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

OUTSTANDING SHARES AT:

Common Stock, par value $0.01 per share

August 13, 2015

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 JUNE 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.




PART I.	FINANCIAL INFORMATION (UNAUDITED)	PAGE NO.
Item 1.	Financial Statements (unaudited):	3
	Consolidated Balance Sheets at June 30, 2015 and December 31, 2014	3
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014	4
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2015 and 2014	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2015 and 2014	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 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



	June 30, 2015			December 31, 2014
				(Audited)
ASSETS:
Cash And Cash Equivalents	$	9,520,536		$	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 $391,109,584 And $420,876,924 At June 30, 2015 And December 31, 2014, Respectively)	395,663,451			429,700,540
Held To Maturity (Fair Value Of $31,842,622 And $0 At June 30, 2015 And December 31, 2014, Respectively)	32,270,915			—
Total Investments And Mortgage-Backed Securities	427,934,366			429,700,540
Loans Receivable, Net:
Held For Sale	2,400,064			1,864,999
Held For Investment (Net Of Allowance Of $7,795,582 And $8,357,496 At June 30, 2015 And December 31, 2014, Respectively)	314,147,814			338,009,496
Total Loans Receivable, Net	316,547,878			339,874,495
Accrued Interest Receivable:
Loans	865,709			971,569
Mortgage-Backed Securities	663,863			682,585
Investment Securities	1,523,927			1,408,924
Total Accrued Interest Receivable	3,053,499			3,063,078
Premises And Equipment, Net	18,910,898			18,233,226
Federal Home Loan Bank ("FHLB") Stock, At Cost	2,034,600			3,144,600
Other Real Estate Owned	5,584,017			3,229,710
Bank Owned Life Insurance	11,324,045			11,150,045
Intangible Assets, Net	—			—
Goodwill	1,199,754			1,199,754
Other Assets	4,824,854			3,480,676
Total Assets	$	803,029,447		$	825,363,826
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Liabilities:
Deposit Accounts	$	659,204,841		$	660,115,164
Advances From FHLB	30,400,000			52,900,000
Other Borrowings	8,885,455			8,523,348
Junior Subordinated Debentures	5,155,000			5,155,000
Advance Payments By Borrowers For Taxes And Insurance	565,072			266,352
Senior Convertible Debentures	6,084,000			6,084,000
Other Liabilities	5,242,699			4,884,577
Total Liabilities	715,537,067			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 June 30, 2015 And 3,144,934 And 2,944,001, Respectively, At December 31, 2014	31,464			31,449
Additional Paid-In Capital	12,022,494			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	3,190,592			5,476,375
Retained Earnings	54,603,900			52,267,460
Total Shareholders' Equity	87,492,380			87,435,385
Total Liabilities And Shareholders' Equity	$	803,029,447		$	825,363,826

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)



	Three Months Ended June 30,					Six Months Ended June 30,
	2015		2014			2015		2014
Interest Income:
Loans	$	4,622,109	$	4,920,562		$	9,159,304	$	9,784,050
Mortgage-Backed Securities	1,353,336		1,640,016			2,777,689		3,029,134
Investment Securities	1,088,753		1,073,905			2,073,859		2,011,206
Other	1,587		2,457			4,137		6,025
Total Interest Income	7,065,785		7,636,940			14,014,989		14,830,415
Interest Expense:
NOW And Money Market Accounts	103,851		128,974			222,280		309,733
Statement Savings Accounts	7,610		6,589			14,730		12,716
Certificate Accounts	470,104		500,307			949,263		1,009,102
FHLB Advances And Other Borrowed Money	339,233		724,577			760,988		1,432,292
Senior Convertible Debentures	121,680		121,680			243,360		243,360
Junior Subordinated Debentures	25,713		25,187			50,791		50,202
Total Interest Expense	1,068,191		1,507,314			2,241,412		3,057,405
Net Interest Income	5,997,594		6,129,626			11,773,577		11,773,010
Provision For Loan Losses	—		100,000			100,000		200,000
Net Interest Income After Provision For Loan Losses	5,997,594		6,029,626			11,673,577		11,573,010
Non-Interest Income:
Gain (Loss) On Sale Of Investment Securities	181,814		(39,485		)	1,668,753		44,871
Gain On Sale Of Loans	181,082		218,288			335,101		346,530
Service Fees On Deposit Accounts	274,651		284,071			532,167		560,556
Commissions From Insurance Agency	103,547		109,229			233,659		200,863
Trust Income	148,800		141,000			297,600		246,000
Bank Owned Life Insurance Income	87,000		198,537			174,000		404,364
Check Card Fee Income	248,119		233,861			479,420		444,556
Grant Income	—		17,750			—		299,710
Other	162,572		168,687			317,892		320,887
Total Non-Interest Income	1,387,585		1,331,938			4,038,592		2,868,337
Non-Interest Expense:
Compensation And Employee Benefits	2,986,924		2,836,547			5,973,955		5,683,549
Occupancy	455,053		474,836			945,711		975,752
Advertising	99,564		142,863			195,725		243,259
Depreciation And Maintenance Of Equipment	445,585		393,270			862,830		810,776
Federal Deposit Insurance Corporation ("FDIC") Insurance Premiums	155,592		178,785			315,813		364,242
Net Cost Of Operation Of Other Real Estate Owned	90,873		254,474			287,497		523,570
Prepayment Penalties on FHLB Advances	—		—			787,851		—
Other	1,101,446		1,035,848			2,220,250		2,042,154
Total Non-Interest Expense	5,335,037		5,316,623			11,589,632		10,643,302
Income Before Income Taxes	2,050,142		2,044,941			4,122,537		3,798,045
Provision For Income Taxes	527,054		568,125			1,094,822		1,018,709
Net Income	1,523,088		1,476,816			3,027,715		2,779,336
Preferred Stock Dividends	110,000		110,000			220,000		220,000
Net Income Available To Common Shareholders	$	1,413,088	$	1,366,816		$	2,807,715	$	2,559,336
Net Income Per Common Share (Basic)	$	0.48	$	0.46		$	0.95	$	0.87
Net Income Per Common Share (Diluted)	$	0.46	$	0.44		$	0.91	$	0.83
Cash Dividend Per Share On Common Stock	$	0.08	$	0.08		$	0.16	$	0.16
Weighted Average Shares Outstanding (Basic)	2,944,001		2,944,001			2,944,001		2,944,001
Weighted Average Shares Outstanding (Diluted)	3,248,249		3,248,201			3,248,240		3,248,201

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)



	Three Months Ended June 30,
	2015			2014
Net Income	$	1,523,088		$	1,476,816
Other Comprehensive Income (Loss)
Unrealized Gains (Losses) On Securities:
Unrealized Holding Gains (Losses) On Securities Available For Sale, Net Of Taxes Of $(1,494,172) And $1,668,413 At June 30, 2015 And 2014, Respectively	(2,441,980		)	2,697,666
Reclassification Adjustment For (Gains) Losses Included In Net Income, Net Of Taxes Of $69,089 And $(15,004) At June 30, 2015 And 2014, Respectively	(112,725		)	24,481
Amortization Of Unrealized Gains On Available For Sale Securities Transferred to Held To Maturity, Net Of Taxes of $(6,341) and $0 at June 30, 2015 and 2014, Respectively	(10,363		)	—
Other Comprehensive Income (Loss)	(2,565,068		)	2,722,147
Comprehensive Income (Loss)	$	(1,041,980	)	$	4,198,963



	Six Months Ended June 30,
	2015			2014
Net Income	$	3,027,715		$	2,779,336
Other Comprehensive Income (Loss)
Unrealized Gains (Losses) On Securities:
Unrealized Holding Gains (Losses) On Securities Available For Sale, Net Of Taxes Of ($758,513) And $2,707,233 At June 30, 2015 And 2014, Respectively	(1,240,793		)	4,444,884
Reclassification Adjustment For Gains Included In Net Income, Net Of Taxes Of $634,126 And $17,051 At June 30, 2015 And 2014, Respectively	(1,034,627		)	(27,820		)
Amortization Of Unrealized Gains On Available For Sale Securities Transferred to Held To Maturity, Net Of Taxes of $(6,341) and $0 at June 30, 2015 and 2014, Respectively	(10,363		)	—
Other Comprehensive Income (Loss)	(2,285,783		)	4,417,064
Comprehensive Income	$	741,932		$	7,196,400

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

For the Six Months Ended June 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	—		—		—		—			—		2,779,336			2,779,336
Other Comprehensive Income, Net Of Tax	—		—		—		—			4,417,064		—			4,417,064
Stock Option Compensation Expense	—		—		6,338		—			—		—			6,338
Cash Dividends On Preferred Stock	—		—		—		—			—		(220,000		)	(220,000		)
Cash Dividends On Common Stock	—		—		—		—			—		(471,041		)	(471,041		)
Balance at June 30, 2014	$	22,000,000	$	31,449	$	11,984,475	$	(4,330,712	)	$	4,889,470	$	49,927,095		$	84,501,777



	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	—		—		—			—		—			—			3,027,715			3,027,715
Other Comprehensive Loss, Net Of Tax	—		—		—			—		—			(2,285,783		)	—			(2,285,783		)
Common Stock Issuance	—		15		(25,358		)	25,343		—			—			—			—
Stock Option Compensation Expense	—		—		—			6,338		—			—			—			6,338
Cash Dividends On Preferred Stock	—		—		—			—		—			—			(220,000		)	(220,000		)
Cash Dividends On Common Stock	—		—		—			—		—			—			(471,275		)	(471,275		)
Balance at June 30, 2015	$	22,000,000	$	31,464	$	(25,358	)	$	12,022,494	$	(4,330,712	)	$	3,190,592		$	54,603,900		$	87,492,380

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)



	Six Months Ended June 30,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	3,027,715		$	2,779,336
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
Depreciation Expense	609,013			591,422
Amortization Of Intangible Assets	—			11,970
Stock Option Compensation Expense	6,338			6,338
Discount Accretion And Premium Amortization	2,044,787			2,688,258
Provisions For Losses On Loans	100,000			200,000
Income From Bank Owned Life Insurance	(174,000		)	(150,000		)
Gain On Sales Of Loans	(335,101		)	(346,530		)
Gain On Sales Of Mortgage-Backed Securities	(503,051		)	(254,538		)
(Gain) Loss On Sales Of Investment Securities	(1,165,702		)	209,667
Gain On Sale Of Other Real Estate Owned	(104,813		)	(64,723		)
Write Down On Other Real Estate Owned	174,400			405,000
Amortization Of Deferred Costs On Loans	24,866			9,345
Proceeds From Sale Of Loans Held For Sale	11,772,855			12,328,927
Origination Of Loans Held For Sale	(11,972,819		)	(12,132,479		)
(Increase) Decrease In Accrued Interest Receivable:
Loans	105,860			82,442
Mortgage-Backed Securities	18,722			6,602
Investment Securities	(115,003		)	(111,477		)
Increase In Advance Payments By Borrowers	298,720			240,895
Other, Net	997,909			969,761
Net Cash Provided By Operating Activities	4,810,696			7,470,216

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase Of Mortgage-Backed Securities Available For Sale	(27,734,716		)	(38,071,908		)
Principal Repayments On Mortgage-Backed Securities Available For Sale	14,907,051			15,842,466
Principal Repayments On Mortgage-Backed Securities Held To Maturity	1,014,906			—
Purchase Of Investment Securities Available For Sale	(60,620,546		)	(18,395,226		)
Maturities Of Investment Securities Available For Sale	15,329,891			11,985,537
Proceeds From Sale Of Investment Securities Available For Sale	30,890,194			13,953,153
Proceeds From Sale Of Mortgage-Backed Securities Available For Sale	23,333,612			13,351,800
Purchase Of FHLB Stock	(2,020,700		)	(3,671,300		)
Redemption Of FHLB Stock	3,130,700			4,114,780
Proceeds From Bank Owned Life Insurance	—			624,260
Decrease In Loans Receivable	20,012,876			11,213,029
Proceeds From Sale Of Other Real Estate Owned	1,300,046			514,644
Purchase And Improvement Of Premises And Equipment	(1,286,685		)	(1,833,878		)
Net Cash Provided By Investing Activities	18,256,629			9,627,357

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES



Consolidated Statements of Cash Flows (Unaudited) (Continued)	Six Months Ended June 30,
	2015			2014

CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease In Deposit Accounts	$	(910,323	)	$	(272,999	)
Proceeds From FHLB Advances	174,790,000			141,215,000
Repayment Of FHLB Advances	(197,290,000		)	(153,802,746		)
Increase In Other Borrowings, Net	362,107			1,355,628
Dividends To Preferred Stock Shareholders	(220,000		)	(220,000		)
Dividends To Common Stock Shareholders	(471,275		)	(471,041		)
Net Cash Used By Financing Activities	(23,739,491		)	(12,196,158		)
Net Increase (Decrease) In Cash And Cash Equivalents	(672,166		)	4,901,415
Cash And Cash Equivalents At Beginning Of Period	10,192,702			7,629,771
Cash And Cash Equivalents At End Of Period	$	9,520,536		$	12,531,186
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During The Period For:
Interest	$	2,404,297		$	3,089,937
Income Taxes	$	672,388		$	180,350
Supplemental Schedule Of Non Cash Transactions:
Transfers From Loans Receivable To Other Real Estate Owned	$	3,723,940		$	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.

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.

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 June 30,				For the Six Months Ended June 30,
	2015		2014		2015		2014
Earnings Available To Common Shareholders:
Net Income		$1,523,088		$1,476,816		$3,027,715		$2,779,336
Preferred Stock Dividends	110,000		110,000		220,000		220,000
Net Income Available To Common Shareholders		$1,413,088		$1,366,816		$2,807,715		$2,559,336

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 June 30,
	2015					2014
	Income		Shares	Per Share Amounts		Income			Shares		Per Share Amounts
Basic EPS	$	1,413,088	2,944,001	$	0.48	$	1,366,816		2,944,001		$	0.46
Effect of Dilutive Securities:
Senior Convertible Debentures	75,442		304,200	(0.02)		75,422			304,200		(0.02)
Unvested Restricted Stock	—		48	—		—		—	—	—	—
Diluted EPS	$	1,488,530	3,248,249	$	0.46	$	1,442,238		3,248,201		$	0.44



	For the Six Months Ended June 30,
	2015					2014
	Income		Shares	Per Share Amounts		Income			Shares		Per Share Amounts
Basic EPS	$	2,807,715	2,944,001	$	0.95	$	2,559,336		2,944,001		$	0.87
Effect of Dilutive Securities:
Senior Convertible Debentures	150,883		304,200	(0.04)		150,883			304,200		(0.04)
Unvested Restricted Stock	—		39	—		—		—	—	—	—
Diluted EPS	$	2,958,598	3,248,240	$	0.91	$	2,710,219		3,248,201		$	0.83

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 June 30,
	2015		2014
	Shares	Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
	Shares	Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
Balance, Beginning of Period	29,500	$23.55	50,500		$22.49
Options Granted	—	—	—		—
Options Exercised	—	—	—		—
Options Forfeited	—	—	(3,000	)	23.83
Balance, End Of Period	29,500	$23.55	47,500		$22.41

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

5. Stock-Based Compensation, Continued



	Six Months Ended June 30,
	2015			2014
	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
	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	19,800			32,600

Options Available For Grant	50,000			50,000

At June 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	05/19/18

07/01/08	2,000	$22.91	07/01/18

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

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:



	June 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
FHLB Securities	$	6,081,284	$	34,863	$	146,192	$	5,969,955
Federal Farm Credit Bank ("FFCB") Securities	2,000,000		—		56,562		1,943,438
Federal National Mortgage Association ("FNMA") Bonds	997,192		9,870		—		1,007,062
Small Business Administration (“SBA”) Bonds	115,995,397		1,743,576		288,859		117,450,114
Tax Exempt Municipal Bonds	75,821,260		1,103,897		1,763,525		75,161,632
Mortgage-Backed Securities	189,964,013		4,401,328		546,915		193,818,426
Equity Securities	250,438		62,386		—		312,824
Total Available For Sale	$	391,109,584	$	7,355,920	$	2,802,053	$	395,663,451

	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 June 30, 2015 the Bank held an amortized cost and fair value of $125.5 million and $128.4 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. All mortgage-backed securities above are either GSEs or GNMA mortgage-backed securities. The Company has not invested in any private label mortgage-backed securities.

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 June 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	$	756,293	$	759,158
One – Five Years	12,998,123		13,295,430
Over Five – Ten Years	63,923,630		64,618,639
More Than Ten Years	123,467,525		123,171,798
Mortgage-Backed Securities	189,964,013		193,818,426
	$	391,109,584	$	395,663,451

At June 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 $86.5 million and $89.2 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 $17.9 million and $13.4 million in gross proceeds from sales of available for sale securities during the three months ended June 30, 2015 and 2014, respectively. As a result, the Bank recognized gross gains of $182,000 and $168,000 respectively, and gross losses of $0 and $207,000 respectively, for the three months ended June 30, 2015 and 2014.

Similarly, during the six months ended June 30, 2015 and 2014, the Bank received $54.2 million and $27.3 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 $477,000, respectively, and gross losses of $47,000 and $432,000, respectively, for the six months ended June 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.



	June 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	$	—	$	—	$	3,853,808	$	146,192	$	3,853,808	$	146,192
FFCB Securities	1,943,438		56,562		—		—		1,943,438		56,562
SBA Bonds	21,175,148		216,432		7,911,852		72,427		29,087,000		288,859
Tax Exempt Municipal Bond	52,740,553		1,735,478		777,236		28,047		53,517,789		1,763,525
Mortgage-Backed Securities	42,091,207		540,237		1,804,125		6,678		43,895,332		546,915
	$	117,950,346	$	2,548,709	$	14,347,021	$	253,344	$	132,297,367	$	2,802,053

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 June 30, 2015 and December 31, 2014, 9.0% and 67.8% of the unrealized losses, representing nine 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 six months ended June 30, 2015.

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

During the quarter ended June 30, 2015 the Company transferred 22 mortgage-backed securities classified as available for sale to its held to maturity portfolio. 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 June 30, 2015 are as follows:



	June 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage-Backed Securities (1)	$	32,270,915	$	—	$	428,293	$	31,842,622
Total Held to Maturity	$	32,270,915	$	—	$	428,293	$	31,842,622

^{(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 June 30, 2015. There were no investment or mortgage-backed securities classified as held to maturity at December 31, 2014.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

At June 30, 2015, the Bank held GNMA mortgage-backed securities that had an amortized cost and fair value of $22.7 million and $22.4 million, respectively. The Company has not invested in any private label mortgage-backed securities.

At June 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 $28.2 million and $27.9 million, respectively.

The following tables show gross unrealized losses and fair value and length of time that individual held to maturity securities have been in a continuous unrealized loss position for six months ended June 30, 2015.



	June 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)	$	31,842,622	$	428,293	$	—	$	—	$	31,842,622	$	428,293
	$	31,842,622	$	428,293	$	—	$	—	$	31,842,622	$	428,293

^{(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 six months ended June 30, 2015. There were no securities classified as held to maturity during the six months ended June 30, 2014.

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:



	June 30, 2015		December 31, 2014
Residential Real Estate Loans	$	76,906,886	$	77,282,817
Consumer Loans	50,509,764		50,391,224
Commercial Business Loans	8,215,675		10,564,467
Commercial Real Estate Loans	189,241,549		209,530,209
Total Loans Held For Investment	324,873,874		347,768,717
Loans Held For Sale	2,400,064		1,864,999
Total Loans Receivable, Gross	327,273,938		349,633,716
Less:
Allowance For Loan Losses	7,795,582		8,357,496
Loans In Process	2,886,469		1,379,114
Deferred Loan Fees	44,009		22,611
	10,726,060		9,759,221
Total Loans Receivable, Net	$	316,547,878	$	339,874,495

Changes in the allowance for loan losses for the three and six months ended June 30, 2015 and 2014 are summarized as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Balance At Beginning Of Period	$	7,918,917		$	9,845,755		$	8,357,496		$	10,241,970
Provision For Loan Losses	—			100,000			100,000			200,000
Charge Offs	(277,946		)	(1,016,477		)	(896,960		)	(1,794,052		)
Recoveries	154,611			182,879			235,046			464,239
Total Allowance For Loan Losses	$	7,795,582		$	9,112,157		$	7,795,582		$	9,112,157

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.

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
June 30, 2015	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	67,804,564	$	902,510	$	1,402,316	$	6,797,496	$	76,906,886
Consumer	47,463,371		1,950,932		173,621		921,840		50,509,764
Commercial Business	7,258,869		366,829		378,642		211,335		8,215,675
Commercial Real Estate	117,804,892		41,632,382		20,189,398		9,614,877		189,241,549
Total	$	240,331,696	$	44,852,653	$	22,143,977	$	17,545,548	$	324,873,874



	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 June 30, 2015 and December 31, 2014:



June 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	$	—	$	424,625	$	3,307,665	$	3,732,290	$	73,174,596	$	76,906,886
Consumer	653,743		96,033		351,441		1,101,217		49,408,547		50,509,764
Commercial Business	195,971		—		175,802		371,773		7,843,902		8,215,675
Commercial Real Estate	2,331,143		118,266		4,091,092		6,540,501		182,701,048		189,241,549
Total	$	3,180,857	$	638,924	$	7,926,000	$	11,745,781	$	313,128,093	$	324,873,874



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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net, Continued

At June 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 June 30, 2015 compared to December 31, 2014:



	At June 30, 2015				At December 31, 2014				$			%
	Amount		Percent ⁽¹⁾		Amount		Percent ⁽¹⁾		Increase (Decrease)			Increase (Decrease)
Non-accrual Loans:
Residential Real Estate	$	3,307,665	1.03	%	$	3,061,339	0.90	%	$	246,326		8.0	%
Commercial Business	175,802		0.05		246,977		0.10		(71,175		)	(28.8	)
Commercial Real Estate	4,091,092		1.27		9,859,689		2.80		(5,768,597		)	(58.5	)
Consumer	351,441		0.11		573,644		0.20		(222,203		)	(38.7	)
Total Non-accrual Loans	$	7,926,000	2.46	%	$	13,741,649	4.00	%	$	(5,815,649	)	(42.3	)%

^{(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 June 30, 2015
	Residential Real Estate			Consumer			Commercial Business		Commercial Real Estate			Total
Beginning Balance	$	1,354,435		$	1,141,797		$	496,803	$	4,925,882		$	7,918,917
Provision	(44,208		)	125,774			246,264		(327,830		)	—
Charge-Offs	(916		)	(273,007		)	—		(4,023		)	(277,946		)
Recoveries	767			13,420			4,000		136,424			154,611
Ending Balance	$	1,310,078		$	1,007,984		$	747,067	$	4,730,453		$	7,795,582



	For the Six Months Ended June 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	(36,838		)	456,705			591,341			(911,208		)	100,000
Charge-Offs	(45,916		)	(393,625		)	(10,947		)	(446,472		)	(896,960		)
Recoveries	767			58,188			7,320			168,771			235,046
Ending Balance	$	1,310,078		$	1,007,984		$	747,067		$	4,730,453		$	7,795,582

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net, Continued



	For the Three Months Ended June 30, 2014
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	1,668,156		$	803,868		$	369,381		$	7,004,350		$	9,845,755
Provision	(130,818		)	29,492			142,959			58,367			100,000
Charge-Offs	(165,191		)	(13,591		)	(17,132		)	(820,563		)	(1,016,477		)
Recoveries	135,134			13,977			1,370			32,398			182,879
Ending Balance	$	1,507,281		$	833,746		$	496,578		$	6,274,552		$	9,112,157



	For the Six Months Ended June 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	(87,312		)	156,833			67,998			62,481			200,000
Charge-Offs	(247,663		)	(208,040		)	(17,132		)	(1,321,217		)	(1,794,052		)
Recoveries	135,613			37,176			19,054			272,396			464,239
Ending Balance	$	1,507,281		$	833,746		$	496,578		$	6,274,552		$	9,112,157

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
June 30, 2015	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	35,500	$	1,274,578	$	1,310,078
Consumer	3,890		1,004,094		1,007,984
Commercial Business	—		747,067		747,067
Commercial Real Estate	145,760		4,584,693		4,730,453
Total	$	185,150	$	7,610,432	$	7,795,582



	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

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
June 30, 2015	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	2,944,482	$	73,962,404	$	76,906,886
Consumer	247,832		50,261,932		50,509,764
Commercial Business	175,801		8,039,874		8,215,675
Commercial Real Estate	11,649,224		177,592,325		189,241,549
Total	$	15,017,339	$	309,856,535	$	324,873,874



	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 $15.2 million for three months ended June 30, 2015 compared to $29.8 million for the three months ended June 30, 2014.

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 June 30, 2015 and December 31, 2014 and for the three and six months ended June 30, 2015 and 2014.



			At				At
	June 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	$	2,673,511	$	2,758,641	$	—	$	2,519,814	$	2,618,003	$	—
Consumer	180,315		180,315		—		152,029		159,529		—
Commercial Business	175,801		375,801		—		236,030		436,030		—
Commercial Real Estate	10,386,266		13,955,279		—		13,721,964		18,088,149		—
With An Allowance Recorded:
Residential Real Estate	270,971		270,971		35,500		—		—		—
Consumer	67,517		75,017		3,890		66,203		66,203		2,600
Commercial Business	—		—		—		—		—		—
Commercial Real Estate	1,262,958		1,273,688		145,760		3,551,915		3,582,465		472,400
Total
Residential Real Estate	2,944,482		3,029,612		35,500		2,519,814		2,618,003		—
Consumer	247,832		255,332		3,890		218,232		225,732		2,600
Commercial Business	175,801		375,801		—		236,030		436,030		—
Commercial Real Estate	11,649,224		15,228,967		145,760		17,273,879		21,670,614		472,400
Total	$	15,017,339	$	18,889,712	$	185,150	$	20,247,955	$	24,950,379	$	475,000

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net, Continued



	For the Three Months Ended June 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	$	2,694,645	$	486	$	4,298,141	$	14,139
Consumer	181,718		—		249,210		—
Commercial Business	192,401		—		16,089		—
Commercial Real Estate	10,485,665		76,051		21,434,443		155,690
With An Allowance Recorded:
Residential Real Estate	273,476		—		603,056		—
Consumer	68,192		1,344		67,932		839
Commercial Business	—		—		483,561		—
Commercial Real Estate	1,269,379		15,807		2,636,348		8,384
Total
Residential Real Estate	2,968,121		486		4,901,197		14,139
Consumer	249,910		1,344		317,142		839
Commercial Business	192,401		—		499,650		—
Commercial Real Estate	11,755,044		91,858		24,070,791		164,074
Total	$	15,165,476	$	93,688	$	29,788,780	$	179,052



	For the Six Months Ended June 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	$	2,717,895	$	4,397	$	4,351,870	$	26,355
Consumer	182,812		104		250,016		—
Commercial Business	211,100		—		16,089		—
Commercial Real Estate	10,926,601		153,665		21,817,619		268,199
With An Allowance Recorded:
Residential Real Estate	275,966		—		620,314		—
Consumer	69,076		2,712		68,212		2,086
Commercial Business	—		—		488,387		—
Commercial Real Estate	1,275,070		35,110		2,694,448		28,374
Total
Residential Real Estate	2,993,861		4,397		4,972,184		26,355
Consumer	251,888		2,816		318,228		2,086
Commercial Business	211,100		—		504,476		—
Commercial Real Estate	12,201,671		188,775		24,512,067		296,573
Total	$	15,658,520	$	195,988	$	30,306,955	$	325,014

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 included in impaired loans at June 30, 2015 and December 31, 2014 were $6.1 million and $9.6 million, 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 June 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	—	—		—		—	—		—
Commercial Business	—	—		—		—	—		—
Commercial Real Estate	—	—		—		1	79,072		79,072
Total	—	$	—	$	—	1	$	79,072	$	79,072



	For the Six Months Ended June 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	—	—		—		—	—		—
Commercial Business	—	—		—		—	—		—
Commercial Real Estate	3	840,292		840,292		1	79,072		79,072
Total	3	$	840,292	$	840,292	1	$	79,072	$	79,072

There were no loans modified as a TDR during the three months ended June 30, 2015. During the six months ended June 30, 2015, the Bank modified three loans as TDRs. The Bank lowered the interest rate on one loan to enable the customer to begin making monthly principal and interest payments and changed the monthly payment to interest only for an agreed upon period for the other two loans.

During the three and six months ended June 30, 2014, the Bank modified one loan as a TDR by lowering the interest rate. This modification enabled the customer to begin making monthly principal and interest payments.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net, Continued

At June 30, 2015, three loans totaling $468,000 that had previously been restructured were in default. One of the loans, with a balance of $62,000, defaulted during the six month period. In comparison, at June 30, 2014, five loans totaling $3.0 million that had previously been restructured were in default, and four of the loans totaling $2.8 million defaulted during the six month period. No loans that had been previously restructured within the last twelve months defaulted during the six months ended June 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.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

The Federal Reserve requires the Company to maintain capital adequacy that generally parallels the FDIC requirements for the Bank. At June 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)
June 30, 2015
SECURITY FEDERAL CORP.
Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	$	88,100	24.1	%	$	21,976	6.0	%	N/A		N/A
Total Risk-Based Capital (To Risk Weighted Assets)	92,714		25.3	%	29,301		8.0	%	N/A		N/A
Common Equity Tier 1 Capital (To Risk Weighted Assets)	61,100		16.7	%	16,482		4.5	%	N/A		N/A
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	88,100		10.8	%	32,626		4.0	%	N/A		N/A

SECURITY FEDERAL BANK
Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	$	87,444	23.9	%	$	21,958	6.0	%	$	29,277	8.0	%
Total Risk-Based Capital (To Risk Weighted Assets)	92,058		25.2	%	29,277		8.0	%	36,596		10.0	%
Common Equity Tier 1 Capital (To Risk Weighted Assets)	87,444		23.9	%	16,468		4.5	%	23,787		6.5	%
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	87,444		10.7	%	32,617		4.0	%	40,771		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	%

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 June 30, 2015, the Company’s investment portfolio was comprised of government and agency bonds, mortgage-backed securities issued by government agencies or GSEs, municipal securities, and two equity investments. The portfolio did not contain any private label mortgage-backed securities. Fair value measurement is based upon prices obtained from third party pricing services who use independent pricing models which rely on a variety of factors including reported trades, broker/dealer quotes, benchmark yields, economic and industry events and other relevant market information. As such, these securities are classified as Level 2.

Mortgage Loans Held 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.

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 June 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 June 30, 2015 and December 31, 2014, the recorded investment in impaired loans was $15.0 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 June 30, 2015:



Assets:	Quoted Market Price In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
FHLB Securities	$	—	$	5,969,955	$	—
FFCB Securities	—		1,943,438		—
FNMA And FHLMC Bonds	—		1,007,062		—
SBA Bonds	—		117,450,114		—
Tax Exempt Municipal Bonds	—		75,161,632		—
Mortgage-Backed Securities	—		193,818,426		—
Equity Securities	—		312,824		—
Total	$	—	$	395,663,451	$	—

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 June 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 June 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 June 30, 2015 or December 31, 2014.



Assets:	Level 1		Level 2		Level 3		Balance At June 30, 2015
Mortgage Loans Held For Sale	$	—	$	2,400,064	$	—	$	2,400,064
Collateral Dependent Impaired Loans ⁽¹⁾	—		—		14,832,189		14,832,189
Foreclosed Assets	—		—		5,584,017		5,584,017
Total	$	—	$	2,400,064	$	20,416,206	$	22,816,270

^{(1) IMPAIRED LOANS ARE REPORTED NET OF SPECIFIC RESERVES OF $}^185,150



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

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 June 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	$	14,832,189	Appraised Value	Discount Rates/ Discounts to Appraised Values	0% - 70%
Foreclosed Assets	5,584,017		Appraised Value/Comparable Sales	Discount Rates/ Discounts to Appraised Values	13% - 82%

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.

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 June 30, 2015 and December 31, 2014 presented in accordance with the applicable accounting guidance.



	June 30, 2015
	Carrying		Fair Value
(In Thousands)	Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash And Cash Equivalents	$	9,521	$	9,521	$	9,521	$	—	$	—
Certificates Of Deposits With Other Banks	2,095		2,095		—		2,095		—
Investment And Mortgage-Backed Securities	427,934		427,506		—		427,506		—
Loans Receivable, Net	316,548		315,202		—		—		315,202
FHLB Stock	2,035		2,035		2,035		—		—

Financial Liabilities:
Deposits:
Checking, Savings, And Money Market Accounts	$	413,422	$	413,422	$	413,422	$	—	$	—
Certificate Accounts	245,783		245,733		—		245,733		—
Advances From FHLB	30,400		31,905		—		31,905		—
Other Borrowed Money	8,885		8,885		8,885		—		—
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 June 30, 2015, the Bank had $53.1 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.

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 ("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

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.

In June 2015, the FASB issued amendments to clarify the Accounting Standards Codification (ASC), correct unintended application of guidance, and make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments were effective upon issuance (June 12, 2015) for amendments that do not have transition guidance. Amendments that are subject to transition guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. 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.

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 and “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995

This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements often include the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated, including, but not limited to:

•

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 loan loss 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, 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 fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;


•	difficulties in reducing risks 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;


•	our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;


•	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;

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations


•	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, the Public Company Accounting Oversight Board 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 quarterly report and in other public statements we make may turn out to be inaccurate as a result of our beliefs and assumptions we make in connection with the factors set forth above or because of other unidentified and unpredictable factors. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. These risks could cause our actual results for 2015 and beyond to differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect the Company’s financial condition, liquidity and operating and stock price performance.

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

Assets

Total assets decreased $22.3 million or 2.7% to $803.0 million at June 30, 2015 from $825.4 million at December 31, 2014. The primary reason for the decrease in total assets was a decrease of $23.3 million or 6.9% in net loans receivable. The increases and decreases in total assets were primarily concentrated in the following asset categories:



					Increase (Decrease)
	June 30, 2015		December 31, 2014		Amount			Percent
Cash And Cash Equivalents	$	9,520,536	$	10,192,702	$	(672,166	)	(6.6)%
Investment And Mortgage- Backed Securities – Available For Sale	395,663,451		429,700,540		(34,037,089		)	(7.9)
Investment And Mortgage- Backed Securities – Held To Maturity	32,270,915		—		32,270,915			100.0
Loans Receivable, Net	316,547,878		339,874,495		(23,326,617		)	(6.9)
Other Real Estate Owned	5,584,017		3,229,710		2,354,307			72.9
Premise And Equipment, Net	18,910,898		18,233,226		677,672			3.7
FHLB Stock	2,034,600		3,144,600		(1,110,000		)	(35.3)
Other Assets	4,824,854		3,480,676		1,344,178			38.6

Cash and cash equivalents decreased $672,000 or 6.6% to $9.5 million at June 30, 2015 from $10.2 million at December 31, 2014. Investment and mortgage-backed securities available for sale decreased $34.0 million or 7.9% to $395.7 million at June 30, 2015 from $429.7 million at December 31, 2014. The Bank transferred 22 mortgage-backed securities from its available for sale portfolio to its held to maturity portfolio during the quarter ended June 30, 2015. As a result, investment and mortgage-backed securities held to maturity had a balance of $32.3 million at June 30, 2015 compared to no balance at December 31, 2014.

Loans receivable, net, decreased $23.3 million or 6.9% to $316.5 million at June 30, 2015 from $339.9 million at December 31, 2014. This decrease was a result of increased loan repayments combined with lower loan demand from creditworthy borrowers. Residential real estate loans decreased $376,000 or 0.5% to $76.9 million at June 30, 2015 from $77.3 million at December 31, 2014. Consumer loans increased $119,000 or 0.2% to $50.5 million at June 30, 2015 compared to $50.4 million at December 31, 2014. Commercial real estate loans decreased $20.3 million or 9.7% to $189.2 million at June 30, 2015 from $209.5 million at December 31, 2014. Commercial business loans decreased $2.3 million or 22.2% to $8.2 million at June 30, 2015 from $10.6

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

million at December 31, 2014. Loans held for sale increased $535,000 or 28.7% to $2.4 million at June 30, 2015 from $1.9 million at December 31, 2014.

OREO increased $2.4 million or 72.9% to $5.6 million at June 30, 2015 from $3.2 million at December 31, 2014. The increase was due to 22 foreclosures during the six months ended June 30, 2015 with a total book value of $3.7 million offset by OREO sales and writedowns of $1.3 million and $174,000, respectively. At June 30, 2015, the OREO balance consisted of the following real estate properties: 18 single-family residences and 30 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 $678,000 or 3.7% to $18.9 million at June 30, 2015 from $18.2 million at December 31, 2014. The increase was primarily due to $811,000 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 $1.1 million or 35.3% to $2.0 million at June 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 $1.3 million or 38.6% to $4.8 million at June 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:



	June 30, 2015			December 31, 2014			Increase (Decrease)
	Balance		Weighted Rate	Balance		Weighted Rate	Balance			Percent
Demand Accounts:
Checking	$	152,597,772	0.03%	$	143,422,150	0.03%	$	9,175,622		6.40%
Money Market	229,878,262		0.16	234,819,052		0.19	(4,940,790		)	(2.10)
Statement Savings Accounts	30,945,665		0.10	28,622,933		0.10	2,322,732			8.11
Total	413,421,699		0.11	406,864,135		0.13	6,557,564			1.61

Certificate Accounts
0.00 – 1.99%	226,261,303			227,473,082			(1,211,779		)	(0.53)
2.00 – 2.99%	19,521,839			25,605,349			(6,083,510		)	(23.76)
3.00 – 3.99%	—			172,598			(172,598		)	(100.00)
4.00 – 4.99%	—			—			—			—
5.00 – 5.99%	—			—			—			—
Total	245,783,142		0.75	253,251,029		0.79	(7,467,887		)	(2.95)
Total Deposits	$	659,204,841	0.35%	$	660,115,164	0.38%	$	(910,323	)	(0.14)%

Included in the certificate accounts above were $41.9 million and $38.8 million in brokered deposits at June 30, 2015 and December 31, 2014, respectively, with a weighted average interest rate of 1.03% and 1.14%, respectively.

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:



	June 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	5,000,000		4.03	20,000,000		4.61	(15,000,000		)	(75.00)
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	$	30,400,000	3.74%	$	52,900,000	3.87%	$	(22,500,000	)	(42.53)%

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 $82.2 million and $81.9 million at June 30, 2015, respectively, and $99.9 million and $99.3 million at December 31, 2014, respectively. Advances are subject to prepayment penalties. During the six months ended June 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 June 30, 2015 the FHLB advances that are callable as of the dates indicated. These advances are also included in the above table. All callable advances are callable at the option of the FHLB. If an advance is called, the Bank has the option to pay off the advance without penalty, reborrow funds on different terms, or convert the advance to a three-month floating rate advance tied to LIBOR.



As of June 30, 2015
Borrow Date	Maturity Date		Amount	Int. Rate		Type	Call Dates
11/23/05	11/23/15	$	5,000,000	3.933	%	Multi-Call	5/23/08 and quarterly thereafter
11/29/06	11/29/16		5,000,000	4.025		Multi-Call	5/29/08 and quarterly thereafter
05/24/07	05/24/17		7,900,000	4.375		Multi-Call	5/27/08 and quarterly thereafter
07/25/07	07/25/17		5,000,000	4.396		Multi-Call	7/25/08 and quarterly thereafter

Other Borrowings – The Bank had $8.9 million and $8.5 million in other borrowings (non-FHLB advances) at June 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 June 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 $15.7 million and $16.0 million, respectively, at June 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 1.99% at June 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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

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.

Equity – Shareholders’ equity increased $57,000 or 0.1% to $87.5 million at June 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 $2.3 million or 41.7% to $3.2 million at June 30, 2015 from $5.5 million at December 31, 2014. The Company’s net income available for common shareholders was $2.8 million for the six months ended June 30, 2015, after payment of $220,000 in preferred stock dividends. The Board of Directors of the Company declared common stock dividends totaling $471,000 during the six months ended June 30, 2015. Book value per common share was $22.23 at June 30, 2015 and December 31, 2014.

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

Net Income Available to Common Shareholders - Net income available to common shareholders increased $46,000 or 3.4% to $1.4 million or $0.46 per diluted common share for the three months ended June 30, 2015 compared to $1.4 million or $0.44 per diluted common share for the three months ended June 30, 2014. The increase in net income available to common shareholders

was primarily the result of an increase of $56,000 in non-interest income offset slightly by a decrease of $32,000 in net interest income after the provision for loan losses.

Net Interest Income - The net interest margin on a tax equivalent basis increased seven basis points to 3.22% for the three months ended June 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 $132,000 or 2.2% to $6.0 million during the three months ended June 30, 2015, compared to $6.1 million for the same period in 2014. During the three months ended June 30, 2015, average interest earning assets decreased $28.7 million or 3.6% to $766.0 million from $794.7 million for the same period in 2014. Average interest-bearing liabilities decreased $35.7 million or 5.1% to $669.4 million for the three months ended June 30, 2015 from $705.2 million for the comparable period in 2014.

Interest Income - Total tax equivalent interest income decreased $529,000 or 6.8% to $7.2 million during the three months ended June 30, 2015 compared to $7.8 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 $298,000 or 6.1% to $4.6 million during the three months ended June 30, 2015 from $4.9 million during the comparable period in 2014. The decrease was the result of a $29.3 million or 8.3% decrease in the average loan portfolio balance, offset partially by a 13 basis point increase in the yield. Interest income from mortgage-backed securities decreased $287,000 or 17.5% to $1.4 million from $1.6 million during the same period in 2014 as a result of a 29 basis point decrease in the portfolio yield combined with an $18.4 million decrease in the average balance. Tax equivalent interest income from investment securities increased $57,000 or 4.7% to $1.3 million as a result of an $18.4 million increase in the average balance of the investment securities portfolio offset by a 13 basis point decrease in the yield.

The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the three months ended June 30, 2015 and 2014:



	Three Months Ended June 30,								Increase (Decrease) In Interest Income
	2015				2014
	Average Balance		Yield⁽¹⁾		Average Balance		Yield⁽¹⁾
Loans Receivable, Net	$	325,261,779	5.68	%	$	354,583,836	5.55	%	$	(298,453	)
Mortgage-Backed Securities	237,985,120		2.27		256,386,601		2.56		(286,680		)
Investment Securities⁽²⁾	199,420,674		2.51		181,028,201		2.64		56,570
Overnight Time And Certificates of Deposit	3,314,267		0.19		2,666,342		0.37		(870		)
Total Interest-Earning Assets	$	765,981,840	3.77	%	$	794,664,980	3.90	%	$	(529,433	)

⁽¹⁾ Annualized

⁽²⁾ Tax equivalent basis is calculated using an effective tax rate of 34% and amounted to $161,428 and $119,706 for the

quarters ended June 30, 2015 and 2014, respectively.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Interest Expense - Total interest expense decreased $439,000 or 29.1% to $1.1 million during the three months ended June 30, 2015 compared to $1.5 million for the same period in 2014. The decrease in total interest expense was attributable to decreases in interest rates paid and a $35.7 million decrease in the average balance of interest-bearing liabilities. Interest expense on deposits decreased $54,000 or 8.5% to $582,000 during the three months ended June 30, 2015 compared to $636,000 for the same period in 2014. The decrease was attributable to a four basis point decrease in the cost of deposit accounts offset by a $677,000 increase in average interest-bearing deposits to $607.9 million for the three months ended June 30, 2015 compared to $607.2 million for the three months ended June 30, 2014.

Interest expense on FHLB advances and other borrowings decreased $385,000 or 53.2% to $339,000 during the three months ended June 30, 2015 from $725,000 for the same period in 2014. This decrease was due to a decrease in the interest rate combined with a $36.4 million or 42.0% decrease in the average balance to $50.3 million during the three months ended June 30, 2015 from $86.7 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 June 30, 2015 and 2014.



	Three Months Ended June 30,								Increase (Decrease) In Interest Expense
	2015				2014
	Average Balance		Yield⁽¹⁾		Average Balance		Yield⁽¹⁾
Now And Money Market Accounts	$	325,285,215	0.13	%	$	321,842,988	0.16	%	$	(25,123	)
Statement Savings Accounts	30,587,246		0.10		26,478,968		0.10		1,021
Certificate Accounts	251,982,550		0.75		258,855,596		0.77		(30,203		)
FHLB Advances And Other Borrowed Money	50,328,204		2.70		86,734,189		3.34		(385,344		)
Junior Subordinated Debentures	5,155,000		2.00		5,155,000		1.95		526
Senior Convertible Debentures	6,084,000		8.00		6,084,000		8.00		—
Total Interest-Bearing Liabilities	$	669,422,215	0.64	%	$	705,150,741	0.86	%	$	(439,123	)

⁽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 quarter 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.

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.

Net charge-offs were $123,000 or 0.04% of gross loans during the three months ended June 30, 2015 compared to $834,000 or 0.23% of gross loans for the same three month period in 2014. There was no provision for loan losses for the quarter ended June 30, 2015 compared to $100,000 for the same quarter in the prior year. The following table details selected activity associated with the allowance for loan losses for the three months ended June 30, 2015 and 2014:



	Three Months Ended June 30,
	2015		2014
Beginning Balance	$	7,918,917	$	9,845,755
Provision	—		100,000
Charge-offs	(277,946)		(1,016,477)
Recoveries	154,611		182,879
Ending Balance	$	7,795,582	$	9,112,157

Allowance For Loan Losses As A Percentage Of Gross Loans Receivable, Held For Investment At The End Of The Period	2.4%		2.6%
Allowance For Loan Losses As A Percentage Of Impaired Loans At The End Of The Period	51.9%		32.5%
Impaired Loans	$	15,017,339	$	28,088,028
Gross Loans Receivable, Held For Investment ⁽¹⁾	$	321,943,396	$	354,333,331
Total Loans Receivable, Net	$	316,547,878	$	346,605,413

^{(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 increased $56,000 or 4.2% to $1.4 million for the three months ended June 30, 2015, compared to $1.3 million for the three months ended June 30, 2014. The following table provides a detailed analysis of the changes in the components of non-interest income:



	Three Months Ended June 30,					Increase (Decrease)
	2015		2014			Amounts			Percent
Gain (Loss) On Sale Of Investments	$	181,814	$	(39,485	)	$	221,299		560.5	%
Gain On Sale Of Loans	181,082		218,288			(37,206		)	(17.0)
Service Fees On Deposit Accounts	274,651		284,071			(9,420		)	(3.3)
Commissions From Insurance Agency	103,547		109,229			(5,682		)	(5.2)
Bank Owned Life Insurance Income	87,000		198,537			(111,537		)	(56.2)
Trust Income	148,800		141,000			7,800			5.5
Check Card Fee Income	248,119		233,861			14,258			6.1
Grant Income	—		17,750			(17,750		)	(100.0)
Other	162,572		168,687			(6,115		)	(3.6)
Total Non-Interest Income	$	1,387,585	$	1,331,938		$	55,647		4.2	%

Gain on sale of investment securities was $182,000 during the quarter ended June 30, 2015, an increase of $221,000 or 560.5% compared to a loss of $39,000 for the same period last year. The gain resulted from the sale of nine investment securities during the quarter ended June 30, 2015 compared to 12 investment securities during the same period in 2014.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Income from the cash value of life insurance decreased $112,000 or 56.2% to $87,000 during the quarter ended June 30, 2015 from $199,000 for the same period in 2014. The Company did not receive any life insurance proceeds during the quarter ended June 30, 2015 compared to proceeds of $124,000 recognized during the same period in 2014.

Non-Interest Expense –For the quarter ended June 30, 2015, non-interest expense increased $18,000 or 0.3% compared to the same period in 2014. The following table provides a detailed analysis of the changes in the components of general and administrative expenses:



	Three Months Ended June 30,				Increase (Decrease)
	2015		2014		Amounts			Percent
Compensation And Employee Benefits	$	2,986,924	$	2,836,547	$	150,377		5.3%
Occupancy	455,053		474,836		(19,783		)	(4.2)
Advertising	99,564		142,863		(43,299		)	(30.3)
Depreciation And Maintenance Of Equipment	445,585		393,270		52,315			13.3
FDIC Insurance Premiums	155,592		178,785		(23,193		)	(13.0)
Net Cost Of Operation Of Other Real Estate Owned	90,873		254,474		(163,601		)	(64.3)
Other	1,101,446		1,035,848		65,598			6.3
Total Non-Interest Expense	$	5,335,037	$	5,316,623	$	18,414		0.3%

Compensation and employee benefits expenses increased $150,000, or 5.3% to $3.0 million for the three months ended June 30, 2015 compared to $2.8 million for the same period last year. The increase was due to the addition of a new area executive hired to lead the Bank's Midlands area, a new commercial lender in the Midlands area, and additional personnel hired in the mortgage department during the quarter ended June 30, 2015.

Net cost of operation of OREO decreased $164,000 or 64.3% to $91,000 during the quarter ended June 30, 2015 from $254,000 during the quarter ended June 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 $66,000, or 6.3% to $1.1 million for the three month period ended June 30, 2015 compared to $1.0 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 $41,000 or 7.2% to $527,000 for the three months ended June 30, 2015 from $568,000 for the same period one year ago. Income before income taxes was $2.1 million and $2.0 million for the three months ended June 30, 2015 and 2014, respectively. The Company’s combined federal and state effective income tax rate for the current quarter was 25.7% compared to 27.8% for the same quarter one year ago.

Results of Operations for the Six Month Periods Ended June 30, 2015 and 2014

Net Income Available to Common Shareholders - Net income available to common shareholders increased $248,000 or 9.7% to $2.8 million for the six months ended June 30, 2015 compared to $2.6 million for the six months ended June 30, 2014. The increase in net income was primarily the result of a $1.2 million increase in non-interest income combined with a $101,000 increase in net interest income after the provision for loan losses. These factors were offset by a $946,000 increase in non-interest expense.

Net Interest Income - The net interest margin on a tax equivalent basis increased 13 basis points to 3.16% for the six months ended June 30, 2015 from 3.03% for the comparable period in 2014. Net interest income was $11.8 million for the six months ended June 30, 2015, unchanged from the same period in 2014. During the six months ended June 30, 2015, average interest earning assets decreased $30.2 million or 3.8% to $764.5 million from $794.7 million for the six months ended June 30, 2014, while average interest-bearing liabilities decreased $38.0 million or 5.4% to $669.8 million from $707.8 million for the six months ended June 30, 2014.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Interest Income - Total tax equivalent interest income decreased $776,000 or 5.1% to $14.3 million during the six months ended June 30, 2015 from $15.1 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 $625,000 or 6.4% to $9.2 million during the six months ended June 30, 2015 from $9.8 million for the same period in 2014. The decrease was a result of a $24.8 million or 7.0% decrease in the average loan portfolio to $331.2 million from $356.0 million for the same period in 2014. Interest income from mortgage-backed securities decreased $251,000 or 8.3% to $2.8 million for the six months ended June 30, 2015 from $3.0 million for the same period in 2014 as a result of a five basis point decrease in the portfolio yield combined with a $16.8 million or 6.7% decrease in the average balance. Tax equivalent interest income from investment securities increased $102,000 or 4.5% to $2.4 million as a result of an increase of 9.6 million increase in the average balance of the investment securities portfolio. This increase was offset slightly by a decrease 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 six months ended June 30, 2015 and 2014:



	Six Months Ended June 30,								Increase (Decrease) In Interest Income
	2015				2014
	Average Balance		Yield⁽¹⁾		Average Balance		Yield⁽¹⁾
Loans Receivable, Net	$	331,220,113	5.53	%	$	355,979,382	5.50	%	$	(624,746	)
Mortgage-Backed Securities	236,022,294		2.35		252,847,394		2.40		(251,445)
Investment Securities⁽²⁾	192,535,526		2.45		182,978,094		2.47		101,644
Overnight Time And Certificates of Deposit	4,690,619		0.18		2,884,270		0.42		(1,888		)
Total Interest-Earning Assets	$	764,468,552	3.74	%	$	794,689,140	3.79	%	$	(776,435	)

⁽¹⁾ Annualized

⁽²⁾ Tax equivalent basis is calculated using an effective tax rate of 38% and was $286,229 and $247,238 for the six

months ended June 30, 2015 and 2014, respectively.

Interest Expense - Interest expense decreased $816,000 or 26.7% to $2.2 million during the six months ended June 30, 2015 compared to $3.1 million for the same period in 2014. The decrease in total interest expense is attributable to decreases in interest rates paid and a $38.0 million or 5.4% decrease in the average balance of interest-bearing liabilities. Interest expense on deposits decreased $145,000 or 10.9% to $1.2 million during the six months ended June 30, 2015 compared to $1.3 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 $1.5 million or 0.2% decrease in average interest-bearing deposits to $607.7 million for the six month period ended June 30, 2015 compared to $609.2 million for the six month period ended June 30, 2014. The decrease was concentrated in the certificate accounts, which decreased $6.2 million or 2.4% to $253.7 million during the six months ended June 30, 2015 from $259.9 million for the same period in 2014. The Bank is focusing on increasing its core deposits, or non time deposits, and has been competing less aggressively for time deposits.

Interest expense on FHLB advances and other borrowings decreased $671,000 or 46.9% to $761,000 during the six months ended June 30, 2015. The average balance of FHLB advances and other borrowed money decreased $36.5 million or 41.8% to $50.9 million during the six months ended June 30, 2015 from $87.4 million for the same period last year. During the six months ended June 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 six months ended June 30, 2015 and 2014:

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations



	Six Months Ended June 30,								Increase (Decrease) In Interest Expense
	2015				2014
	Average Balance		Yield⁽¹⁾		Average Balance		Yield⁽¹⁾
Now And Money Market Accounts	$	324,216,634	0.14%		$	323,584,744	0.19	%	$	(87,453	)
Statement Savings Accounts	29,755,068		0.10		25,688,599		0.10		2,014
Certificates Accounts	253,702,223		0.78		259,885,905		0.78		(59,839		)
FHLB Advances And Other Borrowed Money	50,921,409		2.99		87,431,287		3.28		(671,304		)
Junior Subordinated Debentures	5,155,000		2.00		5,155,000		1.95		589
Senior Convertible Debentures	6,084,000		8.00		6,084,000		8.00		—
Total Interest-Bearing Liabilities	$	669,834,334	0.67	%	$	707,829,535	0.86	%	$	(815,993	)

⁽¹⁾ Annualized

Provision for Loan Losses - The provision for loan losses was $100,000 for the six months ended June 30, 2015 compared to $200,000 for the same period in the prior year. The decrease in the provision for loan losses is attributable to a decline in net charge offs. Net charge offs for the six months ended June 30, 2015 declined $668,000 or 50.2% to $662,000 from $1.3 million during the comparable period in 2014. The following table details selected activity associated with the allowance for loan losses for the six months ended June 30, 2015 and 2014:



	Six Months Ended June 30,
	2015		2014
Beginning Balance	$	8,357,496	$	10,241,970
Provision	100,000		200,000
Charge-offs	(896,960)		(1,794,052)
Recoveries	235,046		464,239
Ending Balance	$	7,795,582	$	9,112,157

Non-Interest Income - Non-interest income increased $1.2 million or 40.8% to $4.0 million for the six months ended June 30, 2015, compared to $2.9 million for the six months ended June 30, 2014. The following table provides a detailed analysis of the changes in the components of non-interest income:



	Six Months Ended June 30,				Increase (Decrease)
	2015		2014		Amounts			Percent
Gain On Sale Of Investments	$	1,668,753	$	44,871	$	1,623,882		3,619.0	%
Gain On Sale Of Loans	335,101		346,530		(11,429		)	(3.3)
Service Fees On Deposit Accounts	532,167		560,556		(28,389		)	(5.1)
Bank Owned Life Insurance Income	174,000		404,364		(230,364		)	(57.0)
Commissions From Insurance Agency	233,659		200,863		32,796			16.3
Trust Income	297,600		246,000		51,600			21.0
Check Card Fee Income	479,420		444,556		34,864			7.8
Grant Income	0		299,710		(299,710		)	(100.0)
Other	317,892		320,887		(2,995		)	(0.9)
Total Non-Interest Income	$	4,038,592	$	2,868,337	$	1,170,255		40.8	%

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Management's Discussion and Analysis of Financial Condition and Results of Operations

Gain on sale of investments was $1.7 million during the six months ended June 30, 2015 an increase of $1.6 million or 3,619.0% compared to a gain of $45,000 during the same period last year. The increase resulted from the sale of 41 investment securities during the period compared to 21 sold during the comparable period of 2014. The Bank used the gain to offset a $788,000 prepayment penalty on FHLB advances during the six month period.

Bank owned life insurance income decreased $230,000 or 57.0% to $174,000 for the six months ended June 30, 2015 compared to $404,000 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 six months ended June 30, 2014, the Bank recognized $254,000 in death benefits in 2014 in addition to $150,000 in income related to changes in the cash surrender value of the bank owned life insurance policies.

There was no grant income received during the six months ended June 30, 2015 compared to $300,000 received during the same period in 2014 from the U.S. Treasury's Community Development Financial Institution's Fund.

Non-Interest Expense – For the six months ended June 30, 2015, non-interest expense increased $946,000 or 8.9% to $11.6 million compared to $10.6 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 general and administrative expenses:



	Six Months Ended June 30,				Increase (Decrease)
	2015		2014		Amounts			Percent
Compensation And Employee Benefits	$	5,973,955	$	5,683,549	$	290,406		5.1	%
Occupancy	945,711		975,752		(30,041		)	(3.1)
Advertising	195,725		243,259		(47,534		)	(19.5)
Depreciation And Maintenance Of Equipment	862,830		810,776		52,054			6.4
FDIC Insurance Premiums	315,813		364,242		(48,429		)	(13.3)
Amortization Of Intangibles	0		11,970		(11,970		)	(100.0)
Net Cost Of Operation Of Other Real Estate Owned	287,497		523,570		(236,073		)	(45.1)
Prepayment Penalties On FHLB Advances	787,851		0		787,851			100.0
Other	2,220,250		2,030,184		190,066			9.4
Total Non-Interest Expense	$	11,589,632	$	10,643,302	$	946,330		8.9	%

Compensation and employee benefits expenses were $6.0 million for the six months ended June 30, 2015, an increase of $290,000 or 5.1% from $5.7 million during the same period last year due to general increases in the economy combined with increases related to the addition of several new hires during the six months ended June 30, 2015.

Net cost of operation of OREO decreased $236,000 or 45.1% to $287,000 for the six months ended June 30, 2015 from $524,000 during the six months ended June 30, 2014. The decrease was primarily due to a reduction in writedowns of OREO, which were $174,000 for the six months ended June 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 six months ended June 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 six months ended June 30, 2014.

Provision For Income Taxes – The provision for income taxes increased $76,000 or 7.5% to $1.1 million for the six months ended June 30, 2015 from $1.0 million for the same period in 2014. Income before taxes was $4.1 million and $3.8 million for the six months ended June 30, 2015 and 2014, respectively. The Company’s combined federal and state effective income tax rate for the six months ended June 30, 2015 was 26.6% compared to 26.8% for the same period in 2014.

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 six months ended June 30, 2015 loan repayments exceeded loan originations resulting in a $23.3 million or 6.9% decrease in total net loans receivable. During the six months ended June 30, 2015, deposits decreased $910,000 or 0.1% and FHLB advances decreased $22.5 million or 42.5%. The Bank had $216.5 million in additional borrowing capacity at the FHLB at the end of the period. At June 30, 2015, the Bank had $145.0 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 June 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 23.9%, 10.7%, 23.9%, and 25.2%, 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 16.7%, 10.8%, 24.1%, and 25.3%, respectively, at June 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 June 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	$	415	$	1,746	$	19,532	$	21,693	$	30,587	$	52,280
Standby Letters Of Credit	—		41		742		783		23		806
Total	$	415	$	1,787	$	20,274	$	22,476	$	30,610	$	53,086

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 six months ended June 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 3.14% and 3.07% respectively.

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 June 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 June 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

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 June 30, 2015, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income (Loss); (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements (16)

_____________


(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.

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.


(16)	Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section


	18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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:	August 13, 2015	By:	/s/J. Chris Verenes
				J. Chris Verenes
				Chief Executive Officer
				Duly Authorized Representative



Date:	August 13, 2015	By:	/s/Jessica T. Cummins
				Jessica T. Cummins
				Chief Financial Officer
				Duly Authorized Representative

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 June 30, 2015, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income (Loss); (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements