As filed with the Securities and Exchange Commission on August 27,September 2, 2009

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

AMENDMENT NO. 12 TO

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

 

 

 

Copies to:

 

 

 

 

 

 

 

 

(2)  Previously paid.

 

The debentures are convertible at any time prior to maturity, unless previously redeemed. The debentures are convertible into common stock, par value $.01 per share, of Security Federal Corporation, at a conversion rate of 50 shares of common stock for each $1,000 principal amount of debentures (equivalent to a conversion price of $20.00 per share), subject to adjustment in certain events. On _____, 2009, the last reported sale price of the common stock on the OTC Bulletin Board (symbol "SFDL.OB") was $____ per share. The high bid and low asked prices for the common stock on that date were $____ and $____ per share, respectively. The debentures will not be listed for trading on the OTC Bulletin Board or any securities exchange; consequently it is anticipated the debentures will not be readily marketable. See "Market For Our Common Stock and Dividends."

The debentures will mature on December 1, 2029 and will accrue interest at the rate of 8.0% per annum until maturity or earlier redemption or repayment. Interest on the debentures is payable on June 1 and December 1 of each year, commencing June 1, 2010. The debentures are redeemable, in whole or in part, at the option of Security Federal Corporation at any time on or after December 1, 2019, at a price equal to 100% of the principal amount of the debentures to be purchased plus any accrued and unpaid interest to, but excluding, the date of redemption. The debentures will be unsecured general obligations of Security Federal Corporation ranking equal in right of payment to all of our present and future unsecured indebtedness that is not expressly subordinated. If at any time after the earlier of (i) December 19, 2011 and (ii) the date on which all of the shares of our Series A Preferred Stock have been redeemed by us or transferred by the U.S. Treasury to third parties, we experience a fundamental change as defined in this prospectus, holders may require us to repurchase for cash all or a portion of their debentures at a price equal to 101% of the principal amount of the debentures to be repurchased plus any accrued and unpaid interest to, but excluding, the date of repurchase  See "Description of  Debentures" beginning on page ____.

The date of this Prospectus is _______, 2009

 

 

This prospectus describes the specific details regarding this offering and the terms and conditions of the debentures being offered hereby, including the principal amount, interest rate and terms and conditions upon which our debentures are convertible into shares of our common stock, and the risks of investing in our debentures and our common stock. To the extent information in this prospectus is inconsistent with any of the documents incorporated by reference into this prospectus, you should rely on this prospectus. You should read this prospectus together with the additional information about us described in the section entitled "Where You Can Find More Information."

As used in this prospectus, the terms "we," "our" and "us" refer to Security Federal Corporation and its consolidated subsidiaries, unless the context indicates otherwise. When we refer to the "Bank" in this prospectus, we are referring to Security Federal Bank, a wholly owned subsidiary of Security Federal Corporation.

 

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may inspect without charge any documents filed by us at the Public Reference Room of the Securities and Exchange Commission or SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain copies of all or any part of these materials from the SEC upon the payment of certain fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The SEC also maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. Our filings with the SEC are available to the public through the SEC's website at www.sec.gov.

We have filed with the SEC a registration statement on Form S-1 relating to the securities covered by this prospectus. This prospectus is part of the registration statement and does not contain all of the information in the registration statement. You will find additional information about us in the registration statement. Any statement made in this prospectus concerning a contract or other document of ours is not necessarily complete, and you should read the documents that are filed as exhibits to the registration statement or otherwise filed with the SEC for a more complete understanding of the document or matter. Each such statement is qualified in all respects by reference to the document to which it refers. You may inspect without charge a copy of the registration statement at the SEC's Public Reference Room in Washington D.C., as well as through the SEC's website.

 

As allowed by the SEC's rules, we "incorporate by reference" certain information that we file with the SEC, which means that we can disclose important information to you by referring you to other documents. The information incorporated by reference is an important part of this prospectus.

We incorporate by reference into this prospectus the documents listed below:

 

 

Notwithstanding the above, we are not incorporating by reference any documents or information deemed to have been "furnished" and not "filed" in accordance with SEC rules.

 

 

The debentures offered hereby are unsecured obligations of Security Federal Corporation, are not savings accounts, deposits or other obligations of any depository institution or subsidiary of Security Federal Corporation and are not insured by the Federal Deposit Insurance Corporation, also referred to in this document as the FDIC, or any other government agency.

 

Security Federal Corporation was incorporated under the laws of the State of Delaware in July 1987 for the purpose of becoming the savings and loan holding company for Security Federal Bank, otherwise referred to in this prospectus as the Bank, upon the Bank's conversion from the mutual form of ownership to the stock form of ownership. Effective August 17, 1998, Security Federal Corporation changed its state of incorporation from Delaware to South Carolina. Security Federal Corporation's common stock is quoted on the OTC Bulletin Board under the symbol "SFDL.OB."

 

We serve our primary market areas, Aiken, Richland and Lexington Counties, South Carolina, and Columbia County, Georgia, through our 13 retail banking offices. At June 30, 2009, we had total assets of $975.6 million, including loans receivable, net, of $607.4 million, investment and mortgage-backed securities of $305.8 million, deposits of $665.3 million and shareholders' equity of $67.1 million.

 

Our principal business is accepting deposits from the general public and originating commercial business and real estate loans and, to a lesser extent, residential mortgage loans to enable borrowers to purchase or refinance one- to four-family residential real estate. In addition, we make consumer loans and construction loans on single family residences, multi-family dwellings and commercial real estate, as well as loans for the acquisition, development and construction of residential subdivisions and commercial projects. Additional financial services are provided by our wholly owned subsidiary, Security Federal Insurance, Inc.

Our income is derived primarily from interest and fees earned in connection with our lending activities, and our principal expenses are interest paid on savings deposits and borrowings and operating expenses. Our results of operations are largely dependent upon our net interest income, which is the difference between the interest we receive on our loan portfolio and our securities portfolio and the interest we pay on our deposit accounts and borrowings, and our asset quality.

We have recently achieved significant growth. Our consolidated assets have increased from $586.0 million at March 31, 2005 to $975.6 million at June 30, 2009. Although we expect our growth rate to slow down in light of the current recessionary economy, our long term business strategy is to grow in a reasonable manner through the expansion of our branch network either by purchasing branches from other financial institutions or establishing new branches in suitable locations within our existing market areas. This will permit us to continue to meet the financial services needs of the communities we serve and to take advantage of the projected growth in population and income which management believes will occur in our primary market areas. In addition, our business strategy includes the possible acquisition of other financial services institutions and related companies operating generally within our market areas. Although we have no current written or oral arrangements, commitments or understandings relating to current acquisitions, on an ongoing basis we enter into possible acquisition discussions consistent with our business strategy.

 

 

 

 

 

 

 

 

 

 

 

 

Recently enacted legislation and other measures undertaken by the Treasury, the Federal Reserve and other governmental agencies may not help stabilize the U.S. financial system or improve the housing market.

 

 

Pursuant to the TARP, the Treasury has the authority to, among other things, purchase up to $700 billion in mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.

 

The EESA followed numerous actions by the Federal Reserve, Congress, Treasury, the Securities and Exchange Commission, and others to address the currently liquidity and credit crisis that has followed the sub-prime meltdown that commenced in 2007. These measures include homeowner relief that encourages loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the repeated lowering of the federal funds rate; emergency action against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; coordinated international efforts to address illiquidity and other weaknesses in the banking sector.

 

In addition, the Internal Revenue Service has issued an unprecedented wave of guidance in response to the credit crisis, including a relaxation of limits on the ability of financial institutions that undergo an ownership change to utilize their pre-change net operating losses and net unrealized built-in losses. The relaxation of these limits may make significantly more attractive the acquisition of financial institutions whose tax basis in their loan portfolios significantly exceeds the fair market value of those portfolios.

 

 

The actual impact that EESA and such related measures undertaken to alleviate the credit crisis, including the extreme levels of volatility and limited credit availability currently being experienced, is unknown. The failure of such measures to help stabilize the financial markets and a continuation or worsening of current financial market

 

Recent negative developments in the financial industry and credit markets may continue to adversely impact our operations, financial condition and results of operations.

 

We are particularly exposed to downturns in the U.S. housing market. Dramatic declines in the housing market over the past year -- with falling home prices, increases in foreclosures, unemployment and under-employment -- have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities, major commercial and investment banks, and regional financial institutions such as us. Concerned about the stability of the financial markets and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including funding to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility, and widespread reduction of business activity generally. The resulting economic pressures on consumers and lack of confidence in the financial markets have adversely affected our business, financial condition and results of operations. We do not expect that the difficult conditions in the financial markets are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry. In particular, we may face the following risks in connection with these events:

 

 

 

 

 

We expect to pay significantly higher FDIC premiums because market developments have significantly depleted the FDIC insurance fund and the ratio of reserves to insured deposits has declined.

 

Current levels of market volatility are unprecedented and could adversely affect our liquidity, results of operations and financial condition.

 

The capital and credit markets have been experiencing volatility and disruption for more than a year reaching unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers' underlying financial strength. If current levels of market disruption and volatility continue or worsen, our ability to access capital may be adversely affected, which in turn could adversely affect our business, financial condition and results of operations.

 

We may be required to make further increases in our provisions for loan losses and to charge off additional loans in the future, which could adversely affect our results of operations.

 

 

 

 

 

 

In addition, our Compensation Committee must identify the features in the named executive officers' compensation arrangements that could lead officers to take unnecessary and excessive risks that could threaten our value. The Committee must also have a meeting at least annually with our senior risk officers to discuss and review the relationship between our risk management policies and practices and named executive officer compensation arrangements.

 

We became subject to the additional executive compensation limitations in connection with the enactment of ARRA on February 17, 2009. The ARRA amends, among other things, the TARP legislation by directing the Treasury Department to issue regulations implementing strict limitations on compensation paid or accrued by financial institutions, such as us, participating in the TARP. These limitations are to include:

 

 

 

 

 

 

The ARRA directs the Treasury Department to issue regulations implementing the executive compensation restrictions. Many questions remain regarding the scope of the limitations and the requirements of the ARRA because none of the regulations mandated by the law have been issued to date. Pending the issuance of regulations, we are reviewing the requirements of the ARRA, its impact on compensation, and the effect of its requirements on our compensation arrangements. Actions required by the ARRA and consideration of competitive factors may include changes to the form and amount of compensation paid to our executive officers, including adjustments to base salaries, the reduction or elimination of bonus compensation, issuance of long-term restricted stock awards and modifications to existing agreements.

 

The securities purchase agreement between us and Treasury limits our ability to pay dividends on and repurchase our common stock.

 

The securities purchase agreement between us and Treasury provides that prior to the earlier of (i) December 19, 2011 and (ii) the date on which all of the shares of the Series A Preferred Stock have been redeemed by us or transferred by Treasury to third parties, we may not, without the consent of Treasury, (a) increase the cash dividend on our common stock or (b) subject to limited exceptions, redeem, repurchase or otherwise acquire shares of our common stock or preferred stock other than the Series A Preferred Stock or trust preferred securities. In addition, we are unable to pay any dividends on our common stock unless we are current in our dividend payments on the Series A Preferred Stock. These restrictions, together with the potentially dilutive impact of the warrant described in the next risk factor, could have a negative effect on the value of our common stock. Moreover, holders of our common stock are entitled to receive dividends only when, as and if declared by our Board of Directors. Although we have historically paid cash dividends on our common stock, we are not required to do so and our Board of Directors could reduce or eliminate our common stock dividend in the future.

 

The Series A Preferred Stock impacts net income available to our common shareholders and earnings per common share and the warrant we issued to Treasury may be dilutive to holders of our common stock.

 

The dividends declared on the Series A Preferred Stock will reduce the net income available to common shareholders and our earnings per common share. The Series A Preferred Stock will also receive preferential treatment in the event of our liquidation, dissolution or winding up. Additionally, the ownership interest of the existing holders of our common stock will be diluted to the extent the warrant we issued to Treasury in conjunction with the sale of the Series A Preferred Stock is exercised. The shares of common stock underlying the warrant represent approximately 5.31% of the shares of our common stock outstanding as of March 31, 2009 (including the shares issuable upon exercise of the warrant in total shares outstanding). Although Treasury has agreed not to vote any of the shares of common stock it receives upon exercise of the warrant, a transferee of any portion of the warrant or of any shares of common stock acquired upon exercise of the warrant is not bound by this restriction.

 

 

Our compliance with these regulations is costly and may restrict certain activities, including but not limited to, payment of dividends on our common stock, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, access to capital and brokered deposits and location of banking offices. If we were unable to meet these or other regulatory requirements, our financial condition, liquidity, and results of operations would be materially and adversely affected.

 

Our federal thrift charter may be eliminated under the Administration’s Financial Regulatory Reform Plan.

 

The 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. There is no assurance as to how this new charter, or the supervision by the NBS, will affect our operations going forward.

 

If our allowance for loan losses is not sufficient to cover actual loan losses or if we are required to increase our provision for loan losses, our earnings could be reduced.

 

We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and the loss and delinquency experience, and evaluate economic conditions. Management recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner. If our assumptions are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for additions to our allowance through an increase in the provision for loan losses. Material additions to the allowance or increases in our provision for loan losses could have a material adverse effect on our financial condition and results of operations. Our allowance for loan losses was 1.87% of gross loans receivable, held for investment and 58.6% of nonperforming loans at June 30, 2009.

 

In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by the bank regulators, may have a materially adverse effect on our financial condition and results of operations.

 

 

 

 

Our success depends primarily on the general economic conditions of the states of South Carolina and Georgia and the specific local markets in which we operate. Unlike larger national or other regional banks that are more geographically diversified, we provide banking and financial services to customers located primarily in Aiken, Richland, and Lexington Counties in South Carolina and Columbia County in Georgia.  The local economic conditions in our market areas have a significant impact on the demand for our products and services as well as the ability of our customers to repay loans, the value of the collateral securing loans and the stability of our deposit funding sources.

 

Adverse economic conditions unique to these markets could have a materially adverse effect on our financial condition and results of operations. Further, a significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets, or other factors could impact these state and local markets and, in turn, could result in the following consequences, any of which could hurt our business materially:

 

 

 

 

 

Our business activities and credit exposure are primarily concentrated in Aiken, Richland, and Lexington Counties in South Carolina and Columbia County in Georgia. Beginning in 2007 and throughout 2008, the housing market in the United States has experienced significant adverse trends, including accelerated price depreciation in some markets and rising delinquency and default rates. Our construction and land, commercial and multifamily loan portfolios and certain of our other loans have been affected by the downturn in the residential real estate market. During 2008, evidence of this downturn became more apparent in the markets we serve. We anticipate that further declines in the estate markets in our primary market area will hurt our business. As of June 30, 2009, substantially all of our loan portfolio consisted of loans secured by real estate located in Aiken, Richland, and Lexington Counties in South Carolina and Columbia County in Georgia. If real estate values continue to decline the collateral for our loans will provide less security and our ability to recover on defaulted loans by selling the underlying real estate will be diminished, making it more likely that we will suffer losses on defaulted loans. As a result of these trends, we have recently experienced an increase in delinquency and default rates in our primary market areas. These trends if they continue or worsen could cause further credit losses and loan loss provisioning and could adversely affect our earnings and financial condition.

 

We may suffer losses in our loan portfolio despite our underwriting practices.

 

We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices. Although we believe that our underwriting criteria are appropriate for the various kinds of loans we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our allowance for loan losses.

 

Our loan portfolio is concentrated in loans with a higher risk of loss.

 

We originate loans collateralized by commercial business and commercial real estate loans, as well as residential mortgage loans primarily within our market areas. Generally, commercial business and commercial real estate loans, have a higher risk of loss than the residential mortgage loans. We had approximately $426.2 million outstanding in these types of higher risk loans at June 30, 2009. These loans have greater credit risk than residential real estate for a number of reasons, including those described below:

 

 

 

 

Our ability to foreclose on single family home loans may be restricted.

 

New legislation proposed by Congress may give bankruptcy judges the power to reduce the increasing number of home foreclosures. Bankruptcy judges would be given the authority to restructure mortgages and reduce a borrower's payments. Property owners would be allowed to keep their property while working out their debts. This legislation may restrict our collection efforts on one-to-four family loans. Separately, the administration has announced a voluntary program under the Troubled Asset Relief Program law, which provides for government subsidies for reducing a borrower's interest rate, which a lender would have to match with its own money.

 

Our real estate lending also exposes us to the risk of environmental liabilities.

 

In the course of our business, we may foreclose and take title to real estate, and we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third persons for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the

 

We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially harmed.

 

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, growth and prospects.

 

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. We rely on customer deposits and advances from the FHLB, the Federal Reserve Bank of Richmond ("FRB") and other borrowings to fund our operations. Although we have historically been able to replace maturing deposits and advances if desired, we may not be able to replace such funds in the future if, among other things, our financial condition, the financial condition of the FHLB or FRB, or market conditions change. Our access to funding sources in amounts adequate to finance our activities or the terms of which are acceptable could be impaired by factors that affect us specifically or the financial services industry or economy in general -- such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us.

 

Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Although we consider our sources of funds adequate for our liquidity needs, we may seek additional debt in the future to achieve our long-term business objectives. Additional borrowings, if sought, may not be available to us or, if available, may not be available on reasonable terms. If additional financing sources are unavailable, or are not available on reasonable terms, our financial condition, results of operations, growth and future prospects could be materially adversely affected. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs.

 

In addition, if we are unable to redeem the Series A Preferred Stock prior to December 19, 2014, the cost of this capital to us will increase substantially on that date, from 5.0% per annum (approximately $900,000 annually) to 9.0% per annum (approximately $1.6 million annually). Depending on our financial condition at the time, this increase in the annual dividend rate on the Series A Preferred Stock could have a material negative effect on our liquidity.

 

We could see declines in our uninsured deposits, which would reduce the funds we have available for lending and other funding purposes.

 

The FDIC in the fourth quarter of 2008 increased the federal insurance of deposit accounts from $100,000 to $250,000 and provided 100% insurance coverage for noninterest-bearing transaction accounts for participating members including the Bank. These increases of coverage, with the exception of IRA and certain retirement accounts, are scheduled to expire December 31, 2013. With the increase of bank failures, depositors are reviewing deposit relationships to maximize federal deposit insurance coverage. We may see outflows of uninsured deposits as customers restructure their banking relationships in setting up multiple accounts in multiple banks to maximize federal deposit insurance coverage.

 

Changes in accounting standards may affect our performance.

 

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time there are changes in the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how we report and record our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in restating prior period financial statements.

 

We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed.

 

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise additional capital to support our continued growth, both internally and through acquisitions, or we may otherwise elect to raise additional capital. In that regard, a number of financial institutions have recently raised considerable amounts of capital as a result of a deterioration in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic conditions, declines in real estate values and other factors. Should we elect to seek additional capital, we may do so through the issuance of, among other things, our common stock or securities convertible into our common stock.

 

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when needed, it may have a material adverse effect on our financial condition, results of operations and prospects.

 

Strong competition within our market areas may limit our growth and may adversely affect our profitability.

 

The banking and financial services industry is very competitive. Legal and regulatory developments have made it easier for new and sometimes unregulated competitors to compete with us. Consolidation among financial service providers has resulted in fewer very large national and regional banking and financial institutions holding a large accumulation of assets. These institutions generally have significantly greater resources, a wider geographic presence or greater accessibility. Our competitors sometimes are also able to offer more services, more favorable

 

Our information systems may experience an interruption or breach in security.

 

We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

 

We rely on third-party service providers for much of our communications, information, operating and financial control systems technology. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources for these services. We may not be able to negotiate terms that are as favorable to us, or obtain services with similar functionality, as found in our existing systems, without the need to expend substantial resources, if at all. Any of these circumstances could have an adverse effect on our business.

 

We rely on dividends from subsidiaries for most of our revenue.

 

Security Federal Corporation is a separate and distinct legal entity from its subsidiaries, and receives substantially all of its revenue from dividends from its subsidiaries. These dividends are the principal source of funds to pay dividends on Security Federal Corporation's capital stock and interest and principal on its debt. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to Security Federal Corporation. Also, its right to participate in a distribution of assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors. In the event the Bank is unable to pay dividends, Security Federal Corporation may not be able to service its debt, pay obligations or pay dividends on its capital stock. The

Our recent results may not be indicative of future results, and may not be an adequate measure of the risk of investing in our stock.

 

We may not be able to sustain our historical growth rate or our recent growth rates in loans and deposits. If we are unable to sustain our growth, this would negatively affect risks related to our earnings and the value of our common stock.

 

 

Our primary source of funds is dividends from Security Federal Bank, which may limit our ability to pay principal and interest on the debentures and dividends on the Series A Preferred Stock and Our Common Stock.

 

Security Federal Corporation is a legal entity separate and distinct from Security Federal Bank. As a general business corporation, Security Federal Corporation generally is not restricted in its business activities and operations. The debentures will be direct unsecured obligations of Security Federal Corporation only, and Security Federal Corporation will be solely responsible for the payment of all principal and interest on the debentures. At present, Security Federal Corporation's primary source of revenues is dividends from Security Federal Bank. The debentures are not deposits in, or other obligations of, the Bank and are not insured by any governmental agency. Security Federal Bank's ability to pay dividends or make other capital distributions to Security Federal Corporation is governed by regulations of the Office of Thrift Supervision or OTS. In addition, Security Federal Corporation and Security Federal Bank are "affiliates" for regulatory purposes, and thus are subject to restrictions on loans and other transactions between Security Federal Bank and Security Federal Corporation. The assets of Security Federal Corporation are subject to the claims of all direct creditors (including depositors of Security Federal Bank). The debentures mature on December 1, 2029, and no sinking fund will be created to repay the debentures upon maturity or earlier redemption. See "Market for Our Common Stock and Dividends."

 

Shares of the Series A Preferred Stock and our common stock  are equity interests in Security Federal Corporation and do not constitute indebtedness. As such, the Series A Preferred Stock and our common stock, ranks junior to all indebtedness, including the debentures and other non-equity claims on Security Federal Corporation with respect to assets available to satisfy claims on Security Federal Corporation, including in a liquidation of Security Federal Corporation. Additionally, unlike the debentures or other indebtedness, where principal and interest would customarily be payable on specified due dates, in the case of preferred stock like the Series A Preferred Stock, as with our common stock, (1) dividends are payable only when, as and if authorized and declared by, our Board of Directors and depend on, among other things, our results of operations, financial condition, debt service requirements, other cash needs and any other factors our Board of Directors deems relevant, and (2) as a South Carolina corporation, under South Carolina law we are subject to restrictions on payments of dividends out of lawfully available funds. See "Regulatory Considerations."

 

There is no limit on our ability to incur future indebtedness and the debentures are structurally subordinated to the indebtedness of the Bank. This may affect your ability to receive payments on the debentures.

 

 

Our right to receive any assets of  the Bank upon liquidation or reorganization, and, as a result, the right of the holders of the debentures to participate in those assets, will be effectively subordinated to the claims of the Bank's creditors, including depositors, other creditors and preferred stockholders, if any. The debentures do not restrict the ability of the Bank or any future subsidiary to incur additional liabilities. In addition, even if we were a creditor to the Bank or another subsidiary, our rights as a creditor would be subordinate to any security interest in the assets of our subsidiaries and any indebtedness of our subsidiaries senior to indebtedness held by us.

 

 

The limited covenants in the indenture will not protect you from a payment default.

 

The covenants in the indenture are limited, do not protect holders of the debentures in the event of a material adverse change in our financial condition or results of operations and do not limit our ability to incur additional senior indebtedness or general obligations.

 

 

 

 

 

 

 

 

Some significant restructuring transactions may not constitute a fundamental change, in which case we would not be obligated to offer to repurchase the debentures.

 

Upon the occurrence of a fundamental change, you may have the right to require us to repurchase the debentures. However, the fundamental change provisions will not afford protection to holders of debentures in the event of certain transactions. For example, any leveraged recapitalization, refinancing, restructuring, or acquisition initiated by us will generally not constitute a fundamental change requiring us to repurchase the debentures. In the event of any such transaction, holders of the debentures will not have the right to require us to repurchase the debentures, even though any of these transactions could increase the amount of our indebtedness, or otherwise adversely affect our capital structure, thereby adversely affecting the holders of debentures.

 

The conversion rate of the debentures may not be adjusted for all dilutive events.

 

The conversion rate of the debentures will be subject to adjustment for certain events, including, but not limited to, the issuance of stock dividends on our common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness or assets, cash dividends and certain issuer tender or exchange offers as described under "Description of the Debentures." However, the conversion rate will not be adjusted for other events, such as a third-party tender or exchange offer or an issuance of common stock for cash, that may adversely affect the trading price of the debentures or the common stock. See "The debentures are not expected to have an active market and their price may be volatile. You may be unable to sell your debentures at the price you desire or at all."

 

Conversion of the debentures will dilute the ownership interest of existing shareholders, including holders who had previously converted their debentures.

 

The conversion of some or all of the debentures will dilute the ownership interests of existing shareholders. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the debentures may encourage short selling by market participants because the conversion of the debentures could be used to satisfy short positions, or anticipated conversion of the debentures into shares of our common stock could depress the price of our common stock.

 

If you hold debentures, you will not be entitled to any rights with respect to our common stock, but you will be subject to all changes made with respect to our common stock.

 

If you hold debentures, you will not be entitled to any rights with respect to our common stock (including, without limitation, voting rights and rights to receive any dividends or other distributions on our common stock), but if you subsequently convert your debentures into common stock, you will be subject to all changes affecting the common stock. You will have rights with respect to our common stock only if and when we deliver shares of common stock to you upon conversion of your debentures and, to a limited extent, under the conversion rate adjustments applicable to the debentures. For example, in the event that an amendment is proposed to our articles of

 

We may not be able to refinance the debentures if required or if we so desire.

 

We may need or desire to refinance all or a portion of the debentures or any other future indebtedness that we incur on or before the maturity of the debentures. There can be no assurance that we will be able to refinance any of our indebtedness on commercially reasonable terms, if at all.

 

We will retain broad discretion in using the net proceeds from this offering, and might not use the proceeds effectively.

 

We intend to utilize up to $5.0 million of the net proceeds to repay a line of credit with another financial institution. We intend to utilize any remaining net proceeds for general corporate purposes, which may include future acquisitions as well as investments in or extensions of credit to Security Federal Bank and our other existing or future subsidiaries. Accordingly, our management will retain broad discretion to allocate any remaining net proceeds of this offering. Any remaining net proceeds may be applied in ways with which you and other investors in the offering may not agree. Moreover, our management may use any remaining proceeds for corporate purposes that may not increase our market value or make us more profitable. In addition, it may take us some time to effectively deploy any remaining proceeds. Until these proceeds are effectively deployed, our return on equity and earnings per share may be negatively impacted. Management's failure to use any remaining net proceeds effectively could have an adverse effect on our business, financial condition and results of operations.

 

 

The price of our common stock may fluctuate significantly, and this may make it difficult for you to resell the common stock when you want or at prices you find attractive.

 

We cannot predict how the shares of our common stock will trade in the future. The market price of our common stock will likely continue to fluctuate in response to a number of factors, including the following, most of which are beyond our control, as well as the other factors described in this "Risk Factors" section:

 

 

 

 

 

 

 

Our shares do not at this time qualify for listing on any national securities exchange, and we cannot assure you that our shares will ever be listed on a national securities exchange. However, the shares are traded on the OTC Bulletin Board and at least one company makes a market in our common stock. Because the shares are not listed on a national securities exchange, a broadly followed, established trading market for our common stock may never develop or be maintained. Furthermore, we cannot assure you that at least one company will continue to make a

 

The securities purchase agreement between us and Treasury limits our ability to pay dividends on and repurchase our common stock and repurchase our preferred stock or the debentures.

 

The securities purchase agreement between us and Treasury provides that prior to the earlier of (i) December 19, 2011 and (ii) the date on which all of the shares of the Series A Preferred Stock have been redeemed by us or transferred by Treasury to third parties, we may not, without the consent of Treasury, (a) increase the cash dividend on our common stock or (b) subject to limited exceptions, redeem, repurchase or otherwise acquire shares of our common stock, preferred stock or the debentures other than the Series A Preferred Stock or trust preferred securities. In addition, we are unable to pay any dividends on our common stock unless we are current in our dividend payments on the Series A Preferred Stock. These restrictions, together with the potentially dilutive impact of the warrant described in the next risk factor, could have a negative effect on the value of our common stock.  Moreover, holders of our common stock are entitled to receive dividends only when, as and if declared by our Board of Directors. Although we have historically paid cash dividends on our common stock, we are not required to do so and our Board of Directors could reduce or eliminate our common stock dividend in the future.

 

The Series A Preferred Stock impacts net income available to our common stockholders and earnings per common share, and the warrant we issued to Treasury may be dilutive to holders of our common stock.

 

The dividends declared on the Series A Preferred Stock will reduce the net income available to common stockholders and our earnings per common share. The Series A Preferred Stock will also receive preferential treatment in the event of liquidation, dissolution or winding up of Security Federal Corporation. Additionally, the ownership interest of the existing holders of our common stock will be diluted to the extent the warrant we issued to Treasury in conjunction with the sale to Treasury of the Series A Preferred Stock is exercised. The shares of common stock underlying the warrant represent approximately 5.3% of the shares of our common stock outstanding as of June 30, 2009 (including the shares issuable upon exercise of the warrant in total shares outstanding).  Although Treasury has agreed not to vote any of the shares of common stock it receives upon exercise of the warrant, a transferee of any portion of the warrant or of any shares of common stock acquired upon exercise of the warrant is not bound by this restriction.

 

Our directors and executive officers could have the ability to influence shareholder actions in a manner that may be adverse to your personal investment objectives; Our articles of incorporation and bylaws, and state and federal laws could discourage hostile acquisition of us.

 

As of June 30, 2009, our directors and executive officers owned shares of our common stock, which represents approximately 27.3% of our issued and outstanding common stock. Our directors, director emeritus and executive officers intend to purchase approximately $2.7 million of debentures. Additionally, we have issued 28,600 stock options to our directors and executive officers. If our directors and executive officers exercised all of their stock options and converted all of their debentures into common stock, they would own shares upon exercise representing approximately 31.9% of our then outstanding common stock.

 

Due to their significant ownership interests, our directors and executive officers are able to exercise significant influence over our management and business affairs. For example, using their voting power, the directors and executive officers may be able to influence the outcome of director elections or block significant transactions, such as a merger or acquisition, or any other matter that might otherwise be approved by other shareholders.

 

 

 

There may be future issuances of additional common stock or other dilution of our equity, which may adversely affect the market price of our common stock.

 

The issuance of additional shares of Security Federal Corporation's common stock could have a dilutive effect on the market for the common stock, and could adversely affect the market prices of the stock. Following this offering, we will have up to $15.0 million in aggregate principal amount of debentures outstanding which would be convertible into 750,000 shares of common stock and have issued a warrant to purchase 137,966 shares of our common stock to Treasury in connection with our issuance of the Series A Preferred Stock. In addition, there are no restrictions in the indenture preventing us from issuing additional shares of common stock or other securities convertible into or exercisable for common stock. As noted herein, we may pursue acquisitions from time to time consistent with our strategic plan which could be accomplished by the issuance of additional shares of common stock or other securities convertible into or exercisable for such common stock. Our articles of incorporation authorizes the issuance of 5,000,000 shares of common stock of which 2,461,090 shares were issued and outstanding at June 30, 2009. In addition, an aggregate of 100,500 shares of common stock were issuable upon exercise of outstanding stock options at June 30, 2009, none of which had an exercise price less than the market price of the common stock as of that date, and an additional 50,000 shares remain available for issuance pursuant to Security Federal Corporation's stock option plans. The conversion of debentures or other securities or the exercise of warrants or stock options which have conversion or exercise prices that are less than the then current market price will dilute the ownership interest of our existing common shareholders. Any sales in the public market of our common stock, issuable upon such conversion, could adversely affect prevailing market prices of the outstanding shares of our common stock and the debentures. In addition, the existence of our debentures may encourage short selling or arbitrage trading activity by market participants because the conversion of our debentures could depress the price of our equity securities. See "Use of Proceeds,"  "Capitalization" and "Description of The Capital Stock."

 

The following financial information is derived in part from our audited financial statements for the fiscal years ended March 31, 2005 through 2009. The information is only a summary and you should read it in conjunction with our historical financial statements and related notes contained in the annual and quarterly reports that we have filed with the Securities and Exchange Commission. Some of this historical financial information has also been incorporated into this prospectus by reference. We have listed the documents that we incorporate by reference under the heading "Where You Can Find More Information."

 

 

 

 

This prospectus and the documents incorporated into this prospectus by reference contain forward-looking statements, which can be identified by the use of words such as "believes," "expects," "anticipates," "estimates" or similar expressions. Forward-looking statements include:

 

 

 

 

 

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Any of the forward-looking statements that we make in this prospectus and the documents incorporated into this prospectus by reference and in other public statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements.

 

We caution readers not to place undue reliance on any such forward-looking statements, which are based on information available to us as of the date of this prospectus. The cautionary statements in the ''Risk Factors'' section and elsewhere in this prospectus also identify important factors and possible events which involve risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. If you are interested in purchasing our debentures, you should consider these risk factors carefully, as well as factors discussed elsewhere in this prospectus, before making a decision to invest. We do not intend to, and assume no responsibility for, and specifically disclaim any responsibility for updating any forward-looking statements or publicly announcing future events or developments that affect the forward-looking statements that may be made by us or on our behalf in this prospectus or any of the documents incorporated by reference into this prospectus. These risks could cause our actual results for fiscal 2010 and beyond to differ materially from those expressed in any forward-looking statements by, or on behalf of, us. Consequently, no forward-looking statement can be guaranteed.

 

 

Security Federal Corporation was incorporated under the laws of the State of Delaware in July 1987 for the purpose of becoming the savings and loan holding company for the Bank, upon the Bank's conversion from mutual to the stock form of ownership. Effective August 17, 1998, Security Federal Corporation changed its state of incorporation from Delaware to South Carolina.

 

Our principal business is accepting deposits from the general public and originating commercial business and real estate loans and, to a lesser extent, residential mortgage loans to enable borrowers to purchase or refinance one- to four-family residential real estate. In addition, we make consumer loans and construction loans on single family residences, multi-family dwellings and commercial real estate, as well as loans for the acquisition, development and construction of residential subdivisions and commercial projects. Additional financial services are provided by our wholly owned subsidiary, Security Federal Insurance, Inc.

 

Our income is derived primarily from interest and fees earned in connection with our lending activities, and our principal expenses are interest paid on savings deposits and borrowings and operating expenses. Our results of operations are largely dependent upon our net interest income, which is the difference between the interest we receive on our loan portfolio and our securities portfolio and the interest we pay on our deposit accounts and borrowings, and our asset quality.

 

We have recently achieved significant growth. Our consolidated assets have increased from $586.0 million at March 31, 2005 to $975.6 million at June 30, 2009. Although we expect our growth rate to slow down in light of the current recessionary economy, our long term business strategy is to grow in a reasonable manner through the expansion of our branch network either by purchasing branches from other financial institutions or establishing new branches in suitable locations within our existing market areas. This will permit us to continue to meet the financial services needs of the communities we serve and to take advantage of the projected growth in population and income which management believes will occur in our primary market areas. In addition, our business strategy includes the possible acquisition of other financial services institutions and related companies operating generally within our market areas. Although we have no current written or oral arrangements, commitments or understandings relating to current acquisitions, on an ongoing basis we enter into possible acquisition discussions consistent with our business strategy.

 

Our executive office is located at 238 Richland Avenue West, Aiken, South Carolina 29801, and our telephone number is (803) 641-3000.

Net proceeds from the sale of the debentures being offered are estimated to be $5.0 million and $15.0  million at the minimum and maximum of the offering range, respectively, before deducting estimated offering expenses. We intend to utilize up to $4.8 million of the net proceeds to repay a line of credit with another financial institution. The unsecured line of credit has an interest rate equal to one month LIBOR plus 2.00% and matures on October 1, 2009. At June 30, 2009 the interest rate was 2.31%. Initially, any remaining net proceeds may be invested in short-term securities or deposited in interest-bearing accounts with Security Federal Bank or third parties. Any remaining net proceeds will be available for use by us for general corporate purposes to promote our business strategy including, without limitation, possible future expansion or acquisitions as well as investments in or extensions of credit to our existing or future subsidiaries. Our business strategy is to attain asset growth primarily through de novo branching, branch acquisitions or the possible acquisition of other financial services companies. Although we have no current written or oral arrangements, commitments or understandings relating to acquisitions, on an ongoing basis we enter into, and are currently involved in, possible acquisition discussions consistent with our business strategy. The amount, if any, of net proceeds to be invested in Security Federal Bank is not known at this time. The precise amounts and timing of the application of any remaining net proceeds will depend upon the funding requirements of Security Federal Corporation and Security Federal Bank and the availability and cost of other funds.

Based upon facts and circumstances which may arise following the offering, the Board of Directors may determine to repurchase common stock in the future subject to compliance with the securities purchase agreement between us and Treasury. See "Risk Factors - Risks Related to Our Common Stock - The securities purchase agreement between us and Treasury limits our ability to pay dividends on and repurchase our common stock." These facts and circumstances may include but are not limited to

 

 

 

 

Any stock repurchases will be subject to the determination of the Board of Directors that we will be capitalized in excess of all applicable regulatory requirements after any such repurchases, that capital will be adequate taking into account, among other things, our level of non-performing assets and other loans of concern, our current and projected results of operations and asset/liability structure, the economic environment and tax and other regulatory considerations. A stock repurchase program may have the effect of:

 

 

 

 

 

As of the date hereof, Security Federal Corporation had repurchased 200,933 shares of its common stock.

 

 

 

 

The table below shows the range of high and low bid prices for Security Federal Corporation common stock for the periods reported. These prices represent actual transactions and do not include retail markups, markdowns or commissions. Our stock is traded on the Over-The-Counter-Bulletin Board under the symbol "SFDL.OB."  The stock began trading on the OTC Bulletin Board in October 2003. Market makers include Sterne, Agee, and Leach, Inc., Morgan Keegan and Company, Inc., A.G. Edwards and Sons, Inc., Hill, Thompson, and Magid, and Monroe Securities, Inc. At June 30, 2009, there were 2,461,090 shares of Security Federal Corporation's common stock issued and outstanding.

 

The stockholders are entitled to dividends when, as and if declared by our Board of Directors, subject to compliance with applicable law. Security Federal Corporation has paid cash dividends on its common stock for every full calendar quarter since paying its first dividend in March 1991. We anticipate we will continue to pay of cash dividends on the common stock, although there can be no assurance as to the amount or timing of future dividends. Funds for the payment by Security Federal Corporation of future cash dividends are expected to be obtained primarily through dividends received by Security Federal Corporation from Security Federal Bank. The declaration and payment of such future dividends will be subject to our operating results and financial condition, general economic conditions, compliance with regulatory requirements and other factors.

 

 

As a savings and loan holding company, Security Federal Corporation is subject to regulation, supervision and examination by the OTS. For a discussion of elements of the regulatory framework applicable to savings and

 

In addition to the foregoing regulatory restrictions, we are and may in the future become subject to contractual restrictions that would limit or prohibit us from paying dividends on our common stock, including those contained in the securities purchase agreement between us and Treasury, as described under "Description of the Capital Stock - Common Stock- -Restrictions on Dividends and Repurchases Under Agreement with Treasury."

 

 

The following table sets forth our capitalization, including indebtedness, at June 30, 2009 and as adjusted to give effect to the issuance of the debentures offered hereby (assuming that none of the debentures have been converted into shares of Security Federal Corporation common stock). The information set forth below should be read in conjunction with our Consolidated Financial Statements and the Notes to the Consolidated Financial Statement incorporated by reference into this prospectus.

 

________________________

 

The debentures are to be issued under to an indenture (the "indenture"), between Security Federal Corporation and Wilmington Trust Company as trustee (the "trustee").

 

 

 

The debentures will be senior unsecured obligations of Security Federal Corporation, will be limited to an aggregate principal amount of up to $15.0 million and will mature on December 1, 2029. The debentures do not have the benefit of a sinking fund. The debentures will bear interest at the rate per annum shown on the front cover  from the date of issuance or from the most recent interest payment date to which interest has been paid or provided for, payable semiannually on June 1 and December 1 of each year, commencing June 1, 2010, to the person in whose name the debenture (or any predecessor debenture) is registered at the close of business on the regular record date for such interest, which shall be May 15 or November 15 (whether or not a business day), as the case may be, next preceding such interest payment date.

 

The debentures will not be secured by the assets of the Company or any of its subsidiaries, including the Bank, or otherwise and will not have the benefit of a sinking fund for the retirement of principal or interest. The rights of the Company to participate in any distribution of assets of any subsidiary, including the Bank, upon its liquidation or reorganization or otherwise (and thus the ability of holders of the debentures to benefit indirectly from such distribution) are subject to the prior claims of creditors of that subsidiary, including depositors of the Bank. Claims on the Company's subsidiaries by creditors, other than the Company, include substantial obligations with respect to deposit liabilities and other borrowings. Additionally, distributions to the Company by its subsidiaries, whether in liquidation, reorganization or otherwise, will be subject to regulatory restrictions and, under certain circumstances, may be prohibited.

Principal of and premium, if any, and interest on the debentures will be payable by the paying agent, which will initially be the trustee, and the transfer of debentures will be registrable at the offices of the trustee in Wilmington, Delaware. In addition, payment of interest may, at the option of Security Federal Corporation, be made by check mailed to the address of the person entitled thereto as it appears in the security register.

The debentures will be issued only in fully registered form, without coupons, in denominations of $5,000 and $1,000 increments thereof. No service charge will be made for any registration of transfer or exchange of debentures, but Security Federal Corporation may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Because Security Federal Corporation is a holding company, its rights and the rights of its creditors, including the holders of the debentures, to participate in the assets or earnings of any subsidiary through the payment of dividends or otherwise will be subject to the prior claims of the subsidiary's creditors, except to the extent that Security Federal Corporation may itself be a creditor with recognized claims against the subsidiary.

 

The debentures will be convertible into the common stock of Security Federal Corporation at any time up to and including the maturity date (subject to prior redemption by Security Federal Corporation on not less than 30 nor more than 60 days' notice) at the principal amount thereof, initially at the conversion price stated on the cover page hereof (subject to adjustments as described below). The right to convert debentures called for redemption will terminate at the close of business on the redemption date and will be lost if not exercised prior to that time unless

Security Federal Corporation defaults in making the payment due upon redemption. For information as to notices of redemption, see " - Optional Redemption."

 

The conversion price will be subject to adjustment upon the occurrence of certain events, including:

 

 

 

 

 

 

 

In no event will any adjustment of the conversion price be required to be made until cumulative adjustments amount to 1% or more of the conversion price as last adjusted.

 

In addition to the foregoing adjustments, Security Federal Corporation will be permitted to make such adjustment to the conversion price as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend or distribution of stock or issuance of rights or warrants will not be taxable to the holders of the common stock.

 

The indenture does not contain provisions which would afford holders of the debentures protection in the event of a highly leveraged or other transaction involving Security Federal Corporation that may adversely affect holders of the debentures.

 

In case of certain consolidations or mergers to which Security Federal Corporation is a party or the transfer of substantially all of the assets of Security Federal Corporation, each debenture then outstanding would, without the consent of any holders of debentures, become convertible only into the kind and amount of securities, cash and other property receivable upon the consolidation, merger or transfer by a holder of the number of shares of common stock into which such debenture might have been converted immediately prior to such consolidation, merger or transfer (assuming such holder of common stock failed to exercise any rights of election and received per share the kind and amount of securities, cash and other property received per share by a plurality of nonelecting shares).

Fractional shares of common stock will not be issued upon conversion, but, in lieu thereof, Security Federal Corporation will pay a cash adjustment based upon the market price of the common stock. Debentures surrendered for conversion during the period from the close of business on any regular record date next preceding any interest payment date to the opening of business on such interest payment date (except debentures called for redemption on a redemption date within such period) must be accompanied by payment of an amount equal to the interest thereon which the registered holder is to receive. In the case of any debenture that has been converted after any regular record date but on or before the next interest payment date, interest whose stated maturity is on such interest payment date will be payable on such interest payment date notwithstanding such conversion, and such interest will be paid to the holder of such debenture on such regular record date. Except as described above, no interest on converted debentures will be payable by Security Federal Corporation on any interest payment date subsequent to the date of conversion. No other payment or adjustment for interest or dividends will be made upon conversion.

 

 

 

If a fundamental change (as defined below in this section) occurs at any time after the earlier of (i) December 19, 2011 and (ii) the date on which all of the shares of Series A Preferred Stock have been redeemed by us or transferred by Treasury to third parties, you will have the right, at your option, to require us to repurchase for cash any or all of your debentures, or any portion of the principal amount thereof, that is equal to $1,000 or any multiple of $1,000. The price we are required to pay (the "fundamental change repurchase price") is equal to 101% of the principal amount of the debentures to be repurchased plus accrued and unpaid interest, to but excluding the fundamental change repurchase date (unless the fundamental change repurchase date is between a regular record date and the interest payment date to which it relates, in which case we will pay accrued and unpaid interest to the holder of record on such regular record date). The fundamental change repurchase date will be a business day specified by us that is no later than the 35th calendar day following the date of our fundamental change notice as described below. Any debentures repurchased by us will be paid for in cash.

 

A "fundamental change" will be deemed to have occurred if any of the following occurs after the earlier of (i) December 19, 2011 and (ii) the date on which all of the shares of Series A Preferred Stock have been redeemed by us or transferred by Treasury to third parties:

 

 

 

 

 

A fundamental change as a result of clause (2) above will not be deemed to have occurred, however, if at least 90% of the consideration received or to be received by our common shareholders, excluding cash payments for fractional shares and cash payments in respect of dissenters' or appraisal rights, in connection with the transaction or transactions otherwise constituting the fundamental change consists of shares of common stock traded on a U.S. national securities exchange or which will be so traded or quoted when issued or exchanged in connection with a fundamental change (these securities being referred to as "publicly traded securities") and as a result of this transaction or transactions the debentures become convertible into such publicly traded securities, excluding cash payments for fractional shares and cash payments in respect of dissenters' or appraisal rights.

 

"Continuing director" means a director who either was a member of our board of directors on the date of this prospectus or who becomes a member of our board of directors subsequent to that date and whose election, appointment or nomination for election by our shareholders, is duly approved by a majority of the continuing directors on our board of directors at the time of such approval, either by a specific vote or by approval of the proxy statement issued by us on behalf of our entire board of directors in which such individual is named as nominee for director.

 

If after the earlier of (i) December 19, 2011 and (ii) the date on which all of the shares of Series A Preferred Stock have been redeemed by us or transferred by Treasury to third parties a fundamental change occurs, then on or before the 20th day after the occurrence of the fundamental change, we will provide to all holders of the debentures and the trustee and paying agent a notice of the occurrence of the fundamental change and of the resulting repurchase right. Such notice will state, among other things:

 

 

 

 

 

 

 

 

 

Simultaneously with providing such notice, we will publish a notice containing this information in a newspaper of general circulation in the City of Aiken or publish the information on our website or through such other public medium as we may use at that time.

 

To exercise the repurchase right, you must deliver, on or before the business day immediately preceding the fundamental change repurchase date, subject to extension to comply with applicable law, the debentures to be repurchased, duly endorsed for transfer, together with a written repurchase notice and the form entitled "Form of Fundamental Change Repurchase Notice" on the reverse side of the debentures duly completed, to the paying agent. Your repurchase notice must state:

 

 

 

 

You may withdraw any repurchase notice (in whole or in part) by a written notice of withdrawal delivered to the paying agent prior to the close of business on the business day prior to the fundamental change repurchase date. The notice of withdrawal must state:

 

 

 

 

We will be required to repurchase the debentures on the fundamental change repurchase date, subject to extension to comply with applicable law. You will receive payment of the fundamental change repurchase price promptly following the fundamental change repurchase date. If the paying agent holds cash sufficient to pay the fundamental change repurchase price of the debentures, immediately following the fundamental change repurchase date, then:

 

 

 

In connection with any repurchase offer pursuant to a fundamental change repurchase notice, we will, if required:

 

 

 

 

The repurchase rights of the holders could discourage a potential acquisition of us. The fundamental change repurchase feature, however, is not the result of management's knowledge of any specific effort to obtain control of us by any means or part of a plan by management to adopt a series of anti-takeover provisions.

 

The term fundamental change is limited to specified transactions and may not include other events that might adversely affect our financial condition. In addition, the requirement that we offer to repurchase the debentures upon a fundamental change may not protect holders in the event of a highly leveraged transaction, reorganization, merger or similar transaction involving us.

 

The definition of fundamental change includes a phrase relating to the conveyance, transfer, sale, lease or disposition of "all or substantially all" of our consolidated assets. There is no precise, established definition of the phrase "substantially all" under applicable law. Accordingly, the ability of a holder of the debentures to require us to repurchase its debentures as a result of the conveyance, transfer, sale, lease or other disposition of less than all of our assets may be uncertain.

 

If a fundamental change were to occur, we may not have enough funds to pay the fundamental change repurchase price. Our ability to repurchase the debentures for cash may be limited by restrictions on our ability to obtain funds for such repurchase through dividends from our subsidiaries, the terms of our then existing borrowing arrangements or otherwise. See "Risk Factors—Risks Related to this Offering—We may not have the ability to repurchase the debentures in cash upon the occurrence of a fundamental change, or to pay cash upon the conversion of debentures." If we fail to repurchase the debentures when required following a fundamental change, we will be in default under the indenture. In addition, we may in the future incur other indebtedness with similar change in control provisions permitting our holders to accelerate or to require us to repurchase our indebtedness upon the occurrence of similar events or on some specific dates.

 

The debentures will be senior unsecured obligations of Security Federal Corporation. The debentures will rank:

 

 

 

 

Security Federal Corporation may from time to time incur additional indebtedness constituting senior indebtedness. While the indenture prohibits us from incurring unsecured indebtedness that would be senior in right of payment to the debentures, it does not otherwise prohibit or limit the incurrence of additional indebtedness or indebtedness which is collateralized. We may incur substantial additional amounts of indebtedness in the future.

 

 

The debentures will be redeemable at Security Federal Corporation's option, subject to obtaining any required approval from the government agency having primary regulatory authority over Security Federal Corporation, in whole or from time to time in part, upon not less than 30 nor more than 60 days' notice mailed to each holder of debentures to be redeemed at such holder's address appearing in the security register, on any date on or after December 1, 2019 and prior to maturity at a redemption price equal to 100% of the principal amount, together in the case of any such redemption with accrued interest to the redemption date (subject to the right of holders of record on the relevant regular record date to receive interest due on an interest payment date that is on or prior to the redemption date).

 

 

 

 

 

 

 

The term "junior securities" means:

 

 

 

 

 

 

 

The indenture provides that Security Federal Corporation shall not sell, transfer or otherwise dispose of any shares of the capital stock of the Bank or permit the Bank to issue, sell or otherwise dispose of shares of its capital stock, unless, in either case, the Bank remains a wholly-owned subsidiary of Security Federal Corporation. In addition, the indenture provides that Security Federal Corporation shall not permit the Bank to merge or consolidate with any other entity (other than Security Federal Corporation), unless the surviving entity is the Bank or a wholly owned subsidiary of Security Federal Corporation, or permit the Bank to convey or transfer its properties and assets substantially as an entirety to any person, except to Security Federal Corporation or any wholly owned subsidiary of Security Federal Corporation. The indenture also prohibits the Bank from issuing any of its capital stock, preferred or otherwise, which has a priority or preference senior to any capital stock of the Bank held by Security Federal Corporation. At June 30, 2009, the Bank had 100,000 shares of common stock outstanding and no preferred stock outstanding.

 

 

The indenture defines an event of default with respect to the debentures as any one of the following events:

 

 

 

 

 

 

 

 

Security Federal Bank is currently the only major depository institution subsidiary of Security Federal Corporation. If any event of default occurs and is continuing, either the Trustee or the holders of not less than 25% in principal amount of the outstanding debentures may declare the principal amount of all debentures to be due and payable immediately, but upon certain conditions such declaration may be rescinded and annulled and past defaults may be waived by the holders of a majority in principal amount of the outstanding debentures on behalf of the holders of all debentures. In case an event of default shall occur and be continuing, the trustee may in its discretion proceed to protect and enforce its rights and the rights of the holders by such appropriate judicial proceedings as the trustee deems most effectual. The indenture does not contain any provisions that would provide protection to holders of the debentures against a sudden and significant decline in credit quality of Security Federal Corporation, resulting from any takeover, recapitalization or similar restructuring of Security Federal Corporation.

 

The indenture provides that the trustee will give to the holders of the outstanding debentures notice within 90 days after the occurrence of any event of default (or any event which is, or after notice or lapse of time or both would become, an event of default) known to it if uncured or not waived; provided, however, that such notice shall

 

The indenture provides that, subject to the duty of the trustee during default to act with the required standard of care, the trustee will not be under an obligation to exercise any of its rights or powers under the indenture at the request or direction of any of the holders, unless such holders shall have offered to the trustee reasonable security or indemnity. The indenture provides that the holders of a majority in principal amount of the outstanding debentures may direct the time, method and place of conducting any proceeding for any remedy available to the trustee, or exercising any trust or other power conferred on the trustee, provided that the trustee may decline to act if such direction is contrary to law or the indenture and may take other action deemed proper that is not inconsistent with such direction.

 

The indenture includes a covenant that Security Federal Corporation will file annually with the trustee a certificate of no default, or specifying any default that exists.

 

 

Security Federal Corporation, without the consent of the holders of any of the debentures under the indenture, may consolidate with or merge into any other person or convey, transfer or lease its properties and assets substantially as an entirety to any person, provided that:

 

 

 

 

 

Although these types of transactions are permitted under the indenture, certain of the foregoing transactions could constitute a fundamental change (as defined above) permitting each holder to require us to repurchase the debentures of such holder as described above.

 

 

No holder of any debenture shall have the right to institute any proceeding, judicial or otherwise, with respect to the indenture, or for the appointment of a receiver or trustee, or for any other remedy under the indenture, unless:

 

 

 

 

 

 

 

Security Federal Corporation and its subsidiaries will not directly or indirectly enter into any transaction or series of related transactions with any affiliate of Security Federal Corporation (other than Security Federal Corporation or any wholly-owned subsidiary) unless the transaction or series of related transactions is in writing and on terms that are no less favorable to Security Federal Corporation  or the subsidiary, as the case may be, than would

 

If a transaction or series of related transactions involves aggregate payments in excess of $1,500,000, Security Federal Corporation must also deliver an officers' certificate to the trustee certifying that the transaction or series of related transactions complies with the preceding paragraph and the transaction or series of related transactions has been approved by a majority of the disinterested directors of Security Federal Corporation.

 

If a transaction or series of related transactions involving aggregate payments in excess of $2,500,000 or, in the event no members of the board of directors of Security Federal Corporation are disinterested directors with respect to any transaction or series of transactions involving aggregate payments in excess of $1,500,000 then:

 

 

 

The limitations set forth in the paragraph above shall not apply to:

 

 

 

 

An affiliate of Security Federal Corporation generally includes any executive officer, director or 10% stockholder of Security Federal Corporation or the Bank.

 

 

The indenture contains a number of additional covenants and other provisions relating to the Corporation and its operations, including the following:

 

 

and risks to the person, rights and property of others, to the extent that such insurance is usually carried by corporations similarly situated and engaged in like business; provided, however, that Security Federal Corporation or any subsidiary may maintain a self-insurance program covering minor risks conforming to the practices of similar corporations maintaining self-insurance if adequate reserves, are maintained in connection with such program and if such program is not disadvantageous in any material respect to the holders of debentures.

 

 

 

 

 

 

 

 

Modifications and amendments of the indenture may be made by Security Federal Corporation and the trustee with the consent of the holders of not less than 66-2/3% in principal amount of the outstanding debentures; provided, however, that no such modification or amendment may, without the consent of the holder of each outstanding debenture affected thereby;

 

 

 

 

 

 

 

 

 

The holders of not less than a majority in principal amount of the outstanding debentures may on behalf of the holders of all of the debentures waive any past default under the indenture, except a default in the payment of principal of (or premium, if any) or interest on any debenture or in respect of a covenant or provision which cannot be modified without the consent of each holder of debentures affected.

 

Without the consent of any holder, we and the trustee may amend the indenture to:

 

 

 

 

 

 

 

 

The consent of the holders is not necessary under the indenture to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment. After an amendment under the indenture becomes effective, we are required to mail to the holders a notice briefly describing such amendment. However, the failure to give such notice to all the holders, or any defect in the notice, will not impair or affect the validity of the amendment.

 

 

We may satisfy and discharge our obligations under the indenture by delivering to the securities registrar for cancellation all outstanding debentures or by depositing with the trustee or delivering to the holders, as applicable, after the debentures have become due and payable, whether at stated maturity, or any fundamental change repurchase date, or upon conversion or otherwise, cash or shares of common stock sufficient to pay all of the outstanding debentures and paying all other sums payable under the indenture by us. Such discharge is subject to terms contained in the indenture.

The indenture also provides that upon compliance with certain conditions we may omit to comply with the covenant described under the headings "-Restrictions on Issuance and Sale of Capital Stock or Dispositions of the Bank", "-Limitations on Dividends, Redemptions, Etc.", "-Limitation on Transactions with Affiliates", "-Additional Covenants-Corporate Existence of the Corporation and its Subsidiaries", "-Additional Covenants-Limitations on Liens on Bank Stock" and certain other covenants set forth in the indenture and any omission to comply with those covenants will not constitute a default or an event of default with respect to the debentures, which we refer to as a "covenant defeasance."

 

The conditions include:

 

 

 

 

Except as otherwise provided above, we will be responsible for making all calculations called for under the debentures. These calculations include, but are not limited to, determinations of the last reported sale prices of our common stock, accrued interest payable on the debentures and the conversion rate of the debentures. We will make all these calculations in good faith and, absent manifest error, our calculations will be final and binding on holders of debentures. We will provide a schedule of our calculations to each of the trustee and the conversion agent, and each of the trustee and conversion agent is entitled to rely conclusively upon the accuracy of our calculations without independent verification. The trustee will forward our calculations to any holder of debentures upon the request of that holder.

 

 

Wilmington Trust Company is the trustee, security registrar, paying agent and conversion agent. Wilmington Trust Company, in each of its capacities, including without limitation as trustee, security registrar, paying agent and conversion agent, assumes no responsibility for the accuracy or completeness of the information concerning us or our affiliates or any other party contained in this document or the related documents or for any failure by us or any other party to disclose events that may have occurred and may affect the significance or accuracy of such information.

 

 

The indenture provides that it and the debentures will be governed by, and construed in accordance with, the laws of the State of Delaware.

 

The 5,200,000 shares of capital stock authorized by Security Federal Corporation's articles of incorporation are divided into two classes, consisting of 5,000,000 shares of common stock (par value $.01 per share) and 200,000 shares of serial preferred stock (par value $.01 per share). As of June 30, 2009, there were 2,461,090 shares of our common stock issued and outstanding and 18,000 shares of our preferred stock issued and outstanding, all of which consisted of our Series A Preferred Stock, which we issued, along with a ten-year warrant to purchase 137,966 shares of our common stock, to Treasury on December 19, 2008 pursuant to Treasury's Troubled Asset Relief Program Capital Purchase Program.

 

 

 

 

 

 

Except as discussed herein, Security Federal Corporation has no present plans for the issuance of the additional authorized shares of common stock or for the issuance of any additional shares of preferred stock. In the future, the authorized but unissued and unreserved shares of common stock will be available for general corporate purposes, including but not limited to possible issuance as stock dividends or stock splits, in future mergers or acquisitions, under a cash dividend reinvestment and stock purchase plan, in a future underwritten or other public offering, or under an employee stock ownership plan. The authorized but unissued shares of preferred stock will similarly be available for issuance in future mergers or acquisitions, in a future underwritten public offering or private placement or for other general corporate purposes. Except as described above or as otherwise required to approve the transaction in which the additional authorized shares of common stock or authorized shares of preferred stock would be issued, no stockholder approval will be required for the issuance of these shares. Accordingly, the Board of Directors of Security Federal Corporation, without stockholder approval, can issue preferred stock with voting and conversion rights which could adversely affect the voting power of the holders of common stock.

 

bylaws which may affect the ability of Security Federal Corporation's stockholders to participate in certain transactions relating to acquisitions of control of Security Federal Corporation.

 

 

 

Our articles of incorporation permit our Board of Directors to authorize the issuance of up to 200,000 shares of preferred stock, par value $0.01, in one or more series, without shareholder action. The Board of Directors can fix the designation, powers, preferences and rights of each series. Therefore, without approval of the holders of our common stock or the Series A Preferred Stock (except as may be required under the terms of the Series A Preferred Stock (see "-Series A Preferred Stock-Voting Rights") or by the rules of the NASDAQ Stock Market or any other exchange or market on which our securities may then be listed or quoted), our Board of Directors may authorize the issuance of preferred stock with voting, dividend, liquidation and conversion and other rights that could dilute the voting power or other rights or adversely affect the market value of our common stock and may assist management in impeding any unfriendly takeover or attempted change in control. See "-Restrictions on Acquisitions of Stock and Related Takeover Defensive Provisions."

 

 

This section summarizes specific terms and provisions of the Series A Preferred Stock. The description of the Series A Preferred Stock set forth below is qualified in its entirety by the actual terms of the Series A Preferred Stock. The terms of our Series A Preferred Stock are set forth in the certificate of designation for such stock, which was attached as Exhibit 3.1 to our Current Report on Form 8-K filed on December 23, 2008 and incorporated herein by reference. See "Where You Can Find More Information."

 

 

 

Dividends on the Series A Preferred Stock will be cumulative. If for any reason our Board of Directors does not declare a dividend on the Series A Preferred Stock for a particular dividend period, or if our Board of Directors declares less than a full dividend, we will remain obligated to pay the unpaid portion of the dividend for that period and the unpaid dividend will compound on each subsequent dividend date (meaning that dividends for future dividend periods will accrue on any unpaid dividend amounts for prior dividend periods).

 

We are not obligated to pay holders of the Series A Preferred Stock any dividend in excess of the dividends on the Series A Preferred Stock that are payable as described above. There is no sinking fund with respect to dividends on the Series A Preferred Stock.

 

"Junior Stock" means our common stock and any other class or series of our stock the terms of which expressly provide that it ranks junior to the Series A Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of Security Federal Corporation. We currently have no outstanding class or series of stock constituting Junior Stock other than our common stock.

 

"Parity Stock" means any class or series of our stock, other than the Series A Preferred Stock, the terms of which do not expressly provide that such class or series will rank senior or junior to the Series A Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of Security Federal Corporation, in each case without regard to whether dividends accrue cumulatively or non-cumulatively. We currently have no outstanding class or series of stock constituting Parity Stock.

 

 

For purposes of the liquidation rights of the Series A Preferred Stock, neither a merger or consolidation of Security Federal Corporation with another entity nor a sale, lease or exchange of all or substantially all of Security Federal Corporation's assets will constitute a liquidation, dissolution or winding up of the affairs of Security Federal Corporation.

 

 

Subsequent to our issuance of the Series A Preferred Stock, on February 17, 2009, President Obama signed the ARRA into law. Among other things, the ARRA provides that subject to consulting with the appropriate federal banking agency (the Office of Thrift Supervision in our case), Treasury must permit repayment of funds provided under the TARP Capital Purchase Program without regard to whether the institution which received the funds has replaced the funds from any other source, and upon repayment of the assistance, Treasury will liquidate warrants issued by the institution at the current market price. Accordingly, the ARRA effectively permits us to currently cause the redemption of the Series A Preferred Stock, without regard to whether we have raised additional capital in a Qualified Equity Offering or otherwise, subject to Treasury's consultation with the Office of Thrift Supervision.

 

Shares of Series A Preferred Stock that we redeem, repurchase or otherwise acquire will revert to authorized but unissued shares of preferred stock, which may then be reissued by us as any series of preferred stock other than the Series A Preferred Stock.

 

 

Whenever dividends have not been paid on the Series A Preferred Stock for six or more quarterly dividend periods, whether or not consecutive, the authorized number of directors of Security Federal Corporation will automatically increase by two and the holders of the Series A Preferred Stock will have the right, with the holders of shares of any other classes or series of Voting Parity Stock outstanding at the time, voting together as a class, to elect two directors (the "Preferred Directors") to fill such newly created directorships at our next annual meeting of shareholders (or at a special meeting called for that purpose prior to the next annual meeting) and at each subsequent annual meeting of shareholders until all accrued and unpaid dividends for all past dividend periods on all outstanding shares of Series A Preferred Stock have been paid in full at which time this right will terminate with respect to the Series A Preferred Stock, subject to revesting in the event of each and every subsequent default by us in the payment of dividends on the Series A Preferred Stock.

 

Upon any termination of the right of the holders of the Series A Preferred Stock and Voting Parity Stock as a class to vote for directors as described above, the Preferred Directors will cease to be qualified as directors, the terms of office of all Preferred Directors then in office will terminate immediately and the authorized number of directors will be reduced by the number of Preferred Directors which had been elected by the holders of the Series A Preferred Stock and the Voting Parity Stock. Any Preferred Director may be removed at any time, with or without cause, and any vacancy created by such a removal may be filled, only by the affirmative vote of the holders a majority of the outstanding shares of Series A Preferred Stock voting separately as a class together with the holders of shares of Voting Parity Stock, to the extent the voting rights of such holders described above are then exercisable. If the office of any Preferred Director becomes vacant for any reason other than removal from office, the remaining Preferred Director may choose a successor who will hold office for the unexpired term of the office in which the vacancy occurred.

 

The term "Voting Parity Stock" means with regard to any matter as to which the holders of the Series A Preferred Stock are entitled to vote, any series of Parity Stock (as defined under "—Priority of Dividends") upon which voting rights similar to those of the Series A Preferred Stock have been conferred and are exercisable with respect to such matter. We currently have no outstanding shares of Voting Parity Stock.

 

In addition to any other vote or consent required by South Carolina law or by our articles of incorporation, the vote or consent of the holders of at least 66 2/3% of the outstanding shares of Series A Preferred Stock, voting as a separate class, is required in order to do the following:

 

 

 

 

To the extent holders of the Series A Preferred Stock are entitled to vote, holders of shares of the Series A Preferred Stock will be entitled to one for each share then held.

The following discussion is a general summary of the material provisions of Security Federal Corporation's articles of incorporation and bylaws and certain other regulatory provisions, which may be deemed to have an "anti-takeover" effect. Please refer to the articles of incorporation of Security Federal Corporation, which is filed as an exhibit to the registration statement of which this prospectus forms a part, for a detailed description of the provisions summarized below. To obtain a copy of our articles of incorporation, see "Where You Can Find More Information."

 

 

 

The articles of incorporation provides that a director may only be removed for cause by the affirmative vote of two-thirds of the shares eligible to vote.

 

 

 

 

 

 

The bylaws may be amended by a vote of two-thirds the board of directors or the affirmative vote of  two-thirds of the total votes eligible to be voted at a duly constituted meeting of stockholders.

 

 

 

South Carolina's "fair price" statue was intended to ensure that all stockholders of a South Carolina corporation would receive comparable prices per share for stock sold to an interested stockholder in a business combination. The statute was designed to eliminate coercive "two-tiered" pricing arrangements to gain control of corporations, whereby a tender offer is initiated as the first step in a business combination, with a higher price per share being offered to those stockholders who initially tender their shares to the potential acquirer, and a lower price to the minority of stockholders who initially elect not to tender their stock. The statute addresses this potential for

unequal treatment of minority stockholders by imposing special voting requirements on business combinations involving an interested stockholder.

 

 

The Change in Bank Control Act provides that no person, acting directly or indirectly or through or in concert with one or more other individuals, may acquire control of a federal savings bank, unless the OTS has been given 60 days prior written notice. Similar notice is required to be provided to the OTS by an individual acquiring a similar ownership interest in a savings association holding company. The Home Owners' Loan Act provides that no company may acquire "control" of a savings association without the prior approval of the OTS. Any company that acquires such control becomes a savings and loan holding company subject to registration, examination and regulation by the OTS. In addition, acquisitions of control of a savings association holding company by another company are subject to the approval of the OTS.

 

Pursuant to OTS regulations, control of a savings institution or its holding company is conclusively deemed to have been acquired by, among other things, the acquisition of more than 25% of any class of voting stock of the institution or its holding company or the ability to control the election of a majority of the directors of an institution or its holding company. Moreover, control is presumed to have been acquired, subject to rebuttal, upon the acquisition of more than 10% of any class of voting stock, or of more than 25% of any class of stock of a savings institution or its holding company, where certain enumerated "control factors" are also present in the acquisition. The OTS may prohibit an acquisition of control if:

 

 

 

 

These restrictions do not apply to the acquisition of a savings institution's or its holding company's capital stock by one or more tax-qualified employee stock benefit plans, provided that the plans do not have beneficial ownership of more than 25% of any class of equity security of the savings institution.

 

 

The following is a summary of certain material U.S. federal income tax considerations of the purchase, ownership and disposition of debentures and the shares of common stock into which the debentures may be converted. This summary is based upon provisions of the Internal Revenue Code of 1986 or the Code, applicable regulations, administrative rulings and judicial decisions in effect as of the date hereof, any of which may subsequently be changed, possibly retroactively, so as to result in U.S. federal income tax consequences different from those discussed below. Except where noted, this summary deals only with a debenture or share of common stock held as a capital asset by a beneficial owner who purchased the debenture on original issuance at its "issue price". This summary does not address all aspects of U.S. federal income taxation and does not deal with all tax consequences that may be relevant to holders in light of their personal circumstances or particular situations, such as:

 

 

 

 

 

 

 

 

If a partnership holds debentures or shares of common stock, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner in a partnership holding the debentures or shares of common stock, you should consult your tax advisors.

 

 

As used herein, the term "U.S. holder" means a beneficial owner of debentures or shares of common stock received upon conversion of the debentures that is, for U.S. federal income tax purposes:

 

 

 

 

 

 

 

Consequences to U.S. Holders

 

Interest paid on the debentures will be taxable as ordinary income.

 

 

Upon a redemption or repurchase of the debentures, an original holder will recognize gain or loss equal to the difference between the amount of cash received (other than cash received on account of accrued interest which will be taxable as ordinary income) and the holder's tax basis in the debentures received. Such gain or loss will be capital gain or loss, provided that the debentures were held as capital assets, and will be long-term gain or loss if the debentures were held for more than one year.

 

 

 

 

No gain or loss will be realized upon the conversion of debentures into shares of common stock. However, a holder that receives cash in lieu of a fractional share will be treated as having received such fractional share and having exchanged it for cash in a redemption. A holder's basis in common stock received upon the conversion of debentures will equal the adjusted tax basis of the debentures converted, and, provided the debentures are held as capital assets, the holding period of such common stock will include the holding period of the debentures converted.

 

Adjustments to the conversion price of the debentures, such as to reflect taxable distributions with respect to the common stock (but generally not for nontaxable stock dividends or stock splits) may be deemed to be a taxable distribution to holders of the debentures. For example, conversion price adjustments incident to a taxable distribution of evidences of indebtedness or certain assets of Security Federal Corporation to holders of its common stock might result in such a taxable distribution. In certain circumstances, the absence of an adjustment in the conversion price of the debentures also may be deemed to be a taxable distribution to the holders of debentures.

 

 

Holders of debentures may be subject to backup withholding on interest and on the proceeds of any redemption or other disposition of debentures. Generally, backup withholding applies only when the taxpayer fails to furnish or certify a proper taxpayer identification number or when the taxpayer is notified by the Internal Revenue Service that the taxpayer has failed to report payments of interest or dividends properly. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a U.S. holder's U.S. federal income tax liability, provided the required information is furnished timely to the Internal Revenue Service. Holders should consult their own tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining any applicable exemption.

 

 

 

 

Certain legal matters in connection with the debentures and the shares of common stock issuable upon conversion of the debentures will be passed upon for us by Breyer & Associates PC, McLean, Virginia.

 

 

Our consolidated balance sheets as of March 31, 2009 and March 31, 2008 and the related consolidated statements of income, changes in shareholders' equity and comprehensive income, and cash flows for each of the years in the three year period ended March 31, 2009 have been audited by Elliott Davis LLC, as stated in their report incorporated herein, and have been so included in reliance on the report of this firm given upon their authority as an expert in accounting and auditing.

 

 

 

Article XIV of the Registrant’s Articles of Incorporation  requires indemnification of directors, officers, employees, trustees and agents of the Registrant for expenses actually and reasonably incurred in connection with the defense or settlement of any threatened, pending or completed action, suit or proceeding.

Chapter 8, Article 5 of the South Carolina Business Corporation Act provides for permissible, mandatory and court-ordered indemnification of directors, officers, employees and agents in certain circumstances. Sections 33-8-510, 33-8-520 and 33-8-560 provide as follows:

33-8-510  AUTHORITY TO INDEMNIFY. (a) Except as provided in subsection (d), a corporation may indemnify an individual made a party to a proceeding because he is or was a director against liability incurred in the proceeding if: (1) he conducted himself in good faith; and (2) he reasonably believed: (i) in the case of conduct in his official capacity with the corporation, that his conduct was in the best interest: and (ii) in all other cases, that his conduct was at least not opposed to its best interest; and (3) in the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful.

(b) A director’s conduct with respect to an employee benefit plan for a purpose he reasonably believed to be in the interests of the participants in and beneficiaries of the plan is conduct that satisfies the requirement of subsection (a)(2)(ii).

(c) The termination of a proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent is not, of itself, determinative that the director did not meet the standard of conduct described in this section.

(d) A corporation may not indemnify a director under this section: (1) in connection with a proceeding by or in the right of the corporation in which the director was adjudged liable to the corporation; or (2) in connection with any other proceeding

charging improper personal benefit to him, whether or not involving action in his official capacity, in which he was adjudged liable on the basis that personal benefit was improperly received by him.

(e) Indemnification permitted under this section in connection with a proceeding by or in the right of the corporation is limited to reasonable expenses incurred in connection with the proceeding.

33-8-520  MANDATORY INDEMNIFICATION.  Unless limited by its articles of incorporation, a corporation shall indemnify a director who was wholly successful, on the merits or otherwise, in the defense of any proceeding to which he was a party because he is or was a director of the corporation against reasonable expenses incurred by him in connection with the proceeding.

33-8-560  INDEMNIFICATION OF OFFICERS, EMPLOYEES, AND AGENTS.  Unless a corporation’s articles of incorporation provide otherwise: (1) an officer of the corporation who is not a director is entitled to mandatory indemnification under Section 33-8-520, and is entitled to apply for court-ordered indemnification under Section 33-8-540, in each case to the same extent as a director; (2) the corporation may indemnify and advance expenses under this subchapter to an officer, employee, or agent of the corporation who is not a director to the same extent as to a director; and (3) a corporation also may indemnify and advance expenses to an officer, employee, or agent who is not a director to the extent, consistent with public policy, that may be provided by its articles of incorporation, bylaws, general or specific action of its board of directors, or contract.

Section 33-8-570 also authorizes a corporation to purchase and maintain insurance for directors, officers, employees and agents against liability arising from their positions, whether or not the corporation would have the power to indemnify against the same liability under Section 33-8-510 or Section 33-8-520.

The Registrant maintains directors’ and officers’ liability insurance for the benefit of its directors and officers.

 

In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form S-1 and authorized this amended Registration Statement to be signed on its behalf by the undersigned, in the City of Aiken, State of South Carolina, on August 27,September 2, 2009.

 

 

In accordance with the requirements of the Securities Act of 1933, this amended Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.

 

 

 

 

 

 

___________________

*By power of attorney dated July 9, 2009.