option of the
Company, in whole or in part, at any time on or after December 1, 2019 at the
redemption price equal to 100% of the principal amount of the debentures to be
redeemed, plus accrued and unpaid interest, if any. The offering is scheduled to
end on or before December 9, 2009.
 
 13.    Subsequent
Events
 
 Management
has evaluated events and transactions through November 13, 2009 for potential
recognition or disclosure in the consolidated financial statements and has
determined there are no subsequent events that require disclosure.
 
  22
 Security
Federal Corporation and Subsidiaries
 Item
2- Management’s Discussion and Analysis of Financial Condition and Results of
Operations
  Safe
Harbor Statement
 
 Certain
matters in this Quarterly Report on Form 10-Q for the quarter ended September
30, 2009 constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995.  These forward-looking
statements relate to, among others, expectations of the business environment in
which the Company operates, projections of future performance, perceived
opportunities in the market, potential future credit experience, and statements
regarding the Company’s mission and vision.  These forward-looking
statements are based upon current management expectations, and may, therefore,
involve risks and uncertainties.  The Company’s actual results,
performance, or achievements may differ materially from those suggested,
expressed, or implied by forward-looking statements as a result of a wide range
of factors including, but not limited to, the general business environment,
interest rates, the South Carolina real estate market, the demand for loans,
competitive conditions between banks and non-bank financial services providers,
regulatory changes, and other factors and risks detailed in the Company’s
reports filed with the Securities and Exchange Commission, including the Annual
Report on Form 10-K for the fiscal year ended March 31,
2009.  Forward-looking statements are effective only as of the date
that they are made and the Company assumes no obligation to update this
information.
 
 Comparison
Of Financial Condition At September 30, 2009 and March 31, 2009
 
 General– Total assets
decreased $2.7 million or 0.3% to $982.0 million at September 30, 2009 from
$984.7 million at March 31, 2009.  The primary reason for the decrease
in total assets was an $11.4 million or 1.9% decrease in net loans receivable to
$599.7 million. This decrease was offset partially by an increase in cash and
cash equivalents, investment and mortgage- backed securities available for sale
and other assets.
 
 Assets –The increases and
decreases in total assets were primarily concentrated in the following asset
categories:
 
 Increase
      (Decrease)September
      30, 2009
              
              
              March
      31, 2009
              
              
              Amount
              
              
              PercentCash
      And Cash Equivalents
              
              $
              7,838,722
              
              
              $
              6,562,394
              
              
              $
              1,276,328
              
              
              
              19.4
              %Investment
      And Mortgage-
                Backed
      Securities –
                Available
      For Sale
              
              
              295,376,106
              
              
              
              282,832,735
              
              
              
              12,543,371
              
              
              
              4.4Investment
      And Mortgage-
                Backed
      Securities – Held
                To
      Maturity
              
              
              24,682,628
              
              
              
              31,265,866
              
              
              
              (6,583,238
              )
              
              
              (21.1
              )Loan
      Receivable, Net
              
              
              599,657,360
              
              
              
              611,089,873
              
              
              
              (11,432,513
              )
              
              
              (1.9
              )Premises
      And Equipment,
                Net
              
              
              21,301,694
              
              
              
              21,675,434
              
              
              
              (373,740
              )
              
              
              (1.7
              )Bank
      Owned Life Insurance
              
              
              9,821,305
              
              
              
              9,641,305
              
              
              
              180,000
              
              
              
              1.9Repossessed
      Assets
                Acquired
      in Settlement of
                Loans
              
              
              2,647,280
              
              
              
              1,985,172
              
              
              
              662,108
              
              
              
              33.4Goodwill
              
              
              1,199,754
              
              
              
              1,421,754
              
              
              
              (222,000
              )
              
              
              (15.6
              )Other
      Assets
              
              
              3,098,436
              
              
              
              1,657,189
              
              
              
              1,441,247
              
              
              
              87.0
 
 Cash and
cash equivalents increased $1.3 million to $7.8 million at September 30, 2009
from $6.6 million at March 31, 2009.
 
 Investments
and mortgage-backed securities available for sale increased $12.5 million or
4.4% to $295.4 million at September 30, 2009 from $282.8 million at March 31,
2009. The increase in investments and mortgage-backed securities available for
sale is attributable to additional purchases of mortgage-backed securities and
investments and increases in the market values of these securities. This is
offset partially by paydowns on mortgage-backed securities and sales, calls and
maturities on mortgage-backed securities and investments. Investments and
mortgage-backed securities held to maturity decreased $6.6 million to $24.7
million at September 30, 2009 compared to $31.3 million at March 31, 2009. This
is a result of maturities and paydowns on investments.
 
  23
 Security
Federal Corporation and Subsidiaries
 Item
2- Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued
  Loans
receivable, net decreased $11.4 million or 1.9% to $599.7 million at September
30, 2009 from $611.1 million at March 31, 2009.  The decrease is a
result of the slowing down of the national and local economy combined with
increased underwriting standards. Residential real estate loans decreased $8.2
million to $118.8 million at September 30, 2009 from $127.0 million at March 31,
2009 primarily as a result of a slowdown in the local real estate market
combined with generally lower market interest rates. In a low interest rate
environment, borrowers tend to refinance their mortgages into lower fixed rate
loans. We typically sell these types of loans to minimize interest rate risk.
Consumer loans increased $468,000 to $69.5 million at September 30, 2009 from
$69.0 million at March 31, 2009. Commercial business loans increased $403,000 to
$21.4 million at September 30, 2009 from $21.0 million at March 31, 2009 while
commercial real estate loans decreased $3.2 million to $401.2 million at
September 30, 2009 from $404.4 million at March 31, 2009.  Loans held
for sale increased $122,000 or 2.1% to $5.8 million at September 30, 2009 from
$5.7 million at March 31, 2009.
 
 Premises
and equipment, net decreased $374,000 or 1.7% to $21.3 million at September 30,
2009 from $21.7 million at March 31, 2009.  The majority of the
decrease related to depreciation consistent with the normal course of business.
The Company did not undergo any significant asset purchases during the period.
Bank Owned Life Insurance increased $180,000 or 1.9% to $9.8 million at
September 30, 2009 from $9.6 million at March 31, 2009 as a result of an
increase in the cash surrender value.
 
 Repossessed
Assets Acquired in Settlement of Loans increased $662,000 or 33.4% to $2.6
million at September 30, 2009 from $2.0 million at March 31,
2009.  The Company sold three real estate properties and repossessed
nine additional properties during the period. At September 30, 2009, the balance
of repossessed assets consisted of the following 20 real estate properties: two
lots within one subdivision of Aiken, South Carolina and one lot within a
subdivision of Lexington, South Carolina; approximately 17 acres of land and one
commercial building in Aiken, South Carolina; a commercial building and three
single-family residences in Augusta, Georgia; one single-family residence under
construction in North Augusta, South Carolina; three manufactured homes in South
Carolina; and seven single-family residences in South Carolina.
 
 Goodwill
decreased $222,000 to $1.2 million at September 30, 2009 from $1.4 million at
March 31, 2009. The Company sold the South Augusta office of its insurance
subsidiary as it was not within the Company’s branch footprint. The sale
resulted in a reduction in the goodwill associated with the South Augusta
portion of the original purchase of the insurance subsidiary in
2006.
 
 Other
assets increased $1.4 million or 87.0% to $3.1 million at September 30, 2009
from $1.7 million at March 31, 2009.
 
 Liabilities
 Deposit
Accounts
 BalanceSeptember
      30, 2009
              
              
              March
      31, 2009
              
              
              Increase
      (Decrease)Balance
              
              
              Weighted
                Rate
              
              
              Balance
              
              
              Weighted
                Rate
              
              
              Amount
              
              
              PercentDemand
      Accounts:Checking
              
              
              $
              104,279,635
              
              
              
              0.20
              %
              
              $
              104,662,377
              
              
              
              0.21
              %
              
              $
              (382,742
              )
              
              
              (0.4
              )%Money
      Market
              
              
              
              163,050,247
              
              
              
              1.42
              
              
              
              150,513,010
              
              
              
              1.88
              
              
              
              12,537,237
              
              
              
              8.3Statement
      Savings
                Accounts
              
              
              17,295,030
              
              
              
              0.44
              
              
              
              17,187,295
              
              
              
              0.54
              
              
              
              107,735
              
              
              
              0.6Total
              
              
              
              284,624,912
              
              
              
              0.91
              
              
              
              272,362,682
              
              
              
              1.15
              
              
              
              12,262,230
              
              
              
              4.5Certificate
      Accounts0.00
      – 1.99
              %
              
              
              96,202,260
              
              
              
              
              
              
              
              21,143,194
              
              
              
              
              
              
              
              75,059,066
              
              
              
              355.02.00
      – 2.99
              %
              
              
              180,333,808
              
              
              
              
              
              
              
              112,373,285
              
              
              
              
              
              
              
              67,960,523
              
              
              
              60.53.00
      – 3.99
              %
              
              
              55,598,660
              
              
              
              
              
              
              
              76,088,180
              
              
              
              
              
              
              
              (20,489,520
              )
              
              
              (26.9
              )4.00
      – 4.99
              %
              
              
              40,159,037
              
              
              
              
              
              
              
              173,467,216
              
              
              
              
              
              
              
              (133,308,179
              )
              
              
              (76.8
              )5.00
      – 5.99
              %
              
              
              5,496,109
              
              
              
              
              
              
              
              6,279,018
              
              
              
              
              
              
              
              (782,909
              )
              
              
              (12.5
              )Total
              
              
              
              377,789,874
              
              
              
              2.63
              
              
              
              389,350,893
              
              
              
              3.51
              
              
              
              (11,561,019
              )
              
              
              (3.0
              )Total
      Deposits
              
              
              $
              662,414,786
              
              
              
              1.89
              %
              
              $
              661,713,575
              
              
              
              2.54
              %
              
              $
              701,211
              
              
              
              0.1
              %
 
 Included
in the certificates above were $20.0 million and $25.4 million in brokered
deposits at September 30, 2009 and March 31, 2009, respectively with a weighted
average interest rate of 2.05% and 2.04%, respectively.
  24
 Security
Federal Corporation and Subsidiaries
 Item
2- Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued
  Advances From FHLB–
FHLB advances are summarized by year of maturity and weighted average interest
rate in the table below:
 
 BalanceSeptember
      30, 2009
              
              
              March
      31, 2009
              
              
              Increase
      (Decrease)Fiscal
      Year Due:
              
              Balance
              
              
              Rate
              
              
              Balance
              
              
              Rate
              
              
              Balance
              
              
              Percent2010
              
              $
              61,500,000
              
              
              
              0.41
              %
              
              $
              91,080,000
              
              
              
              0.94
              %
              
              $
              (29,580,000
              )
              
              
              (32.5
              %)2011
              
              
              15,000,000
              
              
              
              4.87
              
              
              
              15,000,000
              
              
              
              4.87
              
              
              
              -
              
              
              
              -2012
              
              
              34,700,000
              
              
              
              3.66
              
              
              
              24,700,000
              
              
              
              4.56
              
              
              
              10,000,000
              
              
              
              40.52013
              
              
              10,000,000
              
              
              
              4.76
              
              
              
              10,000,000
              
              
              
              4.76
              
              
              
              -
              
              
              
              -2014
              
              
              20,000,000
              
              
              
              3.84
              
              
              
              20,000,000
              
              
              
              3.84
              
              
              
              -
              
              
              
              -Thereafter
              
              
              58,210,529
              
              
              
              4.30
              
              
              
              58,218,434
              
              
              
              4.30
              
              
              
              (7,905
              )
              
              
              -Total
      Advances
              
              $
              199,410,529
              
              
              
              3.01
              %
              
              $
              218,998,434
              
              
              
              2.95
              %
              
              $
              (19,587,905
              )
              
              
              (8.9
              )%
 
 Advances
from FHLB decreased $19.6 million to $199.4 million at September 30, 2009 from
$219.0 million at March 31, 2009. The Company replaced maturing FHLB advances
with lower cost TAF borrowings, which increased $15.0 million during the same
period. In addition, the decrease in loans during the period allowed the Company
to repay some of these advances.
 
 Advances
from FHLB are secured by a blanket collateral agreement with the FHLB by
pledging the Bank’s portfolio of residential first mortgage loans and investment
securities with approximate amortized cost and fair value of $135.5 million and
$141.7 million, respectively, at September 30, 2009.  Advances are
subject to prepayment penalties.
 
 The
following table shows callable FHLB advances as of the dates
indicated.  These advances are also included in the above
table.  All callable advances are callable at the option of the
FHLB.  If an advance is called, the Bank has the option to payoff the
advance without penalty, re-borrow funds on different terms, or convert the
advance to a three-month floating rate advance tied to LIBOR.
 
 As
      of September 30, 2009Borrow Date
              
              Maturity Date
              
              Amount
              
              Int. Rate
              
              Type
              
              Call
      Dates06/24/05
              
              06/24/15
              
              5,000,000
              3
              3.710%
              
              1
      Time Call
              
              06/24/1011/10/05
              
              11/10/15
              
              5,000,000
              
              4.400%
              
              1
      Time Call
              
              11/10/0911/23/05
              
              11/23/15
              
              5,000,000
              
              3.933%
              
              Multi-Call
              
              05/25/08
      and quarterly thereafter12/14/05
              
              12/14/11
              
              5,000,000
              
              4.640%
              
              1
      Time Call
              
              12/14/0901/12/06
              
              01/12/16
              
              5,000,000
              
              4.450%
              
              1
      Time Call
              
              01/12/1103/01/06
              
              03/03/14
              
              5,000,000
              
              4.720%
              
              1
      Time Call
              
              03/03/1006/02/06
              
              06/02/16
              
              5,000,000
              
              5.160%
              
              1
      Time Call
              
              06/02/1107/11/06
              
              07/11/16
              
              5,000,000
              
              4.800%
              
              Multi-Call
              
              07/11/08
      and quarterly thereafter11/29/06
              
              11/29/16
              
              5,000,000
              
              4.025%
              
              Multi-Call
              
              05/29/08
      and quarterly thereafter01/19/07
              
              07/21/14
              
              5,000,000
              
              4.885%
              
              1
      Time Call
              
              07/21/1103/09/07
              
              03/09/12
              
              4,700,000
              
              4.286%
              
              Multi-Call
              
              06/09/08
      and quarterly thereafter05/24/07
              
              05/24/17
              
              7,900,000
              
              4.375%
              
              Multi-Call
              
              05/27/08
      and quarterly thereafter07/25/07
              
              07/25/17
              
              5,000,000
              
              4.396%
              
              Multi-Call
              
              07/25/08
      and quarterly thereafter11/16/07
              
              11/16/11
              
              5,000,000
              
              3.745%
              
              Multi-Call
              
              11/17/08
      and quarterly thereafter08/28/08
              
              08/28/13
              
              5,000,000
              
              3.113%
              
              Multi-Call
              
              08/30/10
      and quarterly thereafter08/28/08
              
              08/28/18
              
              5,000,000
              
              3.385%
              
              1
      Time Call
              
              08/29/11
 
 Other Borrowings-The Bank had
$15.6 million and $16.1 million in other borrowings (non-FHLB advances) at
September 30, 2009 and March 31, 2009, respectively.  These borrowings
consist of short-term repurchase agreements with certain commercial demand
deposit customers for sweep accounts and the current balance on a revolving line
of credit with another financial institution.  At September 30, 2009
and March 31, 2009, short-term repurchase agreements were $10.8 million and
$11.3 million, respectively. The repurchase agreements typically mature within
one to three days and the interest rate paid on these borrowings floats monthly
with money market type rates. At September 30, 2009 and March 31, 2009, the
interest rate paid on the repurchase agreements was 0.85% and 1.24%,
respectively.  The Bank had pledged as collateral for these repurchase
agreements investment and mortgage-backed securities with amortized costs and
fair values of $21.3 million and $21.9 million at September 30, 2009 and $25.5
million and $26.0 million at March 31, 2009, respectively.
   25
 
 Security
Federal Corporation and Subsidiaries
 Item
2- Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued
  At
September 30, 2009 and March 31, 2009, the balance on the revolving line of
credit was $4.8 million.  The unsecured line of credit has an interest
rate equal to one month LIBOR plus 2.0% and matures on December 1,
2009.
 
 Term Auction Facility
Borrowings- During the year ended March 31, 2009, the Company began
participating in the Federal Reserve’s Term Auction Facility program, an auction
program designed to provide liquidity for qualifying depository institutions.
Under the program, institutions place a bid for an advance from their local
Federal Reserve Bank at an interest rate that is determined as the result of the
auction. Borrowings under the program typically have a maturity of 84-days or
less. At September 30, 2009, the Company had $25.0 million outstanding in
advances obtained through the TAF program, an increase of $15.0 million from
$10.0 million at March 31, 2009. The interest rate on these advances was 0.25%
at September 30, 2009 and March 31, 2009.  The balance at September
30, 2009 matures within three months. The Company had pledged as collateral for
these borrowings investment and mortgage-backed securities with amortized costs
and fair values of $43.1 million and $44.0 million, respectively, at September
30, 2009 and $17.8 million and $17.9 million, respectively, at March 31,
2009.
 
 Mandatorily Redeemable Financial
Instrument – On June 30, 2006, the Company recorded a $1.4 million
mandatorily redeemable financial instrument as a result of the acquisition of
the Collier-Jennings Companies.  The shareholder of the
Collier-Jennings Companies received cash and was issued stock in the Company to
settle the acquisition.  The Company will release the shares to the
shareholder of the Collier-Jennings Companies over a three-year
period.  The stock is mandatorily redeemable at the option of the
shareholder of the Collier-Jennings Companies in cumulative increments of 20%
per year for a five-year period at the greater of $26 per share or one and
one-half times the book value of the Company’s stock. At September 30, 2009, the
shareholder had not elected to have any of the shares redeemed.
 
 Junior Subordinated Debentures
– On September 21, 2006, Security Federal Statutory Trust (the “Trust”), a
wholly-owned subsidiary of the Company, issued and sold fixed and floating rate
capital securities of the Trust (the “Capital Securities”), which are reported
on the consolidated balance sheet as junior subordinated debentures, generating
proceeds of $5.0 million. The Trust loaned these proceeds to the Company to use
for general corporate purposes, primarily to provide capital to the Bank. The
debentures qualify as Tier 1 capital under Federal Reserve Board
guidelines.
 
 The
Capital Securities accrue and pay distributions quarterly at a rate per annum
equal to a blended rate of 4.44% at September 30, 2009.  One-half of
the Capital Securities issued in the transaction has a fixed rate of 6.88% and
the remaining half has a floating rate of three-month LIBOR plus 170 basis
points, which was 2.00% at September 30, 2009. The distribution rate payable on
the Capital Securities is cumulative and payable quarterly in
arrears.
 
 The
Company has the right, subject to events of default, to defer payments of
interest on the Capital Securities for a period not to exceed 20 consecutive
quarterly periods, provided that no extension period may extend beyond the
maturity date of December 15, 2036. The Company has no current intention to
exercise its right to defer payments of interest on the Capital
Securities.
 
 The
Capital Securities mature or are mandatorily redeemable upon maturity on
December 15, 2036, and or upon earlier optional redemption as provided in the
indenture. The Company has the right to redeem the Capital Securities in whole
or in part, on or after September 15, 2011. The Company may also redeem the
capital securities prior to such dates upon occurrence of specified conditions
and the payment of a redemption premium.
 
 Equity – Shareholders’ equity
increased $1.1 million or 1.6% to $68.2 million at September 30, 2009 from $67.1
million at March 31, 2009. Accumulated other comprehensive income, net of tax
increased $954,000 to $4.8 million at September 30, 2009.  The
Company’s net income available for common shareholders was $468,000 for the six
month period ended September 30, 2009, after preferred stock dividends of
$450,000 and accretion of preferred stock of $36,000.  The Board of
Directors of the Company declared the 74th and 75th consecutive quarterly common
stock dividends, which were $0.08 per share, in May 2009 and August 2009, and
totaled $394,000.  Book value per common share was $20.37 at
September 30, 2009 and $19.95 at March 31, 2009.
  26
 Security
Federal Corporation and Subsidiaries
 Item
2- Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued
  Non-performing Assets- The
following table sets forth detailed information concerning our non-performing
assets for the periods indicated:
 
 At
      September 30, 2009
              
              
              At
      March 31, 2009
              
              
              $
      Increase
              
              
              %
      IncreaseAmount
              
              
              Percent
      (1)
              
              
              Amount
              
              
              Percent
      (1)
              
              
              (Decrease)
              
              
              (Decrease)Loans
      90 days or more past due or non-accrual loans:Residential real
      estate
              
              $
              5,763,789
              
              
              
              1.0
              %
              
              $
              1,112,023
              
              
              
              0.2
              %
              
              $
              4,651,766
              
              
              
              418.3
              %Commercial business
              
              
              2,643,048
              
              
              
              0.4
              
              
              
              2,808,080
              
              
              
              0.5
              
              
              
              (165,032
              )
              
              
              (5.9
              )Commercial real estate
              
              
              27,636,558
              
              
              
              4.6
              
              
              
              8,044,372
              
              
              
              1.3
              
              
              
              19,592,186
              
              
              
              243.6Consumer
              
              
              885,638
              
              
              
              0.1
              
              
              
              955,683
              
              
              
              0.1
              
              
              
              (70,045
              )
              
              
              (7.3
              )Total non-performing
      loans
              
              
              36,929,033
              
              
              
              6.1
              
              
              
              12,920,158
              
              
              
              2.1
              
              
              
              24,008,875
              
              
              
              185.8Other
      non-performing assetsRepossessed
    assets
              
              
              68,032
              
              
              
              0.0
              
              
              
              61,126
              
              
              
              0.0
              
              
              
              6,906
              
              
              
              11.3Real estate
    owned
              
              
              2,579,248
              
              
              
              0.4
              
              
              
              1,924,046
              
              
              
              0.3
              
              
              
              655,202
              
              
              
              34.1Total other non-performing
      assets
              
              
              2,647,280
              
              
              
              0.4
              
              
              
              1,985,172
              
              
              
              0.3
              
              
              
              662,108
              
              
              
              33.4Total
      non-performing assets
              
              $
              39,576,313
              
              
              
              6.5
              %
              
              $
              14,905,330
              
              
              
              2.4
              %
              
              $
              24,670,983
              
              
              
              165.5
              %Total
      non-performing assets as a percentage of total assets
              
              
              4.0
              %
              
              
              
              
              
              
              1.5
              %
 
 (1)
Percent of gross loans receivable, net of deferred fees and loans in process and
loans held for sale
 
 The
Company’s non-performing assets increased $24.7 million to $39.6 million at
September 30, 2009 from $14.9 million at March 31, 2009. The increase was
primarily concentrated in non-performing commercial real estate loans which
increased $19.6 million to $27.6 million at September 30, 2009 from $8.0 million
at March 31, 2009. The balance in non-performing commercial real estate loans
consisted of 37 loans with an average loan balance of $747,000. However, 70% of
the total balance was comprised of seven loans to seven different
borrowers.
 
 The
majority of the increase in the commercial real estate category was concentrated
in acquisition and development loans, land loans, and residential construction
loans, which totaled $16.2 million and represented 58.6% of the total commercial
real estate non-performing loans at September 30, 2009. The Company placed
approximately $5.6 million in acquisition and development loans on non accrual
during the period comprised of two loans for the development of two residential
subdivisions in the Midlands area of South Carolina. In addition, the Company
placed three land loans totaling approximately $5.1 million and four single
family construction loans to two builders totaling $2.2 million on non-accrual
during the period.
 
 The
Company also experienced an increase in non-performing one- to four- family real
estate loans which increased $4.7 million to $5.8 million at September 30, 2009
from $1.1 million at March 31, 2009. At September 30, 2009, this balance was
comprised of 25 loans with an average balance of $231,000.  The
increase in non-performing one- to four- family real estate loans is a result of
the general deteriorating conditions in the local economy including rising
unemployment rates and declining housing prices.
 
 The
cumulative interest not accrued during the six months ended September 30, 2009
relating to all non-performing loans totaled $504,000. We intend to work with
our borrowers to reach acceptable payment plans while protecting our interests
in the existing collateral.  In the event an acceptable arrangement
cannot be reached, we may have to acquire these properties through foreclosure
or other means and subsequently sell, develop, or liquidate them.
 
 
  27
 Security
Federal Corporation and Subsidiaries
 Item
2- Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued
  COMPARISON OF THE RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND
2008
 
 Net Income -Net income
available to common shareholders decreased $446,000 or 56.8% to $339,000 for the
three months ended September 30, 2009 compared to $785,000 for the three months
ended September 30, 2008. The decrease in net income is primarily the result of
the Company’s decision to increase the allowance for loan losses as a result of
current economic conditions and increases in its nonperforming loans coupled
with an increase in general and administrative expenses attributable primarily
to increased FDIC insurance premiums paid.  These factors were offset
slightly by an increase in the Company’s net interest margin and an increase in
non-interest income.
 
 Net Interest Income -Net
interest income increased $1.1 million or 20.9% to $6.6 million during the three
months ended September 30, 2009, compared to $5.5 million for the same period in
2008, as a result of a decrease in interest expense offset in part by a decrease
in interest income.  The Company’s net interest margin increased 29
basis points to 2.89% for the quarter ended September 30, 2009 from 2.60% for
the same quarter in 2008. Average interest-earning assets increased $72.0
million to $913.5 million at September 30, 2009 while average interest-bearing
liabilities increased $52.9 million to $853.4 million at September 30,
2009.  The interest rate spread increased 30 basis points to 2.73%
during the three months ended September 30, 2009 compared to 2.43% for the same
period in 2008.
 
 Interest Income -Total
interest income decreased $572,000 or 4.6% to $11.8 million during the three
months ended September 30, 2009 from $12.3 million for the same period in
2008.  Total interest income on loans decreased $445,000 or 5.0% to
$8.5 million during the three months ended September 30, 2009 as compared to the
same period one year prior as a result of the yield in the loan portfolio
decreasing 80 basis points. This was offset by a $46.8 million increase in the
average loan portfolio balance during the same period. Interest income from
mortgage-backed securities decreased $91,000 or 3.5% to $2.5 million for the
quarter ended September 30, 2009 from $2.6 million for the same quarter in 2009.
This was the result of a decrease in the portfolio yield of 59 basis points
offset partially by an increase in the average balance of $21.2 million.
Interest income from investment securities decreased $32,000 or 4.1% as a result
of a 45 basis point decrease in the yield offset by an increase in the average
balance of the investment securities portfolio of $4.3 million.
 
 The
following table compares detailed average balances, associated yields, and the
resulting changes in interest income for the three months ended September 30,
2009 and 2008:
 
 Three
      Months Ended September 30,2009
              
              
              2008Average
                Balance
              
              
              Yield
              
              
              Average
                Balance
              
              
              Yield
              
              
              Decrease
      In
                Interest
      And
                Dividend
      Income
                From
      2008Loans
      Receivable, Net
              
              $
              603,256,400
              
              
              
              5.63
              %
              
              $
              556,454,581
              
              
              
              6.43
              %
              
              $
              (445,225
              )Mortgage-Backed
      Securities
              
              
              236,591,334
              
              
              
              4.28
              
              
              
              215,390,697
              
              
              
              4.87
              
              
              
              (91,108
              )Investment
      Securities
              
              
              72,513,078
              
              
              
              4.11
              
              
              
              68,201,340
              
              
              
              4.56
              
              
              
              (31,918
              )Overnight
      Time
              
              
              1,148,770
              
              
              
              0.04
              
              
              
              1,443,202
              
              
              
              1.08
              
              
              
              (3,783
              )Total
      Interest-Earning Assets
              
              $
              913,509,582
              
              
              
              5.15
              %
              
              $
              841,489,820
              
              
              
              5.87
              %
              
              $
              (572,034
              )
 
 Interest Expense - Total
interest expense decreased $1.7 million or 24.9% to $5.2 million during the
three months ended September 30, 2009 compared to $6.9 million for the same
period one-year earlier.  The decrease in total interest expense is
attributable to decreases in interest rates paid offset slightly by an increase
in the average balances of interest-bearing liabilities.  Interest
expense on deposits decreased $1.1 million or 24.1% during the period. The
decrease was attributable to a 108 basis point decrease in the cost of deposits
offset by an increase in average interest-bearing deposits of $69.7 million when
compared to the average balance in the three months ended September 30,
2008.  The decrease in the cost of deposits primarily resulted from
maturing certificate accounts repricing at lower interest rates. Interest
expense on advances and other borrowings decreased $598,000 or 26.7% as the cost
of debt outstanding decreased 79 basis points during the 2009 quarter ended
September 30, 2009 compared to the same quarter in 2008.  Average
total borrowings outstanding decreased $16.8 million during the same period. The
Company replaced maturing FHLB advances with lower cost TAF advances. Interest
expense on junior subordinated debentures was $60,000 for the three months ended
September 30, 2009 compared to $75,000 for the same period one year
ago.  The average balance of junior subordinated debentures remained
the same during both periods.
 
  28
 Security
Federal Corporation and Subsidiaries
 Item
2- Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued
  The
following table compares detailed average balances, cost of funds, and the
resulting changes in interest expense for the three months ended September 30,
2009 and 2008:
 
 Three
      Months Ended September 30,2009
              
              
              2008Average
                Balance
              
              
              Yield
              
              
              Average
                Balance
              
              
              Yield
              
              
              Decrease
      In Interest Expense From 2008Now
      And Money Market
                Accounts
              
              $
              223,306,302
              
              
              
              1.14
              %
              
              $
              199,983,451
              
              
              
              1.93
              %
              
              $
              (328,134
              )Statement
      Savings Accounts
              
              
              17,364,194
              
              
              
              0.45
              
              
              
              16,248,617
              
              
              
              0.74
              
              
              
              (10,725
              )Certificates
      Accounts
              
              
              381,334,642
              
              
              
              2.94
              
              
              
              336,056,478
              
              
              
              4.25
              
              
              
              (762,928
              )FHLB
      Advances, TAF Advances
                And
      Other Borrowed Money
              
              
              226,204,895
              
              
              
              2.90
              
              
              
              242,974,148
              
              
              
              3.69
              
              
              
              (597,673
              )Junior
      Subordinated Debentures
              
              
              5,155,000
              
              
              
              4.68
              
              
              
              5,155,000
              
              
              
              5.81
              
              
              
              (14,569
              )Total
      Interest-Bearing Liabilities
              
              $
              853,365,033
              
              
              
              2.42
              %
              
              $
              800,417,694
              
              
              
              3.44
              %
              
              $
              (1,714,029
              )
 
 Provision for Loan Losses -
The amount of the provision is determined by management’s on-going monthly
analysis of the loan portfolio and the adequacy of the allowance for loan
losses. The Company has policies and procedures in place for evaluating and
monitoring the overall credit quality of the loan portfolio and for timely
identification of potential problem loans including internal and external loan
reviews. The adequacy of the allowance for loan losses is reviewed monthly by
the Asset Classification Committee and quarterly by the Board of
Directors.
 
 Management’s
monthly review of the adequacy of the allowance includes three main components.
The first component is an analysis of loss potential in various homogenous
segments of the portfolio based on historical trends and the risk inherent in
each category. Previously, management applied a five year historical loss ratio
to each loan category to estimate the inherent loss in these pooled loans.
However as a result of the decline in economic conditions and the unprecedented
increases in delinquencies and charge offs experienced by the industry in recent
periods, the Company no longer considers five year historical losses relevant
indicators of future losses. Management began applying 18 month historical loss
ratios to each loan category at the end of the previous fiscal year to more
accurately predict losses in the near future.
 
 The
second component of management’s monthly analysis is the specific review and
evaluation of significant problem credits identified through the Company’s
internal monitoring system. These loans are evaluated for impairment and
recorded in accordance with SFAS 114. For each loan deemed impaired as permitted
under SFAS 114, management calculates a specific reserve for the amount in which
the recorded investment in the loan exceeds the fair value. This estimate is
based on a thorough analysis of the most probable source of repayment, which is
typically liquidation of the collateral.
 
 The third
component is an analysis of changes in qualitative factors that may affect the
portfolio, including but not limited to: relevant economic trends that could
impact borrowers’ ability to repay, industry trends, changes in the volume and
composition of the portfolio, credit concentrations, or lending policies and the
experience and ability of the staff and Board of Directors. Management also
reviews and incorporates certain ratios such as percentage of classified
loans, average historical loan losses by loan category, delinquency percentages,
and the assignment of percentage targets of reserves in each loan category when
evaluating the allowance.
 
 Once the
analysis is completed, the three components are combined and compared to the
allowance amount. Based on this, charges are made to the provision as
needed.
  29
 Security
Federal Corporation and Subsidiaries
 Item
2- Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued
  The
Bank’s provision for loan losses was $1.6 million and $275,000 during the three
months ended September 30, 2009 and 2008, respectively. The increase reflects
the Company’s concern for deteriorating economic conditions in the local economy
coupled with an increase in non-performing assets within its loan portfolio. The
following table details selected activity associated with the allowance for loan
losses for the three months ended September 30, 2009 and 2008:
 
 September
      30, 2009
              
              September
      30, 2008Beginning
      Balance
              $
              11,420,326
              $
              8,246,496Provision
              
              1,600,000
              
              275,000Charge-offs
              
              (308,395)
              
              (261,404)Recoveries
              
              11,990
              
              3,243Ending
      Balance
              $
              12,723,921
              $
              8,263,335Allowance
      For Loan Losses As A Percentage Of Gross Loans Receivable,
                Held
      For Investment At The End Of The Period
              
              2.10%
              
              1.41%Allowance
      For Loan Losses As A Percentage Of Impaired Loans At The
                End
      Of The Period
              
              34.13%
              
              84.41%Impaired
      Loans
              $
              37,284,300
              $
              9,790,084Non-accrual Loans And 90 Days Or More Past Due Loans As
      A
                Percentage Of Loans Receivable, Held For Investment At The
                End Of The Period
              
              6.09%
              
              1.55%Gross
      Loans Receivable,  Held For Investment
              $
              606,547,174
              $
              585,826,823Total
      Loans Receivable, Net
              $
              599,657,360
              $
              579,132,177
  Non-performing
assets, which consisted of 100 non-accrual loans and 20 repossessed properties,
increased $24.7 million to $39.6 million at September 30, 2009 from $14.9
million at March 31, 2009. Despite this increase, the Bank maintained relatively
low and stable trends related to net charge-offs. Annualized net charge-offs as
a percent of gross loans were 0.20% for the three months ended September 30,
2009 compared to 0.12% for the year ended March 31, 2009 and 0.18% for the three
months ended September 30, 2008. Management of the Bank continues to be
concerned about current market conditions and closely monitors the loan
portfolio on an ongoing basis to proactively identify any potential issues. The
Company established specific reserves totaling $4.1 million at September 30,
2009 related to $11.5 million of the impaired loans. These reserves will be
subsequently charged off when the properties are taken into other repossessed
assets or as circumstances warrant. The Company had no specific reserves for the
remaining $25.7 million in impaired loans.
 
 Non-accrual
loans and loans 90 days or more past due increased $24.0 million to $36.9
million at September 30, 2009 when compared to $12.9 million at March 31, 2009.
At September 30, 2009, the Company did not have any loans that were 90 days or
more past due and still accruing interest.
 
 Non-Interest Income -Non-interest income increased $361,000 or 34.0% to $1.4 million for the
three months ended September 30, 2009 from $1.1 million for the same period one
year ago primarily as a result of an increase in gain on sale of investments and
loans.  The following table provides a detailed analysis of the
changes in the components of non-interest income:
 
 Three
      Months Ended September 30,
              
              Increase
      (Decrease)2009
              
              
              2008
              
              
              Amounts
              
              
              PercentGain
      On Sale Of Investments
              $
              323,234
              
              $
              25,035
              
              $
              298,199
              
              
              1,191.1%Gain
      On Sale Of Loans
              
              162,858
              
              
              109,035
              
              
              53,823
              
              
              49.4Service
      Fees On Deposit Accounts
              
              312,300
              
              
              276,240
              
              
              36,060
              
              
              13.1Income
      From Cash Value Of
                Life
      Insurance
              
              90,000
              
              
              92,746
              
              
              (2,746)
              
              
              (3.0)Commissions
      From Insurance Agency
              
              108,076
              
              
              164,138
              
              
              (56,062)
              
              
              (34.2)Other
      Agency Income
              
              119,044
              
              
              76,081
              
              
              42,963
              
              
              56.5Trust
      Income
              
              105,000
              
              
              105,000
              
              
              -
              
              
              -Other
              
              200,635
              
              
              212,328
              
              
              (11,693)
              
              
              (5.5)Total
      Non-Interest Income
              $
              1,421,147
              
              $
              1,060,603
              
              $
              360,544
              
              
              34.0%
  Gain on
sale of investments was $323,000 during the quarter ended September 30, 2009
compared to $25,000 in the same period one year earlier. The gain resulted from
the sale of 19 investments during the period. Based on an analysis of the
portfolio, the Company was able to maximize return by selling securities with
short average lives as a result of call features or securities with adjustable
rates scheduled to reprice down in the near future. The Company sold four
securities during the same quarter of the previous year.
  30
  Security
Federal Corporation and Subsidiaries
 Item
2- Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued
   Gain on
sale of loans increased $54,000 to $163,000 during the three months ended
September 30, 2009 when compared to the same period one year ago as a result of
an increase in the volume of fixed rate residential mortgage loans originated
and sold. The increase in volume is primarily attributable to an increase in
refinancing activity as a result of the current low interest rate environment.
Service fees on deposit accounts increased $36,000 to $312,000 for the quarter
ended September 30, 2009 compared to the same quarter in 2008. Income from cash
value of life insurance was $90,000 for the three months ended September 30,
2009 compared to $93,000 during the same period one year ago.
 
 Commissions
from insurance and other agency income decreased $13,000 to $227,000 during the
three months ended September 30, 2009 when compared to the same period one year
ago. The Company sold the South Augusta office of its insurance subsidiary,
Security Federal Insurance during the first quarter of the year. This resulted
in the loss of premium income associated with this location. Trust income was
$105,000 during the three months ended September 30, 2009 and 2008. Other
miscellaneous income including credit life insurance commissions, safe deposit
rental income, annuity and stock brokerage commissions, trust fees, and other
miscellaneous fees, decreased $12,000 to $201,000 during the three months ended
September 30, 2009 compared to the same period one year ago.
 
 General and Administrative
Expenses – General and administrative expenses increased $337,000 or 6.6%
to $5.4 million for the three months ended September 30, 2009 from $5.1 million
for the same period one year ago.  The largest increase was in FDIC
insurance premiums paid which increased $159,000 to $351,000 for the quarter
ended September 30, 2009 when compared to the same quarter in the previous year.
The following table provides a detailed analysis of the changes in the
components of general and administrative expenses:
 
 Three
      Months Ended September 30,
              
              Increase
      (Decrease)2009
              
              
              2008
              
              
              Amounts
              
              
              PercentSalaries
      And Employee Benefits
              $
              2,876,830
              
              $
              2,831,272
              
              $
              45,558
              
              
              1.6%Occupancy
              
              499,819
              
              
              493,366
              
              
              6,453
              
              
              1.3Advertising
              
              81,375
              
              
              106,856
              
              
              (25,481)
              
              
              (23.8)Depreciation
      And Maintenance
                Of
      Equipment
              
              440,369
              
              
              414,910
              
              
              25,459
              
              
              6.1FDIC
      Insurance Premiums
              
              351,000
              
              
              191,535
              
              
              159,465
              
              
              83.3Amortization
      of Intangibles
              
              22,500
              
              
              22,500
              
              
              -
              
              
              -Mandatorily
      Redeemable Financial
                Instrument
      Valuation Expense
              
              122,000
              
              
              60,000
              
              
              62,000
              
              
              103.3Loss
      On Sale Of Repossessed Assets
                Acquired
      In Settlement Of Loans
              
              37,921
              
              
              -
              
              
              37,921
              
              
              100.0Other
              
              980,265
              
              
              954,950
              
              
              25,315
              
              
              2.7Total
      General And Administrative
                Expenses
              $
              5,412,079
              
              $
              5,075,389
              
              $
              336,690
              
              
              6.6%
  Salary
and employee benefits increased $46,000 to $2.9 million for the three months
ended September 30, 2009 from $2.8 million for the same period one year ago.
This increase was primarily the result of standard annual cost of living
increases combined with an increase in the number of employees employed by the
Company. At September 30, 2009, the Company had 233 full time equivalent
employees compared to 230 full time equivalents at September 30,
2008.
 
 Occupancy
increased 1.3% to $500,000 for the three months ended September 30, 2009 from
$493,000 for the same period one year ago. Depreciation and maintenance expense
increased $25,000 or 6.1% to $440,000 for the three months ended September 30,
2009 from $415,000 for the same period one year ago. Advertising expense
decreased $25,000 to $81,000 for the three months ended September 30, 2009 from
$107,000 for the same period one year ago. FDIC insurance premiums increased
$159,000 or 83.3% to $351,000 for the three month period ended September 30,
2009 when compared to the same period a year ago.
 
 Mandatorily
redeemable financial instrument valuation expense was $122,000 for the three
months ended September 30, 2009 compared to $60,000 for the same period one year
earlier. Based on its terms, the mandatorily redeemable financial instrument is
redeemable at the greater of $26 per share or one and a half times the book
value of the Company. The Company recorded a valuation expense to properly
reflect the fair value of the instrument at September 30, 2009 based on the book
value.
 
 Other
general and administrative expenses increased $25,000 or 2.7% to $980,000 for
the three months ended September 30, 2009 when compared to the same period one
year ago.
  31
 Security
Federal Corporation and Subsidiaries
 Item
2- Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued
  Provision For Income Taxes –Provision for income taxes increased $44,000 or 11.2% to $432,000 for the
three months ended September 30, 2009 from $388,000 for the same period one year
ago.  Income before income taxes was $1.0 million for the three months
ended September 30, 2009 compared to $1.2 million for the three months ended
September 30, 2008.  The Company’s combined federal and state
effective income tax rate for the current quarter was 42.6% compared to 33.1%
for the same quarter one year ago. Expense associated with valuation of the
mandatorily redeemable financial instrument is not tax deductible.
 
 COMPARISON OF THE RESULTS OF
OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2009 AND
2008
 
 Net Income -Net income
available to common shareholders decreased $1.1 million or 70.5% to $468,000 for
the six months ended September 30, 2009 compared to $1.6 million for the six
months ended September 30, 2008.  The decrease in net income was
primarily the result of the Company’s decision to increase the allowance for
loan losses in conjunction with the effects of two non-operating items incurred
during the period: an increase in FDIC insurance premiums accrued as a result of
a one-time special assessment charged to all deposit institutions and a loss on
the sale of the South Augusta office of Security Federal Insurance, a location
that was not within the Company’s branch footprint.  These factors
were offset slightly by an increase in the Company’s net interest margin and an
increase in non-interest income.
 
 Net Interest Income -Despite
the negative impact of rising credit costs, the Company’s core performance
improved during the six months ended September 30, 2009. The net interest margin
increased 22 basis points to 2.80% for the six months ended September 30, 2009
compared to 2.58% for the comparable period in the previous year.
  Net
interest income increased $2.3 million or 22.2% to $12.9 million during the six
months ended September 30, 2009, compared to $10.6 million during the same
period in 2008. The increase is a result of a decrease in interest expense
offset in part by a decrease in interest income.  Average
interest-earning assets increased $104.5 million to $924.2 million while average
interest-bearing liabilities increased $85.7 million to $863.7
million.  The interest rate spread was 2.64% and 2.41% during the six
months ended September 30, 2009 and 2008, respectively.
  Interest Income -Total
interest income decreased $339,000 or 1.4% to $23.8 million during the six
months ended September 30, 2009 from $24.2 million for the same period in
2008.  Total interest income on loans decreased $287,000 or 1.6% to
$17.2 million during the six months ended September 30, 2009 as a result of the
yield in the loan portfolio decreasing 79 basis points as a result of lower
market interest rates generally,offset in part by the average loan portfolio
balance increasing $66.3 million.  Interest income from
mortgage-backed securities increased $361,000 or 7.2% to $5.4 million as a
result of an increase in the average balance of the portfolio of $37.9 million
offset by a 45 basis point decrease in the yield in the mortgage-backed
portfolio.   Interest income from investment securities decreased
$404,000 or 24.2% to $1.3 million as a result of a 121 basis point decrease in
the yield.  The average balance of the investment securities portfolio
increased $616,000.  Interest income on overnight time decreased
$9,000 as a result of a decrease in the yield and average balance of overnight
time.
 
 The
following table compares detailed average balances, associated yields, and the
resulting changes in interest income for the six months ended September 30, 2009
and 2008:
 
 Six
      Months Ended September 30,2009
              
              
              2008Average
                Balance
              
              
              Yield
              
              
              Average
                Balance
              
              
              Yield
              
              
              Increase
      (Decrease)
                In
      Interest And
                Dividend
      Income
                From
      2008Loans
      Receivable, Net
              
              $
              608,173,060
              
              
              
              5.66
              %
              
              $
              541,857,885
              
              
              
              6.45
              %
              
              $
              (286,823
              )Mortgage-Backed
      Securities
              
              
              245,642,366
              
              
              
              4.38
              
              
              
              207,702,241
              
              
              
              4.83
              
              
              
              360,779Investments
              
              
              69,495,259
              
              
              
              3.63
              
              
              
              68,879,433
              
              
              
              4.84
              
              
              
              (403,822
              )Overnight
      Time
              
              
              879,746
              
              
              
              0.08
              
              
              
              1,216,422
              
              
              
              1.49
              
              
              
              (8,747
              )Total
      Interest-Earning Assets
              
              $
              924,190,431
              
              
              
              5.16
              %
              
              $
              819,655,981
              
              
              
              5.90
              %
              
              $
              (338,613
              )
 
  32
 Security
Federal Corporation and Subsidiaries
 Item
2- Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued
  Interest Expense - Total
interest expense decreased $2.7 million or 19.8% to $10.9 million during the six
months ended September 30, 2009 compared to $13.6 million for the same period
one year earlier.  The decrease in total interest expense is
attributable to the decreases in interest rates paid, reflecting a lower market
interest rate environment, despite an increase in the amount of interest-bearing
deposits, and borrowings.  Interest expense on deposits decreased $1.7
million or 19.0% during the period as average interest bearing deposits grew
$73.7 million compared to the average balance in the six months ended September
30, 2008, and the cost of deposits decreased 96 basis points. The decrease in
the cost of deposits was primarily a result of maturing certificates that
repriced at lower rates during the period. Interest expense on advances and
other borrowings decreased $917,000 or 21.6% as the cost of debt outstanding
decreased 97 basis points during the six months ended September 30, 2009
compared to the same period in 2008 while average borrowings outstanding
increased approximately $12.1 million.  Interest expense on junior
subordinated debentures was $124,000 for the six months ended September 30, 2009
compared to $149,000 for the same period one year ago.
 
 The
following table compares detailed average balances, cost of funds, and the
resulting changes in interest expense for the six months ended September 30,
2009 and 2008:
 
 Six
      Months Ended September 30,2009
              
              
              2008Average
                Balance
              
              
              Yield
              
              
              Average
                Balance
              
              
              Yield
              
              
              Decrease
      In
                Interest
      Expense
                From
      2008Now
      And Money Market
                Accounts
              
              $
              219,896,374
              
              
              
              1.20
              %
              
              $
              203,195,729
              
              
              
              1.86
              %
              
              $
              (567,629
              )Statement
      Savings Accounts
              
              
              17,342,955
              
              
              
              0.45
              
              
              
              16,331,323
              
              
              
              0.78
              
              
              
              (24,110
              )Certificates
      Accounts
              
              
              385,256,776
              
              
              
              3.16
              
              
              
              329,316,486
              
              
              
              4.39
              
              
              
              (1,151,149
              )FHLB
      Advances, TAF Advances
                And
      Other Borrowed Money
              
              
              236,022,927
              
              
              
              2.83
              
              
              
              223,931,674
              
              
              
              3.80
              
              
              
              (916,823
              )Junior
      Subordinated Debentures
              
              
              5,155,000
              
              
              
              4.81
              
              
              
              5,155,000
              
              
              
              5.78
              
              
              
              (24,928
              )Total
      Interest-Bearing Liabilities
              
              $
              863,674,032
              
              
              
              2.52
              %
              
              $
              777,930,212
              
              
              
              3.49
              %
              
              $
              (2,684,639
              )
 
 Provision for Loan Losses -Additions to the allowance for loan losses were $3.0 million for the six
months ended September 30, 2009 compared to $500,000 for the same period in the
prior year. This increase reflects the Company’s concern for deteriorating
economic conditions in the local economy coupled with an increase in
non-performing assets within its loan portfolio. The following table details
selected activity associated with the allowance for loan losses for the six
months ended September 30, 2009 and 2008:
 
 September
      30, 2009
              
              September
      30, 2008Beginning
      Balance
              $
              10,181,599
              $
              8,066,762Provision
              
              3,000,000
              
              500,000Charge-offs
              
              (480,174)
              
              (311,590)Recoveries
              
              22,496
              
              8,163Ending
      Balance
              $
              12,723,921
              $
              8,263,335
 
 Annualized
net charge-offs as a percent of gross loans were 0.15% for the six months ended
September 30, 2009 compared to 0.12% for the year ended March 31, 2009 and 0.10%
for the six months ended September 30, 2008. Management of the Bank continues to
be concerned about current market conditions and closely monitors the loan
portfolio on an ongoing basis to proactively identify any potential issues. The
average balance in impaired loans was $33.1 million for the six months ended
September 30, 2009 compared to $5.9 million for the same period in the prior
year.
  33
 Security
Federal Corporation and Subsidiaries
 Item
2- Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued
  Non-Interest Income -Non-interest income increased $666,000 or 30.5% to $2.8 million for the
six months ended September 30, 2009 from $2.2 million for the same period one
year ago.  The following table provides a detailed analysis of the
changes in the components of non-interest income:
 
 Six
      Months Ended September 30,
              
              Increase
      (Decrease)2009
              
              
              2008
              
              
              Amounts
              
              
              PercentGain
      On Sale Of Investments
              $
              374,125
              
              $
              126,440
              
              $
              247,685
              
              
              195.9%Gain
      On Sale Of Loans
              
              596,465
              
              
              227,718
              
              
              368,747
              
              
              161.9Service
      Fees On Deposit Accounts
              
              588,682
              
              
              557,393
              
              
              31,289
              
              
              5.6Income
      From Cash Value Of
                Life
      Insurance
              
              180,000
              
              
              178,492
              
              
              1,508
              
              
              0.8Commissions
      From Insurance Agency
              
              247,330
              
              
              333,130
              
              
              (85,800)
              
              
              (25.8)Other
      Agency Income
              
              241,511
              
              
              123,018
              
              
              118,493
              
              
              96.3Trust
      Income
              
              210,000
              
              
              210,000
              
              
              -
              
              
              -Other
              
              409,221
              
              
              425,619
              
              
              (16,398)
              
              
              (3.9)Total
      Non-Interest Income
              $
              2,847,334
              
              $
              2,181,810
              
              $
              665,524
              
              
              30.5%
 
 Gain on
sale of investments was $374,000 for the six months ended September 30, 2009
compared to $126,000 in the comparable period in the prior year as a result of
the sale of 24 securities. Based on an analysis of the portfolio, the Company
was able to maximize return by selling securities with short average lives as a
result of call features or securities with an adjustable rate scheduled to
reprice down in the near future. The Company sold 11 securities in the same
period in the prior year. Gain on sale of loans increased $369,000 to $596,000
during the six months ended September 30, 2009 when compared to the same period
one year ago. This increase is attributable to the increase in the origination
and sale of fixed rate residential mortgage loans that is the result of the
continued low interest rate environment. Service fees on deposit accounts
increased $31,000 to $589,000 for the six months ended September 30, 2009,
compared to the same period in 2008. Commissions from insurance agency and other
agency income increased $33,000 during the six months ended September 30, 2009
when compared to the same period one year ago. This increase is a result of the
growth and expansion of the Bank’s insurance subsidiary specifically the premium
finance business.  Trust income remained constant at $210,000 during
the six months ended September 30, 2009 and 2008.
 
 Other
miscellaneous income including credit life insurance commissions, safe deposit
rental income, annuity and stock brokerage commissions, trust fees, and other
miscellaneous fees, decreased $16,000 to $409,000 during the six months ended
September 30, 2009 compared to the same period one year ago.
 
 General and Administrative
Expenses – General and administrative expenses increased $1.3 million or
12.9% to $11.2 million for the six months ended September 30, 2009 from $9.9
million for the same period one year ago.  The following table
provides a detailed analysis of the changes in the components of general and
administrative expenses:
 
 Six
      Months Ended September 30,
              
              Increase
      (Decrease)2009
              
              
              2008
              
              
              Amounts
              
              
              PercentSalaries
      And Employee Benefits
              $
              5,821,265
              
              $
              5,615,507
              
              $
              205,758
              
              
              3.7%Occupancy
              
              993,164
              
              
              990,686
              
              
              2,478
              
              
              0.3Advertising
              
              215,929
              
              
              247,677
              
              
              (31,748)
              
              
              (12.8)Depreciation
      And Maintenance
                Of
      Equipment
              
              882,396
              
              
              841,834
              
              
              40,562
              
              
              4.8FDIC
      Insurance Premiums
              
              1,107,000
              
              
              347,345
              
              
              759,655
              
              
              218.7Amortization
      of Intangibles
              
              45,000
              
              
              45,000
              
              
              -
              
              
              -Mandatorily
      Redeemable Financial
                Instrument
      Valuation Expense
              
              44,000
              
              
              60,000
              
              
              (16,000)
              
              
              (26.7)Loss
      (Gain)On Sale Of Repossessed
                Assets
      Acquired In Settlement Of
                Loans
              
              61,104
              
              
              (13,694)
              
              
              74,798
              
              
              546.2Other
              
              2,002,135
              
              
              1,763,024
              
              
              239,111
              
              
              13.6Total
      General And Administrative
                Expenses
              $
              11,171,993
              
              $
              9,897,379
              
              $
              1,274,614
              
              
              12.9%
 
  34
 Security
Federal Corporation and Subsidiaries
 Item
2- Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued
  Salary
and employee benefits increased $206,000 to $5.8 million for the six months
ended September 30, 2009 from $5.6 million for the same period one year
ago.  Occupancy increased $2,000 or 0.3% to $993,000 for the six month
period ended September 30, 2009 when compared to the same period one year ago.
This increase was primarily the result of standard annual cost of living
increases combined with an increase in the number of employees employed by the
Company. At September 30, 2009, the Company had 233 full time equivalent
employees compared to 230 full time equivalents at September 30,
2008.
 
 Depreciation
and maintenance expense increased $41,000 or 4.8% to $882,000 for the six months
ended September 30, 2009 from $842,000 for the same period one year ago.
Advertising expense decreased $32,000 to $216,000 for the six months ended
September 30, 2009 from $248,000 for the same period one year
ago.  The decrease can be attributed to the Company’s effort to reduce
expenses during the period.
 
 FDIC
insurance premiums increased $760,000 or 218.7% to $1.1 million for the six
month period ended September 30, 2009 when compared to the same period a year
ago. The Company recorded $425,000 in additional FDIC insurance premiums as a
result of a one-time special assessment mandated by the FDIC to help replenish
the government’s deposit insurance fund. This amount was in addition to the
regular quarterly assessment amount. The special assessment applied to all
federally insured depository institutions and is calculated based on 5% of an
assessment base determined relative to asset size.
 
 Mandatorily
redeemable financial instrument valuation expense was $44,000 for the six months
ended September 30, 2009 compared to $60,000 for the same period one year
earlier. Based on its terms, the mandatorily redeemable financial instrument is
redeemable at the greater of $26 per share or one and a half times the book
value of the Company. The Company recorded a valuation expense to properly
reflect the fair value of the instrument at September 30, 2009 based on the book
value.
 
 Provision For Income Taxes –Provision for income taxes decreased $131,000 or 16.6% to $655,000 for
the six months ended September 30, 2009 from $785,000 for the same period one
year ago.  Income before income taxes was $1.6 million for the six
months ended September 30, 2009 compared to $2.4 million for the six months
ended September 30, 2008.  The Company’s combined federal and state
effective income tax rate for the six month ended September 30, 2009 was 40.7%
compared to 33.1% for the same period one
 
 Liquidity
Commitments, Capital Resources, and Impact of Inflation and Changing
Prices
 
 Liquidity –The Company
actively analyzes and manages the Bank’s liquidity with the objective of
maintaining an adequate level of liquidity and to ensure the availability of
sufficient cash flows to support loan growth, fund deposit withdrawals, fund
operations, and satisfy other financial commitments.  See the
“Consolidated Statements of Cash Flows” contained in Item 1 – Financial
Statements, herein.
 
 The
primary sources of funds are customer deposits, loan repayments, loan sales,
maturing investment securities, and advances from the FHLB and from the Federal
Reserve’s TAF program.  The sources of funds, together with retained
earnings and equity, are used to make loans, acquire investment securities and
other assets, and fund continuing operations.  While maturities and
the scheduled amortization of loans are a predictable source of funds, deposit
flows and mortgage repayments are greatly influenced by the level of interest
rates, economic conditions, and competition.  Management believes that
the Company’s current liquidity position and its forecasted operating results
are sufficient to fund all of its existing commitments.
 
 During
the six months ended September 30, 2009, loan repayments exceeded loan
disbursements resulting in an $11.4 million or 1.9% decrease in total net loans
receivable.  During the six months ended September 30, 2009, deposits
increased $701,000, TAF advances increased $15.0 million, and FHLB advances
decreased $19.6 million. The Bank had $85.8 million in additional borrowing
capacity at the FHLB at the end of the period.  At September 30, 2009,
the Bank had $325.7 million of certificates of deposit maturing within one
year.  Based on previous experience, the Bank anticipates a
significant portion of these certificates will be renewed.
 
 The Bank
is subject to various regulatory capital requirements that are administered by
federal banking agencies.  Failure to meet minimum capital
requirements can initiate certain mandatory and discretionary actions by
regulators that could have a material adverse effect on the
Company.  Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank’s assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices.  The Bank’s capital amounts and classifications are also
subject to qualitative judgments by regulators with regard to components, risk
weightings, and other factors.
 
 
 35
 
 Security
Federal Corporation and Subsidiaries
 Item
2- Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued
   As of
September 30, 2009 and March 31, 2009, the Bank was categorized as “well
capitalized” under the regulatory framework for prompt corrective
action.  To be categorized as well capitalized, the Bank had to
maintain total risk-based capital, Tier 1 risk-based capital, and Tier 1
leverage ratios at 10%, 6%, and 5%, respectively.  There are no
conditions or events that management believes have changed the Bank’s
classification.
 
 Off-Balance Sheet Commitments
– The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers.  These financial instruments generally include commitments
to originate mortgage, commercial and consumer loans, and involve to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet.  The Company’s maximum exposure to
credit loss in the event of nonperformance by the borrower is represented by the
contractual amount of those instruments.  Since some commitments may
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.  The Company uses the same credit
policies in making commitments as it does for on-balance sheet
instruments.
 The
following table sets forth the length of time until maturity for unused
commitments to extend credit and standby letters of credit at September 30,
2009:
 
 (Dollars
      in thousands)
              Within
                One
                Month
              
              After
      One
                Through
                Three
                Months
              
              After
                Three
                Through
                Twelve
                Months
              
              Within
                One
      Year
              
              Greater
                Than
                One
                Year
              
              TotalUnused
      lines of credit
              $3,225
              
              $818
              
              $29,298
              
              $33,341
              
              $33,744
              
              $67,085Standby
      letters of credit
              278
              
              262
              
              165
              
              705
              
              107
              
              812Total
              $3,503
              
              $1,080
              
              $29,463
              
              $34,046
              
              $33,851
              
              $67,897
  36
 Security
Federal Corporation and Subsidiaries
  Item
3. Quantitative and Qualitative Disclosures about Market Risk
 
 Market
risk is the risk of loss from adverse changes in market prices and
rates.  The Company’s market risk arises principally from interest
rate risk inherent in its lending, investment, deposit and borrowing
activities.  Management actively monitors and manages its interest
rate risk exposure.  Although the Company manages other risks such as
credit quality and liquidity risk in the normal course of business, management
considers interest rate risk to be its most significant market risk that could
potentially have the largest material effect on the Company’s financial
condition and results of operations.  Other types of market risks such
as foreign currency exchange rate risk and commodity price do not arise in the
normal course of the Company’s business activities.
 
 The
Company’sprofitability is
affected by fluctuations in the market interest rate.  Management’s
goal is to maintain a reasonable balance between exposure to interest rate
fluctuations and earnings.  A sudden and substantial increase or
decrease in interest rates may adversely impact the Company’s earnings to the
extent that the interest rates on interest-earning assets and interest-bearing
liabilities do not change at the same rate, to the same extent or on the same
basis.  The Company monitors the impact of changes in interest rates
on its net interest income using a test that measures the impact on net interest
income and net portfolio value of an immediate change in interest rates in 100
basis point increments and by measuring the Bank’s interest sensitivity gap
(“Gap”).  Net portfolio value is defined as the net present value of
assets, liabilities, and off-balance sheet contracts.  Gap is the
amount of interest sensitive assets repricing or maturing over the next twelve
months compared to the amount of interest sensitive liabilities maturing or
repricing in the same time period.  Recent net portfolio value reports
furnished by the OTS indicate that the Bank’s interest rate risk sensitivity has
improved slightly over the past year.  The Bank has rated favorably
compared to thrift peers concerning interest rate sensitivity. However, these
reports are based on estimates and may vary from actual
circumstances.
 
 Item
4. Controls and Procedures
 
 a)
Evaluation of Disclosure Controls and Procedures:  An evaluation of
the Company’s disclosure controls and procedures (as defined in Rule 13a - 15(e)
of the Securities Exchange Act of 1934 (“Act”)) was carried out under the
supervision and with the participation of the Company’s Chief Executive Officer,
Chief Financial Officer and several other members of the Company’s senior
management as of the end of the period covered by this quarterly
report.  The Company’s Chief Executive Officer and Chief Financial
Officer concluded that at September 30, 2009 the Company’s disclosure controls
and procedures were effective in ensuring that the information required to be
disclosed by the Company in the reports it files or submits under the Act is (i)
accumulated and communicated to the Company’s management (including the Chief
Executive Officer and Chief Financial Officer) in a timely manner, and (ii)
recorded, processed, summarized and reported within the time period specified in
the Securities and Exchange Commission’s rules and forms.
 
 The
Company does not expect that its disclosure controls and procedures will prevent
all error and or fraud. A control procedure, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control procedure are met. Because of the inherent limitations
in all control procedures, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur
because of a simple error or mistake. Additionally, controls can be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the control. The design of any control procedure also
is based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time, controls may
become inadequate because of changes in conditions, or the degree of compliance
with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control procedure, misstatements due to error or
fraud may occur and not be detected.
  (b)
Changes in Internal Controls: In the quarter ended September 30, 2009, the
Company did not make any significant changes in, nor take any corrective actions
regarding, its internal controls or other factors that could significantly
affect these controls.
  Part
II: Other Information
  Item
1     Legal
Proceedings
 The
Company is not engaged in any legal proceedings of a material nature at the
present time.  From time to time, the Company is a party to legal
proceedings in the ordinary course of business wherein it enforces its security
interest in mortgage loans it has made.
  37
 Security
Federal Corporation and Subsidiaries
  
 Item
1A  Risk
Factors
 There
have been no material changes in the risk factors previously disclosed in the
Company’s Annual Report on Form 10-K for the year ended March 31, 2009 except
that the following risk factors are added to those previously contained in the
Form 10-K:
 
 Our
federal thrift charter may be eliminated under the Obama Administration’s
Financial Regulatory Reform Plan.
  The Obama
administration has proposed the creation of a new federal government agency, the
National Bank Supervisor (“NBS”) that would charter and supervise all federally
chartered depository institutions, and all federal branches and agencies of
foreign banks.  It is proposed that the NBS take over the responsibilities
of the Office of the Comptroller of the Currency, which currently charters and
supervises nationally chartered banks, and responsibility for the institutions
currently supervised by the Office of Thrift Supervision, which supervises
federally chartered thrift and thrift holding companies, such as Security
Federal Corporation and Security Federal Bank.  In addition, under the
administration’s proposal, the thrift charter, under which Security Federal Bank
is organized, would be eliminated.  If the administration’s proposal is
finalized, Security Federal Bank may be subject to a new charter mandated by the
NBS.  It is uncertain as to how this new charter, or the supervision by the
NBS, will affect our operations going forward.
 
 Increases
in deposit insurance premiums and special FDIC assessments will hurt
our earnings.
  Beginning
in late 2008, the economic environment caused higher levels of bank failures,
which dramatically increased FDIC resolution costs and led to a significant
reduction in the Deposit Insurance Fund. As a result, the FDIC has significantly
increased the initial base assessment rates paid by financial institutions for
deposit insurance. The base assessment rate was increased by seven basis points
(seven cents for every $100 of deposits) for the first quarter of 2009.
Effective April 1, 2009, initial base assessment rates were changed to
range from 12 basis points to 45 basis points across all risk categories with
possible adjustments to these rates based on certain debt-related components.
These increases in the base assessment rate have increased our deposit insurance
costs and negatively impacted our earnings. In addition, in May 2009, the FDIC
imposed a special assessment on all insured institutions as a result of recent
bank and savings association failures. The emergency assessment amounts to five
basis points on each institution’s assets minus Tier 1 capital as of
June 30, 2009, subject to a maximum equal to 10 basis points times the
institution’s assessment base.
  In
addition, the FDIC may impose additional emergency special assessments, of up to
five basis points per quarter on each institution’s assets minus Tier 1
capital if necessary to maintain public confidence in federal deposit
insurance or as a result of deterioration in the Deposit Insurance Fund reserve
ratio as a result of institution failures. The latest date possible for imposing
any such additional special assessment is December 31, 2009, with
collection on March 30, 2010. Any additional emergency special assessment
imposed by the FDIC will hurt our earnings.  Additionally, as a
potential alternative to special assessments, in September 2009, the FDIC
proposed a rule that would require financial institutions to prepay its
estimated quarterly risk-based assessment for the fourth quarter of 2009 and for
all of 2010, 2011 and 2012.  This proposal would not immediately
impact our earnings as the payment would be expensed over time.
  We
operate in a highly regulated environment and may be adversely affected by
changes in federal and state laws and regulations, including changes that may
restrict our ability to foreclose on single-family home loans and offer
overdraft protection.
  We are
subject to extensive examination, supervision and comprehensive regulation by
the OTS and the FDIC. Banking regulations are primarily intended to protect
depositors' funds, federal deposit insurance funds, and the banking system as a
whole, and not holders of our common stock. These regulations affect our lending
practices, capital structure, investment practices, dividend policy, and growth,
among other things. Congress and federal regulatory agencies continually review
banking laws, regulations, and policies for possible changes. Changes to
statutes, regulations, or regulatory policies, including changes in
interpretation or implementation of statutes, regulations, or policies, could
affect us in substantial and unpredictable ways. Such changes could subject us
to additional costs, limit the types of financial services and products we may
offer, restrict mergers and acquisitions, investments, access to capital, the
location of banking offices, and/or increase the ability of non-banks to offer
competing financial services and products, among other things. Failure to comply
with laws, regulations or policies could result in sanctions by regulatory
agencies, civil money penalties and/or reputational damage, which could have a
material adverse effect on our business, financial condition and results of
operations. While we have policies and procedures designed to prevent any such
violations, there can be no assurance that such violations will not
occur.
  
 38
  Security Federal
Corporation and Subsidiaries
   Item
1A     Risk Factors,
Continued
  New
legislation proposed by Congress may give bankruptcy courts the power to reduce
the increasing number of home foreclosures by giving bankruptcy judges the
authority to restructure mortgages and reduce a borrower’s payments. Property
owners would be allowed to keep their property while working out their debts.
Other similar
bills placing additional temporary moratoriums on foreclosure sales or otherwise
modifying foreclosure procedures to the benefit of borrowers and the detriment
of lenders may be enacted by either Congress or the State of Missouri in the
future. These laws may further restrict our collection efforts on one-to-four
single-family loans. Additional legislation proposed or under consideration in
Congress would give current debit and credit card holders the chance to opt out
of an overdraft protection program and limit overdraft fees which could result
in additional operational costs and a reduction in our non-interest
income.
  Liquidity
risk could impair the Company’s ability to fund operations and jeopardize its
financial condition, growth and prospects.
  Liquidity
is essential to the Company’s business. An inability to raise funds through
deposits, borrowings, the sale of loans and other sources could have a
substantial negative effect on the Company’s liquidity. The Company relies on
customer deposits and advances from the FHLB of Atlanta (“FHLB”), and other
borrowings to fund its operations. Although the Company has historically been
able to replace maturing deposits and advances if desired, it may not be able to
replace such funds in the future if, among other things, the Company’s financial
condition, the financial condition of the FHLB or market conditions change. The
Company’s access to funding sources in amounts adequate to finance its
activities or the terms of which are acceptable could be impaired by factors
that affect the Company 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 the
Company’s access to liquidity sources include a decrease in the level of the
Company’s business activity as a result of a downturn in the South Carolina or
Georgia markets where its loans are concentrated or adverse regulatory action
against it.
  The
Company’s financial flexibility will be severely constrained if it was unable to
maintain its access to funding or if adequate financing is not available to
accommodate future growth at acceptable interest rates. Although the Company
considers its sources of funds adequate for its liquidity needs, the Company may
seek additional debt in the future to achieve its long-term business objectives.
Additional borrowings, if sought, may not be available to the Company or, if
available, may not be available on reasonable terms. If additional financing
sources are unavailable, or are not available on reasonable terms, the Company’s
financial condition, results of operations, growth and future prospects could be
materially adversely affected.  Finally, if the Company is required to
rely more heavily on more expensive funding sources to support future growth,
its revenues may not increase proportionately to cover its costs.
  Item
2     Unregistered sales of Equity
Securities and Use Of Proceeds
 
 None
 
 Item
3     Defaults Upon Senior
Securities
 None
 
 Item
4T   Submission Of Matters To A
Vote Of Security Holders
 
  The
election of directors was presented for vote to the shareholders at the Annual
Meeting held July 16, 2009.  Votes for Timothy W. Simmons were as
follows: 1,846,225 votes for, 51,400 withheld.  Votes for T. Clifton
Weeks were as follows: 1,852,025 votes for, 45,400 votes
withheld.  Votes for Roy G. Lindburg were as
follows:  1,832,925 votes for, 64,700 votes
withheld.  Directors continuing in office are Thomas L. Moore, Gasper
L. Toole, III, Robert E. Alexander, William Clyburn, J. Chris Verenes and Frank
M. Thomas.
  The
results of the voting for the approval of the compensation of the company’s
named executive officers were as follows:  1,843,752 votes for, 42,973
votes against and 10,900 votes abstained.
 
 Item
5      Other
Information
 None
 
  39
 Security
Federal Corporation and Subsidiaries
  Item
6     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 CumulativePerpetual
      Preferred Stock Series A(2)3.3
                Bylaws (3)4.1
                Instruments defining
      the rights of security holders, including indentures (4)4.2
                Warrant to purchase
      shares of the Company’s common stock dated December 19, 2008(2)4.3
                Letter Agreement
      (including Securities Purchase Agreement Standard Terms) dated December
      19, 2008 between theCompany
      and the United States Department of the Treasury (2)10.1
                1993 Salary
      Continuation Agreements (5)10.2
                Amendment One to
      1993 Salary Continuation Agreement (6)10.3
                Form of 2006 Salary
      Continuation Agreement(7)10.4
                1999
      Stock Option Plan (3)10.5
                1987 Stock Option
      Plan (5)10.6
                2002
      Stock Option Plan (8)10.7
                2006
      Stock Option Plan (9)10.8
                2004 Employee Stock
      Purchase Plan (11)10.9
                Incentive
      Compensation Plan (5)10.10
                Form of Security
      Federal Bank Salary Continuation Agreement (12)10.11
                Form of Security
      Federal Split Dollar Agreement (12)10.12
                2008 Equity
      Incentive Plan (10)10.12
                Form of Compensation
      Modification Agreement (2)14
                Code
      of Ethics (13)31.1
                Certification of the
      Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act.31.2
                Certification of the
      Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act.32
                Certifications
      Pursuant to Section 906 of the Sarbanes-Oxley Act.
 
 
 (1)
              Filed
      on June 26, 1998, as an exhibit to the Company’s Proxy Statement and
      incorporated herein by reference.
 (2)
              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 June 28, 1993, as an exhibit to the Company’s Annual Report on Form
      10-KSB and incorporated herein by reference.(6)
              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.
 (7)
              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.
 (8)
              Filed
      on June 19, 2002, as an exhibit to the Company’s Proxy Statement and
      incorporated herein by reference.
 (9)
              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.(10)
              Filed
      on June 20, 2008, as an exhibit to the Company’s Proxy Statement and
      incorporated herein by reference.(11)
              Filed
      on June 18, 2004, as an exhibit to the Company’s Proxy Statement and
      incorporated herein by reference(12)
              Filed
      on May 24, 2006 as an exhibit to the Current Report on Form 8-K and
      incorporated herein by reference.(13)
              Filed
      on June 27, 2008 as an exhibit to the Company’s Annual Report on Form 10-K
      and incorporated herein by
reference.
  
   40
 Security
Federal Corporation and Subsidiaries
  Signatures
 
 Pursuant
to the requirement of the Securities Exchange Act of 1934, the registrant has
duly caused this report to the signed on its behalf by the undersigned thereunto
duly authorized.
  SECURITY FEDERAL
CORPORATION
   Date:
              November
      13, 2009
              
              By:
              /s/
      Timothy W. SimmonsTimothy
      W. SimmonsPresidentDuly
      Authorized Representative
  
  Date:
              November13,
      2009
              
              By:
              /s/
      Roy G. LindburgRoy
      G. LindburgCFODuly
      Authorized Representative
 
 
 
  41