SECURITIES
AND EXCHANGE COMMISSION




WASHINGTON,
DC  20549




FORM
10 – Q


(Mark
one)




(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934




FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2009




(_)
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934






FOR THE
TRANSITION PERIOD:




FROM:
            
            
            TO:




COMMISSION
FILE NUMBER:  0-16120




SECURITY
FEDERAL CORPORATION


(Exact
name of registrant as specified in its charter)





South
      Carolina
            
            57-0858504(State
      or other jurisdiction
              of
      incorporation or organization)
            
            (IRS
      Employer
              Identification
      No.)


1705
      WHISKEY ROAD, AIKEN, SOUTH CAROLINA
              29801(Address of Principal Executive Office)
              (Zip
      code)




(803)
641-3000


(Registrant’s
telephone number, including area code)





Indicate
by check mark whether the registrant:  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.


YES  X
            No____





Indicate
by check mark whether the registrant 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, or a non-accelerated filer or a smaller reporting
company.  See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.


Large accelerated
      filed
            
            [  ]
            Accelerated
      filer
            [  ]Non-accelerated
      filer
            
            [  ]
            Smaller reporting
      company
            [X]













Indicate
by check mark whether the registrant is a shell company (defined in Rule 12b-2
of the Exchange Act).


YES
            No__X__







Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practical date.




CLASS:
            
            OUTSTANDING
      SHARES AT:
            
            
            SHARES:Common
      Stock, par
              value
      $0.01 per share
            
            July
      31, 2009
            
            
            
            2,461,090










INDEX




PART
      I.
            FINANCIAL
      INFORMATION (UNAUDITED)
            
            PAGE
      NO.Item
      1.
            Financial
      Statements (Unaudited):Consolidated
      Balance Sheets at June 30, 2009 and March 31, 2009
            
            1Consolidated
      Statements of Income for the Three Months Ended June 30, 2009 and
      2008
            
            2Consolidated
      Statements of Shareholders’ Equity and Comprehensive Income at June 30,
      2009 and 2008
            
            3Consolidated
      Statements of Cash Flows for the Three Months Ended June 30, 2009 and
      2008
            
            4Notes
      to Consolidated Financial Statements
            
            6Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            19Item
      3.
            Quantitative
      and Qualitative Disclosures about Market Risk
            
            30Item
      4T.
            Controls
      and Procedures
            
            30PART
      II.
            OTHER
      INFORMATIONItem
      1.
            Legal
      Proceedings
            
            31Item
      1A.
            Risk
      Factors
            
            31Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            31Item
      3.
            Defaults
      Upon Senior Securities
            
            31Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            
            31Item
      5
            Other
      Information
            
            31Item
      6.
            Exhibits
            
            32Signatures
            
            33






SCHEDULES
OMITTED






All
schedules other than those indicated above are omitted because of the absence of
the conditions under which they are required or because the information is
included in the consolidated financial statements and related
notes.







Part
I.   Financial Information


Item
1.  Financial Statements


Security
Federal Corporation and Subsidiaries


Consolidated
Balance Sheets


June
      30, 2009
            
            
            March
      31, 2009Assets:
            
            (Unaudited)
            
            
            (Audited)Cash
      And Cash Equivalents
            
            $
            9,339,816
            
            
            $
            6,562,394Investment
      And Mortgage-Backed Securities:Available
      For Sale: (Amortizedcost of $272,935,437
      atJune 30, 2009and $276,687,428
              atMarch 31,
      2009)
            
            
            279,077,087
            
            
            
            282,832,735Held
      To Maturity: (Fair value of$27,735,595atJune 30, 2009and  $32,492,407at
              March
      31, 2009)
            
            
            26,700,599
            
            
            
            31,265,866Total
      Investment And Mortgage-Backed Securities
            
            
            305,777,686
            
            
            
            314,098,601Loans
      Receivable, Net:Held
      For Sale
            
            
            7,157,299
            
            
            
            5,711,807Held
      For Investment:(Net of allowanceof $11,420,326atJune 30, 2009and $10,181,599
              atMarch 31,
      2009)
            
            
            600,211,095
            
            
            
            605,378,066Total
      Loans Receivable, Net
            
            
            607,368,394
            
            
            
            611,089,873Accrued
      Interest Receivable:Loans
            
            
            2,046,289
            
            
            
            2,011,967Mortgage-Backed
      Securities
            
            
            1,016,575
            
            
            
            1,138,911Investments
            
            
            583,826
            
            
            
            363,707Premises
      And Equipment, Net
            
            
            21,392,627
            
            
            
            21,675,434Federal
      Home Loan Bank Stock (“FHLB”), At Cost
            
            
            12,624,400
            
            
            
            12,662,700Bank
      Owned Life Insurance
            
            
            9,731,305
            
            
            
            9,641,305Repossessed
      Assets Acquired In Settlement Of Loans
            
            
            1,882,432
            
            
            
            1,985,172Intangible
      Assets, Net
            
            
            317,000
            
            
            
            352,500Goodwill
            
            
            1,199,754
            
            
            
            1,421,754Other
      Assets
            
            
            2,339,211
            
            
            
            1,657,189Total
      Assets
            
            $
            975,619,315
            
            
            $
            984,661,507Liabilities
      And Shareholders’ EquityLiabilities:Deposit
      Accounts
            
            $
            665,349,100
            
            
            $
            661,713,575Advances
      From FHLB
            
            
            193,794,491
            
            
            
            218,998,434Term
      Auction Facility Advances
            
            
            22,000,000
            
            
            
            10,000,000Other
      Borrowed Money
            
            
            15,933,942
            
            
            
            16,055,966Advance
      Payments By Borrowers For Taxes And Insurance
            
            
            448,791
            
            
            
            421,461Mandatorily
      Redeemable Financial Instrument
            
            
            1,522,312
            
            
            
            1,600,312Junior
      Subordinated Debentures
            
            
            5,155,000
            
            
            
            5,155,000Other
      Liabilities
            
            
            4,346,802
            
            
            
            3,624,461Total
      Liabilities
            
            $
            908,550,438
            
            
            $
            917,569,209Shareholders'
      Equity:Serial
      Preferred Stock, $.01 Par Value; Authorized 200,000 Shares; Issued And
              Outstanding, 18,000 At June 30, 2009 And At March 31, 2009
            
            $
            17,638,144
            
            
            $
            17,620,065Common
      Stock, $.01 Par Value; Authorized Shares – 5,000,000; Issued -
              2,662,023 And Outstanding
      Shares – 2,461,090 At June 30, 2009And
              2,660,528 And 2,459,595 At March 31, 2009
            
            
            26,055
            
            
            
            26,040Warrants
      Issued In Conjunction With Serial Preferred Stock
            
            
            400,000
            
            
            
            400,000Additional
      Paid-In Capital
            
            
            5,327,205
            
            
            
            5,299,235Treasury
      Stock, (At Cost, 200,933 Shares At June 30, 2009 And March 31,
              2009, Respectively)
            
            
            (4,330,712
            )
            
            
            (4,330,712
            )Accumulated
      Other Comprehensive Income
            
            
            3,808,248
            
            
            
            3,809,934Retained
      Earnings, Substantially Restricted
            
            
            44,199,937
            
            
            
            44,267,736Total
      Shareholders' Equity
            
            $
            67,068,877
            
            
            $
            67,092,298Total
      Liabilities And Shareholders' Equity
            
            $
            975,619,315
            
            
            $
            984,661,507


See
accompanying notes to consolidated financial statements.





Security
Federal Corporation and Subsidiaries


Consolidated
Statements of Income (Unaudited)


Three
      Months Ended June 30,2009
            
            
            2008Interest
      Income:Loans
            
            $
            8,700,137
            
            
            $
            8,541,735Mortgage-Backed
      Securities
            
            
            2,847,270
            
            
            
            2,395,382Investment
      Securities
            
            
            516,997
            
            
            
            888,901Other
            
            
            214
            
            
            
            5,179Total
      Interest Income
            
            
            12,064,618
            
            
            
            11,831,197Interest
      Expense:NOW
      And Money Market Accounts
            
            
            684,596
            
            
            
            924,090Passbook
      Accounts
            
            
            20,118
            
            
            
            33,503Certificate
      Accounts
            
            
            3,274,705
            
            
            
            3,662,926Advances
      And Other Borrowed Money
            
            
            1,692,614
            
            
            
            2,011,765Junior
      Subordinated Debentures
            
            
            63,760
            
            
            
            74,119Total
      Interest Expense
            
            
            5,735,793
            
            
            
            6,706,403Net
      Interest Income
            
            
            6,328,825
            
            
            
            5,124,794Provision
      For Loan Losses
            
            
            1,400,000
            
            
            
            225,000Net
      Interest Income After Provision For Loan Losses
            
            
            4,928,825
            
            
            
            4,899,794Non-Interest
      Income:Gain
      On Sale of Investments
            
            
            50,891
            
            
            
            101,405Gain
      On Sale Of Loans
            
            
            433,607
            
            
            
            118,683Service
      Fees On Deposit Accounts
            
            
            276,382
            
            
            
            281,153Income
      From Cash Value Of Life Insurance
            
            
            90,000
            
            
            
            85,746Commissions
      On Insurance
            
            
            139,254
            
            
            
            168,992Other
      Agency Income
            
            
            122,467
            
            
            
            46,937Trust
      Income
            
            
            141,678
            
            
            
            105,000Mandatorily
      Redeemable Financial Instrument Valuation Adjustment
            
            
            78,000
            
            
            
            -Other
            
            
            171,908
            
            
            
            213,291Total
      Non-Interest Income
            
            
            1,504,187
            
            
            
            1,121,207General
      And Administrative Expenses:Salaries
      And Employee Benefits
            
            
            2,944,435
            
            
            
            2,784,235Occupancy
            
            
            493,345
            
            
            
            497,320Advertising
            
            
            134,554
            
            
            
            140,821Depreciation
      And Maintenance Of Equipment
            
            
            442,027
            
            
            
            426,924Federal
      Deposit Insurance Corporation Special Assessment
            
            
            425,000
            
            
            
            -Federal
      Deposit Insurance Corporation Insurance Premiums
            
            
            331,000
            
            
            
            155,810Amortization
      of Intangibles
            
            
            22,500
            
            
            
            22,500Other
            
            
            1,045,053
            
            
            
            794,380Total
      General And Administrative Expenses
            
            
            5,837,914
            
            
            
            4,821,990Income
      Before Income Taxes
            
            
            595,098
            
            
            
            1,199,011Provision
      For Income Taxes
            
            
            222,931
            
            
            
            397,106Net
      Income
            
            
            372,167
            
            
            
            801,905Preferred
      Stock Dividends
            
            
            225,000
            
            
            
            -Accretion
      Of Preferred Stock To Redemption Value
            
            
            18,079
            
            
            
            -Net
      Income Available To Common Shareholders
            
            $
            129,088
            
            
            $
            801,905Basic
      Net Income Per Common Share
            
            $
            0.05
            
            
            $
            0.32Diluted
      Net Income Per Common Share
            
            $
            0.05
            
            
            $
            0.32Cash
      Dividend Per Share On Common Stock
            
            $
            0.08
            
            
            $
            0.08Basic
      Weighted Average Shares Outstanding
            
            
            2,460,137
            
            
            
            2,531,679Diluted
      Weighted Average Shares Outstanding
            
            
            2,503,777
            
            
            
            2,532,377


See
accompanying notes to consolidated financial statements.


2


Security
Federal Corporation and Subsidiaries


Consolidated
Statements of Shareholders’ Equity and Comprehensive Income
(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
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            801,905
            
            
            
            801,905Other
      Comprehensive Income,
              Net
      Of Tax:Unrealized
      Holding Losses
              On
      Securities Available
              For
      Sale, Net Of Taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3,579,553
            )
            
            
            -
            
            
            
            (3,579,553
            )Reclassification
      Adjustment
              For
      Gains Included In Net
              Income,
      Net Of Taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (62,871
            )
            
            
            -
            
            
            
            (62,871
            )Comprehensive
      Loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,840,519
            )Purchase
      Of Treasury Stock
              At
      Cost, 3,900 shares
            
            
            -
            
            
            
            -
            
            
            
            (89,872
            )
            
            
            -
            
            
            
            -
            
            
            
            (89,872
            )Employee
      Stock Purchase Plan
              Purchases
            
            
            14
            
            
            
            27,629
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            27,643Stock
      Compensation Expense
            
            
            -
            
            
            
            7,848
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            7,848Cash
      Dividends
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (202,553
            )
            
            
            (202,553
            )Balance
      At June 30, 2008
            
            $
            25,939
            
            
            $
            5,107,563
            
            
            $
            (2,859,318
            )
            
            $
            (1,246,887
            )
            
            $
            43,371,663
            
            
            $
            44,398,960








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
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            372,167
            
            
            
            372,167Other
      Comprehensive Income,
              Net
      Of Tax:Unrealized
      Holding Gains
              On
      Securities Available
              For
      Sale, Net Of Taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            29,866
            
            
            
            -
            
            
            
            29,866Reclassification
      Adjustment
              For
      Gains Included In Net
              Income,
      Net Of Taxes
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (31,552
            )
            
            
            -
            
            
            
            (31,552
            )Comprehensive
      Income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            370,481Accretion
      Of Preferred Stock To Redemption Value
            
            
            18,079
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (18,079
            )
            
            
            -Employee
      Stock Purchase Plan Purchases
            
            
            -
            
            
            
            -
            
            
            
            15
            
            
            
            19,689
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            19,704Stock
      Compensation Expense
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            8,281
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            8,281Cash
      Dividends On Preferred
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (225,000
            )
            
            
            (225,000
            )Cash
      Dividends On Common
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (196,887
            )
            
            
            (196,887
            )Balance
      At June 30, 2009
            
            $
            17,638,144
            
            
            $
            400,000
            
            
            $
            26,055
            
            
            $
            5,327,205
            
            
            $
            (4,330,712
            )
            
            $
            3,808,248
            
            
            $
            44,199,937
            
            
            $
            67,068,877




See
accompanying notes to consolidated financial statements.











3





Security
Federal Corporation and Subsidiaries


Consolidated
Statements of Cash Flows (Unaudited)





Three
      Months Ended June 30,2009
            
            
            2008Cash Flows From Operating Activities:Net Income
            
            $
            372,167
            
            
            $
            801,905Adjustments To Reconcile Net Income To Net Cash Provided (Used) By
      Operating Activities:Depreciation And Amortization Expense
            
            
            385,374
            
            
            
            368,771Amortization Of Intangible Assets
            
            
            22,500
            
            
            
            22,500Stock Option Compensation Expense
            
            
            8,281
            
            
            
            7,848Discount Accretion And Premium Amortization
            
            
            443,610
            
            
            
            106,619Provisions For Losses On Loans And Real Estate
            
            
            1,400,000
            
            
            
            225,000Write Down Of Goodwill
            
            
            222,000
            
            
            
            -Gain On Sale of Investments Available For Sale
            
            
            -
            
            
            
            (120,491
            )(Gain) Loss On Sale of Mortgage-Backed Securities Available For
      Sale
            
            
            (50,891
            )
            
            
            19,087Gain On Sale Of Loans
            
            
            (433,607
            )
            
            
            (118,683
            )(Gain) Loss On Sale Of Real Estate
            
            
            23,183
            
            
            
            (13,694
            )Capital Improvements Repossessed Assets
            
            
            -
            
            
            
            (20,000
            )Amortization Of Deferred Fees On Loans
            
            
            (36,453
            )
            
            
            (27,043
            )Mandatorily Redeemable Financial Instrument Valuation
            
            
            (78,000
            )
            
            
            -Income From Bank Owned Life
    Insurance
            
            
            (90,000
            )
            
            
            (85,746
            )Proceeds From Sale Of Loans Held For Sale
            
            
            26,878,606
            
            
            
            8,542,717Origination Of Loans For Sale
            
            
            (27,890,491
            )
            
            
            (9,679,094
            )(Increase) Decrease In Accrued Interest Receivable:Loans
            
            
            (34,322
            )
            
            
            129,420Mortgage-Backed Securities
            
            
            122,336
            
            
            
            (74,644
            )Investments
            
            
            (220,119
            )
            
            
            178,266Increase In Advance Payments By Borrowers
            
            
            27,330
            
            
            
            114,555Other,
      Net
            
            
            55,264
            
            
            
            (528,787
            )Net Cash Provided (Used) By Operating Activities
            
            
            1,126,768
            
            
            
            (151,494
            )Cash Flows From Investing Activities:Principal Repayments On Mortgage-Backed Securities Available For
      Sale
            
            
            18,421,913
            
            
            
            13,840,922Principal Repayments On Mortgage-Backed Securities Held To
      Maturity
            
            
            2,511,493
            
            
            
            -Purchase Of Investment Securities Available For Sale
            
            
            (15,113,956
            )
            
            
            (5,635,679
            )Purchase
      Of Mortgage-Backed Securities Available For Sale
            
            
            (10,253,625
            )
            
            
            (36,375,912
            )Maturities
      Of Investment Securities Available For Sale
            
            
            6,549,685
            
            
            
            8,075,718Maturities
      of Investment Securities Held To Maturity
            
            
            2,000,000
            
            
            
            5,000,000Proceeds
      From Sale of Investment Securities Available For Sale
            
            
            -
            
            
            
            6,108,615Proceeds
      From Sale of Mortgage-Backed Securities Available For Sale
            
            
            3,809,030
            
            
            
            1,277,417Purchase
      Of FHLB Stock
            
            
            -
            
            
            
            (3,837,500
            )Redemption
      Of FHLB Stock
            
            
            38,300
            
            
            
            2,110,600(Increase)
      Decrease In Loans To Customers
            
            
            3,686,274
            
            
            
            (15,873,082
            )Proceeds
      From Sale Of Repossessed Assets
            
            
            196,707
            
            
            
            346,000Purchase
      And Improvement Of Premises And Equipment
            
            
            (102,542
            )
            
            
            (799,948
            )Net Cash Provided (Used) By Investing Activities
            
            
            11,743,279
            
            
            
            (25,762,849
            )(Continued) See
accompanying notes to consolidated financial statements.


4





Security
Federal Corporation and Subsidiaries


Consolidated
Statements of Cash Flows (Unaudited)- Continued





Three
      Months Ended June 30,2009
            
            
            2008Cash
      Flows From Financing Activities:Increase
      (Decrease) In Deposit Accounts
            
            $
            3,635,525
            
            
            $
            (13,522,258
            )Proceeds
      From FHLB Advances
            
            
            64,100,000
            
            
            
            104,880,000Repayment
      Of FHLB Advances
            
            
            (89,303,943
            )
            
            
            (66,503,864
            )Proceeds
      From Term Auction Facility Borrowings
            
            
            22,000,000
            
            
            
            -Repayment
      Of Term Auction Facility Borrowings
            
            
            (10,000,000
            )
            
            
            -Net
      Proceeds (Repayments) Of Other Borrowings
            
            
            (122,024
            )
            
            
            1,798,430Dividends
      To Preferred Shareholders
            
            
            (225,000
            )
            
            
            -Dividends
      To Common Shareholders
            
            
            (196,887
            )
            
            
            (202,553
            )Purchase
      Of Treasury Stock
            
            
            -
            
            
            
            (89,872
            )Proceeds
      From Employee Stock Purchases
            
            
            19,704
            
            
            
            27,643Net
      Cash Provided (Used)  By Financing Activities
            
            
            (10,092,625
            )
            
            
            26,387,526Increase
      In Cash And Cash Equivalents
            
            
            2,777,422
            
            
            
            473,183Cash
      And Cash Equivalents At Beginning Of Period
            
            
            6,562,394
            
            
            
            10,539,054Cash
      And Cash Equivalents At End Of Period
            
            $
            9,339,816
            
            
            $
            11,012,237Supplemental
      Disclosure Of Cash Flows Information:Cash
      Paid During The Period For Interest
            
            $
            5,804,625
            
            
            $
            6,960,918Cash
      Paid During The Period For Income Taxes
            
            $
            595,111,
            
            
            $
            305,822Additions
      To Repossessed Acquired Through Foreclosure
            
            $
            117,150
            
            
            $
            20,000Change
      In Unrealized Gain or Loss On Securities Available For
      Sale,
              Net
      Of Taxes
            
            $
            (1,686
            )
            
            $
            (3,642,424
            )





See
accompanying notes to consolidated financial statements.


5


Security
Federal Corporation and Subsidiaries


Notes
to Consolidated Financial Statements (Unaudited)





1.
            Basis
      of Presentation





The
accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and accounting principles generally
accepted in the United States of America; therefore, they do not include all
disclosures necessary for a complete presentation of financial condition,
results of operations, and cash flows.  Such statements are unaudited
but, in the opinion of management, reflect all adjustments, which are of a
normal recurring nature and necessary for a fair presentation of results for the
selected interim periods.  Users of financial information produced for
interim periods are encouraged to refer to the footnotes contained in the
audited financial statements appearing in Security Federal Corporation’s 2009
Annual Report to Shareholders when reviewing interim financial
statements.  The results of operations for the three month period
ended June 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, changes in interest rates, the demand for loans, the
regulatory environment, general economic conditions and inflation, and the
securities markets.  Management cautions readers of this Form 10-Q not
to place undue reliance on the forward-looking statements contained
herein.





2.
            Principles
      of Consolidation





The
accompanying consolidated financial statements include the accounts of Security
Federal Corporation (the “Company”) and its wholly owned subsidiary, Security
Federal Bank (the “Bank”) and the Bank’s wholly owned subsidiaries, Security
Federal Insurance, Inc. (“SFINS”) and Security Financial Services Corporation
(“SFSC”). SFINS was formed during fiscal 2002 and began operating during the
December 2001 quarter and is an insurance agency offering auto, business,
health, and home insurance.  SFINS has a wholly owned subsidiary,
Collier Jennings Financial Corporation which has as subsidiaries Collier
Jennings Inc., The Auto Insurance Store Inc., and Security Federal Premium Pay
Plans Inc. 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.  The Bank is primarily engaged in the business of
accepting savings and demand deposits and originating mortgage loans and other
loans to individuals and small businesses for various personal and commercial
purposes.





3.
            Critical
      Accounting Policies




The
Company has adopted various accounting policies, which govern the application of
accounting principles generally accepted in the United States in the preparation
of our financial statements.  Our significant accounting policies are
described in the footnotes to the audited consolidated financial statements at
March 31, 2009 included in our 2009 Annual Report to Stockholders, which was
filed as an exhibit to our 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.  We consider these accounting
policies to be critical accounting policies.  The judgments and
assumptions we use are based on historical experience and other factors, which
we believe to be reasonable under the circumstances.  Because of the
nature of the judgments and assumptions we make, actual results could differ
from these judgments and estimates which could have a material impact on our
carrying values of assets and liabilities and our results of
operations.





The
Company believes the allowance for loan losses is a critical accounting policy
that requires the most significant judgments and estimates used in preparation
of the consolidated financial statements.  The Company provides for
loan losses using the allowance method.  Accordingly, all loan losses
are charged to the related allowance and all recoveries are credited to the
allowance for loan losses.  Additions to the allowance for loan losses
are provided by charges to operations based on various factors, which, in
management’s judgment, deserve current recognition in estimating possible
losses.  Such factors considered by management include the fair value
of the underlying collateral, stated guarantees by the borrower (if applicable),
the borrower’s ability to repay from other economic resources, growth and
composition of the loan portfolios, the relationship of the allowance for loan
losses to the outstanding loans, loss experience, delinquency trends, and
general economic conditions.  Management evaluates the carrying value
of the loans periodically and the allowance is adjusted
accordingly.






6


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.  The allowance for
loan losses is subject to periodic evaluations by various authorities and may be
subject to adjustments based upon the information that is available at the time
of their examination.





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.”  SFAS No. 128 specifies the computation, presentation and
disclosure requirements for EPS for entities with publicly held common stock or
potential common stock such as options, warrants, convertible securities or
contingent stock agreements if those securities trade in a public market. This
standard specifies computation and presentation requirements for both basic EPS
and, for entities with complex capital structures, diluted EPS.  Basic
EPS is computed by dividing net income by the weighted average number of common
shares outstanding.  Diluted EPS is similar to the computation of
basic EPS except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the dilutive
potential common shares had been issued.  The dilutive effect of
options outstanding under the Company’s stock option plan is reflected in
diluted earnings per share by application of the treasury stock
method.





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





June
      30,2009
            
            
            2008Earnings
      Available to Common Shareholders:Net
      Income
            
            $
            372,167
            
            
            $
            801,905Preferred
      Stock Dividends
            
            
            225,000
            
            
            
            -Deemed
      Dividends On Preferred Stock From Net
              Accretion
      of Preferred Stock
            
            
            18,079
            
            
            
            -Net
      Income Available To Common Shareholders
            
            $
            129,088
            
            
            $
            801,905





7


Security
Federal Corporation and Subsidiaries


Notes
to Consolidated Financial Statements (Unaudited), Continued





4.   Earnings
Per Common Share, Continued





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





For
      the Quarter EndedJune
      30, 2009Income
      (Numerator) Amount
            
            
            Shares
      (Denominator)
            
            
            Per
      ShareBasic
      EPS
            
            $
            129,088
            
            
            
            2,460,137
            
            
            $
            0.05Effect
      of Diluted Securities:Stock
      Options & Warrants
            
            
            -
            
            
            
            -
            
            
            
            -Mandatorily
      Redeemable
              Shares
            
            
            -
            
            
            
            43,640
            
            
            
            -Diluted
      EPS
            
            $
            129,088
            
            
            
            2,503,777
            
            
            $
            0.05





For
      the Quarter EndedJune
      30, 2008Income
      (Numerator) Amount
            
            
            Shares
      (Denominator)
            
            
            Per
      ShareBasic
      EPS
            
            $
            801,905
            
            
            
            2,531,679
            
            
            $
            0.32Effect
      of Diluted Securities:Stock Options
            
            
            -
            
            
            
            698
            
            
            
            -Diluted
      EPS
            
            $
            801,905
            
            
            
            2,532,377
            
            
            $
            0.32





5.      Stock-Based
Compensation





Certain
officers and directors of the Company participate in an incentive and
non-qualified stock option plan. Options are granted at exercise prices not less
than the fair value of the Company’s common stock on the date of the grant. The
following is a summary of the activity under the Company’s stock option plans
for the periods presented:





June
      30, 2009
            
            
            June
      30, 2008Shares
            
            
            Weighted
      Average Exercise Price
            
            
            Shares
            
            
            Weighted
      Average Exercise PriceBalance,
      Beginning of Period
            
            
            100,500
            
            
            $
            22.01
            
            
            
            111,100
            
            
            $
            21.55Options
      granted
            
            
            -
            
            
            
            -
            
            
            
            2,500
            
            
            
            22.91Options
      exercised
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Options
      forfeited
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      End of Period
            
            
            100,500
            
            
            $
            22.01
            
            
            
            113,600
            
            
            $
            21.58Options
      Exercisable
            
            
            60,000
            
            
            $
            21.09
            
            
            
            74,100
            
            
            $
            20.60Options
      Available For Grant
            
            
            50,000
            
            
            
            
            
            
            
            124,801











8


Security
Federal Corporation and Subsidiaries


Notes
to Consolidated Financial Statements (Unaudited), Continued





5.      Stock-Based
Compensation, Continued





At June
30, 2009, the Company had the following options outstanding:





Grant
      Date
            
            Outstanding
      Options
            
            
            Option
      Price
            
            Expiration
      Date10/19/99
            
            
            9,600
            
            
            
            $16.67
            
            09/30/05
      to 09/30/0909/01/03
            
            
            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





None of
the options outstanding at June 30, 2009 have an exercise price below the
average market price during the three month period ended June 30, 2009.
Therefore these options are not deemed to be dilutive.





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. These warrants have a
10-year term and were immediately exercisable upon issuance. At June 30, 2009,
these warrants were anti-dilutive.  A summary of the status of the
Company’s stock warrants and changes during the period is presented
below.





June
      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 June 30, 2008.






9


Security
Federal Corporation and Subsidiaries


Notes
to Consolidated Financial Statements (Unaudited), Continued





7.    Carrying
Amounts and Fair Value of Financial Instruments





Effective
April 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”) which provides a framework for measuring and disclosing fair value
under generally accepted accounting principles. SFAS 157 requires disclosures
about the fair value of assets and liabilities recognized in the balance sheet
in periods subsequent to initial recognition, whether the measurements are made
on a recurring basis (for example, available-for-sale investment securities) or
on a nonrecurring basis (for example, impaired loans).





SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair
value.





The
standard describes three levels of inputs that may be used to measure fair
value:





Level
      1
            Quoted
      prices in active markets for identical assets or liabilities. Level 1
      assets and liabilities include debt and equity securities and derivative
      contracts that are traded in an active exchange market, as well as U.S.
      Treasuries and money market funds.Level
      2
            Observable
      inputs other than Level 1 prices such as quoted prices for similar assets
      or liabilities; quoted prices in markets that are not active; or other
      inputs that are observable or can be corroborated by observable market
      data for substantially the full term of the assets or liabilities. Level 2
      assets and liabilities include debt securities with quoted prices that are
      traded less frequently than exchange-traded instruments, mortgage-backed
      securities, municipal bonds, corporate debt securities and derivative
      contracts whose value is determined using a pricing model with inputs that
      are observable in the market or can be derived principally from or
      corroborated by observable market data. This category generally includes
      certain derivative contracts and impaired loans.Level
      3
            Unobservable
      inputs that are supported by little or no market activity and that are
      significant to the fair value of the assets or liabilities. Level 3 assets
      and liabilities include financial instruments whose value is determined
      using pricing models, discounted cash flow methodologies, or similar
      techniques, as well as instruments for which the determination of fair
      value requires significant management judgment or estimation. For example,
      this category generally includes certain private equity investments,
      retained residual interests in securitizations, residential mortgage
      servicing rights, and highly-structured or long-term derivative
      contracts.





Assets
and liabilities measured at fair value on a recurring basis are as follows as of
June 30, 2009:





Assets:
            
            Quoted
      Market Price
              In
      Active Markets
              (Level
      1)
            
            
            Significant
      Other
              Observable
      Inputs
              (Level
      2)
            
            
            Significant
              Unobservable
      Inputs
              (Level
      3)Available-For-Sale
              Investment
      And
              Mortgage-
      Backed
              Securities
            
            $
            -
            
            
            $
            279,077,087
            
            
            $
            -Mortgage
      Loans Held
              For
      Sale
            
            
            -
            
            
            
            7,157,299
            
            
            
            -Total
            
            $
            -
            
            
            $
            286,234,386
            
            
            $
            -Liabilities:Mandatorily
              Redeemable
      Financial
              Instrument
            
            $
            -
            
            
            $
            1,522,312
            
            
            $
            -Total
            
            $
            -
            
            
            $
            1,522,312
            
            
            $
            -


10


Security
Federal Corporation and Subsidiaries


Notes
to Consolidated Financial Statements (Unaudited), Continued





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





The
Company is predominantly an asset based lender with real estate serving as
collateral on a substantial majority of loans. Loans which are deemed to be
impaired are primarily valued on a nonrecurring basis at the fair values of the
underlying real estate collateral. Such fair values are obtained using
independent appraisals, which the Company considers to be level 2 inputs. As of
June 30, 2009, the recorded investment in impaired loans was $33.8 million. The
average recorded investment in impaired loans was $31.1 million for the quarter
ended June 30, 2009.





Repossessed
assets acquired in settlement of loans are carried at the lower of carrying
value or fair value on a non-recurring basis. The fair value is dependent
primarily upon independent appraisals, which the Company considers level 2
inputs. At June 30, 2009, the recorded investment in repossessed assets acquired
in the settlement of loans was $1.9 million.





Goodwill
and other intangible assets are measured for impairment on an annual basis, as
of September 30th, or more frequently if there is a change in circumstances. If
the goodwill or other intangibles exceed the fair value, an impairment charge is
recorded in an amount equal to the excess. Impairment is tested using accepted
valuation techniques that utilize implied fair value based on a multiple of
revenue. The measurement of these fair values is considered a level 3
measurement.





The
following table is a summary of the carrying value and estimated fair value of
the Company’s financial instruments as of June 30, 2009 and March 31, 2009 as
defined by SFAS No. 107, Disclosures about Fair Value of
Financial Instruments:





June
      30, 2009
            
            March
      31, 2009Carrying
              Amount
            
            Estimated
              Fair
      Value
            
            Carrying
              Amount
            
            Estimated
              Fair
      Value(In
      Thousands)Financial
      Assets:Cash
      And Cash Equivalents
            $
            9,340
            $
            9,340
            $
            6,562
            $
            6,562Investment
      And Mortgage-Back Securities
            
            305,778
            
            306,813
            
            314,099
            
            315,325Loans
      Receivable, Net
            
            607,368
            
            607,777
            
            611,090
            
            623,362FHLB
      Stock
            
            12,624
            
            12,624
            
            12,663
            
            12,663Financial
      Liabilities:Deposits:Checking,
      Savings, And Money Market Accounts
            $
            285,402
            $
            285,402
            $
            272,363
            $
            272,363Certificate
      Accounts
            
            379,947
            
            387,070
            
            389,351
            
            395,647Advances
      From FHLB
            
            193,794
            
            202,228
            
            218,998
            
            225,852Term
      Auction Facility Borrowings
            
            22,000
            
            22,000
            
            10,000
            
            10,000Other
      Borrowed Money
            
            15,934
            
            15,934
            
            16,056
            
            16,056Junior
      Subordinated Debentures
            
            5,155
            
            5,155
            
            5,155
            
            5,155Mandatorily
      Redeemable Financial Instrument
            
            1,522
            
            1,522
            
            1,600
            
            1,600





At June
30, 2009, the Bank had $64.9 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 methods and assumptions are set forth below:




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.




Investment
Securities—Fair values are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.




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.









11


Security
Federal Corporation and Subsidiaries


Notes
to Consolidated Financial Statements (Unaudited), Continued





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




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.




Federal
Home Loan Bank Advances—Fair value is estimated based on discounted cash flows
using current market rates for borrowings with similar terms.




Term
Auction Facility Borrowings—The carrying value of these short term borrowings
approximates fair value.




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.




Mandatorily
Redeemable Financial Instrument—Fair value is determined as the greater of $26
per share or 1.5 times the book value of the Company in accordance with the
underlying agreement.




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.


12


Security
Federal Corporation and Subsidiaries


Notes
to Consolidated Financial Statements (Unaudited), Continued





8.      Accounting
and Reporting Changes





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





In June
2009, the Financial Accounting Standards Board (“FASB”) issued 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.SFAS 168,
(FASB ASC 105-10-05, 10, 15, 65, 70) is effective for interim and annual periods
ending after September 15, 2009 and will not have an impact on the Company’s
financial position but will change the referencing system for accounting
standards.  The following pronouncements provide citations to the
applicable Codification by Topic, Subtopic and Section in addition to the
original standard type and number.





FSP
Emerging Issues Task Force (“EITF”) 99-20-1, “Amendments to the Impairment
Guidance of EITF Issue No. 99-20,” (FASB ASC 325-40-65) (“FSP EITF 99-20-1”) was
issued in January 2009.  Prior to the FSP, other-than-temporary
impairment was determined by using either EITF Issue No. 99-20, “Recognition of
Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests that Continue to be Held by a Transferor in Securitized Financial
Assets,” (“EITF 99-20”) or SFAS No. 115, “Accounting for Certain Investments in
Debt and Equity Securities,” (“SFAS 115”) depending on the type of
security.  EITF 99-20 required the use of market participant
assumptions regarding future cash flows regarding the probability of collecting
all cash flows previously projected.  SFAS 115 determined impairment
to be other than temporary if it was probable that the holder would be unable to
collect all amounts due according to the contractual terms. To achieve a more
consistent determination of other-than-temporary impairment, the FSP amends EITF
99-20 to determine any other-than-temporary impairment (“OTTI”) based on the
guidance in SFAS 115, allowing management to use more judgment in determining
any OTTI.  The FSP was effective for reporting periods ending after
December 15, 2008.  Management has reviewed the Company’s security
portfolio and evaluated the portfolio for any OTTIs.





On April
9, 2009, the FASB issued three staff positions related to fair value which are
discussed below.





FSP SFAS
115-2 and SFAS 124-2 (FASB ASC 320-10-65), “Recognition and Presentation of
Other-Than-Temporary Impairments,” (“FSP SFAS 115-2 and SFAS 124-2”) categorizes
losses on debt securities available-for-sale or held-to-maturity determined by
management to be OTTI into losses as a result of credit issues and losses
related to all other factors.  OTTI exists when it is more likely than
not that the security will mature or be sold before its amortized cost basis can
be recovered.  An OTTI related to credit losses should be recognized
through earnings.  An OTTI related to other factors should be
recognized in other comprehensive income.  The FSP does not amend
existing recognition and measurement guidance related to OTTIs of equity
securities.  Annual disclosures required in SFAS 115 and FSP SFAS
115-1 and SFAS 124-1 are also required for interim periods (including the aging
of securities with unrealized losses).





FSP SFAS
157-4 (FASB ASC 820-10-65), “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That are Not Orderly” recognizes that quoted prices may not be
determinative of fair value when the volume and level of trading activity has
significantly decreased.


13


Security
Federal Corporation and Subsidiaries


Notes
to Consolidated Financial Statements (Unaudited), Continued





8.      Accounting
and Reporting Changes, Continued





The
evaluation of certain factors may necessitate that fair value be determined
using a different valuation technique.  Fair value should be the price
that would be received to sell an asset or paid to transfer a liability in an
orderly transaction, not a forced liquidation or distressed sale.  If
a transaction is considered to not be orderly, little, if any, weight should be
placed on the transaction price.  If there is not sufficient
information to conclude as to whether or not the transaction is orderly, the
transaction price should be considered when estimating fair value.  An
entity’s intention to hold an asset or liability is not relevant in determining
fair value.  Quoted prices provided by pricing services may still be
used when estimating fair value in accordance with SFAS 157; however, the entity
should evaluate whether the quoted prices are based on current information and
orderly transactions.  Inputs and valuation techniques are required to
be disclosed in addition to any changes in valuation techniques.





FSP SFAS
107-1 and APB 28-1 (FASB ASC 825-10-65), “Interim Disclosures about Fair Value
of Financial Instruments” requires disclosures about the fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements and also requires those disclosures in
summarized financial information at interim reporting periods  A
publicly traded company includes any company whose securities trade in a public
market on either a stock exchange or in the over-the-counter market, or any
company that is a conduit bond obligor.  Additionally, when a company
makes a filing with a regulatory agency in preparation for sale of its
securities in a public market it is considered a publicly traded company for
this purpose.





The three
staff positions are effective for periods ending after June 15, 2009, with early
adoption of all three permitted for periods ending after March 15,
2009.  The Company adopted the staff positions for its Form 10-Q for
the first quarter of fiscal 2010.  The adoption of these staff
positions had no material impact on the Company’s financial
statements.  Additional disclosures as a result of these staff
positions have been provided in this 10-Q where applicable.





Also on
April 1, 2009, the FASB issued FSP SFAS 141(R)-1 (FASB ASC 805-20-25, 30, 35,
50), “Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies.”  The FSP requires that
assets acquired and liabilities assumed in a business combination that arise
from a contingency be recognized at fair value.





If fair
value cannot be determined during the measurement period as determined in SFAS
141 (R), the asset or liability can still be recognized if it can be determined
that it is probable that the asset existed or the liability had been incurred as
of the measurement date and if the amount of the asset or liability can be
reasonably estimated.  If it is not determined to be probable that the
asset/liability existed/was incurred or no reasonable amount can be determined,
no asset or liability is recognized. The entity should determine a rational
basis for subsequently measuring the acquired assets and assumed
liabilities.  Contingent consideration agreements should be recognized
initially at fair value and subsequently reevaluated in accordance with guidance
found in paragraph 65 of SFAS 141 (R).  The FSP is effective for
business combinations with an acquisition date on or after the beginning of the
Company’s first annual reporting period beginning on or after December 15,
2008.  The Company will assess the impact of the FSP if and when a
future acquisition occurs.





The
Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin
(“SAB”) No. 111 (FASB ASC 320-10-S99-1) on April 9, 2009 to amend Topic 5.M.,
“Other Than Temporary Impairment of Certain Investments in Debt and Equity
Securities” and to supplement FSP SFAS 115-2 and SFAS 124-2.  SAB 111
maintains the staff’s previous views related to equity securities; however debt
securities are excluded from its scope.  The SAB provides that
“other-than-temporary” impairment is not necessarily the same as “permanent”
impairment and unless evidence exists to support a value equal to or greater
than the carrying value of the equity security investment, a write-down to fair
value should be recorded and accounted for as a realized loss.  The
SAB was effective upon issuance and had no impact on the Company’s financial
position.





SFAS 165
(FASB ASC 855-10-05, 15, 25, 45, 50, 55), “Subsequent Events,” (“SFAS 165”) was
issued in May 2009 and provides guidance on when a subsequent event should be
recognized in the financial statements.  Subsequent events that
provide additional evidence about conditions that existed at the date of the
balance sheet should be recognized at the balance sheet date. Subsequent events
that provide evidence about conditions that arose after the balance sheet date
but before financial statements are issued, or are available to be issued, are
not required to be recognized. The date through which subsequent events have
been evaluated must be disclosed as well as whether it is the date the financial
statements were issued or the date the financial statements were available to be
issued.  For non-recognized subsequent events which should be
disclosed to keep the financial statements from being misleading, the nature of
the event and an estimate of its financial effect, or a statement that such an
estimate cannot be made, should be disclosed.  The standard is
effective for interim or annual periods ending after June 15,
2009.  See Note 11 for Management’s evaluation of subsequent
events.






14





Security
Federal Corporation and Subsidiaries


Notes
to Consolidated Financial Statements (Unaudited), Continued





8.      Accounting
and Reporting Changes, Continued





The FASB
issued SFAS No. 166 (not yet reflected in FASB ASC), “Accounting for Transfers
of Financial Assets – an amendment of FASB Statement No. 140,” (“SFAS 166”) in
June 2009.  SFAS 166 limits the circumstances in which a financial
asset should be derecognized when the transferor has not transferred the entire
financial asset by taking into consideration the transferor’s continuing
involvement.  The standard requires that a transferor recognize and
initially measure at fair value all assets obtained (including a transferor’s
beneficial interest) and liabilities incurred as a result of a transfer of
financial assets accounted for as a sale.  The concept of a qualifying
special-purpose entity is removed from SFAS No. 140 along with the exception
from applying FIN 46(R).  The standard is effective for the first
annual reporting period that begins after November 15, 2009, for interim periods
within the first annual reporting period, and for interim and annual reporting
periods thereafter.  Earlier application is prohibited.  The
Company does not expect the standard to have any impact on the Company’s
financial position.





SFAS No.
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 is 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 a material impact on the Company’s financial position.





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.





9.      Securities





Investment And
Mortgage-Backed Securities, Available For Sale




The
amortized cost, gross unrealized gains, gross unrealized losses, and fair values
of investment and mortgage-backed securities available for sale are as
follows:




June
      30, 2009Amortized
      Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Fair
      valueFHLB
      Securities
            
            $
            21,930,032
            
            
            $
            448,815
            
            
            $
            60,478
            
            
            $
            22,318,369Federal
      Farm Credit Securities
            
            
            11,446,040
            
            
            
            41,767
            
            
            
            152,930
            
            
            
            11,334,877Federal
      National Mortgage
              Association
      (“FNMA”) Bonds
            
            
            2,000,000
            
            
            
            4,690
            
            
            
            -
            
            
            
            2,004,690Small
      Business Administration
              (“SBA”)
      Bonds
            
            
            8,427,818
            
            
            
            10,789
            
            
            
            27,203
            
            
            
            8,411,404Taxable
      Municipal Bond
            
            
            1,019,114
            
            
            
            -
            
            
            
            1,990
            
            
            
            1,017,124Mortgage-Backed
      Securities
            
            
            228,009,495
            
            
            
            5,946,906
            
            
            
            17,978
            
            
            
            233,938,423Equity
      Securities
            
            
            102,938
            
            
            
            -
            
            
            
            50,738
            
            
            
            52,200$
            272,935,437
            
            
            $
            6,452,967
            
            
            $
            311,317
            
            
            $
            279,077,087





15


Security
Federal Corporation and Subsidiaries


Notes
to Consolidated Financial Statements (Unaudited), Continued


9.      Securities,
Continued





March
      31, 2009Amortized
      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 June 30, 2009 and March 31, 2009, the Company held an
amortized cost and fair value of $103.3 million and $106.1 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 $3.8 million and $7.4 million, respectively in proceeds
from sales of available for sale securities during the quarters ended June 30,
2009 and 2008 and recognized approximately $51,000 in gross gains during the
June quarter of 2009 and $121,000 in gross gains and $20,000 in gross losses for
the June quarter of 2008.





The
amortized cost and fair value of investment and mortgage-backed securities
available for sale at June 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
            
            $
            444,827
            
            
            $
            450,447One
      – Five Years
            
            
            7,257,886
            
            
            
            7,385,152Over
      Five – Ten Years
            
            
            21,344,677
            
            
            
            21,515,456After
      Ten Years
            
            
            15,878,552
            
            
            
            15,787,609Mortgage-Backed
      Securities
            
            
            228,009,495
            
            
            
            233,938,423$
            272,935,437
            
            
            $
            279,077,087





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 June 30,
2009.





Less
      than 12 Months
            
            
            12
      Months or More
            
            
            TotalFair
              Value
            
            
            Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Unrealized
              Losses
            
            
            Fair
              Value
            
            
            Unrealized
              LossesFHLB
      Securities
            
            $
            4,501,839
            
            
            $
            60,478
            
            
            $
            -
            
            
            $
            -
            
            
            $
            4,501,839
            
            
            $
            60,478Federal
      Farm Credit
              Securities
            
            
            6,921,870
            
            
            
            152,930
            
            
            
            -
            
            
            
            -
            
            
            
            6,921,870
            
            
            
            152,930Mortgage-Backed
      Securities
            
            
            5,718,652
            
            
            
            10,806
            
            
            
            1,058,666
            
            
            
            7,172
            
            
            
            6,777,318
            
            
            
            17,978SBA
      Bonds
            
            
            5,011,398
            
            
            
            27,203
            
            
            
            -
            
            
            
            -
            
            
            
            5,011,398
            
            
            
            27,203Taxable
      Municipal Bond
            
            
            1,017,124
            
            
            
            1,990
            
            
            
            -
            
            
            
            -
            
            
            
            1,017,124
            
            
            
            1,990Equity
      Securities
            
            
            -
            
            
            
            -
            
            
            
            52,200
            
            
            
            50,738
            
            
            
            52,200
            
            
            
            50,738$
            23,170,883
            
            
            $
            253,407
            
            
            $
            1,110,866
            
            
            $
            57,910
            
            
            $
            24,281,749
            
            
            $
            311,317






16


Security
Federal Corporation and Subsidiaries


Notes
to Consolidated Financial Statements (Unaudited), Continued





9.      Securities,
Continued





Securities
classified as available for sale are recorded at fair market value.
Approximately 18.6% of the unrealized losses, or four 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.





Investment and
Mortgage-Backed Securities, Held to Maturity




The
amortized cost, gross unrealized gains, gross unrealized losses, and fair values
of investment and mortgage-backed securities held to maturity are as
follows:




June 30,
      2009
            
            Amortized
              Cost
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Fair
      ValueFHLB
      Securities
            
            $
            5,000,000
            
            
            $
            327,200
            
            
            $
            6,870
            
            
            $
            5,320,330Federal
      Farm Credit Securities
            
            
            1,000,000
            
            
            
            15,940
            
            
            
            -
            
            
            
            1,015,940SBA
      Bonds
            
            
            5,355,957
            
            
            
            176,841
            
            
            
            -
            
            
            
            5,532,798Mortgage-Backed
      Securities
            
            
            15,189,642
            
            
            
            521,885
            
            
            
            -
            
            
            
            15,711,527Equity
      Securities
            
            
            155,000
            
            
            
            -
            
            
            
            -
            
            
            
            155,000Total
            
            $
            26,700,599
            
            
            $
            1,041,866
            
            
            $
            6,870
            
            
            $
            27,735,595March 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





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 June 30, 2009, the Company held an amortized cost and
fair value of $8.9 million and $9.2 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 June 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
            
            $
            1,000,000
            
            
            $
            1,015,940One
      – Five Years
            
            
            2,155,000
            
            
            
            2,292,510Over
      Five – Ten Years
            
            
            3,448,132
            
            
            
            3,685,834More
      Than Ten Years
            
            
            4,907,825
            
            
            
            5,029,784Mortgage-Backed
      Securities
            
            
            15,189,642
            
            
            
            15,711,527$
            26,700,599
            
            
            $
            27,735,595


17


Security
Federal Corporation and Subsidiaries


Notes
to Consolidated Financial Statements (Unaudited), Continued





9.      Securities,
Continued





The
Company only had one held to maturity security that was in an unrealized loss
position at June 30, 2009. The fair value of this FHLB security was $993,130 and
the unrealized loss was $6,870. 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
June 30, 2009. The Company’s held to maturity portfolio is recorded at amortized
cost.  The Company has the ability and intends to hold these
securities to maturity. There were no sales of securities held to maturity
during the quarters ended June 30, 2009 or 2008, or during the year ended March
31, 2009.





10.   
Loans Receivable, Net





Loans
receivable, net, at June 30, 2009 and March 31, 2009 consisted of the
following:





June
      30, 2009
            
            
            March
      31, 2009Residential
      Real Estate
            
            $
            118,774,125
            
            
            $
            126,980,894Consumer
            
            
            70,425,688
            
            
            
            69,025,082Commercial
      Business
            
            
            22,078,473
            
            
            
            21,032,000Commercial
      Real Estate
            
            
            404,071,667
            
            
            
            404,403,186Loans
      Held For Sale
            
            
            7,157,299
            
            
            
            5,711,807622,507,252
            
            
            
            627,152,969Less:Allowance
      For Possible Loan Loss
            
            
            11,420,326
            
            
            
            10,181,599Loans
      In Process
            
            
            3,514,109
            
            
            
            5,602,248Deferred
      Loan Fees
            
            
            204,423
            
            
            
            279,24915,138,858
            
            
            
            16,063,096$
            607,368,394
            
            
            $
            611,089,873





11.    Subsequent
Events





On July
13, 2009, the Company filed a preliminary prospectus in the form of a
registration statement on Form S-1 with the SEC to propose 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, 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 Company
anticipates, subject to the SEC declaring the Form S-1 effective, that the
offering will be completed by December 31, 2009.





Management
has evaluated all other subsequent events through August 13, 2009 and determined
there are no other events that require disclosure.





18


Security
Federal Corporation and Subsidiaries


Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations





Safe
Harbor Statement





Certain
matters in this Quarterly Report on Form 10-Q for the quarter ended June 30,
2009 constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. 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 variety or range of factors
including, but not limited to, interest rate fluctuations; changes in the level
and trend of loan delinquencies and write-offs; economic conditions in the
Company’s primary market area; ; results of examinations of us by the Office of
Thrift Supervision or other regulatory authorities, including the possibility
that any such regulatory authority may, among other things, require us to
increase our reserve for loan losses or to write-down assets; demand for residential,
commercial business and commercial real estate, consumer, and other types of
loans; success of new products; competitive conditions between banks and
non-bank financial service providers; regulatory and accounting changes;
technology factors affecting operations; pricing of products and services; and
other risks detailed in the Company’s reports filed with the SEC, including the
Annual Report on Form 10-K for the year ended March 31,
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 June 30, 2009 and March 31, 2009





General– Total assets
decreased $9.0 million or 0.9% to $975.6 million at June 30, 2009 from $984.7
million at March 31, 2009.  The primary reason for the decrease in
total assets was a decrease in net loans receivable combined with a decrease in
investment and mortgage-backed securities, held as available for sale and -held
to maturity. For the quarter ended June 30, 2009, the Company applied any excess
funds resulting from these decreases to the repayment of advances from the FHLB
to increase and enhance liquidity. Advances from the FHLB decreased $25.2
million or 11.5% during the quarter to $193.8 million at June 30,
2009.





Assets –The increases and
decreases in total assets were primarily concentrated in the following asset
categories:





Increase
      (Decrease)June
      30,
              2009
            
            
            March
      31,
              2009
            
            
            Amount
            
            
            PercentCash
      And Cash Equivalents
            
            $
            9,339,816
            
            
            $
            6,562,394
            
            
            $
            2,777,422
            
            
            
            42.3
            %Investment
      And Mortgage-
              Backed
      Securities –
              Available
      For Sale
            
            
            279,077,087
            
            
            
            282,832,735
            
            
            
            (3,755,648
            )
            
            
            (1.3
            )Investment
      And Mortgage-
              Backed
      Securities – Held
              To
      Maturity
            
            
            26,700,599
            
            
            
            31,265,866
            
            
            
            (4,565,267
            )
            
            
            (14.6
            )Loan
      Receivable, Net
            
            
            607,368,394
            
            
            
            611,089,873
            
            
            
            (3,721,479
            )
            
            
            (0.6
            )Premises
      And Equipment,
              Net
            
            
            21,392,627
            
            
            
            21,675,434
            
            
            
            (282,807
            )
            
            
            (1.3
            )Goodwill
            
            
            1,199,754
            
            
            
            1,421,754
            
            
            
            (222,000
            )
            
            
            (15.6
            )Repossessed
      Assets
              Acquired
      In
              Settlement
      of Loans
            
            
            1,882,432
            
            
            
            1,985,172
            
            
            
            (102,740
            )
            
            
            (5.2
            )Other
      Assets
            
            
            2,339,211
            
            
            
            1,657,189
            
            
            
            682,022
            
            
            
            41.2





Cash and
cash equivalents increased $2.8 million or 42.3% to 9.3 million at June 30, 2009
compared to $6.6 million at March 31, 2009. Loans receivable, net decreased $3.7
million or 0.6% to $607.4 million at June 30, 2009 from $611.1 million at March
31, 2009 as a result of decreased loan demand, specifically in the residential
real estate loan category. Residential real estate loans decreased $8.2 million
to $118.8 million at June 30, 2009 from $127.0 million at March 31, 2009,
primarily attributable to the slowing of the local and national
economy.





The
decrease in residential real estate loans was offset partially by increases in
consumer and commercial business and real estate loans and in loans held for
sale. Consumer loans increased $1.4 million to $70.4 million at June 30, 2009
compared to $69.0 million at March 31, 2009. Commercial real estate loans and
commercial business loans increased $332,000 and $1.0 million, respectively, to
$404.1 million and $22.1 million, respectively at June 30, 2009 when compared to
the balance at March 31, 2009. Loans held for sale increased $1.4 million to
$7.2 million at June 30, 2009 from $5.7 million at March 31, 2009.




19


Security
Federal Corporation and Subsidiaries


Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued





Investment
and mortgage-backed securities available for sale decreased $3.8 million or 1.3%
to $279.1 million at June 30, 2009 from $283.0 million at March 31, 2009. This
decrease was the result of principal repayments on mortgage-backed securities
coupled with the sale of three securities during the quarter, offset slightly by
security purchases.Investment and
mortgage-backed securities held to maturity decreased $4.6 million or 14.6% to
$26.7 million at June 30, 2009 as a result of calls and maturities of securities
during the quarter as well as principal repayments on mortgage-backed
securities. The Company did not purchase or sell any held to maturity securities
during the period.





Premises
and equipment, net, decreased $283,000 to $21.4 million at June 30, 2009 from
$21.7 million at March 31, 2009 primarily attributable to depreciation expense
during the period of approximately $385,000.





Goodwill
decreased $222,000 to $1.2 million at June 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.





FHLB
stock, at cost, decreased $38,000 to $12.6 million at June 30, 2009 from $12.7
million at March 31, 2009.  The decrease is attributable to a decrease
in total assets combined with a decrease in FHLB advances. The amount of FHLB
stock is determined by a FHLB requirement that the Company maintain stock equal
to 0.20% of total assets at June 30, 2009 plus a transaction component, which
equals 4.5% of outstanding advances (borrowings) from the FHLB of
Atlanta.





Repossessed
assets acquired in settlement of loans decreased $103,000 to $1.9 million at
June 30, 2009 from $2.0 million at March 31, 2009.  The Company sold
one real estate property and two vehicles and repossessed one additional
property during the period for a net decrease during the quarter. At June 30,
2009, the balance of repossessed assets consisted of the following 14 real
estate properties: two lots within one subdivision of Aiken, South Carolina;
approximately 17 acres of land in Aiken, South Carolina; a commercial building
and two single-family residences in Augusta, Georgia; one single-family
residence under construction in Columbia, South Carolina; and seven
single-family residences in South Carolina.





Other
assets increased $682,000 to $2.3 million at June 30, 2009 from $1.7 million at
March 31, 2009.





Liabilities


Deposit
Accounts


BalanceJune
      30, 2009
            
            
            March
      31, 2009
            
            
            Increase
      (Decrease)Balance
            
            
            Weighted
              Rate
            
            
            Balance
            
            
            Weighted
              Rate
            
            
            Amount
            
            
            PercentDemand
      Accounts:Checking
            
            
            $
            111,185,006
            
            
            
            0.18
            %
            
            $
            104,662,377
            
            
            
            0.21
            %
            
            $
            6,522,629
            
            
            
            6.2
            %Money
      Market
            
            
            
            156,999,331
            
            
            
            1.51
            
            
            
            150,513,010
            
            
            
            1.88
            
            
            
            6,486,321
            
            
            
            4.3Statement
      Savings
              Accounts
            
            
            
            17,217,922
            
            
            
            0.44
            
            
            
            17,187,295
            
            
            
            0.54
            
            
            
            30,627
            
            
            
            0.2Total
            
            
            
            285,402,259
            
            
            
            0.93
            
            
            
            272,362,682
            
            
            
            1.15
            
            
            
            13,039,577
            
            
            
            4.8Certificate
      Accounts0.00
      – 1.99%
            
            
            
            61,503,463
            
            
            
            
            
            
            
            21,143,194
            
            
            
            
            
            
            
            40,360,269
            
            
            
            190.92.00
      – 2.99%
            
            
            
            121,848,647
            
            
            
            
            
            
            
            112,373,285
            
            
            
            
            
            
            
            9,475,362
            
            
            
            8.43.00
      – 3.99%
            
            
            
            65,714,020
            
            
            
            
            
            
            
            76,088,180
            
            
            
            
            
            
            
            (10,374,160
            )
            
            
            (13.6
            )4.00
      – 4.99%
            
            
            
            124,998,983
            
            
            
            
            
            
            
            173,467,216
            
            
            
            
            
            
            
            (48,468,233
            )
            
            
            (27.9
            )5.00
      – 5.99%
            
            
            
            5,881,728
            
            
            
            
            
            
            
            6,279,018
            
            
            
            
            
            
            
            (397,290
            )
            
            
            (6.3
            )Total
            
            
            
            379,946,841
            
            
            
            3.18
            
            
            
            389,350,893
            
            
            
            3.51
            
            
            
            (9,404,052
            )
            
            
            (2.4
            )Total
      Deposits
            
            
            $
            665,349,100
            
            
            
            2.21
            %
            
            $
            661,713,575
            
            
            
            2.54
            %
            
            $
            3,635,525
            
            
            
            0.5
            %





Included
in the certificates above were $20.0 million and $25.4 million in brokered
deposits at June 30, 2009 and March 31, 2009, respectively with a weighted
average interest rate of 1.81% and 2.04%, respectively.


20


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:





BalanceJune
      30, 2009
            
            
            March
      31, 2009
            
            
            DecreaseFiscal
      Year Due:
            
            Balance
            
            
            Rate
            
            
            Balance
            
            
            Rate
            
            
            Balance
            
            
            Percent2010
            
            $
            65,880,000
            
            
            
            1.10%
            
            
            $
            91,080,000
            
            
            
            0.94%
            
            
            $
            (25,200,000
            )
            
            
            (27.7
            )%2011
            
            
            15,000,000
            
            
            
            4.87%
            
            
            
            15,000,000
            
            
            
            4.87%
            
            
            
            -
            
            
            
            -2012
            
            
            24,700,000
            
            
            
            4.56%
            
            
            
            24,700,000
            
            
            
            4.56%
            
            
            
            -
            
            
            
            -2013
            
            
            10,000,000
            
            
            
            4.76%
            
            
            
            10,000,000
            
            
            
            4.76%
            
            
            
            -
            
            
            
            -2014
            
            
            20,000,000
            
            
            
            3.84%
            
            
            
            20,000,000
            
            
            
            3.84%
            
            
            
            -
            
            
            
            -Thereafter
            
            
            58,214,491
            
            
            
            4.30%
            
            
            
            58,218,434
            
            
            
            4.30%
            
            
            
            (3,943
            )
            
            
            (0.0
            )%Total
      Advances
            
            $
            193,794,491
            
            
            
            3.27%
            
            
            $
            218,998,434
            
            
            
            2.95%
            
            
            $
            (25,203,943
            )
            
            
            (11.5
            )%





The
following table shows callable FHLB advances as of the dates
indicated.  These advances are also included in the above
table.  All callable advances are callable at the option of the
FHLB.  If an advance is called, the Bank has the option to payoff the
advance without penalty, re-borrow funds on different terms, or convert the
advance to a three-month floating rate advance tied to LIBOR.





As
      of June 30, 2009Borrow
      Date
            
            Maturity
      Date
            
            Amount
            
            Int.
      Rate
            
            Type
            
            Call
      Dates06/24/05
            
            06/24/15
            
            5,000,000
            
            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
            
            09/14/0901/12/06
            
            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











21


Security
Federal Corporation and Subsidiaries


Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued





As
      of March 31, 2009Borrow
      Date
            
            Maturity
      Date
            
            Amount
            
            Int.
      Rate
            
            Type
            
            Call
      Dates06/24/05
            
            06/24/15
            
            5,000,000
            
            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 thereafter11/29/05
            
            11/29/13
            
            5,000,000
            
            4.320%
            
            1
      Time Call
            
            05/29/0912/14/05
            
            12/14/11
            
            5,000,000
            
            4.640%
            
            1
      Time Call
            
            09/14/0901/12/06
            
            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 thereafter06/29/07
            
            06/29/12
            
            5,000,000
            
            4.945%
            
            1
      Time Call
            
            06/29/0907/25/07
            
            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
$15.9 million and $16.1 million in other borrowings (non-FHLB advances) at June
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 June 30, 2009 and March
31, 2009, short-term repurchase agreements were $11.1 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 June 30, 2009 and March 31, 2009, the interest rate paid
on the repurchase agreements was 1.09% 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 $22.8 million
and $23.4 million at June 30, 2009 and $25.5 million and $26.0 million at March
31, 2009, respectively.





At June
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 October 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 (“TAF”) 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 28-day or
84-day maturity. At June 30, 2009, the Company had $22.0 million outstanding in
advances obtained through the TAF program, an increase of $12.0 million from
$10.0 million at March 31, 2009. The interest rate on these advances was 0.25%
at June 30, 2009 and March 31, 2009.  The balance at June 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 $32.6 million and $32.9 million, respectively, at June 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 by the shareholder of the
Collier-Jennings Companies in cumulative increments of 20% per year for a
five-year period at the greater of $26 per share or one and one-half times the
book value of the Company’s stock. At June 30, 2009, the shareholder had not
elected to redeem any of the shares.








22





Security
Federal Corporation and Subsidiaries


Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued





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 4.61% at June 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 2.33% at June 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
remained fairly constant at $67.1 million at June 30, 2009, decreasing $23,000
or less than 0.1%  from $67.1 million at March 31, 2009. Accumulated
other comprehensive income, net of tax decreased $2,000 to $3.8 million at June
30, 2009.  The Company’s net income available for common shareholders
was $129,000 for the three month period ended June 30, 2009, after preferred
stock dividends of $225,000 and accretion of preferred stock of
$18,000.  The Board of Directors of the Company declared the 74th
consecutive quarterly common stock dividend, which was $0.08 per share, in May
2009, and totaled $197,000.  Book value per common share was
$19.92 at June 30, 2009 and $19.95 at March 31, 2009.





Non-performing
Assets.  The following table sets forth detailed information
concerning our non-performing assets for the periods indicated:





At
      June 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
            
            $
            2,758,553
            
            
            
            0.5
            %
            
            $
            1,112,023
            
            
            
            0.2
            %
            
            $
            1,646,530
            
            
            
            148.1
            %Commercial business
            
            
            2,626,645
            
            
            
            0.4
            
            
            
            2,808,080
            
            
            
            0.5
            
            
            
            (181,435
            )
            
            
            (6.5
            )Commercial real
      estate
            
            
            13,199,367
            
            
            
            2.2
            
            
            
            8,044,372
            
            
            
            1.3
            
            
            
            5,154,995
            
            
            
            64.1Consumer
            
            
            888,019
            
            
            
            0.1
            
            
            
            955,683
            
            
            
            0.1
            
            
            
            (67,664
            )
            
            
            (7.1
            )Total non-performing
      loans
            
            
            19,472,584
            
            
            
            3.2
            
            
            
            12,920,158
            
            
            
            2.1
            
            
            
            6,552,426
            
            
            
            50.7Other
      non-performing assetsRepossessed
    assets
            
            
            30,076
            
            
            
            0.0
            
            
            
            61,126
            
            
            
            0.0
            
            
            
            (31,050
            )
            
            
            (50.8
            )Real estate
    owned
            
            
            1,852,356
            
            
            
            0.3
            
            
            
            1,924,046
            
            
            
            0.3
            
            
            
            (71,690
            )
            
            
            (3.7
            )Total other non-performing
      assets
            
            
            1,882,432
            
            
            
            0.3
            
            
            
            1,985,172
            
            
            
            0.3
            
            
            
            (102,740
            )
            
            
            (5.2
            )Total
      non-performing assets
            
            $
            21,355,016
            
            
            
            3.5
            %
            
            $
            14,905,330
            
            
            
            2.4
            %
            
            $
            6,449,686
            
            
            
            43.3
            %Total
      non-performing assets as a percentage of total assets
            
            
            2.2
            %
            
            
            
            
            
            
            1.5
            %





(1)
Percent of gross loans receivable, net of deferred fees and loans in process and
loans held for sale


23


Security
Federal Corporation and Subsidiaries


Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued





The
Company’s non-performing assets increased $6.4 million to $21.4 million at June
30, 2009 from $14.9 million at March 31, 2009. The increase was primarily
concentrated in commercial real estate loans. The Company placed $3.9 million in
loans on non- accrual during the period as a result of cash flow problems
experienced by three local residential builders and one developer resulting in
their inability to meet the debt service requirements of their
loans.  In addition, the Company classified $4.1 million related to
one commercial real estate participation loan.  The Company also
experienced a slight increase in non-performing one- to four- family real estate
loans as a result of the general deteriorating conditions in the local economy
including rising unemployment rates and declining housing markets.





The
cumulative interest not accrued during the quarter ended June 30, 2009 relating
to all non-performing loans totaled $200,000. We intend to work with our
builders and other 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.





COMPARISON OF THE RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008





Net Income Available to Common
Shareholders -Net income available to common shareholders decreased
$673,000 or 83.9% to $129,000 for the three months ended June 30, 2009 compared
to $802,000 for the three months ended June 30, 2008. The decrease in net income
was primarily the result of the Company’s decision to increase the provision 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 quarter. The net interest margin increased 14 basis points
to 2.71% for the quarter ended June 30, 2009 from 2.57% for the comparable
quarter in the previous year. Net interest income increased $1.2 million or
23.5% to $6.3 million during the three months ended June 30, 2009, compared to
$5.1 million for the same period in 2008, as a result of an increase in interest
income combined with a decrease in interest expense.  During the three
months ended June 30, 2009, average interest earning assets increased $137.4
million to $935.0 million while average interest-bearing liabilities increased
$121.9 million to $874.1 million.  The interest rate spread increased
18 basis points to 2.54% during the three months ended June 30, 2009 compared to
the same period in 2008.





Interest Income -Total
interest income increased $233,000 or 2.0% to $12.1 million during the three
months ended June 30, 2009 from $11.8 million for the same period in 2008. This
increase is primarily the result of the increase in interest earning assets.
Total interest income on loans increased $158,000 or 1.9% to $8.7 million during
the three months ended June 30, 2009 as a result of the average loan portfolio
balance increasing $86.0 million, offset slightly by the yield in the loan
portfolio decreasing 80 basis points. Interest income from mortgage-backed
securities increased $452,000 or 18.9% as a result of a $54.9 million increase
in the average balance of the portfolio offset by a 32 basis point decrease in
yield. Interest income from investment securities decreased $372,000 or 41.8% as
a result of a decrease of $3.1 million in the average balance of the investment
securities portfolio combined with a 200 basis point decrease in the
yield.


24


Security
Federal Corporation and Subsidiaries


Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued





The
following table compares detailed average balances, associated yields, and the
resulting changes in interest income for the three months ended June 30, 2009
and 2008:





Three
      Months Ended June 30,2009
            
            
            2008Average
              Balance
            
            
            Yield
            
            
            Average
              Balance
            
            
            Yield
            
            
            Increase
      (Decrease) In Interest And Dividend Income From 2008Loans
      Receivable, Net
            
            $
            613,143,758
            
            
            
            5.68
            %
            
            $
            527,101,104
            
            
            
            6.48
            %
            
            $
            158,402Mortgage-Backed
      Securities
            
            
            254,792,860
            
            
            
            4.47
            
            
            
            199,929,297
            
            
            
            4.79
            
            
            
            451,888Investment
      Securities
            
            
            66,444,277
            
            
            
            3.11
            
            
            
            69,564,979
            
            
            
            5.11
            
            
            
            (371,904
            )Other
            
            
            607,766
            
            
            
            0.14
            
            
            
            987,149
            
            
            
            2.10
            
            
            
            (4,965
            )Total
      Interest-Earning Assets
            
            $
            934,988,661
            
            
            
            5.16
            %
            
            $
            797,582,529
            
            
            
            5.93
            %
            
            $
            233,421





Interest Expense - Total
interest expense decreased $971,000 or 14.5% to $5.7 million during the three
months ended June 30, 2009 compared to $6.7 million for the same period one-year
earlier. The decrease in total interest expense is attributable to a 95 basis
point decrease in interest rates paid during the quarter, offset by an increase
in the average balance of interest-bearing liabilities outstanding of $121.9
million when compared to the prior year.





Interest
expense on deposits decreased $641,000 or 13.9% to $4.0 million during the
period as a result of an 83 basis point decrease in the cost of deposits from
3.39% for the quarter ended June 30, 2008 to 2.56% for the same quarter in 2009.
The decrease in the cost of deposits was offset by an increase in the average
balance during the quarter. Average interest bearing deposits grew $77.6 million
to $623.0 million compared to $545.4 million for the three months ended June 30,
2008.  Interest expense on advances and other borrowings decreased
$319,000 or 15.9% during the 2009 period compared to 2008 as a result of a 124
basis point decrease in the average cost of debt outstanding combined with a
$44.3 million increase in the average total borrowings outstanding. Interest
expense on junior subordinated debentures decreased $10,000 to $63.8 million for
the three months ended June 30, 2009 compared to $74.1 million for the same
period one year ago while the average balance remained constant at $5.2 million
for the three months ended June 30, 2009 and 2008, respectively, as a result of
an 80 basis point decrease in the rate paid.





The
following table compares detailed average balances, cost of funds, and the
resulting changes in interest expense for the three months ended June 30, 2009
and 2008:





Three
      Months Ended June 30,2009
            
            
            2008Average
              Balance
            
            
            Yield
            
            
            Average
              Balance
            
            
            Yield
            
            
            Decrease
      In Interest Expense From 2008Now
      And Money Market
              Accounts
            
            $
            216,448,975
            
            
            
            1.27
            %
            
            $
            206,443,306
            
            
            
            1.79
            %
            
            $
            (239,494
            )Statement
      Savings Accounts
            
            
            17,321,483
            
            
            
            0.46
            
            
            
            16,414,938
            
            
            
            0.82
            
            
            
            (13,385
            )Certificate
      Accounts
            
            
            389,222,011
            
            
            
            3.37
            
            
            
            322,502,428
            
            
            
            4.54
            
            
            
            (388,221
            )FHLB
      Advances And Other
              Borrowed
      Money
            
            
            245,948,850
            
            
            
            2.75
            
            
            
            201,686,231
            
            
            
            3.99
            
            
            
            (319,151
            )Junior
      Subordinated
              Debentures
            
            
            5,155,000
            
            
            
            4.95
            
            
            
            5,155,000
            
            
            
            5.75
            
            
            
            (10,359
            )Total
      Interest-Bearing
              Liabilities
            
            $
            874,096,319
            
            
            
            2.62
            %
            
            $
            752,201,903
            
            
            
            3.57
            %
            
            $
            (970,610
            )











25


Security
Federal Corporation and Subsidiaries


Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued





Provision for Loan Losses -The amount of the provision is determined by management’s on-going
monthly analysis of the loan portfolio.  Management uses multiple
methods to measure the estimate of the adequacy of the allowance for loan
losses.  These methods incorporate percentage of classified loans,
five-year and two-year averages of historical loan losses in each loan category
and current economic trends, and the assignment of percentage targets of
reserves in each loan category.  The Company considers subjective
factors such as changes in local and national economic conditions, industry
trends, the composition and volume of the loan portfolio, credit concentrations,
lending policies, and the experience and ability of the staff and Board of
Directors.





Conditions
in the local and national economy continued to impact the Company’s loan
portfolio during the quarter ended June 30, 2009. Rising unemployment rates and
the decline in the housing market negatively impacted borrowers’ ability to
repay their loan obligations.  The provision for loan losses was $1.4
million for the quarter ended June 30, 2009 compared to $225,000 for the same
quarter in the prior year. This increase reflects the Company’s concern for
deteriorating economic conditions in the local economy coupled with an increase
in non-performing assets within its loan portfolio.





The
following table details selected activity associated with the allowance for loan
losses for the three months ended June 30, 2009 and 2008:


June
      30, 2009
            
            
            June
      30, 2008Beginning
      Balance
            
            $
            10,181,599
            
            
            $
            8,066,762Provision
            
            
            1,400,000
            
            
            
            225,000Charge-offs
            
            
            (171,779
            )
            
            
            (50,186
            )Recoveries
            
            
            10,506
            
            
            
            4,920Ending
      Balance
            
            $
            11,420,326
            
            
            $
            8,246,496Allowance
      For Loan Losses As A Percentage Of Gross Loans Receivable
              Held
      For Investment At The End Of The Period
            
            
            1.87
            %
            
            
            1.53
            %Allowance
      For Loan Losses As A Percentage Of Impaired Loans At The
              End
      Of The Period
            
            
            33.78
            %
            
            
            241.87
            %Impaired
      Loans
            
            
            33,803,496
            
            
            
            3,409,465Nonaccrual
      Loans And 90 Days Or More Past Due Loans As A
              Percentage
      Of Gross Loans Receivable Held For Investment At The
              End
      Of The Period
            
            
            3.18
            %
            
            
            1.25
            %Loans
      Receivable, Net
            
            $
            607,368,394
            
            
            $
            534,861,890





Non-performing
assets, which consisted of 73 non-accrual loans and 13 repossessed properties,
increased $6.4 million to $21.4 million at June 30, 2009 from $14.9 million at
March 31, 2009. Despite the increase in non-performing assets, the Company
maintained relatively low and stable trends related to net charge-offs.
Annualized net charge-offs as a percent of gross loans were 0.11% for the
quarter ended June 30, 2009 compared to 0.12% for the year March 31, 2009 and
0.03% for the quarter ended June 30, 2008. Management of the Company continues
to be concerned about current market conditions and closely monitors the loan
portfolio on an ongoing basis to proactively identify any potential
issues.





Non-accrual
loans and loans 90 days or more past due increased $6.6 million to $19.5 million
at June 30, 2009 when compared to $12.9 million at March 31, 2009. The increase
was primarily attributable to a slowing down of the residential real estate
market and the overall deterioration of economic conditions in the Company’s
market area. At June 30, 2009, the Company did not have any loans that were 90
days or more past due and still accruing interest.











26


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 $383,000 to $1.5 million for the three
months ended June 30, 2009 from $1.1 million for the three months ended June 30,
2008. The following table provides a detailed analysis of the changes in the
components of non-interest income:





Three
      Months Ended June 30,
            
            
            Increase
      (Decrease)2009
            
            
            2008
            
            
            Amounts
            
            
            PercentGain
      On Sale Of Investments
            
            $
            50,891
            
            
            $
            101,405
            
            
            $
            (50,514
            )
            
            
            (49.8
            )%Gain
      On Sale Of Loans
            
            
            433,607
            
            
            
            118,683
            
            
            
            314,924
            
            
            
            265.4Service
      Fees On Deposit Accounts
            
            
            276,382
            
            
            
            281,153
            
            
            
            (4,771
            )
            
            
            (1.7
            )Income
      From Cash Value Of
              Life
      Insurance
            
            
            90,000
            
            
            
            85,746
            
            
            
            4,254
            
            
            
            5.0Commissions
      On Insurance
            
            
            139,254
            
            
            
            168,992
            
            
            
            (29,738
            )
            
            
            (17.6
            )Other
      Agency Income
            
            
            122,467
            
            
            
            46,937
            
            
            
            75,530
            
            
            
            160.9Trust
      Income
            
            
            141,678
            
            
            
            105,000
            
            
            
            36,678
            
            
            
            34.9Mandatorily
      Redeemable Financial
              Instrument
      Valuation Adjusted
            
            
            78,000
            
            
            
            -
            
            
            
            78,000
            
            
            
            100.0Other
            
            
            171,908
            
            
            
            213,291
            
            
            
            (41,383
            )
            
            
            (19.4
            )Total
      Non-Interest Income
            
            $
            1,504,187
            
            
            $
            1,121,207
            
            
            $
            382,980
            
            
            
            34.2
            %





Gain on
sale of investments was $51,000 for the three months ended June 30, 2009,
compared to $101,000 in the same period one year earlier. The gain resulted from
the sale of three investments during the three month period. Seven securities
were sold during the same quarter of the previous year. Gain on sale of loans
increased $315,000 to $434,000 during the three months ended June 30, 2009
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 decreased $5,000 to $276,000 for the quarter ended June 30,
2009 compared to the same quarter in 2008.





Commissions
on insurance and other agency income increased $46,000 to $262,000 for the
quarter ended June 30, 2009 compared to the same quarter in 2008 as a result of
the growth and expansion of the insurance subsidiary, specifically the premium
finance business.  Trust income was $142,000 for the three months
ended June 30, 2009 compared to $105,000 for the comparable quarter in the
previous year.





The
Company recorded $78,000 in valuation income related to the mandatorily
redeemable financial instrument during the quarter ended June 30, 2009. The
mandatorily redeemable financial instrument is reported at fair value on the
balance sheet with any resulting valuation adjustments included in
earnings.





Other
miscellaneous income including credit life insurance commissions, safe deposit
rental income, annuity and stock brokerage commissions, and other miscellaneous
fees, decreased $41,000 to $172,000 during the three months ended June 30, 2009
compared to the same period one year ago.





27


Security
Federal Corporation and Subsidiaries


Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued





General And Administrative
Expenses – General and administrative expenses increased $1.0 million or
21.1% to $5.8 million for the three months ended June 30, 2009 from $4.8 million
for the same period one year ago.  The following table provides a
detailed analysis of the changes in the components of general and administrative
expenses:





Three
      Months Ended June 30,
            
            
            Increase
      (Decrease)2009
            
            
            2008
            
            
            Amounts
            
            
            PercentSalaries
      And Employee Benefits
            
            $
            2,944,435
            
            
            $
            2,784,235
            
            
            $
            160,200
            
            
            
            5.6
            %Occupancy
            
            
            493,345
            
            
            
            497,320
            
            
            
            (3,975
            )
            
            
            (0.8
            )Advertising
            
            
            134,554
            
            
            
            140,821
            
            
            
            (6,267
            )
            
            
            (4.5
            )Depreciation
      And Maintenance
              Of
      Equipment
            
            
            442,027
            
            
            
            426,924
            
            
            
            15,103
            
            
            
            3.5FDIC
      Insurance Premiums
            
            
            756,000
            
            
            
            155,810
            
            
            
            600,190
            
            
            
            385.2Amortization
      of Intangibles
            
            
            22,500
            
            
            
            22,500
            
            
            
            -
            
            
            
            -Other
            
            
            1,045,053
            
            
            
            794,380
            
            
            
            250,673
            
            
            
            31.6Total
      General And Administrative Expenses
            
            $
            5,837,914
            
            
            $
            4,821,990
            
            
            $
            1,015,924
            
            
            
            21.1
            %





Salary
and employee benefits increased $160,000 or 5.6% to $2.9 million for the three
months ended June 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 June 30, 2009, the Company had 235 full time equivalent employees
compared to 228 full time equivalents at June 30, 2008.





Occupancy
decreased $4,000 or 0.8% to 493,000 for the three months ended June 30, 2009
from $497,000 for the same period one year ago. Advertising expense decreased
$6,000 or 4.5% to $135,000 for the three months ended June 30, 2009 from
$141,000 for the same period one year ago.  The decreases in both
occupancy and advertising can be attributed to the Company’s effort to reduce
expenses during the quarter.





FDIC
insurance premiums increased $600,000 or 385.2% to $756,000 for the three month
period ended June 30, 2009 compared to $156,000 for the same period a year ago.
The Company accrued $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 of approximately $225,000. The assessment applies to
all federally insured depository institutions and is calculated based on 5% of
an assessment base determined relative to asset size.





Other
expenses increased $251,000 to $1.0 million for the three month period ended
June 30, 2009, an increase of 31.6% when compared to the same period in the
prior year. Other expenses include legal fees which increased $71,000 for the
three month period ended June 30, 2009 when compared to the same period in the
prior year. This increase is a result of fees associated with the Company’s
anticipated senior convertible debt offering discussed in Note 11 combined with
costs required to insure compliance with increased regulation and legislation
that is present in the current environment. Consultant fees, which are also
included in other expenses, increased $44,000 during the three month period
ended June 30, 2009 when compared to the same period in 2008 as a result of
costs associated with an independent credit quality review performed on the loan
portfolio during the quarter. The Company hired an independent party to perform
a credit quality review of all existing loans exceeding a certain threshold
within the Company’s loan portfolio in an effort to proactively identify any
potential problems that might arise as a result of current economic conditions.
Other expenses also include increased real estate owned expenses and increased
expenses associated with loan collection and workout efforts.





Provision For Income Taxes –Provision for income taxes decreased $174,000 or 43.9% to $223,000 for
the three months ended June 30, 2009 from $397,000 for the same period one year
ago.  Income before income taxes was $595,000 and $1.2 million for the
three months ended June 30, 2009 and 2008, respectively.  The
Company’s combined federal and state effective income tax rate for the current
quarter was 37.5% for the current quarter compared to 33.1% for the same quarter
one year ago.


28


Security
Federal Corporation and Subsidiaries


Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations, Continued





Liquidity
Commitments, Capital Resources, and Impact of Inflation and Changing
Prices





Liquidity –The Company
actively analyzes and manages the Bank’s liquidity with the objective of
maintaining an adequate level of liquidity and to ensure the availability of
sufficient cash flows to support loan growth, fund deposit withdrawals, fund
operations, and satisfy other financial commitments.  See the
“Consolidated Statements of Cash Flows” contained in Item 1 – Financial
Statements, herein.





The
primary sources of funds are customer deposits, loan repayments, loan sales,
maturing investment securities, and advances from the FHLB 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 three months ended June 30, 2009 loan repayments exceeded loan disbursements
resulting in a $3.7 million or 0.6% decrease in total net loans
receivable.  During the three months ended June 30, 2009, deposits
increased $3.6 million and FHLB advances decreased $25.2 million.  The
Bank had $93.4 million in additional borrowing capacity at the FHLB at the end
of the period.  At June 30, 2009, the Bank had $338.6 million of
certificates of deposit maturing within one year.  Based on previous
experience, the Bank anticipates a significant portion of these certificates
will be renewed.





Off-Balance Sheet Commitments
– The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers.  These financial instruments generally include commitments
to originate mortgage, commercial and consumer loans, and involve to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet.  The Company’s maximum exposure to
credit loss in the event of nonperformance by the borrower is represented by the
contractual amount of those instruments.  Since some commitments may
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.  The Company uses the same credit
policies in making commitments as it does for on-balance sheet
instruments.  Collateral is not required to support
commitments.





The
following table sets forth the length of time until maturity for unused
commitments to extend credit and standby letters of credit at June 30,
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
            
            $
            2,480
            
            
            $
            4,075
            
            
            $
            23,014
            
            
            $
            29,569
            
            
            $
            34,526
            
            
            $
            64,095Standby
      letters of credit
            
            
            22
            
            
            
            266
            
            
            
            461
            
            
            
            749
            
            
            
            100
            
            
            
            849Total
            
            $
            2,502
            
            
            $
            4,341
            
            
            $
            23,475
            
            
            $
            30,318
            
            
            $
            34,626
            
            
            $
            64,944





29


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.





For the
three months ended June 30, 2009, the Bank's interest rate spread, defined as
the average yield on interest bearing assets less the average rate paid on
interest bearing liabilities was 2.54%.  For the year ended March 31,
2009, the interest rate spread was 2.45%.





Item
4T. Controls and Procedures





(a)
Evaluation of Disclosure Controls and Procedures:  An evaluation of
the Company’s disclosure controls and procedures (as defined in Rule 13a - 15(e)
of the Securities Exchange Act of 1934 (“Act”)) was carried out under the
supervision and with the participation of the Company’s Chief Executive Officer,
Chief Financial Officer and several other members of the Company’s senior
management as of the end of the period covered by this quarterly
report.  The Company’s Chief Executive Officer and Chief Financial
Officer concluded that at June 30, 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.




Section
404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and
annually report on their systems of internal control over financial reporting.
Under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
Company conducted an assessment of the effectiveness of the Company's internal
control over financial reporting based on the framework established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. As reported in the 10-K, based on this assessment,
management determined that the Company's internal control over financial
reporting as of March 31, 2009 is effective.








30


Security
Federal Corporation and Subsidiaries





Item
4T. Controls and Procedures, Continued





(b)
Changes in Internal Controls: In the quarter ended June 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.





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.





Item
2     Unregistered sales of Equity
Securities and Use Of Proceeds





Period
            
            (a)
      Total
              Number
      of
              Shares
              Purchased
            
            
            (b)
      Average
              Price
      Paid
              per
      Share
            
            
            (c)
      Total Number of Shares Purchased as Part of Publicly Announced
      Program
            
            
            (d)
      Maximum Number
              of
      Shares that May
              Yet
      Be Purchased
              Under
      the ProgramApril
      1 – April 30, 2009
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            50,067May
      1 – May 31, 2009
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            50,067June
      1 – June 30, 2009
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            50,067Total
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            50,067





In August
2008, the Company’s Board of Directors authorized a plan to continue
repurchasing shares of the Company’s outstanding common stock. This plan
authorized the repurchase of 125,000 shares or 5% of the Company’s outstanding
common stock. As of June 30, 2009, 74,933 shares have been repurchased under
this program. The Company did not repurchase any shares during the three months
ended June 30, 2009. As a part of the Company’s participation in the Treasury’s
Capital Purchase Program this share repurchase program was suspended
indefinitely.





Item
3     Defaults Upon Senior
Securities


None





Item
4     Submission Of Matters To A
Vote Of Security Holders


None





Item
5     Other
Information


None












31


Security
Federal Corporation and Subsidiaries





Part
II: Other Information, Continued








Item
      6
            Exhibits3.1
            Articles
      Of Incorporation, as amended (1)3.2
            Bylaws
      (2)4
            Instruments
      defining the rights of security holders, including indentures (3)10.1
            1993
      Salary Continuation Agreements (4)10.2
            Amendment
      One to 1993 Salary Continuation Agreement (5)10.3
            Form
      of 2006 Salary Continuation Agreement(6)10.4
            1999
      Stock Option Plan (2)


10.5
            1987
      Stock Option Plan (4)


10.6
            2002
      Stock Option Plan (7)


10.7
            2004
      Employee Stock Purchase Plan (8)10.8
            Incentive
      Compensation Plan (4)10.9
            Form
      of Security Federal Bank Salary Continuation Agreement (9)10.10
            Form
      of Security Federal Split Dollar Agreement (9)10.11
            2008
      Equity Incentive Plan (10)14
            Code
      of Ethics (11)31.1
            Certification
      of the Chief Executive Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act.31.2
            Certification
      of the Chief Financial Officer Pursuant to Section 302 of the
      Sarbanes-Oxley Act.32
            Certifications
      Pursuant to Section 906 of the Sarbanes-Oxley
  Act.





(1)
            Filed
      on June 26, 1998, as an exhibit to the Company’s Proxy Statement and
      incorporated herein by reference.


(2)
            Filed
      on March 2, 2000, as an exhibit to the Company’s Registration Statement on
      Form S-8 and incorporated herein by reference.(3)
            Filed
      on August 12, 1987, as an exhibit to the Company’s Registration Statement
      on Form 8-A and incorporated herein by reference.(4)
            Filed
      on June 28, 1993, as an exhibit to the Company’s Annual Report on Form
      10-KSB and incorporated herein by reference.(5)
            Filed
      as an exhibit to the Company’s Quarterly Report on Form 10-QSB for the
      quarter ended September 30, 1993 and incorporated herein by
      reference.(6)
            Filed
      on May 24, 2006 as an exhibit to the Company’s Current Report on Form 8-K
      dated May 18, 2006 and incorporated herein by
    reference.(7)
            Filed
      on June 19, 2002, as an exhibit to the Company’s Proxy Statement and
      incorporated herein by reference.(8)
            Filed
      on June 18, 2004, as an exhibit to the Company’s Proxy Statement and
      incorporated herein by reference.(9)
            Filed
      on May 24, 2006 as an exhibit to the Current Report on Form 8-K and
      incorporated herein by reference.(10)
            Filed
      on June 20, 2008, as an exhibit to the Company’s Proxy Statement and
      incorporated herein by reference.(11)
            Filed
      on June 27, 2008 as an exhibit to the Company’s Annual Report on Form 10-K
      and incorporated herein by
reference.








32


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 CORPORATIONDate:
            August  14,
      2009
            
            By:
            /s/Timothy
      W. SimmonsTimothy
      W. SimmonsPresidentDuly
      Authorized Representative









Date:
            August
      14, 2009
            
            By:
            /s/Roy
      G. LindburgRoy
      G. LindburgCFODuly
      Authorized Representative
















33