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SECURITY FEDERAL CORP - Quarter Report: 2015 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 – Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD:
FROM:
 
TO:
 
COMMISSION FILE NUMBER: 0-16120
SECURITY FEDERAL CORPORATION
(Exact name of registrant as specified in its charter)
 
South Carolina
 
57-0858504
 
 
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
238 RICHLAND AVENUE NORTHWEST, AIKEN, SOUTH CAROLINA 29801
(Address of principal executive office and Zip Code)
(803) 641-3000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES
 
X
 
NO
 
 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filed    [ ]
 
Accelerated filer [ ]
 
 
Non-accelerated filer    [ ]
 
Smaller reporting company [ X ]
 

Indicate by check mark whether the registrant is a shell corporation (defined in Rule 12b-2 of the Exchange Act).
YES
 
 
 
NO
 
X

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
 
CLASS:
 
OUTSTANDING SHARES AT:
 
SHARES:
 
 
Common Stock, par value $0.01 per share
 
November 12, 2015
 
2,945,474
 




 
 
 
 
PART I.
FINANCIAL INFORMATION (UNAUDITED)
 
PAGE NO.
Item 1.
Financial Statements (unaudited):
 
3
 
Consolidated Balance Sheets at September 30, 2015 and December 31, 2014
 
3
 
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014
 
4
 
Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014
 
5
 
Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2015 and 2014
 
6
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014
 
7
 
Notes to Consolidated Financial Statements
 
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
34
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
46
Item 4.
Controls and Procedures
 
47
 
 
 
 
PART II.
OTHER INFORMATION
 
 
Item 1.
Legal Proceedings
 
47
Item 1A.
Risk Factors
 
47
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
47
Item 3.
Defaults Upon Senior Securities
 
47
Item 4.
Mine Safety Disclosures
 
47
Item 5.
Other Information
 
47
Item 6.
Exhibits
 
48
 
Signatures
 
50
 
 
 
 

SCHEDULES OMITTED

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





SECURITY FEDERAL CORPORATION AND SUBSIDIARIES


Part 1. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
 
September 30, 2015
 
December 31, 2014
 
 
(Audited)
ASSETS:
 
 
 
Cash And Cash Equivalents
$
8,374,489

 
$
10,192,702

Certificates Of Deposit With Other Banks
2,095,000

 
2,095,000

Investment And Mortgage-Backed Securities:
 
 
 
Available For Sale (Amortized Cost Of $381,228,581 And $420,876,924 At September 30, 2015 And December 31, 2014, Respectively)
388,352,231

 
429,700,540

Held To Maturity (Fair Value Of $30,730,644 And $0 At September 30, 2015 And December 31, 2014, Respectively)
30,847,402

 

Total Investments And Mortgage-Backed Securities
419,199,633

 
429,700,540

Loans Receivable, Net:
 
 
 
Held For Sale
1,518,631

 
1,864,999

Held For Investment  (Net Of Allowance Of $7,935,023 And $8,357,496 At September 30, 2015 And December 31, 2014, Respectively)
318,236,103

 
338,009,496

Total Loans Receivable, Net
319,754,734

 
339,874,495

Accrued Interest Receivable:
 
 
 
Loans
872,962

 
971,569

Mortgage-Backed Securities
627,431

 
682,585

Investment Securities
1,531,662

 
1,408,924

Total Accrued Interest Receivable
3,032,055

 
3,063,078

Premises And Equipment, Net
19,548,390

 
18,233,226

Federal Home Loan Bank ("FHLB") Stock, At Cost
2,224,200

 
3,144,600

Other Real Estate Owned ("OREO")
4,928,998

 
3,229,710

Bank Owned Life Insurance
16,441,045

 
11,150,045

Goodwill
1,199,754

 
1,199,754

Other Assets
4,067,406

 
3,480,676

Total Assets
$
800,865,704

 
$
825,363,826

LIABILITIES AND SHAREHOLDERS’ EQUITY:
 
 
 
Liabilities:
 
 
 
Deposit Accounts
$
652,127,017

 
$
660,115,164

Advances From FHLB
33,280,000

 
52,900,000

Other Borrowings
7,725,360

 
8,523,348

Junior Subordinated Debentures
5,155,000

 
5,155,000

Advance Payments By Borrowers For Taxes And Insurance
596,149

 
266,352

Senior Convertible Debentures
6,084,000

 
6,084,000

Other Liabilities
5,448,035

 
4,884,577

Total Liabilities
710,415,561

 
737,928,441

Shareholders' Equity:
 
 
 
Serial Preferred Stock, $.01 Par Value; Authorized 200,000 Shares; Issued And Outstanding, 22,000 Shares
22,000,000

 
22,000,000

Common Stock, $.01 Par Value; Authorized 5,000,000 Shares; Issued And Outstanding Shares, 3,146,407 And 2,945,474, Respectively, At September 30, 2015 And 3,144,934 And 2,944,001, Respectively, At December 31, 2014
31,464

 
31,449

Additional Paid-In Capital
12,025,663

 
11,990,813

Treasury Stock, At Cost (200,933 Shares)
(4,330,712
)
 
(4,330,712
)
Unvested Restricted Stock
(25,358
)
 

Accumulated Other Comprehensive Income
4,746,422

 
5,476,375

Retained Earnings
56,002,664

 
52,267,460

Total Shareholders' Equity
90,450,143

 
87,435,385

Total Liabilities And Shareholders' Equity
$
800,865,704

 
$
825,363,826

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

3


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Interest Income:
 
 
 
 
 
 
 
 
Loans
 
$
4,521,458

 
$
4,852,458

 
$
13,680,762

 
$
14,636,508

Mortgage-Backed Securities
 
1,259,822

 
1,538,902

 
4,037,511

 
4,568,036

Investment Securities
 
1,124,683

 
995,233

 
3,198,542

 
3,006,439

Other
 
1,897

 
2,345

 
6,034

 
8,370

Total Interest Income
 
6,907,860

 
7,388,938

 
20,922,849

 
22,219,353

Interest Expense:
 
 
 
 
 
 
 
 
NOW And Money Market Accounts
 
103,819

 
125,749

 
326,099

 
435,482

Statement Savings Accounts
 
7,805

 
6,821

 
22,535

 
19,537

Certificate Accounts
 
444,385

 
488,300

 
1,393,648

 
1,497,402

FHLB Advances And Other Borrowed Money
 
296,497

 
617,271

 
1,057,485

 
2,049,563

Senior Convertible Debentures
 
121,680

 
121,680

 
365,040

 
365,040

Junior Subordinated Debentures
 
26,279

 
25,441

 
77,070

 
75,643

Total Interest Expense
 
1,000,465

 
1,385,262

 
3,241,877

 
4,442,667

Net Interest Income
 
5,907,395

 
6,003,676

 
17,680,972

 
17,776,686

Provision For Loan Losses
 
(200,000
)
 

 
(100,000
)
 
200,000

Net Interest Income After Provision For Loan Losses
 
6,107,395

 
6,003,676

 
17,780,972

 
17,576,686

Non-Interest Income:
 
 
 
 
 
 
 
 
Gain On Sale Of Investment Securities
 
7,651

 
142,816

 
1,676,404

 
187,687

Gain On Sale Of Loans
 
191,194

 
119,041

 
526,295

 
465,571

Service Fees On Deposit Accounts
 
258,522

 
300,920

 
790,689

 
861,476

Commissions From Insurance Agency
 
139,980

 
116,894

 
373,639

 
317,757

Trust Income
 
152,200

 
158,000

 
449,800

 
404,000

Bank Owned Life Insurance Income
 
117,000

 
75,000

 
291,000

 
479,364

Check Card Fee Income
 
239,739

 
229,542

 
719,159

 
674,098

Grant Income
 
97,640

 
183,789

 
97,640

 
483,499

Other
 
164,488

 
160,304

 
482,380

 
481,191

Total Non-Interest Income
 
1,368,414

 
1,486,306

 
5,407,006

 
4,354,643

Non-Interest Expense:
 
 
 
 
 
 
 
 
Compensation And Employee Benefits
 
3,002,259

 
2,781,418

 
8,976,214

 
8,464,967

Occupancy
 
481,713

 
515,881

 
1,427,424

 
1,491,633

Advertising
 
95,226

 
115,268

 
290,951

 
358,527

Depreciation And Maintenance Of Equipment
 
401,102

 
408,685

 
1,263,932

 
1,219,461

Federal Deposit Insurance Corporation ("FDIC") Insurance Premiums
 
140,172

 
177,537

 
455,985

 
541,779

Amortization Of Intangibles
 

 

 

 
11,970

Net Cost (Proceeds) Of Operation Of OREO
 
(19,713
)
 
(71,623
)
 
267,784

 
451,947

Prepayment Penalties on FHLB Advances
 

 

 
787,851

 

Other
 
1,029,201

 
1,095,710

 
3,249,451

 
3,125,894

Total Non-Interest Expense
 
5,129,960

 
5,022,876

 
16,719,592

 
15,666,178

Income Before Income Taxes
 
2,345,849

 
2,467,106

 
6,468,386

 
6,265,151

Provision For Income Taxes
 
601,446

 
756,466

 
1,696,268

 
1,775,175

Net Income
 
1,744,403

 
1,710,640

 
4,772,118

 
4,489,976

Preferred Stock Dividends
 
110,000

 
110,000

 
330,000

 
330,000

Net Income Available To Common Shareholders
 
$
1,634,403

 
$
1,600,640

 
$
4,442,118

 
$
4,159,976

Net Income Per Common Share (Basic)
 
$
0.56

 
$
0.54

 
$
1.51

 
$
1.41

Net Income Per Common Share (Diluted)
 
$
0.53

 
$
0.52

 
$
1.44

 
$
1.35

Cash Dividend Per Share On Common Stock
 
$
0.08

 
$
0.08

 
$
0.24

 
$
0.24

Weighted Average Shares Outstanding (Basic)
 
2,944,001

 
2,944,001

 
2,944,001

 
2,944,001

Weighted Average Shares Outstanding (Diluted)
 
3,248,361

 
3,248,201

 
3,248,284

 
3,248,201

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

4


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

 
 
Three Months Ended September 30,
 
 
2015
 
2014
Net Income
 
$
1,744,403

 
$
1,710,640

Other Comprehensive Income (Loss)
 
 
 
 
Unrealized Gains (Losses) On Securities:
 
 
 
 
Unrealized Holding Gains (Losses) On Securities Available For Sale, Net Of Taxes Of $979,277 And $(67,172) At September 30, 2015 And 2014, Respectively
 
1,598,158

 
(111,155
)
Reclassification Adjustment For Gains Included In Net Income, Net Of Taxes Of $2,907 And $54,270 At September 30, 2015 And 2014, Respectively
 
(4,744
)
 
(88,546
)
Amortization Of Unrealized Gains On Available For Sale Securities Transferred to Held To Maturity, Net Of Taxes Of $(22,996) and $0 at September 30, 2015 and 2014, Respectively
 
(37,584
)
 

Other Comprehensive Income (Loss)
 
1,555,830

 
(199,701
)
Comprehensive Income
 
$
3,300,233

 
$
1,510,939



 
 
Nine Months Ended September 30,
 
 
2015
 
2014
Net Income
 
$
4,772,118

 
$
4,489,976

Other Comprehensive Income (Loss)
 
 
 
 
Unrealized Gains On Securities:
 
 
 
 
Unrealized Holding Gains On Securities Available For Sale, Net Of Taxes Of $220,764 And $2,649,406 At September 30, 2015 And 2014, Respectively
 
357,366

 
4,333,729

Reclassification Adjustment For Gains Included In Net Income, Net Of Taxes Of $637,033 And $71,321 At September 30, 2015 And 2014, Respectively
 
(1,039,371
)
 
(116,366
)
Amortization Of Unrealized Gains On Available For Sale Securities Transferred to Held To Maturity, Net Of Taxes Of $(29,337) and $0 at September 30, 2015 and 2014, Respectively
 
(47,948
)
 

Other Comprehensive Income (Loss)
 
(729,953
)
 
4,217,363

Comprehensive Income
 
$
4,042,165

 
$
8,707,339






SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


5


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
For the Nine Months Ended September 30, 2015 and 2014

 
 
 
Preferred
 Stock
 
 
 
Common
Stock
 
 
Additional
Paid – In
 Capital
 
 
 
Treasury
Stock
 
Accumulated
Other
 Comprehensive Income
 
 
 
Retained
Earnings
 
 
 
 
Total
Balance at December 31, 2013
$
22,000,000

 
$
31,449

 
$
11,978,137

 
$
(4,330,712
)
 
$
472,406

 
$
47,838,800

 
$
77,990,080

Net Income

 

 

 

 

 
4,489,976

 
4,489,976

Other Comprehensive Income, Net Of Tax

 

 

 

 
4,217,363

 

 
4,217,363

Stock Option Compensation Expense

 

 
9,507

 

 

 

 
9,507

Cash Dividends On Preferred Stock

 

 

 

 

 
(330,000
)
 
(330,000
)
Cash Dividends On Common Stock

 

 

 

 

 
(706,560
)
 
(706,560
)
Balance at September 30, 2014
$
22,000,000

 
$
31,449

 
$
11,987,644

 
$
(4,330,712
)
 
$
4,689,769

 
$
51,292,216

 
$
85,670,366



 
 
 
Preferred
Stock
 
 
 
Common
Stock
 
Unvested Restricted Stock
 
 
Additional
Paid – In
 Capital
 
 
 
Treasury
Stock
 
Accumulated Other Comprehensive Income
 
 
 
Retained
Earnings
 
 
 
 
Total
Balance at December 31, 2014
$
22,000,000

 
$
31,449

 
$

 
$
11,990,813

 
$
(4,330,712
)
 
$
5,476,375

 
$
52,267,460

 
$
87,435,385

Net Income

 

 

 

 

 

 
4,772,118

 
4,772,118

Other Comprehensive Loss, Net Of Tax

 

 

 

 

 
(729,953
)
 

 
(729,953
)
Common Stock Issuance

 
15

 
(25,358
)
 
25,343

 

 

 

 

Stock Option Compensation Expense

 

 

 
9,507

 

 

 

 
9,507

Cash Dividends On Preferred Stock

 

 

 

 

 

 
(330,000
)
 
(330,000
)
Cash Dividends On Common Stock

 

 

 

 

 

 
(706,914
)
 
(706,914
)
Balance at September 30, 2015
$
22,000,000

 
$
31,464

 
$
(25,358
)
 
$
12,025,663

 
$
(4,330,712
)
 
$
4,746,422

 
$
56,002,664

 
$
90,450,143


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

6


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
 
Nine Months Ended September 30,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
4,772,118

 
$
4,489,976

Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
 
 
 
Depreciation Expense
914,784

 
891,142

Amortization Of Intangible Assets

 
11,970

Stock Option Compensation Expense
9,507

 
9,507

Discount Accretion And Premium Amortization
3,496,657

 
3,922,542

Provisions For Losses On Loans
(100,000
)
 
200,000

Income From Bank Owned Life Insurance
(291,000
)
 
(225,000
)
Gain On Sales Of Loans
(526,295
)
 
(465,571
)
Gain On Sales Of Mortgage-Backed Securities
(510,702
)
 
(451,751
)
(Gain) Loss On Sales Of Investment Securities
(1,165,702
)
 
264,064

Gain On Sale Of OREO
(218,293
)
 
(193,403
)
Write Down On OREO
174,400

 
405,000

Gain On Disposal Of Premises And Equipment
(5,647
)
 

Amortization Of Deferred Costs On Loans
47,756

 
12,775

Proceeds From Sale Of Loans Held For Sale
19,049,761

 
16,877,096

Origination Of Loans Held For Sale
(18,177,098
)
 
(17,234,871
)
(Increase) Decrease In Accrued Interest Receivable:
 
 
 
Loans
98,607

 
46,532

Mortgage-Backed Securities
55,154

 
11,294

Investment Securities
(122,738
)
 
(32,392
)
Increase In Advance Payments By Borrowers
329,797

 
323,250

Other, Net
946,839

 
1,333,451

Net Cash Provided By Operating Activities
8,777,905

 
10,195,611

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase Of Mortgage-Backed Securities Available For Sale
(30,816,752
)
 
(50,417,565
)
Principal Repayments On Mortgage-Backed Securities Available For Sale
21,983,963

 
24,085,687

Principal Repayments On Mortgage-Backed Securities Held To Maturity
1,780,222

 

Purchase Of Investment Securities Available For Sale
(66,339,293
)
 
(40,181,576
)
Maturities Of Investment Securities Available For Sale
22,152,393

 
17,167,888

Proceeds From Sale Of Investment Securities Available For Sale
30,890,194

 
29,526,067

Proceeds From Sale Of Mortgage-Backed Securities Available For Sale
27,329,862

 
25,063,634

Purchase Of FHLB Stock
(2,765,900
)
 
(4,434,480
)
Redemption Of FHLB Stock
3,686,300

 
5,599,480

Proceeds From (Purchase Of) Bank Owned Life Insurance
(5,000,000
)
 
624,260

Decrease In Loans Receivable
15,800,516

 
13,826,634

Proceeds From Sale Of OREO
2,369,726

 
1,461,940

Purchase And Improvement Of Premises And Equipment
(2,232,816
)
 
(2,025,581
)
Proceeds From Disposal Of Premises And Equipment
8,516

 

Net Cash Provided By Investing Activities
18,846,931

 
20,296,388


7


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited) (Continued)
Nine Months Ended September 30,
 
2015
 
2014
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Decrease In Deposit Accounts
$
(7,988,147
)
 
$
(12,232,848
)
Proceeds From FHLB Advances
199,184,000

 
171,890,000

Repayment Of FHLB Advances
(218,804,000
)
 
(191,310,058
)
Increase In (Repayment Of) Other Borrowings, Net
(797,988
)
 
2,778,617

Dividends To Preferred Stock Shareholders
(330,000
)
 
(330,000
)
Dividends To Common Stock Shareholders
(706,914
)
 
(706,560
)
Net Cash Used By Financing Activities
(29,443,049
)
 
(29,910,849
)
Net Increase (Decrease) In Cash And Cash Equivalents
(1,818,213
)
 
581,150

Cash And Cash Equivalents At Beginning Of Period
10,192,702

 
7,629,771

Cash And Cash Equivalents At End Of Period
$
8,374,489

 
$
8,210,921

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash Paid During The Period For:
 
 
 
Interest
$
3,288,927

 
$
4,407,602

Income Taxes
$
1,393,388

 
$
180,350

Supplemental Schedule Of Non Cash Transactions:
 
 
 
Transfers From Loans Receivable To Other Real Estate Owned
$
4,025,121

 
$
1,038,960

Transfers Of Mortgage-Backed Securities From Available For Sale To Held To Maturity
$
32,811,452

 
$

 
 
 
 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


8



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements





1. Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and accounting principles generally accepted in the United States of America; therefore, they do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows.  Such statements are unaudited but, in the opinion of management, reflect all adjustments, which are of a normal recurring nature and necessary for a fair presentation of results for the selected interim periods.  Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the audited consolidated financial statements appearing in Security Federal Corporation’s (the “Company”) 2014 Annual Report to Shareholders which was filed as an exhibit to our Annual Report on Form 10-K, as amended, for the year ended December 31, 2014 (“2014 10-K”) when reviewing interim financial statements. 


2. Principles of Consolidation

The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Security Federal Bank (the “Bank”) and the Bank’s wholly owned subsidiaries, Security Federal Insurance, Inc. (“SFINS”) and Security Financial Services Corporation (“SFSC”). SFINS was formed during fiscal 2002 and began operating during the December 2001 quarter and is an insurance agency offering auto, business, and home insurance.  SFINS has a wholly owned subsidiary, Collier Jennings Financial Corporation, which has as subsidiaries Security Federal Auto Insurance, The Auto Insurance Store Inc., and Security Federal Premium Pay Plans Inc. Security Federal Premium Pay Plans Inc. has one wholly owned premium finance subsidiary and also has an ownership interest in four other premium finance subsidiaries. SFSC was formed in 1975 and is currently inactive.

The Company has a wholly owned subsidiary, Security Federal Statutory Trust (the “Trust”), which issued and sold fixed and floating rate capital securities of the Trust.  However, under current accounting guidance, the Trust is not consolidated in the Company’s financial statements.  The Bank is primarily engaged in the business of accepting savings and demand deposits and originating mortgage loans and other loans to individuals and small businesses for various personal and commercial purposes.


3. Critical Accounting Policies

The Company has adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements.  Our significant accounting policies are described in the footnotes to the audited consolidated financial statements at December 31, 2014 included in our 2014 Annual Report to Shareholders.  Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, and, as such, have a greater possibility of producing results that could be materially different than originally reported.  We consider these accounting policies to be critical accounting policies.  The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances.  Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

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

 

9



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



3. Critical Accounting Policies, Continued

While management uses the best information available to make evaluations, future adjustments may be necessary if economic conditions differ substantially from the assumptions used in making these evaluations.  The allowance for loan losses is subject to periodic evaluations by our bank regulators, including the Board of Governors of the Federal Reserve System ("Federal Reserve"), the FDIC and the South Carolina Board of Financial Institutions, and may be subject to adjustments based upon the information that is available at the time of their examination. The Company values impaired loans at the loan’s fair value if it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement at the present value of expected cash flows, the market price of the loan, if available, or the value of the underlying collateral.  Expected cash flows are required to be discounted at the loan’s effective interest rate.  When the ultimate collectibility of an impaired loan’s principal is in doubt, wholly or partially, all cash receipts are applied to principal.  When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first to interest and then to principal.  Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income to the extent that any interest has been foregone.  Further cash receipts are recorded as recoveries of any amounts previously charged off.

The Company uses assumptions and estimates in determining income taxes payable or refundable for the current year, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. The Company exercises considerable judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments and estimates are reevaluated on a continual basis as regulatory and business factors change. No assurance can be given that either the tax returns submitted by us or the income tax reported on the Consolidated Financial Statements will not be adjusted by either adverse rulings by the United States Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service.


4. Earnings Per Common Share

Accounting guidance specifies the computation, presentation and disclosure requirements for earnings per share (“EPS”) for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding.  Diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive common shares had been issued.  The dilutive effect of options outstanding under the Company’s stock option plan is reflected in diluted earnings per share by application of the treasury stock method.

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

The following table provides a reconciliation of net income to net income available to common shareholders for the periods presented:
  
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Earnings Available To Common Shareholders:
 
 
 
 
 
 
 
Net Income

$1,744,403

 

$1,710,640

 

$4,772,118

 

$4,489,976

Preferred Stock Dividends
110,000

 
110,000

 
330,000

 
330,000

Net Income Available To Common Shareholders

$1,634,403

 

$1,600,640

 

$4,442,118

 

$4,159,976







10



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



4. Earnings Per Common Share, Continued

The following tables include a summary of the Company's basic and diluted earnings per share for the periods indicated.

 
For the Three Months Ended September 30,
 
2015
 
2014
 
Income
 
Shares
 
Per Share Amounts
 
Income
 
Shares
 
Per Share Amounts
Basic EPS
$
1,634,403

 
2,944,001

 
$
0.56

 
$
1,600,640

 
2,944,001

 
$
0.54

Effect of Dilutive Securities:
 
 
 
 
 
 
 
 
 
 
 
Senior Convertible Debentures
75,442

 
304,200

 
(0.03)

 
75,422

 
304,200

 
(0.02)

Unvested Restricted Stock

 
160

 

 





Diluted EPS
$
1,709,845

 
3,248,361

 
$
0.53

 
$
1,676,062

 
3,248,201

 
$
0.52


 
For the Nine Months Ended September 30,
 
2015
 
2014
 
Income
 
Shares
 
Per Share Amounts
 
Income
 
Shares
 
Per Share Amounts
Basic EPS
$
4,442,118

 
2,944,001

 
$
1.51

 
$
4,159,976

 
2,944,001

 
$
1.41

Effect of Dilutive Securities:
 
 
 
 
 
 
 
 
 
 
 
Senior Convertible Debentures
226,325

 
304,200

 
(0.07)

 
226,325

 
304,200

 
(0.06)

Unvested Restricted Stock

 
83

 

 





Diluted EPS
$
4,668,443

 
3,248,284

 
$
1.44

 
$
4,386,301

 
3,248,201

 
$
1.35




5. Stock-Based Compensation

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

 
Three Months Ended September 30,
 
2015
 
2014
 
Shares
 
Weighted Average Exercise Price
 
Shares
 
Weighted Average Exercise Price
 
 
 
 
Balance, Beginning of Period
29,500

 
$23.55
 
47,500

 
$22.41
Options Granted

 
 

 
Options Exercised

 
 

 
Options Forfeited

 
 

 
Balance, End Of Period
29,500

 
$23.55
 
47,500

 
$22.41






11



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



5. Stock-Based Compensation, Continued

 
Nine Months Ended September 30,
 
2015
 
2014
 
Shares
 
Weighted Average Exercise Price
 
Shares
 
Weighted Average Exercise Price
 
 
 
 
Balance, Beginning of Period
47,500

 
$22.41
 
61,500

 
$22.49
Options Granted

 
 

 
Options Exercised

 
 

 
Options Forfeited
(18,000
)
 
20.55
 
(14,000
)
 
22.74
Balance, End Of Period
29,500

 
$23.55
 
47,500

 
$22.41
 
 
 
 
 
 
 
 
Options Exercisable
21,100

 
 
 
33,900

 
 
 
 
 
 
 
 
 
 
Options Available For Grant
50,000

 
 
 
50,000

 
 



At September 30, 2015, the Company had the following options outstanding:

Grant Date
 
Outstanding Options
 
Option Price
 
Expiration Date
01/01/06
 
3,500
 
$23.91
 
01/01/16
 
 
 
 
 
 
 
08/24/06
 
3,500
 
$23.03
 
08/24/16
 
 
 
 
 
 
 
05/24/07
 
2,000
 
$24.34
 
05/24/17
 
 
 
 
 
 
 
07/09/07
 
1,000
 
$24.61
 
07/09/17
 
 
 
 
 
 
 
10/01/07
 
2,000
 
$24.28
 
10/01/17
 
 
 
 
 
 
 
01/01/08
 
13,000
 
$23.49
 
01/01/18
 
 
 
 
 
 
 
05/19/08
 
2,500
 
$22.91
 
05/18/18
 
 
 
 
 
 
 
07/01/08
 
2,000
 
$22.91
 
07/01/18

None of the options outstanding at September 30, 2015 or 2014 had an exercise price below the average market price during the three or nine month periods ended September 30, 2015 or 2014. Therefore, these options were not deemed to be dilutive to earnings per share in those periods.


12



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



6. Investment and Mortgage-Backed Securities, Available For Sale

The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment and mortgage-backed securities available for sale at the dates indicated are as follows:
 
September 30, 2015
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
FHLB Securities
$
5,113,509

 
$
4,254

 
$
56,284

 
$
5,061,479

Federal Farm Credit Bank ("FFCB") Securities
2,000,000

 

 
10,138

 
1,989,862

Federal National Mortgage Association ("FNMA") Bonds
997,380

 
17,281

 

 
1,014,661

Small Business Administration (“SBA”) Bonds
111,586,926

 
1,674,338

 
135,029

 
113,126,235

Tax Exempt Municipal Bonds
79,370,686

 
1,897,885

 
737,204

 
80,531,367

Mortgage-Backed Securities
181,909,642

 
4,563,834

 
135,449

 
186,338,027

Equity Securities
250,438

 
40,162

 

 
290,600

Total Available For Sale
$
381,228,581

 
$
8,197,754

 
$
1,074,104

 
$
388,352,231

 
 
 
 
 
 
 
 
 
December 31, 2014
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
FHLB Securities
$
13,317,462

 
$
83,691

 
$
154,492

 
$
13,246,661

FFCB Securities
5,750,000

 

 
82,006

 
5,667,994

FNMA Bonds
996,822

 
7,559

 

 
1,004,381

SBA Bonds
106,637,400

 
1,796,943

 
307,649

 
108,126,694

Tax Exempt Municipal Bonds
59,960,960

 
2,579,543

 
45,080

 
62,495,423

Mortgage-Backed Securities
233,963,842

 
5,704,855

 
815,984

 
238,852,713

Equity Securities
250,438

 
56,236

 

 
306,674

Total Available For Sale
$
420,876,924

 
$
10,228,827

 
$
1,405,211

 
$
429,700,540


FHLB securities, FFCB securities and FNMA and FHLMC mortgage-backed securities are issued by government-sponsored enterprises (“GSEs”).  GSEs are not backed by the full faith and credit of the United States government.  SBA bonds are backed by the full faith and credit of the United States government. Included in the tables above and below in mortgage-backed securities are Government National Mortgage Association ("GNMA") mortgage-backed securities, which are also backed by the full faith and credit of the United States government.  At September 30, 2015 the Bank held an amortized cost and fair value of $121.1 million and $124.0 million, respectively, in GNMA mortgage-backed securities included in mortgage-backed securities listed above compared to an amortized cost and fair value of $156.8 million and $160.6 million, respectively, at December 31, 2014. Also included in mortgage-backed securities in the tables above and below are three private label collateralized mortgage obligation ("CMO") securities purchased by the Bank during the three months ended September 30, 2015. These securities are issued by non-governmental real estate mortgage investment conduits, which are not backed by the full faith and credit of the United States government.  At September 30, 2015 the Bank held both an amortized cost and fair value of $3.0 million in private label CMO mortgage-backed securities included in mortgage-backed securities listed above. There were no private label mortgage-backed securities held at December 31, 2014.





13



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



6. Investment and Mortgage-Backed Securities, Available For Sale, Continued

The amortized cost and fair value of investment and mortgage-backed securities available for sale at September 30, 2015 are shown below by contractual maturity.  Expected maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without call or prepayment penalties. Since mortgage-backed securities are not due at a single maturity date, they are disclosed separately, rather than allocated over the the maturity groupings below.
Investment Securities
Amortized Cost
 
Fair Value
Less Than One Year
$
693,127

 
$
692,225

One – Five Years
13,170,421

 
13,414,588

Over Five – Ten Years
63,800,934

 
64,895,557

More Than Ten Years
121,654,457

 
123,011,834

Mortgage-Backed Securities
181,909,642

 
186,338,027

 
$
381,228,581

 
$
388,352,231


At September 30, 2015 the amortized cost and fair value of investment and mortgage-backed securities available for sale pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were $83.9 million and $86.8 million, respectively, compared to an amortized cost and fair value of $120.7 million and $124.4 million, respectively, at December 31, 2014.

The Bank received $4.0 million and $27.3 million in gross proceeds from sales of available for sale securities during the three months ended September 30, 2015 and 2014, respectively. As a result, the Bank recognized gross gains of $8,000 and $319,000 respectively, and gross losses of $0 and $176,000 respectively, for the three months ended September 30, 2015 and 2014.

Similarly, during the nine months ended September 30, 2015 and 2014, the Bank received $58.2 million and $54.6 million, respectively, in gross proceeds from sales of available for sale securities. As a result, the Bank recognized gross gains of $1.7 million and $795,000, respectively, and gross losses of $47,000 and $607,000, respectively, for the nine months ended September 30, 2015 and 2014.

The following tables show gross unrealized losses and fair value, aggregated by investment category, and length of time that the individual available for sale securities have been in a continuous unrealized loss position at the dates indicated.
 
September 30, 2015
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
FHLB Securities
$

 
$

 
$
1,943,716

 
$
56,284

 
$
1,943,716

 
$
56,284

FFCB Securities
1,989,862

 
10,138

 

 

 
1,989,862

 
10,138

SBA Bonds
18,263,615

 
53,112

 
10,312,370

 
81,917

 
28,575,985

 
135,029

Tax Exempt Municipal Bond
37,133,463

 
734,874

 
800,502

 
2,330

 
37,933,965

 
737,204

Mortgage-Backed Securities
21,794,606

 
126,202

 
1,741,983

 
9,247

 
23,536,589

 
135,449

 
$
79,181,546

 
$
924,326

 
$
14,798,571

 
$
149,778

 
$
93,980,117

 
$
1,074,104


14



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



6. Investment and Mortgage-Backed Securities, Available For Sale, Continued

 
December 31, 2014
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
FHLB Securities
$
994,818

 
$
5,182

 
$
3,850,690

 
$
149,310

 
$
4,845,508

 
$
154,492

FFCB Securities

 

 
5,667,994

 
82,006

 
5,667,994

 
82,006

SBA Bonds
27,859,461

 
223,070

 
4,920,631

 
84,579

 
32,780,092

 
307,649

Tax Exempt Municipal Bond
3,605,319

 
16,039

 
1,710,586

 
29,041

 
5,315,905

 
45,080

Mortgage-Backed Securities
34,840,832

 
208,242

 
30,899,075

 
607,742

 
65,739,907

 
815,984

 
$
67,300,430

 
$
452,533

 
$
47,048,976

 
$
952,678

 
$
114,349,406

 
$
1,405,211


Securities classified as available for sale are recorded at fair market value.  At September 30, 2015 and December 31, 2014, 13.9% and 67.8% of the unrealized losses, representing 10 and 24 individual securities, respectively, consisted of securities in a continuous loss position for 12 months or more. The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature.  The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary. The Company reviews its investment securities portfolio at least quarterly and more frequently when economic conditions warrant, assessing whether there is any indication of other-than-temporary impairment (“OTTI”).

Factors considered in the review include estimated future cash flows, length of time and extent to which market value has been less than cost, the financial condition and near term prospects of the issuer, and our intent and ability to retain the security to allow for an anticipated recovery in market value.

If the review determines that there is OTTI, then an impairment loss is recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made, or we may recognize a portion in other comprehensive income. The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment. There was no OTTI recognized during the nine months ended September 30, 2015.

7. Investment and Mortgage-Backed Securities, Held to Maturity

During the nine months ended September 30, 2015 the Company transferred 22 mortgage-backed securities classified as available for sale to its held to maturity portfolio. Management expects interest rates to rise in 2016 and elected to transfer these securities in an effort to reduce volatility in equity. At the date of the transfer these securities had a fair value $32.8 million, which resulted in an unrealized gain of $602,000 that is reported in accumulated other comprehensive income and will be amortized over the remaining life of the securities. The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of held to maturity securities at September 30, 2015 are as follows:
 
September 30, 2015
 
 Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Mortgage-Backed Securities (1)
$
30,847,402

 
$
23,520

 
$
140,278

 
$
30,730,644

Total Held to Maturity
$
30,847,402

 
$
23,520

 
$
140,278

 
$
30,730,644


(1) COMPRISED OF GSES OR GNMA MORTGAGE-BACKED SECURITIES 

Other than the mortgage-backed securities included above, there were no other investment securities classified as held to maturity at September 30, 2015. There were no investment or mortgage-backed securities classified as held to maturity at December 31, 2014.

15



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements




7. Investment and Mortgage-Backed Securities, Held to Maturity, Continued

At September 30, 2015, the Bank held GNMA mortgage-backed securities that had an amortized cost and fair value of $21.4 million and $21.3 million, respectively. The Company has not invested in any private label mortgage-backed securities classified as held to maturity.

At September 30, 2015, the amortized cost and fair value of mortgage-backed securities held to maturity pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were $26.9 million and $26.8 million, respectively.

The following tables show gross unrealized losses, fair value and length of time that individual held to maturity securities have been in a continuous unrealized loss position at September 30, 2015.
 
September 30, 2015
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Mortgage-Backed Securities (1)
$
27,759,478

 
$
140,278

 
$

 
$

 
$
27,759,478

 
$
140,278

 
$
27,759,478

 
$
140,278

 
$

 
$

 
$
27,759,478

 
$
140,278


(1) COMPRISED OF GNMA MORTGAGE-BACKED SECURITIES 

The Company’s held to maturity portfolio is recorded at amortized cost.  The Company has the ability and intent to hold these securities to maturity. There were no sales of securities held to maturity during the nine months ended September 30, 2015. There were no securities classified as held to maturity during the nine months ended September 30, 2014.


16



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



8.    Loans Receivable, Net

Loans receivable, net, consisted of the following as of the dates shown:
 
September 30, 2015
 
December 31, 2014
Residential Real Estate Loans
$
77,915,013

 
$
77,282,817

Consumer Loans
50,800,750

 
50,391,224

Commercial Business Loans
8,974,570

 
10,564,467

Commercial Real Estate Loans
192,672,048

 
209,530,209

Total Loans Held For Investment
330,362,381

 
347,768,717

Loans Held For Sale
1,518,631

 
1,864,999

Total Loans Receivable, Gross
331,881,012

 
349,633,716

Less:
 
 
 
Allowance For Loan Losses
7,935,023

 
8,357,496

Loans In Process
4,153,996

 
1,379,114

Deferred Loan Fees
37,259

 
22,611

 
12,126,278

 
9,759,221

Total Loans Receivable, Net
$
319,754,734

 
$
339,874,495


Changes in the allowance for loan losses for the three and nine months ended September 30, 2015 and 2014 are summarized as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Balance At Beginning Of Period
$
7,795,582

 
$
9,112,157

 
$
8,357,496

 
$
10,241,970

Provision For Loan Losses
(200,000
)
 

 
(100,000
)
 
200,000

Charge Offs
(441,398
)
 
(590,942
)
 
(1,338,358
)
 
(2,384,994
)
Recoveries
780,839

 
125,759

 
1,015,885

 
589,998

Total Allowance For Loan Losses
$
7,935,023

 
$
8,646,974

 
$
7,935,023

 
$
8,646,974


The Company uses a risk based approach based on the following credit quality measures when analyzing the loan portfolio: pass, caution, special mention, and substandard. These indicators are used to rate the credit quality of loans for the purposes of determining the Company’s allowance for loan losses. Pass loans are loans that are performing and are deemed adequately protected by the net worth of the borrower or the underlying collateral value. These loans are considered to have the least amount of risk in terms of determining the allowance for loan losses. Loans that are graded as substandard are considered to have the most risk. These loans typically have an identified weakness or weaknesses and are inadequately protected by the net worth of the borrower or collateral value. All loans 90 days or more past due are automatically classified in this category. The caution and special mention categories fall in between the pass and substandard grades and consist of loans that do not currently expose the Company to sufficient risk to warrant adverse classification but possess weaknesses.



17



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



8.    Loans Receivable, Net, Continued

The following tables list the loan grades used by the Company as credit quality indicators and the balance in each category at the dates presented, excluding loans held for sale.
 
Credit Quality Measures
September 30, 2015
 
Pass
 
 
Caution
 
Special
Mention
 
 
Substandard
 
 
Total Loans
Residential Real Estate
$
69,246,501

 
$
1,140,421

 
$
514,567

 
$
7,013,524

 
$
77,915,013

Consumer
47,428,417

 
1,868,970

 
124,082

 
1,379,281

 
50,800,750

Commercial Business
7,717,250

 
689,421

 
119,000

 
448,899

 
8,974,570

Commercial Real Estate
119,340,093

 
44,502,378

 
18,993,244

 
9,836,333

 
192,672,048

Total
$
243,732,261

 
$
48,201,190

 
$
19,750,893

 
$
18,678,037

 
$
330,362,381


 
Credit Quality Measures
December 31, 2014
 
Pass
 
 
Caution
 
Special
Mention
 
 
Substandard
 
 
Total Loans
Residential Real Estate
$
69,163,911

 
$
956,976

 
$
639,638

 
$
6,522,292

 
$
77,282,817

Consumer
48,283,560

 
1,046,624

 
128,033

 
933,007

 
50,391,224

Commercial Business
9,691,685

 
340,706

 
202,895

 
329,181

 
10,564,467

Commercial Real Estate
125,339,273

 
32,549,335

 
35,169,358

 
16,472,243

 
209,530,209

Total
$
252,478,429

 
$
34,893,641

 
$
36,139,924

 
$
24,256,723

 
$
347,768,717



The following tables present an age analysis of past due balances by category at September 30, 2015 and December 31, 2014:
September 30, 2015
 
30-59 Days
Past Due
 
 
60-89 Days
Past Due
 
90 Days or
More Past Due
 
 
Total Past
Due
 
 
 
Current
 
 
Total Loans
Receivable
Residential
   Real Estate
$

 
$
1,156,451

 
$
3,376,784

 
$
4,533,235

 
$
73,381,778

 
$
77,915,013

Consumer
745,482

 
91,814

 
410,509

 
1,247,805

 
49,552,945

 
50,800,750

Commercial
   Business
320,363

 

 
165,401

 
485,764

 
8,488,806

 
8,974,570

Commercial
   Real Estate
3,036,311

 
989,012

 
3,619,661

 
7,644,984

 
185,027,064

 
192,672,048

Total
$
4,102,156

 
$
2,237,277

 
$
7,572,355

 
$
13,911,788

 
$
316,450,593

 
$
330,362,381


December 31, 2014
 
30-59 Days
Past Due
 
 
60-89 Days
Past Due
 
90 Days or
More Past
Due
 
 
Total Past
Due
 
 
 
Current
 
 
Total Loans
Receivable
Residential
   Real Estate
$

 
$
1,087,299

 
$
3,061,339

 
$
4,148,638

 
$
73,134,179

 
$
77,282,817

Consumer
1,868,787

 
91,223

 
573,644

 
2,533,654

 
47,857,570

 
50,391,224

Commercial
   Business
162,481

 
99,784

 
246,977

 
509,242

 
10,055,225

 
10,564,467

Commercial
   Real Estate
4,544,813

 
1,094,701

 
9,859,689

 
15,499,203

 
194,031,006

 
209,530,209

Total
$
6,576,081

 
$
2,373,007

 
$
13,741,649

 
$
22,690,737

 
$
325,077,980

 
$
347,768,717


18



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



8.    Loans Receivable, Net, Continued

At September 30, 2015 and December 31, 2014, the Company did not have any loans that were 90 days or more past due and still accruing interest. Our strategy is to work with our borrowers to reach acceptable payment plans while protecting our interests in the existing collateral.  In the event an acceptable arrangement cannot be reached, we may have to acquire these properties through foreclosure or other means and subsequently sell, develop, or liquidate them.

The following table shows non-accrual loans by category at September 30, 2015 compared to December 31, 2014:
 
At September 30, 2015
 
At December 31, 2014
 
Increase (Decrease)
 
Amount
 
Percent (1)
 
Amount
 
Percent (1)
 
Amount
 
%
Non-accrual Loans:
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate
$
3,376,784

 
1.04
%
 
$
3,061,339

 
0.90
%
 
$
315,445

 
10.3
 %
Commercial Business
165,401

 
0.05

 
246,977

 
0.10

 
(81,576
)
 
(33.0
)
Commercial Real Estate
3,619,661

 
1.11

 
9,859,689

 
2.80

 
(6,240,028
)
 
(63.3
)
Consumer
410,509

 
0.13

 
573,644

 
0.20

 
(163,135
)
 
(28.4
)
Total Non-accrual Loans
$
7,572,355

 
2.33
%
 
$
13,741,649

 
4.00
%
 
$
(6,169,294
)
 
(44.9
)%

(1) PERCENT OF TOTAL LOANS HELD FOR INVESTMENT, NET OF DEFERRED FEES AND LOANS IN PROCESS. 

The following tables show the activity in the allowance for loan losses by category for the periods indicated:
 
 
For the Three Months Ended September 30, 2015
 
 
Residential
Real Estate
 
 
Consumer
 
Commercial
Business
 
Commercial
Real Estate
 
 
Total
Beginning Balance
 
$
1,310,078

 
$
1,007,984

 
$
747,067

 
$
4,730,453

 
$
7,795,582

Provision
 
142,917

 
199,719

 
4,565

 
(547,201
)
 
(200,000
)
Charge-Offs
 
(59,996
)
 
(77,720
)
 

 
(303,682
)
 
(441,398
)
Recoveries
 
782

 
26,783

 
564

 
752,710

 
780,839

Ending Balance
 
$
1,393,781

 
$
1,156,766

 
$
752,196

 
$
4,632,280

 
$
7,935,023


 
 
For the Nine Months Ended September 30, 2015
 
 
Residential
Real Estate
 
 
Consumer
 
Commercial
Business
 
Commercial
Real Estate
 
 
Total
Beginning Balance
 
$
1,392,065

 
$
886,716

 
$
159,353

 
$
5,919,362

 
$
8,357,496

Provision
 
106,079

 
656,424

 
595,906

 
(1,458,409
)
 
(100,000
)
Charge-Offs
 
(105,912
)
 
(471,345
)
 
(10,947
)
 
(750,154
)
 
(1,338,358
)
Recoveries
 
1,549

 
84,971

 
7,884

 
921,481

 
1,015,885

Ending Balance
 
$
1,393,781

 
$
1,156,766

 
$
752,196

 
$
4,632,280

 
$
7,935,023



19



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



8.    Loans Receivable, Net, Continued
 
 
For the Three Months Ended September 30, 2014
 
 
Residential
Real Estate
 
 
Consumer
 
Commercial
Business
 
Commercial
Real Estate
 
 
Total
Beginning Balance
 
$
1,507,281

 
$
833,746

 
$
496,578

 
$
6,274,552

 
$
9,112,157

Provision
 
26,596

 
73,403

 
36,529

 
(136,528
)
 

Charge-Offs
 
(71,701
)
 
(75,262
)
 
(3,703
)
 
(440,276
)
 
(590,942
)
Recoveries
 
121

 
8,440

 
1,950

 
115,248

 
125,759

Ending Balance
 
$
1,462,297

 
$
840,327

 
$
531,354

 
$
5,812,996

 
$
8,646,974


 
 
For the Nine Months Ended September 30, 2014
 
 
Residential
Real Estate
 
 
Consumer
 
Commercial
Business
 
Commercial
Real Estate
 
 
Total
Beginning Balance
 
$
1,706,643

 
$
847,777

 
$
426,658

 
$
7,260,892

 
$
10,241,970

Provision
 
(60,716
)
 
230,236

 
104,527

 
(74,047
)
 
200,000

Charge-Offs
 
(319,364
)
 
(283,302
)
 
(20,835
)
 
(1,761,493
)
 
(2,384,994
)
Recoveries
 
135,734

 
45,616

 
21,004

 
387,644

 
589,998

Ending Balance
 
$
1,462,297

 
$
840,327

 
$
531,354

 
$
5,812,996

 
$
8,646,974


The following tables present information related to impaired loans evaluated individually and collectively for impairment in the allowance for loan losses at the dates indicated:
 
 
Allowance For Loan Losses
September 30, 2015
 
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
 
Total
Residential Real Estate
 
$

 
$
1,393,781

 
$
1,393,781

Consumer
 
10,600

 
1,146,166

 
1,156,766

Commercial Business
 

 
752,196

 
752,196

Commercial Real Estate
 
29,300

 
4,602,980

 
4,632,280

Total
 
$
39,900

 
$
7,895,123

 
$
7,935,023


 
 
Allowance For Loan Losses
December 31, 2014
 
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
 
Total
Residential Real Estate
 
$

 
$
1,392,065

 
$
1,392,065

Consumer
 
2,600

 
884,116

 
886,716

Commercial Business
 

 
159,353

 
159,353

Commercial Real Estate
 
472,400

 
5,446,962

 
5,919,362

Total
 
$
475,000

 
$
7,882,496

 
$
8,357,496



20



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



8.    Loans Receivable, Net, Continued

The following tables present information related to impaired loans evaluated individually and collectively for impairment in loans receivable at the dates indicated:
 
 
Loans Receivable
September 30, 2015
 
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
 
Total
Residential Real Estate
 
$
3,043,675

 
$
74,871,338

 
$
77,915,013

Consumer
 
196,335

 
50,604,415

 
50,800,750

Commercial Business
 
165,401

 
8,809,169

 
8,974,570

Commercial Real Estate
 
10,478,577

 
182,193,471

 
192,672,048

Total
 
$
13,883,988

 
$
316,478,393

 
$
330,362,381

 
 
Loans Receivable
December 31, 2014
 
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
 
Total
Residential Real Estate
 
$
2,519,814

 
$
74,763,003

 
$
77,282,817

Consumer
 
218,232

 
50,172,992

 
50,391,224

Commercial Business
 
236,030

 
10,328,437

 
10,564,467

Commercial Real Estate
 
17,273,879

 
192,256,330

 
209,530,209

Total
 
$
20,247,955

 
$
327,520,762

 
$
347,768,717


Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired management measures impairment and records the loan at fair value. Fair value is estimated using one of the following methods: fair value of the collateral less estimated costs to sale, discounted cash flows, or market value of the loan based on similar debt. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, the Company reviews the most recent appraisal and if it is over 24 months old will request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, management may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. The average balance of impaired loans was $14.1 million for the three months ended September 30, 2015 compared to $21.2 million for the three months ended September 30, 2014.


21



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



8.    Loans Receivable, Net, Continued

The following tables are a summary of information related to impaired loans at September 30, 2015 and December 31, 2014 and for the three and nine months ended September 30, 2015 and 2014.
 
 
 
 
At
 
 
 
At
 
 
September 30, 2015
 
December 31, 2014
Impaired Loans
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
 
Related
Allowance
With No Related Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate
 
$
3,043,675

 
$
3,182,805

 
$

 
$
2,519,814

 
$
2,618,003

 
$

Consumer
 
96,530

 
105,030

 

 
152,029

 
159,529

 

Commercial Business
 
165,401

 
365,401

 

 
236,030

 
436,030

 

Commercial Real Estate
 
10,027,121

 
12,809,652

 

 
13,721,964

 
18,088,149

 

With An Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate
 

 

 

 

 

 

Consumer
 
99,805

 
99,805

 
10,600

 
66,203

 
66,203

 
2,600

Commercial Business
 

 

 

 

 

 

Commercial Real Estate
 
451,456

 
458,256

 
29,300

 
3,551,915

 
3,582,465

 
472,400

Total
 
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate
 
3,043,675

 
3,182,805

 

 
2,519,814

 
2,618,003

 

Consumer
 
196,335

 
204,835

 
10,600

 
218,232

 
225,732

 
2,600

Commercial Business
 
165,401

 
365,401

 

 
236,030

 
436,030

 

Commercial Real Estate
 
10,478,577

 
13,267,908

 
29,300

 
17,273,879

 
21,670,614

 
472,400

Total
 
$
13,883,988

 
$
17,020,949

 
$
39,900

 
$
20,247,955

 
$
24,950,379

 
$
475,000


























22



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



8.    Loans Receivable, Net, Continued

 
 
For the Three Months Ended September 30,
 
 
2015
 
2014
Impaired Loans
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With No Related Allowance Recorded:
 
 
 
 
 
 
 
 
Residential Real Estate
 
$
3,084,808

 
$

 
$
2,618,971

 
$

Consumer
 
97,894

 

 
161,882

 

Commercial Business
 
170,601

 

 
16,089

 

Commercial Real Estate
 
10,168,004

 
71,766

 
16,726,235

 
98,542

With An Allowance Recorded:
 
 
 
 
 
 
 
 
Residential Real Estate
 

 

 

 

Consumer
 
100,743

 
1,201

 
67,239

 
2,082

Commercial Business
 

 

 
458,059

 

Commercial Real Estate
 
452,393

 
2,303

 
1,159,433

 
22,781

Total
 
 
 
 
 
 
 
 
Residential Real Estate
 
3,084,808

 

 
2,618,971

 

Consumer
 
198,637

 
1,201

 
229,121

 
2,082

Commercial Business
 
170,601

 

 
474,148

 

Commercial Real Estate
 
10,620,397

 
74,069

 
17,885,668

 
121,323

Total
 
$
14,074,443

 
$
75,270

 
$
21,207,908

 
$
123,405


 
 
For the Nine Months Ended September 30,
 
 
2015
 
2014
Impaired Loans
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With No Related Allowance Recorded:
 
 
 
 
 
 
 
 
Residential Real Estate
 
$
3,132,323

 
$
8,477

 
$
2,676,070

 
$

Consumer
 
100,937

 
247

 
171,364

 

Commercial Business
 
198,430

 

 
16,089

 

Commercial Real Estate
 
10,510,256

 
246,219

 
18,142,478

 
266,000

With An Allowance Recorded:
 
 
 
 
 
 
 
 
Residential Real Estate
 

 

 

 

Consumer
 
101,435

 
3,615

 
67,872

 
4,168

Commercial Business
 

 

 
461,206

 

Commercial Real Estate
 
456,982

 
15,919

 
1,173,816

 
51,156

Total
 
 
 
 
 
 
 
 
Residential Real Estate
 
3,132,323

 
8,477

 
2,676,070

 

Consumer
 
202,372

 
3,862

 
239,236

 
4,168

Commercial Business
 
198,430

 

 
477,295

 

Commercial Real Estate
 
10,967,238

 
262,138

 
19,316,294

 
317,156

Total
 
$
14,500,363

 
$
274,477

 
$
22,708,895

 
$
321,324


23



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



8.    Loans Receivable, Net, Continued

In the course of resolving delinquent loans, the Bank may choose to restructure the contractual terms of certain loans. A troubled debt restructuring ("TDR") is a restructuring in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that it would not otherwise consider (Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 310-40).  The concessions granted on TDRs generally include terms to reduce the interest rate, extend the term of the debt obligation, or modify the payment structure on the debt obligation. The Bank grants such concessions to reassess the borrower’s financial status and develop a plan for repayment.  TDRs of $8.1 million and $9.6 million were included in impaired loans at September 30, 2015 and December 31, 2014, respectively.

Loans on nonaccrual status at the date of modification are initially classified as nonaccrual TDRs. Loans on accruing status at the date of concession are initially classified as accruing TDRs if the note is reasonably assured of repayment and performance is expected in accordance with its modified terms. Such loans may be designated as nonaccrual loans subsequent to the concession date if reasonable doubt exists as to the collection of interest or principal under the restructuring agreement. Nonaccrual TDRs are returned to accruing status when there is economic substance to the restructuring, there is documented credit evaluation of the borrower's financial condition, the remaining balance is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated sustained repayment performance in accordance with the modified terms for a reasonable period of time (generally a minimum of six months).

The following table is a summary of loans restructured as TDRs during the periods indicated:
 
 
For the Three Months Ended September 30,
 
 
2015
 
2014
Troubled Debt Restructurings
 
 
 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
 
 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
Residential Real Estate
 

 
$

 
$

 

 
$

 
$

Consumer
 
1

 
36,460

 
36,460

 

 

 

Commercial Business
 

 

 

 

 

 

Commercial Real Estate
 
2

 
32,411

 
32,411

 

 

 

Total
 
3

 
$
68,871

 
$
68,871

 

 
$

 
$

 
 
For the Nine Months Ended September 30,
 
 
2015
 
2014
Troubled Debt Restructurings
 
 
 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
 
 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
Residential Real Estate
 

 
$

 
$

 

 
$

 
$

Consumer
 
1

 
36,460

 
36,460

 

 

 

Commercial Business
 

 

 

 

 

 

Commercial Real Estate
 
5

 
872,703

 
872,703

 
1

 
79,072

 
79,072

Total
 
6

 
$
909,163

 
$
909,163

 
1

 
$
79,072

 
$
79,072


During the nine months ended September 30, 2015, the Bank modified six loans as TDRs, three of which were modified during the three months ended September 30, 2015. The Bank lowered the interest rate on two of the loans to allow the borrowers to begin making monthly principal and interest payments on the loans and changed the monthly payment to an interest only payment for an agreed upon period for the other four loans.


24



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements




8.    Loans Receivable, Net, Continued

There were no loans modified as a TDR during the three months ended September 30, 2014. During the nine months ended September 30, 2014, the Bank modified one loan as a TDR by lowering the interest rate. This modification allowed the borrower to begin making monthly principal and interest payments on the loan.

At September 30, 2015, three loans totaling $684,000 that had previously been restructured were in default. Two of the loans, with a combined outstanding balance of $555,000, defaulted during the nine month period ended September 30, 2015. In comparison, at September 30, 2014, five loans totaling $2.2 million that had previously been restructured were in default, all of which defaulted during the nine month period September 30, 2014. One loan that had been previously restructured within the last twelve months defaulted during the nine months ended September 30, 2015. The Bank considers any loan 30 days or more past due to be in default.

Our policy with respect to accrual of interest on loans restructured as a TDR follows relevant supervisory guidance.  That is, if a borrower has demonstrated performance under the original loan terms and shows the capacity to perform under the restructured loan terms, interest will continue to be accrued at the restructured interest rate.  If a borrower was materially delinquent on payments prior to the restructuring of the loan but shows the capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward.  Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status.

We closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms.  If, after previously being classified as a TDR, a loan is restructured a second time, then that loan is automatically placed on nonaccrual status.  Our policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the modified loan terms before that loan can be placed back on accrual status.  Further, the borrower must show capacity to continue performing into the future prior to restoration of accrual status.


9. Regulatory Matters

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines of the regulatory framework for prompt corrective action, the Company must meet specific capital adequacy guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by applicable regulatory standards, including the newly implemented Basel III revised capital adequacy standards and relevant provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd Frank Act"), require the Bank to maintain (i) a minimum ratio of Tier 1 capital to average total assets, after certain adjustments, of 4.00%, (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.00%, (iii) a minimum ratio of total-capital to risk-weighted assets of 8.00% and (iv) a minimum ratio of common equity Tier 1 capital ("CETI") to risk-weighted assets of 4.50%. A “well-capitalized” institution must generally maintain capital ratios 200 bps higher than the minimum guidelines.











25



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements




9. Regulatory Matters, Continued

The Federal Reserve requires the Company to maintain capital adequacy that generally parallels the FDIC requirements for the Bank.  At September 30, 2015, the Company and the Bank each exceeded all applicable capital requirements. The Company and the Bank’s regulatory capital amounts and ratios are as follows as of the dates indicated:

 
 
 
Actual
 
 
 
For Capital Adequacy
 
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in Thousands)
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
SECURITY FEDERAL CORP.
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)
$
89,502

 
23.6
%
 
$
22,741

 
6.0
%
 
N/A

 
N/A

Total Risk-Based Capital
(To Risk Weighted Assets)
94,276

 
24.9
%
 
30,322

 
8.0
%
 
N/A

 
N/A

Common Equity Tier 1 Capital (To Risk Weighted Assets)
62,502

 
16.5
%
 
17,056

 
4.5
%
 
N/A

 
N/A

Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)
89,502

 
11.2
%
 
31,989

 
4.0
%
 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
SECURITY FEDERAL BANK
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)
$
87,787

 
23.2
%
 
$
22,724

 
6.0
%
 
$
30,299

 
8.0
%
Total Risk-Based Capital
(To Risk Weighted Assets)
92,561

 
24.4
%
 
30,299

 
8.0
%
 
37,874

 
10.0
%
Common Equity Tier 1 Capital (To Risk Weighted Assets)
87,787

 
23.2
%
 
17,043

 
4.5
%
 
24,618

 
6.5
%
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)
87,787

 
11.0
%
 
31,979

 
4.0
%
 
39,974

 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
SECURITY FEDERAL CORP.
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)
$
77,746

 
20.6
%
 
$
15,073

 
4.0
%
 
 
N/A

 
 
N/A

Total Risk-Based Capital
(To Risk Weighted Assets)
89,915

 
23.9
%
 
30,147

 
8.0
%
 
 
N/A

 
 
N/A

Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)
77,746

 
9.5
%
 
32,778

 
4.0
%
 
 
N/A

 
 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
SECURITY FEDERAL BANK
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)
$
87,222

 
23.2
%
 
$
15,062

 
4.0
%
 
$
22,593

 
6.0
%
Total Risk-Based Capital
(To Risk Weighted Assets)
91,973

 
24.4
%
 
30,123

 
8.0
%
 
37,654

 
10.0
%
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)
87,222

 
10.6
%
 
32,792

 
4.0
%
 
40,991

 
5.0
%

26



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



10. Carrying Amounts and Fair Value of Financial Instruments

The Company has adopted accounting guidance which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value under generally accepted accounting principles. This guidance applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

Accounting guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1
Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries and money market funds.
Level 2
Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bonds, corporate debt securities and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts.
Level 3
Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. At September 30, 2015, the Company’s investment portfolio was comprised of government and agency bonds, mortgage-backed securities issued by government agencies or GSEs, three private label CMO mortgage-backed securities, municipal securities, and two equity investments. Fair value measurement is based upon prices obtained from third party pricing services who use independent pricing models which rely on a variety of factors including reported trades, broker/dealer quotes, benchmark yields, economic and industry events and other relevant market information. As such, these securities are classified as Level 2.

Mortgage Loans Held for Sale

The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with Freddie Mac or other investors, are carried in the Company’s loans held for sale portfolio.  These loans are fixed rate residential loans that have been originated in the Company’s name and have closed.  Virtually all of these loans have commitments to be purchased by investors and the majority of these loans were locked in by price with the investors on the same day or shortly thereafter that the loan was locked in with the Company’s customers.  Therefore, these loans present very little market risk for the Company.

The Company usually delivers to, and receives funding from, the investor within 30 days.  Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts" basis. The Company is not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. As a result of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is the same as the value of the loan amount at its origination. These loans are classified as Level 2.

27



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



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

Impaired Loans

The Company does not record loans held for investment at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established as necessary. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment.

Fair value is estimated using one of the following methods: fair value of the collateral less estimated costs to sell, discounted cash flows, or market value of the loan based on similar debt. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, the Company reviews the most recent appraisal and if it is over 24 months old will request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, management may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. Specifically as an example, in situations where the collateral on a nonperforming commercial real estate loan is out of the Company’s primary market area, management would typically order an independent appraisal immediately, at the earlier of the date the loan becomes nonperforming or immediately following the determination that the loan is impaired. However, as a second example, on a nonperforming commercial real estate loan where management is familiar with the property and surrounding areas and where the original appraisal value far exceeds the recorded investment in the loan, management may perform an internal analysis whereby the previous appraisal value would be reviewed and adjusted for current conditions including recent sales of similar properties in the area and any other relevant economic trends. These valuations are reviewed at a minimum on a quarterly basis.

Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2015, most of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The Company records impaired loans as nonrecurring Level 3. As of September 30, 2015 and December 31, 2014, the recorded investment in impaired loans was $13.9 million and $20.2 million, respectively.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 3. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the asset as nonrecurring Level 3.

Assets measured at fair value on a recurring basis are as follows at September 30, 2015:
 
 
Assets:
Quoted Market Price
In Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
FHLB Securities
$

 
$
5,061,479

 
$

FFCB Securities

 
1,989,862

 

FNMA And FHLMC Bonds

 
1,014,661

 

SBA Bonds

 
113,126,235

 

Tax Exempt Municipal Bonds

 
80,531,367

 

Mortgage-Backed Securities

 
186,338,027

 

Equity Securities

 
290,600

 

Total
$

 
$
388,352,231

 
$




28



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements




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

Assets measured at fair value on a recurring basis were as follows at December 31, 2014:
 
 
Assets:
 
Quoted Market Price
In Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
FHLB Securities
 
$

 
$
13,246,661

 
$

FFCB Securities
 

 
5,667,994

 

FNMA Bonds
 

 
1,004,381

 

SBA Bonds
 

 
108,126,694

 

Tax Exempt Municipal Bonds
 

 
62,495,423

 

Mortgage-Backed Securities
 

 
238,852,713

 

Equity Securities
 

 
306,674

 

Total
 
$

 
$
429,700,540

 
$


There were no liabilities measured at fair value on a recurring basis at September 30, 2015 or December 31, 2014.

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. The table below presents assets measured at fair value on a nonrecurring basis at September 30, 2015 and December 31, 2014, aggregated by the level in the fair value hierarchy within which those measurements fall. There were no liabilities measured at fair value on a nonrecurring basis at September 30, 2015 or December 31, 2014.
 
Assets:
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Balance At September 30, 2015
Mortgage Loans Held For Sale
 
$

 
$
1,518,631

 
$

 
$
1,518,631

Collateral Dependent Impaired Loans (1)
 

 

 
13,844,088

 
13,844,088

Foreclosed Assets
 

 

 
4,928,998

 
4,928,998

Total
 
$

 
$
1,518,631

 
$
18,773,086

 
$
20,291,717


(1) IMPAIRED LOANS ARE REPORTED NET OF SPECIFIC RESERVES OF $39,900  
Assets:
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Balance At
December 31, 2014
Mortgage Loans Held For Sale
 
$

 
$
1,864,999

 
$

 
$
1,864,999

Collateral Dependent Impaired Loans (1)
 

 

 
19,772,955

 
19,772,955

Foreclosed Assets
 

 

 
3,229,710

 
3,229,710

Total
 
$

 
$
1,864,999

 
$
23,002,665

 
$
24,867,664


(1) IMPAIRED LOANS ARE REPORTED NET OF SPECIFIC RESERVES OF $475,000  

29



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



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

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis at September 30, 2015, the significant unobservable inputs used in the fair value measurements were as follows:
 
 
 
Valuation
 
Significant
 
 
 
Fair Value
  
Technique
 
Unobservable Inputs
 
Range
Collateral Dependent Impaired Loans
$
13,844,088

 
Appraised Value
  
Discount Rates/ Discounts to Appraised Values
  
0% - 36%
Foreclosed Assets
4,928,998

 
Appraised Value/Comparable Sales
 
Discount Rates/ Discounts to Appraised Values
 
 
13% - 100%
 
 
 
 
 
 
 
 

For assets and liabilities that are not presented on the balance sheet at fair value, the following methods are used to determine the fair value:
 
Cash and cash equivalents—The carrying amount of these financial instruments approximates fair value. All mature within 90 days and do not present unanticipated credit concerns.
 
Certificates of deposit with other banks—Fair value is based on market prices for similar assets.
 
Investment securities held to maturity—Securities held to maturity are valued at quoted market prices or dealer quotes.
 
Loans Receivable, Net—The fair value of loans are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. As discount rates are based on current loan rates as well as management estimates, the fair values presented may not be indicative of the value negotiated in an actual sale.
 
FHLB Stock—The fair value approximates the carrying value.
 
Deposits—The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.
 
FHLB Advances—Fair value is estimated based on discounted cash flows using current market rates for advances with similar terms.
 
Other Borrowed Money—The carrying value of these short term borrowings approximates fair value.
 
Senior Convertible Debentures— The fair value is estimated by discounting the future cash flows using the current rates at which similar debenture offerings with similar terms and maturities would be issued by similar institutions. As discount rates are based on current debenture rates as well as management estimates, the fair values presented may not be indicative of the value negotiated in an actual sale.
 
Junior Subordinated Debentures—The carrying value of junior subordinated debentures approximates fair value.


30



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



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

The following tables are a summary of the carrying value and estimated fair value of the Company’s financial instruments at September 30, 2015 and December 31, 2014 presented in accordance with the applicable accounting guidance.
 
September 30, 2015
 
Carrying
 
Fair Value
(In Thousands)
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash And Cash Equivalents
$
8,374

 
$
8,374

 
$
8,374

 
$

 
$

Certificates Of Deposits With Other Banks
2,095

 
2,095

 

 
2,095

 

Investment And Mortgage-Backed Securities
419,200

 
419,083

 

 
419,083

 

Loans Receivable, Net
319,755

 
318,531

 

 

 
318,531

FHLB Stock
2,224

 
2,224

 
2,224

 

 

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
  Checking, Savings, And Money Market
    Accounts
$
414,432

 
$
414,432

 
$
414,432

 
$

 
$

  Certificate Accounts
237,695

 
237,934

 

 
237,934

 

Advances From FHLB
33,280

 
34,658

 

 
34,658

 

Other Borrowed Money
7,725

 
7,725

 
7,725

 

 

Senior Convertible Debentures
6,084

 
6,084

 

 
6,084

 

Junior Subordinated Debentures
5,155

 
5,155

 

 
5,155

 


 
December 31, 2014
 
Carrying
 
Fair Value
(In Thousands)
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash And Cash Equivalents
$
10,193

 
$
10,193

 
$
10,193

 
$

 
$

Certificates Of Deposits With Other Banks
2,095

 
2,095

 

 
2,095

 

Investment And Mortgage-Backed Securities
429,701

 
429,701

 

 
429,701

 

Loans Receivable, Net
339,874

 
340,368

 

 

 
340,368

FHLB Stock
3,145

 
3,145

 
3,145

 

 

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
  Checking, Savings, And Money Market
    Accounts
$
406,864

 
$
406,864

 
$
406,864

 
$

 
$

  Certificate Accounts
253,251

 
253,300

 

 
253,300

 

Advances From FHLB
52,900

 
55,646

 

 
55,646

 

Other Borrowed Money
8,523

 
8,523

 
8,523

 

 

Senior Convertible Debentures
6,084

 
6,084

 

 
6,084

 

Junior Subordinated Debentures
5,155

 
5,155

 

 
5,155

 


At September 30, 2015, the Bank had $52.8 million of off-balance sheet financial commitments.  These commitments are to originate loans and unused consumer lines of credit and credit card lines.  Because these obligations are based on current market rates, if funded, the original principal amount is considered to be a reasonable estimate of fair value.

Fair value estimates are made on a specific date, based on relevant market data and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale the Bank’s entire holdings of a particular financial instrument.  

31



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



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

Because no active market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, current interest rates and prepayment trends, risk characteristics of various financial instruments, and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in any of these assumptions used in calculating fair value would also significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  For example, the Bank has significant assets and liabilities that are not considered financial assets or liabilities including deposit franchise values, loan servicing portfolios, deferred tax liabilities, and premises and equipment.

In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. The Company has used management’s best estimate of fair value on the above assumptions.  Thus, the fair values presented may not be the amounts, which could be realized, in an immediate sale or settlement of the instrument.  In addition, any income taxes or other expenses that would be incurred in an actual sale or settlement are not taken into consideration in the fair value presented.


11. Accounting and Reporting Changes

The following is a summary of recent authoritative pronouncements that could affect accounting, reporting, and disclosure of financial information by the Company:

In January 2014, the FASB amended the Investments-Equity Method and Joint Ventures topic of the ASC to address accounting for investments in qualified affordable housing projects. If certain conditions are met, the amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects by amortizing the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizing the net investment performance in the income statement as a component of income tax expense (benefit). If those conditions are not met, the investment should be accounted for as an equity method investment or a cost method investment in accordance with existing accounting guidance. The amendments will be effective for the Company for interim and annual reporting periods beginning after December 15, 2014 and should be applied retrospectively for all periods presented. Early adoption is permitted. The amendments did not have a material effect of the Company's financial statements.

In January 2014, the FASB amended the Receivables topic of the ASC. The amendments are intended to resolve diversity in practice with respect to when a creditor should reclassify a collateralized consumer mortgage loan to other real estate owned, or OREO. In addition, the amendments require a creditor reclassify a collateralized consumer mortgage loan to OREO upon obtaining legal title to the real estate collateral, or the borrower voluntarily conveying all interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement. The amendments will be effective for the Company for annual periods, and interim periods within those annual period beginning after December 15, 2014, with early implementation of the guidance permitted. In implementing this guidance, assets that are reclassified from real estate to loans are measured at the carrying value of the real estate at the date of adoption. Assets reclassified from loans to real estate are measured at the lower of the net amount of the loan receivable or the fair value of the real estate less costs to sell at the date of adoption. The Company will apply the amendments prospectively. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 31, 2017. The Company will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

In June 2014, the FASB issued guidance which makes limited amendments to the guidance on accounting for certain repurchase agreements. The new guidance (1) requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales

32



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. The amendments will be effective for the Company for the first interim or annual period beginning after December 15, 2014. The Company will apply the guidance by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

In June 2014, the FASB issued guidance which clarifies that performance targets associated with stock compensation should be treated as a performance condition and should not be reflected in the grant date fair value of the stock award. The amendments will be effective for the Company for fiscal years that begin after December 15, 2015. The Company will apply the guidance to all stock awards granted or modified after the amendments are effective. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

In January 2015, the FASB issued guidance that eliminated the concept of extraordinary items from U.S. GAAP. Existing U.S. GAAP required that an entity separately classify, present, and disclose extraordinary events and transactions. The amendments will eliminate the requirements for reporting entities to consider whether an underlying event or transaction is extraordinary, however, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendments may be applied either prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect these amendments to have a material effect on its financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting authorities are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.


12. Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.

Management has reviewed all events occurring through the date the consolidated financial statements were available to be issued and no other subsequent events occurred requiring accrual or disclosure.
 

33



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations


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

Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risk and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors, including, but not limited to:
the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be affected by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing assets in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves;
changes in general economic conditions, either nationally or in our market areas;
changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;
fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas;
secondary market conditions for loans and our ability to sell loans in the secondary market;
results of examinations of the Company by the Board of Governors of the Federal Reserve and our bank subsidiary by the Federal Deposit Insurance Corporation and the South Carolina State Board of Financial Institutions, or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings;
legislative or regulatory changes that adversely affect our business, or increase capital requirements, including the effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act; changes in regulatory policies and principles, or the interpretation of regulatory capital requirements or other rules, including as a result of Basel III; and any changes in rules affecting our ability to comply with the requirements of the U. S. Department of Treasury Community Development Capital Initiative;
our ability to attract and retain deposits;
increases in premiums for deposit insurance;
our ability to control operating costs and expenses;
our ability to implement our business strategies;
the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
difficulties in reducing risk associated with the loans on our balance sheet;
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
computer systems on which we depend could fail or experience a security breach;
our ability to retain key members of our senior management team;
costs and effects of litigation, including settlements and judgments;

34



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

our ability to manage loan delinquency rates;
increased competitive pressures among financial services companies;
changes in consumer spending, borrowing and savings habits;
the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
our ability to pay dividends on our common stock and preferred stock;
adverse changes in the securities markets;
inability of key third-party providers to perform their obligations to us;
changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; and
other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this document.

Some of these and other factors are discussed in the Company's 2014 Form 10-K in Item 1A, “Risk Factors.”
 
Any of the forward-looking statements that we make in this Form 10-Q and in the other public reports and statements we make may turn out to be wrong because of the inaccurate assumptions we might make because of the factors set forth above or because of other factors we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from those expressed in any forward-looking statements made by or on our behalf. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. We undertake no responsibility to update or revise any forward-looking statements.

Financial Condition At September 30, 2015 and December 31, 2014

Assets
Total assets decreased $24.5 million or 3.0% to $800.9 million at September 30, 2015 from $825.4 million at December 31, 2014. The primary reason for the decrease in total assets was a decrease of $20.1 million or 5.9% in net loans receivable. The increases and decreases in total assets were primarily concentrated in the following asset categories:
 
 
 
 
 
 
Increase (Decrease)
 
 
September 30, 2015
 
December 31, 2014
 
Amount
 
Percent
Cash And Cash Equivalents
 
$
8,374,489

 
$
10,192,702

 
$
(1,818,213
)
 
(17.8)%
Investment And Mortgage-
   Backed Securities –
   Available For Sale
 
388,352,231

 
429,700,540

 
(41,348,309
)
 
(9.6)
Investment And Mortgage- Backed Securities –
Held To Maturity
 
30,847,402

 

 
30,847,402

 
100.0
Loans Receivable, Net
 
319,754,734

 
339,874,495

 
(20,119,761
)
 
(5.9)
OREO
 
4,928,998

 
3,229,710

 
1,699,288

 
52.6
Premises And Equipment, Net
 
19,548,390

 
18,233,226

 
1,315,164

 
7.2
FHLB Stock
 
2,224,200

 
3,144,600

 
(920,400
)
 
(29.3)
Bank Owned Life Insurance
 
16,441,045

 
11,150,045

 
5,291,000

 
47.5
Other Assets
 
4,067,406

 
3,480,676

 
586,730

 
16.9

Cash and cash equivalents decreased $1.8 million or 17.8% to $8.4 million at September 30, 2015 from $10.2 million at December 31, 2014. Investment and mortgage-backed securities available for sale decreased $41.3 million or 9.6% to $388.4 million at September 30, 2015 from $429.7 million at December 31, 2014 due to the sale of 43 available for sale investment securities during the nine months ended September 30, 2015. The Bank also transferred 22 mortgage-backed securities from its available for sale portfolio to its held to maturity portfolio during the nine months ended September 30, 2015. As a result, investment and mortgage-backed securities held to maturity had a balance of $30.8 million at September 30, 2015 compared to no balance at December 31, 2014.


35



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

Loans receivable, net, decreased $20.1 million or 5.9% to $319.8 million at September 30, 2015 from $339.9 million at December 31, 2014. This decrease was concentrated primarily in commercial loans as a result of increased loan repayments combined with lower loan demand from creditworthy borrowers. Commercial real estate loans decreased $16.9 million or 8.0% to $192.7 million at September 30, 2015 from $209.5 million at December 31, 2014. Commercial business loans decreased $1.6 million or 15.0% to $9.0 million at September 30, 2015 from $10.6 million at December 31, 2014. Residential real estate loans increased $632,000 or 0.8% to $77.9 million at September 30, 2015 from $77.3 million at December 31, 2014. Consumer loans increased $410,000 or 0.8% to $50.8 million at September 30, 2015 compared to $50.4 million at December 31, 2014. Loans held for sale decreased $346,000 or 18.6% to $1.5 million at September 30, 2015 from $1.9 million at December 31, 2014.

OREO increased $1.7 million or 52.6% to $4.9 million at September 30, 2015 from $3.2 million at December 31, 2014. The increase was due to 24 foreclosures during the nine months ended September 30, 2015 with a total book value of $3.9 million offset by OREO sales and writedowns of $2.4 million and $174,000, respectively. At September 30, 2015, the OREO balance consisted of the following real estate properties: 14 single-family residences and 27 lots within residential subdivisions located throughout our market areas in South Carolina and Georgia; 11 parcels of commercial land in South Carolina; one commercial building in South Carolina; and eight lots within a subdivision and adjacent 22.96 acres of land in Aiken, South Carolina.

Premises and equipment, net increased $1.3 million or 7.2% to $19.5 million at September 30, 2015 from $18.2 million at December 31, 2014. The increase was primarily due to $1.6 million in additions to construction in progress related to the construction of the new branch location in Ballentine, South Carolina, which is scheduled to open later this year.

FHLB stock decreased $920,000 or 29.3% to $2.2 million at September 30, 2015 compared to $3.1 million at December 31, 2014 as a result of stock redemptions by the FHLB of Atlanta. The Bank, as a member of the FHLB of Atlanta, is required to acquire and hold shares of capital stock in the FHLB of Atlanta in an amount equal to a membership component, which is a percentage of total assets, plus a transaction component, which is a percentage of outstanding advances (borrowings) from the FHLB of Atlanta. As total assets and total advances have decreased, so has the Bank’s required investment in FHLB stock. In addition, effective March 20, 2015, the membership component decreased from 0.15% of total assets to 0.09% and the transaction component decreased from 4.50% of outstanding advances to 4.25%.

Other assets increased $587,000 or 16.9% to $4.1 million at September 30, 2015 from $3.5 million at December 31, 2014. The increase is a result of an increase in net deferred taxes related to decreased unrealized gains in the investment portfolio.

Liabilities
Deposit Accounts – The balances, weighted average rates and increases and decreases in deposit accounts were as follows at the dates indicated below:
 
 
September 30, 2015
 
December 31, 2014
 
Increase (Decrease)
 
 
Balance
 
Weighted Rate
 
Balance
 
Weighted Rate
 
Balance
 

Percent
Demand Accounts:
 
 
 
 
 
 
 
 
 
 
 
 
Checking
 
$
154,632,201

 
0.03%
 
$
143,422,150

 
0.03%
 
$
11,210,051

 
7.82%
Money Market
 
229,021,231

 
0.16
 
234,819,052

 
0.19

 
(5,797,821
)
 
(2.47)
Statement Savings
 
30,778,214

 
0.10
 
28,622,933

 
0.10

 
2,155,281

 
7.53
Total
 
414,431,646

 
0.11
 
406,864,135

 
0.13

 
7,567,511

 
1.86
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificate Accounts:
 
 
 
 
 
 
 
 
 
 
 
 
0.00 – 0.99%
 
172,848,050

 
 
 
185,458,344

 
 
 
(12,610,294
)
 
(6.80)
1.00 – 1.99%
 
52,490,571

 
 
 
42,014,738

 
 
 
10,475,833

 
24.93
2.00 – 2.99%
 
12,356,750

 
 
 
25,605,349

 
 
 
(13,248,599
)
 
(51.74)
3.00 – 3.99%
 

 
 
 
172,598

 
 
 
(172,598
)
 
(100.00)
Total
 
237,695,371

 
0.73
 
253,251,029

 
0.79

 
(15,555,658
)
 
(6.14)
Total Deposits
 
$
652,127,017

 
0.34%
 
$
660,115,164

 
0.38%
 
$
(7,988,147
)
 
(1.21)%

Included in the certificate accounts above were $41.3 million and $38.8 million in brokered deposits at September 30, 2015 and December 31, 2014, respectively, with a weighted average interest rate of 0.96% and 1.14%, respectively.

36



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

Advances From FHLB – FHLB advances are summarized by contractual year of maturity and weighted average interest rate in the table below:
 
 
September 30, 2015
 
December 31, 2014
 
Increase (Decrease)
Year Due:
 
Balance
Rate
 
Balance
Rate
 
Balance
 
Percent
2015
 
$
7,500,000

2.69%
 
$
15,000,000

2.61%
 
$
(7,500,000
)

(50.00)%
2016
 
7,880,000

2.68
 
20,000,000

4.61
 
(12,120,000
)
 
(60.60)
2017
 
12,900,000

4.38
 
12,900,000

4.38
 

 
2018
 
5,000,000

3.39
 
5,000,000

3.39
 

 
Thereafter
 

 

 

 
Total Advances
 
$
33,280,000

3.45%
 
$
52,900,000

3.87%
 
$
(19,620,000
)
 
(37.09)%

Advances are secured by a blanket collateral agreement with the FHLB pledging the Bank’s portfolio of residential first mortgage loans and investment securities with an amortized cost and fair value of $84.0 million and $84.2 million at September 30, 2015, respectively, and $99.9 million and $99.3 million at December 31, 2014, respectively. Advances are subject to prepayment penalties. During the nine months ended September 30, 2015, the Bank prepaid three FHLB advances totaling $15.0 million and incurred $788,000 in prepayment penalties in connection with these prepayments.
 
The following table shows at September 30, 2015 the FHLB advances that are callable at the option of the FHLB as of the dates indicated. These advances are also included in the above table. If an advance is called, the Bank has the option to pay off the advance without penalty, reborrow the funds on different terms, or convert the advance to a three-month floating rate advance tied to the London Interbank Offered Rates ("LIBOR").
As of September 30, 2015
Borrow Date
 
Maturity Date
 
Amount
 
Int. Rate
 
Type
 
Call Dates
11/29/06
 
11/29/16
$
5,000,000
 
4.03
 
Multi-Call
 
5/29/08 and quarterly thereafter
05/24/07
 
05/24/17
 
7,900,000
 
4.38
 
Multi-Call
 
5/27/08 and quarterly thereafter
07/25/07
 
07/25/17
 
5,000,000
 
4.40
 
Multi-Call
 
7/25/08 and quarterly thereafter

Other Borrowings – The Bank had $7.7 million and $8.5 million in other borrowings (non-FHLB advances) at September 30, 2015 and December 31, 2014, respectively. These borrowings consist of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts. The repurchase agreements typically mature within one to three days and the interest rate paid on these borrowings floats monthly with money market type rates. At both September 30, 2015 and December 31, 2014, the interest rate paid on the repurchase agreements was 0.15%. The Bank had pledged as collateral for these repurchase agreements investment and mortgage-backed securities with amortized costs and fair values of $15.2 million and $15.5 million, respectively, at September 30, 2015 and $17.3 million and $18.0 million, respectively, at December 31, 2014.

Junior Subordinated Debentures – On September 21, 2006, Security Federal Statutory Trust (the "Trust") issued and sold fixed and floating rate capital securities of the Trust (the “Capital Securities”). The Trust used the net proceeds from the sale of the Capital Securities to purchase a like amount of junior subordinated debentures (the “Debentures”) of the Company which are reported on the Consolidated Balance Sheets as junior subordinated debentures. The Capital Securities accrue and pay distributions at a floating rate of three month LIBOR plus 170 basis points annually which was equal to 2.04% at September 30, 2015. The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears. The Capital Securities mature or are mandatorily redeemable upon maturity on December 15, 2036, or upon earlier optional redemption as provided in the indenture. The Company has the right to redeem the Capital Securities in whole or in part.

Convertible Debentures – Effective December 1, 2009, the Company issued $6.1 million in convertible senior debentures. The debentures will mature on December 1, 2029 and accrue interest at the rate of 8.0% per annum until maturity or earlier redemption or repayment. Interest on the debentures is payable on June 1 and December 1 of each year and commenced on June 1, 2010. The debentures are convertible into the Company’s common stock at a conversion price of $20 per share at the option of the holder at any time prior to maturity. The debentures are redeemable, in whole or in part, at the option of the Company at any time on or after December 1, 2019, at a price equal to 100% of the principal amount of the debentures to be purchased plus any accrued and unpaid interest to, but excluding, the date of redemption. The debentures are unsecured general obligations of the Company ranking equal in right of payment to all of our present and future unsecured indebtedness that is not expressly subordinated.

37



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations


Equity – Shareholders’ equity increased $3.0 million or 3.4% to $90.5 million at September 30, 2015 from $87.4 million at December 31, 2014. Accumulated other comprehensive income, net of tax, comprised primarily of unrealized gains on securities available for sale, net of tax, decreased $730,000 or 13.3% to $4.7 million at September 30, 2015 from $5.5 million at December 31, 2014. The Company’s net income available for common shareholders was $4.4 million for the nine months ended September 30, 2015, after payment of $330,000 in preferred stock dividends. The Board of Directors of the Company declared common stock dividends totaling $707,000 during the nine months ended September 30, 2015. Book value per common share was $22.24 at September 30, 2015 compared to $22.23 at December 31, 2014.


Results of Operations for the Three Month Periods Ended September 30, 2015 and 2014

Net Income Available to Common Shareholders - Net income available to common shareholders was $1.6 million or $0.53 per diluted common share for the three months ended September 30, 2015, an increase of $34,000 or 2.1% compared to the three months ended September 30, 2014. The increase in net income was primarily the result of a decrease in the provision for loan losses offset by a decrease in non-interest income combined with an increase in non-interest expense.
 
Net Interest Income - The net interest margin on a tax equivalent basis increased 12 basis points to 3.27% for the three months ended September 30, 2015 from 3.15% for the comparable period in 2014 as the decline in the average cost of interest-bearing liabilities outpaced the decline in the average balance of interest-earning assets. Net interest income decreased $96,000 or 1.6% to $5.9 million during the three months ended September 30, 2015, compared to $6.0 million for the same period in 2014. During the three months ended September 30, 2015, average interest earning assets decreased $33.1 million or 4.3% to $745.2 million from $778.2 million for the same period in 2014. Average interest-bearing liabilities decreased $37.7 million or 5.5% to $647.2 million for the three months ended September 30, 2015 from $685.0 million for the comparable period in 2014.

Interest Income - Total tax equivalent interest income decreased $424,000 or 5.6% to $7.1 million during the three months ended September 30, 2015 compared to $7.5 million during the same period in 2014. This decrease was primarily the result of the decrease in interest-earning assets, particularly loans. Total interest income on loans decreased $331,000 or 6.8% to $4.5 million during the three months ended September 30, 2015 from $4.9 million during the comparable period in 2014. The decrease was the result of a $28.0 million or 8.1% decrease in the average loan portfolio balance, offset partially by an eight basis point increase in the yield. Interest income from mortgage-backed securities decreased $279,000 or 18.1% to $1.3 million from $1.5 million during the same period in 2014 as a result of a 16 basis point decrease in the portfolio yield combined with an $30.9 million or 12.5% decrease in the average balance. Tax equivalent interest income from investment securities increased $186,000 or 16.6% to $1.3 million as a result of an $23.8 million increase in the average balance of the investment securities portfolio combined with a seven basis point increase in the yield.

The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the three months ended September 30, 2015 and 2014:
 
Three Months Ended September 30,
 
Increase (Decrease) In Interest Income
 
2015
 
2014
 
 
Average Balance
 
Yield(1)
 
Average Balance
 
Yield(1)
 
Loans Receivable, Net
$
318,992,863

 
5.67
%
 
$
347,042,171

 
5.59
%
 
$
(331,000
)
Mortgage-Backed Securities
217,157,267

 
2.32
 
248,093,103

 
2.48
 
(279,080
)
Investment Securities(2)
204,071,269

 
2.56
 
180,227,672

 
2.49
 
186,243

Overnight Time And
   Certificates of Deposit
4,945,029

 
0.15
 
2,878,994

 
0.33
 
(448
)
Total Interest-Earning Assets
$
745,166,428

 
3.81
%
 
$
778,241,940

 
3.86
%
 
$
(424,285
)
(1) Annualized
(2) Tax equivalent basis is calculated using an effective tax rate of 34% and amounted to $181,592 and $124,799 for the
quarters ended September 30, 2015 and 2014, respectively.




38



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

Interest Expense - Total interest expense decreased $385,000 or 27.8% to $1.0 million during the three months ended September 30, 2015 compared to $1.4 million for the same period in 2014. The decrease in total interest expense was attributable to decreases in interest rates paid and a $37.7 million or 5.5% decrease in the average balance of interest-bearing liabilities. Interest expense on deposits decreased $65,000 or 10.4% to $556,000 during the three months ended September 30, 2015 compared to $621,000 for the same period in 2014. The decrease was attributable to a five basis point decrease in the cost of deposit accounts offset by a $258,000 increase in average interest-bearing deposits to $596.2 million for the three months ended September 30, 2015 compared to $595.9 million for the three months ended September 30, 2014.

Interest expense on FHLB advances and other borrowings decreased $321,000 or 52.0% to $296,000 during the three months ended September 30, 2015 from $617,000 for the same period in 2014. This decrease was due to a decrease in the interest rate combined with a $38.0 million or 48.8% decrease in the average balance to $39.8 million during the three months ended September 30, 2015 from $77.8 million for the same period in 2014. The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the three months ended September 30, 2015 and 2014.
 
Three Months Ended September 30,
 
Increase (Decrease) In Interest Expense
 
2015
 
2014
 
 
Average Balance
 
Yield(1)
 
Average Balance
 
Yield(1)
 
Now And Money Market
   Accounts
$
322,814,725

 
0.13
%
 
$
317,476,865

 
0.16
%
 
$
(21,930
)
Statement Savings Accounts
31,006,921

 
0.10
 
27,095,232

 
0.10
 
984

Certificate Accounts
242,356,598

 
0.73
 
251,348,542

 
0.78
 
(43,915
)
FHLB Advances And
   Other Borrowed Money
39,827,699

 
2.98
 
77,792,528

 
3.17
 
(320,774
)
Junior Subordinated Debentures
5,155,000

 
2.04
 
5,155,000

 
1.97
 
838

Senior Convertible Debentures
6,084,000

 
8.00
 
6,084,000

 
8.00
 

Total Interest-Bearing Liabilities
$
647,244,943

 
0.62
%
 
$
684,952,167

 
0.81
%
 
$
(384,797
)
(1) Annualized

Provision for Loan Losses - The amount of the provision is determined by management’s on-going monthly analysis of the loan portfolio and the adequacy of the allowance for loan losses. The Company has policies and procedures in place for evaluating and monitoring the overall credit quality of the loan portfolio and for timely identification of potential problem loans including internal and external loan reviews. The adequacy of the allowance for loan losses is reviewed monthly by the Asset Classification Committee and quarterly by the Board of Directors.

Management’s monthly review of the adequacy of the allowance includes three main components. The first component is an analysis of loss potential in various homogeneous segments of the portfolio based on historical trends and the risk inherent in each category. Previously, management applied a five year historical loss ratio to each loan category to estimate the inherent loss in these pooled loans, but determined to apply a 12 to 24 month historical loss ratio to each loan category in light of the decline in the economy. As the economy has recently improved, however, management evaluated the historical loss period being used during the current year and determined a three year historical loss period to be a more conservative and accurate indicator of future trends.

The second component of management’s monthly analysis is the specific review and evaluation of significant problem credits identified through the Company’s internal monitoring system. These loans are evaluated for impairment and recorded in accordance with accounting guidance. For each loan deemed impaired, management calculates a specific reserve for the amount in which the recorded investment in the loan exceeds the fair value. This estimate is based on a thorough analysis of the most probable source of repayment, which is typically liquidation of the collateral underlying the loan.

The third component is an analysis of changes in qualitative factors that may affect the portfolio, including but not limited to: relevant economic trends that could impact borrowers’ ability to repay, industry trends, changes in the volume and composition of the portfolio, credit concentrations, or lending policies and the experience and ability of the staff and Board of Directors. Management also reviews and incorporates certain ratios such as percentage of classified loans, average historical loan losses by loan category, delinquency percentages, and the assignment of percentage targets of reserves in each loan category when evaluating the allowance.

39



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

Once the analysis is completed, the three components are combined and compared to the allowance amount. Based on this, charges are made to the provision as needed.

The Bank recorded a negative provision for loan losses of $200,000 for the quarter ended September 30, 2015 compared to no provision for the same quarter in the prior year. The negative provision was the result of an increase in recoveries and a decrease in non-performing assets. The Bank reported net recoveries of $339,000 or 0.42% of gross loans during the three months ended September 30, 2015 compared to net charge-offs of $465,000 or 0.53% of gross loans for the same three month period in 2014. The following table details selected activity associated with the allowance for loan losses for the three months ended September 30, 2015 and 2014:
 
 
Three Months Ended September 30,
 
 
2015
 
2014
Beginning Balance
 
$
7,795,582

 
$
9,112,157

Provision
 
(200,000)

 

Charge-offs
 
(441,398)

 
(590,942)

Recoveries
 
780,839

 
125,759

Ending Balance
 
$
7,935,023

 
$
8,646,974

 
 
 
 
 
Allowance For Loan Losses As A Percentage Of Gross Loans Receivable, Held For Investment At The End Of The Period
 
2.4%
 
2.5%
Allowance For Loan Losses As A Percentage Of Impaired Loans At
  The End Of The Period
 
57.2%
 
41.5%
Impaired Loans
 
$
13,883,988

 
$
20,828,179

Gross Loans Receivable, Held For Investment (1)
 
$
326,171,126

 
$
350,704,336

Total Loans Receivable, Net
 
$
319,754,734

 
$
344,114,867


(1) TOTAL LOANS HELD FOR INVESTMENT, NET OF DEFERRED FEES AND LOANS IN PROCESS. 
Our strategy is to work with our borrowers to reach acceptable payment plans while protecting our interests in the existing collateral. In the event an acceptable arrangement cannot be reached, we may need to acquire these properties through foreclosure or other means and subsequently sell, develop or liquidate them.

Non-Interest Income - Non-interest income decreased $118,000 or 7.9% to $1.4 million for the three months ended September 30, 2015, compared to $1.5 million for the three months ended September 30, 2014. The following table provides a detailed analysis of the changes in the components of non-interest income:
 
 
Three Months Ended September 30,
 
Increase (Decrease)
 
 
2015
 
2014
 
Amounts
 
Percent
Gain On Sale Of Investments
 
$
7,651

 
$
142,816

 
$
(135,165
)
 
94.6%
Gain On Sale Of Loans
 
191,194

 
119,041

 
72,153

 
60.6
Service Fees On Deposit Accounts
 
258,522

 
300,920

 
(42,398
)
 
(14.1)
Commissions From Insurance Agency
 
139,980

 
116,894

 
23,086

 
19.7
Bank Owned Life Insurance Income
 
117,000

 
75,000

 
42,000

 
56.0
Trust Income
 
152,200

 
158,000

 
(5,800
)
 
(3.7)
Check Card Fee Income
 
239,739

 
229,542

 
10,197

 
4.4
Grant Income
 
97,640

 
183,789

 
(86,149
)
 
(46.9)
Other
 
164,488

 
160,304

 
4,184

 
2.6
Total Non-Interest Income
 
$
1,368,414

 
$
1,486,306

 
$
(117,892
)
 
(7.9)%

Gain on sale of investments was $8,000 during the quarter ended September 30, 2015, a decrease of $135,000 or 94.6% compared to a gain of $143,000 for the same period in 2014. The decrease is the result of a decrease in investments sold. Two investment securities were sold during the quarter ended September 30, 2015 compared to 20 investment securities during the same period in 2014.

40



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

Non-Interest Expense - For the quarter ended September 30, 2015, non-interest expense increased $107,000 or 2.1% compared to the same period in 2014. The following table provides a detailed analysis of the changes in the components of non-interest expense:
 
Three Months Ended September 30,
 
Increase (Decrease)
 
2015
 
2014
 
Amounts
 
Percent
Compensation And Employee Benefits
$
3,002,259

 
$
2,781,418

 
$
220,841

 
7.9%
Occupancy
481,713

 
515,881

 
(34,168
)
 
(6.6)
Advertising
95,226

 
115,268

 
(20,042
)
 
(17.4)
Depreciation And Maintenance
Of Equipment
401,102

 
408,685

 
(7,583
)
 
(1.9)
FDIC Insurance Premiums
140,172

 
177,537

 
(37,365
)
 
(21.0)
Net Cost Of Operation Of OREO
(19,713
)
 
(71,623
)
 
51,910

 
(72.5)
Other
1,029,201

 
1,095,710

 
(66,509
)
 
(6.1)
Total Non-Interest Expense
$
5,129,960

 
$
5,022,876

 
$
107,084

 
2.1%

Compensation and employee benefits expenses increased $221,000, or 7.9% to $3.0 million for the three months ended September 30, 2015 compared to $2.8 million for the same period last year in part due to cost of living increases. In addition, the Bank has focused on expanding its presence in the Midlands area of South Carolina, which has included increasing its personnel to support its operations within this area.

Net cost of operation of OREO decreased $52,000 or 72.5% to $20,000 during the quarter ended September 30, 2015 from $72,000 during the quarter ended September 30, 2014. This amount includes all expenses associated with OREO including write-down in value and gain or loss on sales incurred during the period.

Other expenses increased $67,000, or 6.1% to $1.0 million for the three month period ended September 30, 2015 compared to $1.1 million for the same period in the prior year. Other expenses include legal, professional, and consulting expenses, stationary and office supplies and other miscellaneous expenses.

Provision For Income Taxes – The provision for income taxes decreased $155,000 or 20.5% to $601,000 for the three months ended September 30, 2015 from $756,000 for the same period one year ago. Income before income taxes was $2.3 million and $2.5 million for the three months ended September 30, 2015 and 2014, respectively. The Company’s combined federal and state effective income tax rate for the current quarter was 25.6% compared to 30.6% for the same quarter in 2014.


Results of Operations for the Nine Month Periods Ended September 30, 2015 and 2014

Net Income Available to Common Shareholders - Net income available to common shareholders increased $282,000 or 6.8% to $4.4 million for the nine months ended September 30, 2015 compared to $4.2 million for the nine months ended September 30, 2014. The increase in net income was primarily the result of a $204,000 or 1.2% increase in net interest income after the provision for loan losses combined with a $79,000 or 4.4% decrease in the provision for income taxes.

Net Interest Income - The net interest margin on a tax equivalent basis increased 12 basis points to 3.19% for the nine months ended September 30, 2015 from 3.07% for the comparable period in 2014. Net interest income decreased $96,000 or 0.5% to $17.7 million for the nine months ended September 30, 2015 compared to $17.8 million for the same period in 2014. During the nine months ended September 30, 2015, average interest earning assets decreased $31.2 million or 4.0% to $758.0 million from $789.1 million for the nine months ended September 30, 2014, while average interest-bearing liabilities decreased $37.9 million or 5.4% to $662.2 million from $700.1 million for the nine months ended September 30, 2014.

Interest Income - Total tax equivalent interest income decreased $1.2 million or 5.3% to $21.4 million during the nine months ended September 30, 2015 from $22.2 million for the same period in 2014. This decrease was primarily the result of the decrease in interest-earning assets, particularly loans and mortgage-backed securities. Total interest income on loans decreased $956,000 or 6.5% to $13.7 million during the nine months ended September 30, 2015 from $14.6 million for the same period in 2014. The decrease was a result of a $25.9 million or 7.3% decrease in the average loan portfolio to $327.1 million from $353.0 million for the same period in 2014. Interest income from mortgage-backed securities decreased $531,000 or 11.6% to $4.0 million for the

41



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

nine months ended September 30, 2015 from $4.6 million for the same period in 2014 as a result of an eight basis point decrease in the portfolio yield combined with a $21.6 million or 8.6% decrease in the average balance. Tax equivalent interest income from investment securities increased $288,000 or 8.5% to $3.7 million for the nine months ended September 30, 2015 from $3.4 million for the same period in 2014 as a result of a $14.4 million or 7.9% increase in the average balance of the investment securities portfolio and an increase of two basis points in the yield.

The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the nine months ended September 30, 2015 and 2014:
 
Nine Months Ended September 30,
 
Increase (Decrease) In Interest Income
 
2015
 
2014
 
 
Average Balance
 
Yield(1)
 
Average Balance
 
Yield(1)
 
Loans Receivable, Net
$
327,091,312

 
5.58
%
 
$
352,966,633

 
5.53
%
 
$
(955,746
)
Mortgage-Backed Securities
229,664,849

 
2.34

 
251,245,215

 
2.42

 
(530,525)

Investment Securities(2)
196,423,029

 
2.49

 
182,051,212

 
2.47

 
287,677

Overnight Time And
   Certificates of Deposit
4,776,354
 
0.17

 
2,882,492
 
0.39

 
(2,336
)
Total Interest-Earning Assets
$
757,955,544

 
3.76
%
 
$
789,145,552

 
3.82
%
 
$
(1,200,930
)
(1) Annualized
(2) Tax equivalent basis is calculated using an effective tax rate of 34% and was $467,821 and $372,247 for the nine
months ended September 30, 2015 and 2014, respectively.

Interest Expense - Interest expense decreased $1.2 million or 27.0% to $3.2 million during the nine months ended September 30, 2015 compared to $4.4 million for the same period in 2014. The decrease in total interest expense is attributable to decreases in interest rates paid and a $37.9 million or 5.4% decrease in the average balance of interest-bearing liabilities. Interest expense on deposits decreased $210,000 or 10.8% to $1.7 million during the nine months ended September 30, 2015 compared to $2.0 million for the same period last year. The decrease was attributable to a five basis point decrease in the cost of deposit accounts combined with a $898,000 or 0.1% decrease in average interest-bearing deposits to $603.8 million for the nine month period ended September 30, 2015 compared to $604.7 million for the nine month period ended September 30, 2014.

Interest expense on FHLB advances and other borrowings decreased $992,000 or 48.4% to $1.1 million during the nine months ended September 30, 2015 compared to $2.0 million for the same period in 2014. The average balance of FHLB advances and other borrowed money decreased $37.0 million or 44.0% to $47.2 million during the nine months ended September 30, 2015 from $84.2 million for the same period last year. During the nine months ended September 30, 2015 the Bank prepaid $15.0 million in FHLB advances with a weighted average rate of 4.8% in order to reduce interest expense in future periods and improve net interest spread.

The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the nine months ended September 30, 2015 and 2014:
 
Nine Months Ended September 30,
 
Increase (Decrease) In Interest Expense
 
2015
 
2014
 
 
Average Balance
 
Yield(1)
 
Average Balance
 
Yield(1)
 
Now And Money Market Accounts
$
323,744,195

 
0.13%
 
$
321,526,411

 
0.18
%
 
$
(109,383
)
Statement Savings Accounts
30,176,938

 
0.10
 
26,162,629

 
0.10
 
2,998

Certificates Accounts
249,878,789

 
0.74
 
257,008,845

 
0.78
 
(103,754
)
FHLB Advances And
   Other Borrowed Money
47,182,869

 
2.99
 
84,183,061

 
3.25
 
(992,078
)
Junior Subordinated Debentures
5,155,000

 
1.99
 
5,155,000

 
1.96
 
1,427

Senior Convertible Debentures
6,084,000

 
8.00
 
6,084,000

 
8.00
 

Total Interest-Bearing Liabilities
$
662,221,791

 
0.65
%
 
$
700,119,946

 
0.85
%
 
$
(1,200,790
)
(1) Annualized

42



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

Provision for Loan Losses - The Bank reported a negative provision for loan losses of $100,000 for the nine months ended September 30, 2015 compared to a provision expense of $200,000 for the same period in the prior year. The decrease in the provision for loan losses is attributable to a decrease in net charge-offs, which declined $1.5 million or 82.0% to $322,000 for the nine months ended September 30, 2015 from $1.8 million during the comparable period in 2014. The following table details selected activity associated with the allowance for loan losses for the nine months ended September 30, 2015 and 2014:
 
Nine Months Ended September 30,
 
2015
 
2014
Beginning Balance
$
8,357,496

 
$
10,241,970

Provision
(100,000)

 
200,000

Charge-offs
(1,338,358)

 
(2,384,994)

Recoveries
1,015,885

 
589,998

Ending Balance
$
7,935,023

 
$
8,646,974


Our strategy is to work with our borrowers to reach acceptable payment plans while protecting our interests in the existing collateral. In the event an acceptable arrangement cannot be reached, we may need to acquire these properties through foreclosure or other means and subsequently sell, develop or liquidate them.

Non-Interest Income - Non-interest income increased $1.1 million or 24.2% to $5.4 million for the nine months ended September 30, 2015, compared to $4.4 million for the nine months ended September 30, 2014. The following table provides a detailed analysis of the changes in the components of non-interest income:
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
2015
 
2014
 
Amounts
 
Percent
Gain On Sale Of Investments
$
1,676,404

 
$
187,687

 
$
1,488,717

 
793.2
%
Gain On Sale Of Loans
526,295

 
465,571

 
60,724

 
13.0
Service Fees On Deposit Accounts
790,689

 
861,476

 
(70,787
)
 
(8.2)
Bank Owned Life Insurance Income
291,000

 
479,364

 
(188,364
)
 
(39.3)
Commissions From Insurance Agency
373,639

 
317,757

 
55,882

 
17.6
Trust Income
449,800

 
404,000

 
45,800

 
11.3
Check Card Fee Income
719,159

 
674,098

 
45,061

 
6.7
Grant Income
97,640

 
483,499

 
(385,859
)
 
(79.8)
Other
482,380

 
481,191

 
1,189

 
0.2
Total Non-Interest Income
$
5,407,006

 
$
4,354,643

 
$
1,052,363

 
24.2
%

Gain on sale of investments was $1.7 million during the nine months ended September 30, 2015, an increase of $1.5 million or 793.2% compared to a gain of $188,000 during the same period last year. The increase resulted from the sale of 43 investment securities during the period compared to 41 sold during the comparable period of 2014. The Bank used the gain to offset a $788,000 prepayment penalty on FHLB advances during the nine months ended September 30, 2015.

Bank owned life insurance income decreased $188,000 or 39.3% to $291,000 for the nine months ended September 30, 2015 compared to $479,000 for the same period in 2014. The entire portion of income recognized in 2015 was related to changes in the cash surrender value of the bank owned life insurance policies. For the nine months ended September 30, 2014, the Bank recognized $254,000 in death benefits in addition to $225,000 in income related to changes in the cash surrender value of the bank owned life insurance policies.

Grant income decreased $386,000 or 79.8% to $98,000 for the nine months ended September 30, 2015 compared to $483,000 received during the same period in 2014 from the U.S. Treasury's Community Development Financial Institution's Fund. In 2012, the Bank received a Community Development Financial Assistance ("CDFA") award in recognition of its commitment to community development. The Bank used the CDFA award to fund a new Small Business Microloan program which provides small, short-term loans to small businesses. These microloans help boost the local economy by enabling small businesses to obtain credit not otherwise available to them. The Bank received a total award of $1.5 million to be recognized on a pro-rata basis as the microloans are funded. At September 30, 2015, the Bank had $132,000 in microloans left to be funded.

43



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations


Non-Interest Expense – For the nine months ended September 30, 2015, non-interest expense increased $1,053,000 or 6.7% to $16.7 million compared to $15.7 million for the same period in 2014. The increase in non-interest expense was primarily a result of an increase in salaries and employee benefits expense and prepayment penalties on FHLB advances. The following table provides a detailed analysis of the changes in the components of non-interest expense:
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
2015
 
2014
 
Amounts
 
Percent
Compensation And Employee Benefits
$
8,976,214

 
$
8,464,967

 
$
511,247

 
6.0%
Occupancy
1,427,424

 
1,491,633

 
(64,209
)
 
(4.3)
Advertising
290,951

 
358,527

 
(67,576
)
 
(18.8)
Depreciation And Maintenance Of Equipment
1,263,932

 
1,219,461

 
44,471

 
3.6
FDIC Insurance Premiums
455,985

 
541,779

 
(85,794
)
 
(15.8)
Amortization Of Intangibles

 
11,970

 
(11,970
)
 
(100.0)
Net Cost Of OREO
267,784

 
451,947

 
(184,163
)
 
(40.7)
Prepayment Penalties On FHLB Advances
787,851

 

 
787,851

 
100.0
Other
3,249,451

 
3,125,894

 
123,557

 
4.0
Total Non-Interest Expense
$
16,719,592

 
$
15,666,178

 
$
1,053,414

 
6.7%

Compensation and employee benefits expenses were $9.0 million for the nine months ended September 30, 2015, an increase of $511,000 or 6.0% from $8.5 million during the same period last year. The increase was due to general cost of living increases combined with increases related to the addition of several new employees hired during the nine months ended September 30, 2015, including a new area executive to lead the Bank's Midlands area, a new commercial lender in the Midlands area, and additional personnel for the mortgage department. The Company has committed to expanding its presence in the Midlands area of South Carolina and has increased its personnel to support its operations within this area.

Net cost of operation of OREO decreased $184,000 or 40.7% to $268,000 for the nine months ended September 30, 2015 from $452,000 during the nine months ended September 30, 2014. The decrease was primarily due to a reduction in writedowns of OREO, which were $174,000 for the nine months ended September 30, 2015 compared to $405,000 for the same period in 2014.

The Company incurred a prepayment penalty of $788,000 for paying down FHLB advances during the nine months ended September 30, 2015. The Company elected to prepay these higher rate advances to lower cost of funds. No FHLB advances were prepaid by the Company during the nine months ended September 30, 2014.

Provision For Income Taxes – The provision for income taxes decreased $79,000 or 4.4% to $1.7 million for the nine months ended September 30, 2015 from $1.8 million for the same period in 2014. Income before taxes was $6.5 million and $6.3 million for the nine months ended September 30, 2015 and 2014, respectively. The Company’s combined federal and state effective income tax rate for the nine months ended September 30, 2015 was 26.2% compared to 28.3% for the same period in 2014.



44



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

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

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

The primary sources of funds are customer deposits, loan repayments, loan sales, maturing investment securities, and advances from the FHLB. The sources of funds, together with retained earnings and equity, are used to make loans, acquire investment securities and other assets, and fund continuing operations. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage repayments are greatly influenced by the level of interest rates, economic conditions, and competition. Management believes that the Company’s current liquidity position and its forecasted operating results are sufficient to fund all of its existing commitments.

During the nine months ended September 30, 2015 loan repayments exceeded loan originations resulting in a $20.1 million or 5.9% decrease in total net loans receivable. During the nine months ended September 30, 2015, deposits decreased $8.0 million or 1.2% and FHLB advances decreased $19.6 million or 37.1%. The Bank had $207.5 million in additional borrowing capacity at the FHLB at the end of the period. At September 30, 2015, the Bank had $149.7 million of certificates of deposit maturing within one year. Based on previous experience, the Bank anticipates a significant portion of these certificates will be renewed on maturity.

At September 30, 2015, the Bank exceeded all regulatory capital requirements with Common Equity Tier 1 Capital (CET1), Tier 1 leverage-based capital, Tier 1 risk-based capital, and total risk-based capital ratios of 23.2%, 11.0%, 23.2%, and 24.4%, respectively. To be categorized as “well capitalized” under the prompt corrective action provisions the Bank must maintain minimum CET1, total risk based capital, Tier 1 risk based capital and Tier 1 leverage capital ratios of 6.5%, 10.0%, 8.0% and 5.0%, respectively.

The Company also exceeded all regulatory capital requirements with CET1, Tier 1 leverage-based capital, Tier 1 risk- based capital and total risk-based capital ratios of 16.5%, 11.2%, 23.6%, and 24.9%, respectively, at September 30, 2015.

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

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at September 30, 2015.
(Dollars in thousands)
Within
One
Month
 
After One
Through
Three
Months
 
After Three
Through
Twelve Months
 
Within
One Year
 
Greater
Than
One Year
 
Total
Unused Lines Of Credit
$
17

 
$
12

 
$
12,097

 
$
12,126

 
$
39,764

 
$
51,890

Standby Letters Of Credit
141

 
88

 
652

 
881

 
16

 
897

Total
$
158

 
$
100

 
$
12,749

 
$
13,007

 
$
39,780

 
$
52,787



45


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises principally from interest rate risk inherent in its lending, investment, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Company manages other risks such as credit quality and liquidity risk in the normal course of business, management considers interest rate risk to be its most significant market risk that could potentially have the largest material effect on the Company’s financial condition and results of operations. Other types of market risks such as foreign currency exchange rate risk and commodity price do not arise in the normal course of the Company’s business activities.

The Company’s profitability is affected by fluctuations in the market interest rate. Management’s goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. A sudden and substantial increase or decrease in interest rates may adversely impact the Company’s earnings to the extent that the interest rates on interest-earning assets and interest-bearing liabilities do not change at the same rate, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using a test that measures the impact on net interest income and net portfolio value of an immediate change in interest rates in 100 basis point increments and by measuring the Bank’s interest sensitivity gap (“Gap”). Net portfolio value is defined as the net present value of assets, liabilities, and off-balance sheet contracts. Gap is the amount of interest sensitive assets repricing or maturing over the next twelve months compared to the amount of interest sensitive liabilities maturing or repricing in the same time period.

For the three and nine months ended September 30, 2015, the Bank's interest rate spread, defined as the average yield on interest bearing assets less the average rate paid on interest bearing liabilities was 3.19% and 3.11% respectively.

46


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES


Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a - 15(e) of the Securities Exchange Act of 1934 (“Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management as of the end of the period covered by this quarterly report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that at September 30, 2015 the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms. There have been no significant changes in our internal controls over financial reporting during the quarter ended September 30, 2015 that have materially affected or are reasonably likely to affect our internal controls over financial reporting.

The Company does not expect that its disclosure controls and procedures will prevent all error and or fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
Part II: Other Information
Item 1    Legal Proceedings

The Company is not engaged in any legal proceedings of a material nature at the present time. From time to time, the Company is a party to legal proceedings in the ordinary course of business wherein it enforces its security interest in mortgage loans it has made.

Item 1A    Risk Factors
There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Item 2    Unregistered Sales of Equity Securities and Use Of Proceeds

None

Item 3    Defaults Upon Senior Securities

None

Item 4    Mine Safety Disclosures

Not applicable

Item 5    Other Information

None


47


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Item 6    Exhibits

3.1

Articles of Incorporation, as amended (1) 
3.2

Articles of Amendment, including Certificate of Designation relating to the Company's Fixed Rate Cumulative Perpetual Preferred Stock Series B (2)
3.3

Amended and Restated Bylaws (3) 
4.1

Form of Stock Certificate of the Company and other instruments defining the rights of security holders, including indentures (4)
4.2

Form of Certificate for the Series B Preferred Shares (2)
4.3

Form of Indenture with respect to the Company's 8.0% Convertible Senior Debentures Due 2029 (5)
4.4

Specimen Convertible Senior Debenture Due 2029 (5)
4.5

Letter Agreement (including Securities Exchange Agreement B Standard Terms, attached as Exhibit A) dated September 29, 2010 between the Company and the United States Department of the Treasury (2)
4.6

Letter Agreement (including Securities Purchase Agreement B Standard Terms, attached as Exhibit A) dated September 29, 2010 between the Company and the United States Department of the Treasury (2)
10.1

1993 Salary Continuation Agreements (6) 
10.2

Amendment One to 1993 Salary Continuation Agreements (7) 
10.3

Form of 2006 Salary Continuation Agreement (8)
10.4

Form of Security Federal Split Dollar Agreement (8)
10.5

1999 Stock Option Plan (9) 
10.6

2002 Stock Option Plan (10) 
10.7

2006 Stock Option Plan (11)
10.8

2008 Equity Incentive Plan (12)
10.9

Form of incentive stock option agreement and non-qualified stock option agreement pursuant to the 2006 Stock Option Plan (11)
10.10

2004 Employee Stock Purchase Plan (13) 
10.11

Incentive Compensation Plan (6) 
10.12

Form of Compensation Modification Agreement (14) 
14

Code of Ethics (15)
25

Subsidiaries of Registrant 
31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
101

The following materials from Security Federal Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements
_____________
(1)
Filed on June 26, 1998, as an exhibit to the Company’s Proxy Statement and incorporated herein by reference.
(2)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on September 30, 2010.    
(3)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 16, 2015.
(4)
Filed on August 12, 1987, as an exhibit to the Company’s Registration Statement on Form 8-A and incorporated herein by reference.
(5)
Filed on July 13, 2009 as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-160553) and incorporated herein by reference.
(6)
Filed on June 28, 1993, as an exhibit to the Company’s Annual Report on Form 10-KSB and incorporated herein by reference.

48


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

(7)
Filed as an exhibit to the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 1993 and incorporated herein by reference.
(8)
Filed on May 24, 2006 as an exhibit to the Company’s Current Report on Form 8-K dated May 18, 2006 and incorporated herein by reference.
(9)
Filed on March 2, 2000, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference
(10)
Filed on January 3, 2003, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference.
(11)
Filed on August 22, 2006, as an exhibit to the Company's Registration Statement on Form S-8 (Registration Statement No. 333-136813) and incorporated herein by reference.
(12)
Filed on November 12, 2008, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference.
(13)
Filed on June 18, 2004, as an exhibit to the Company’s Proxy Statement and incorporated herein by reference.
(14)
Incorporated by reference to the Company's Current Report on Form 8-K filed on December 23, 2008.
(15)
Filed on June 29, 2006, as an exhibit to the Company’s Annual Report on Form 10-K and incorporated herein by reference.





49



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements




Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date:
November 12, 2015
 
By:
/s/J. Chris Verenes
 
J. Chris Verenes
 
Chief Executive Officer
 
Duly Authorized Representative

Date:
November 12, 2015
 
By:
/s/Jessica T. Cummins
 
Jessica T. Cummins
 
Chief Financial Officer
 
Duly Authorized Representative









50


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

EXHIBIT INDEX

31.1
Certifications of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2
Certifications of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32
Certifications of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
101
The following materials from Security Federal Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements




51