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

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 – Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD:
FROM:
 
TO:
 
COMMISSION FILE NUMBER: 0-16120
SECURITY FEDERAL CORPORATION
(Exact name of registrant as specified in its charter)
 
South Carolina
 
57-0858504
 
 
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
238 RICHLAND AVENUE NORTHWEST, AIKEN, SOUTH CAROLINA 29801
(Address of principal executive office and zip code)
(803) 641-3000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES
 
X
 
NO
 
 

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
 
CLASS:
 
OUTSTANDING SHARES AT:
 
SHARES:
 
 
Common Stock, par value $0.01 per share
 
May 13, 2015
 
2,945,474
 




 
 
 
 
PART I.
FINANCIAL INFORMATION (UNAUDITED)
 
PAGE NO.
Item 1.
Financial Statements (Unaudited):
 
3
 
Consolidated Balance Sheets at March 31, 2015 and December 31, 2014
 
3
 
Consolidated Statements of Income for the Three Months Ended March 31, 2015 and 2014
 
4
 
Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2015 and 2014
 
5
 
Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2015 and 2014
 
6
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014
 
7
 
Notes to Consolidated Financial Statements
 
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
32
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
41
Item 4.
Controls and Procedures
 
42
 
 
 
 
PART II.
OTHER INFORMATION
 
 
Item 1.
Legal Proceedings
 
43
Item 1A.
Risk Factors
 
43
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
43
Item 3.
Defaults Upon Senior Securities
 
43
Item 4.
Mine Safety Disclosures
 
43
Item 5.
Other Information
 
43
Item 6.
Exhibits
 
43
 
Signatures
 
45
 
 
 
 

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
 
March 31, 2015
 
December 31, 2014
ASSETS:
Unaudited
 
Audited
Cash And Cash Equivalents
$
8,461,858

 
$
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 $425,229,107 And $420,876,924 At March 31, 2015 And December 31, 2014, Respectively)
434,502,629

 
429,700,540

Loans Receivable, Net:
 
 
 
Held For Sale
1,878,844

 
1,864,999

Held For Investment:  (Net Of Allowance Of $7,918,917 And $8,357,496 At March 31, 2015 And December 31, 2014, Respectively)
330,179,583

 
338,009,496

Total Loans Receivable, Net
332,058,427

 
339,874,495

Accrued Interest Receivable:
 
 
 
Loans
1,029,658

 
971,569

Mortgage-Backed Securities
675,945

 
682,585

Investment Securities
1,331,054

 
1,408,924

Total Accrued Interest Receivable
3,036,657

 
3,063,078

Premises And Equipment, Net
18,608,102

 
18,233,226

Federal Home Loan Bank ("FHLB") Stock, At Cost
2,196,100

 
3,144,600

Other Real Estate Owned
6,486,850

 
3,229,710

Bank Owned Life Insurance
11,237,044

 
11,150,045

Goodwill
1,199,754

 
1,199,754

Other Assets
3,250,342

 
3,480,676

Total Assets
$
823,132,763

 
$
825,363,826

LIABILITIES AND SHAREHOLDERS’ EQUITY:
 
 
 
Liabilities:
 
 
 
Deposit Accounts
$
672,441,557

 
$
660,115,164

Advances From FHLB
34,200,000

 
52,900,000

Other Borrowings
10,340,157

 
8,523,348

Junior Subordinated Debentures
5,155,000

 
5,155,000

Advance Payments By Borrowers For Taxes And Insurance
414,167

 
266,352

Senior Convertible Debentures
6,084,000

 
6,084,000

Other Liabilities
5,621,054

 
4,884,577

Total Liabilities
734,255,935

 
737,928,441

Shareholders' Equity:
 
 
 
Serial Preferred Stock, $.01 Par Value; Authorized 200,000 Shares; Issued And Outstanding, 22,000 Shares At March 31, 2015 And December 31, 2014, Respectively
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 March 31, 2015 And 3,144,934 And 2,944,001, Respectively, At December 31, 2014
31,464

 
31,449

Additional Paid-In Capital
12,019,325

 
11,990,813

Treasury Stock, At Cost (200,933 Shares At March 31, 2015 And December 31, 2014, Respectively)
(4,330,712
)
 
(4,330,712
)
Unvested Restricted Stock
(25,358
)
 

Accumulated Other Comprehensive Income
5,755,660

 
5,476,375

Retained Earnings
53,426,449

 
52,267,460

Total Shareholders' Equity
88,876,828

 
87,435,385

Total Liabilities And Shareholders' Equity
$
823,132,763

 
$
825,363,826

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

3


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)
 
 
Three Months Ended March 31,
 
 
 
2015
 
2014
 
Interest Income:
 
 
 
 
 
Loans
 
$
4,537,195

 
$
4,863,488

 
Mortgage-Backed Securities
 
1,424,353

 
1,389,118

 
Investment Securities
 
985,106

 
937,301

 
Other
 
2,550

 
3,568

 
Total Interest Income
 
6,949,204

 
7,193,475

 
Interest Expense:
 
 
 
 
 
NOW And Money Market Accounts
 
118,429

 
180,759

 
Statement Savings Accounts
 
7,120

 
6,127

 
Certificate Accounts
 
479,159

 
508,795

 
FHLB Advances And Other Borrowed Money
 
421,755

 
707,715

 
Senior Convertible Debentures
 
121,680

 
121,680

 
Junior Subordinated Debentures
 
25,078

 
25,015

 
Total Interest Expense
 
1,173,221

 
1,550,091

 
Net Interest Income
 
5,775,983

 
5,643,384

 
Provision For Loan Losses
 
100,000

 
100,000

 
Net Interest Income After Provision For Loan Losses
 
5,675,983

 
5,543,384

 
Non-Interest Income:
 
 
 
 
 
Gain On Sale Of Investment Securities
 
1,486,939

 
84,356

 
Gain On Sale Of Loans
 
154,019

 
128,242

 
Service Fees On Deposit Accounts
 
257,516

 
276,485

 
Commissions From Insurance Agency
 
130,112

 
91,634

 
Trust Income
 
148,800

 
105,000

 
Bank Owned Life Insurance Income
 
87,000

 
205,827

 
Check Card Fee Income
 
231,301

 
210,695

 
Grant Income
 

 
281,960

 
Other
 
155,320

 
152,200

 
Total Non-Interest Income
 
2,651,007

 
1,536,399

 
Non-Interest Expense:
 
 
 
 
 
Compensation And Employee Benefits
 
2,987,031

 
2,847,002

 
Occupancy
 
490,658

 
500,916

 
Advertising
 
96,161

 
100,396

 
Depreciation And Maintenance Of Equipment
 
417,245

 
417,506

 
Federal Deposit Insurance Corporation ("FDIC") Insurance Premiums
 
160,221

 
185,457

 
Amortization Of Intangibles
 

 
11,970

 
Net Cost Of Operation Of Other Real Estate Owned
 
196,624

 
269,096

 
Prepayment Penalties on FHLB Advances
 
787,851

 

 
Other
 
1,118,804

 
994,336

 
Total General And Administrative Expenses
 
6,254,595

 
5,326,679

 
Income Before Income Taxes
 
2,072,395

 
1,753,104

 
Provision For Income Taxes
 
567,768

 
450,584

 
Net Income
 
1,504,627

 
1,302,520

 
Preferred Stock Dividends
 
110,000

 
110,000

 
Net Income Available To Common Shareholders
 
$
1,394,627

 
$
1,192,520

 
Net Income Per Common Share (Basic)
 
$
0.47

 
$
0.41

 
Net Income Per Common Share (Diluted)
 
$
0.45

 
$
0.39

 
Cash Dividend Per Share On Common Stock
 
$
0.08

 
$
0.08

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

 
2,944,001

 
Weighted Average Shares Outstanding (Diluted)
 
3,248,230

 
3,248,201

 
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

4


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Net Income
 
$
1,504,627

 
$
1,302,520

Other Comprehensive Income
 
 
 
 
Unrealized Gains On Securities:
 
 
 
 
Unrealized Holding Gains On Securities Available For Sale, Net Of Taxes Of $735,658 And $1,068,967 At March 31, 2015 And 2014, Respectively
 
1,201,187

 
1,747,218

Reclassification Adjustment For Gains Included In Net Income, Net Of Taxes Of $565,037 And $32,055 At March 31, 2015 And 2014, Respectively
 
(921,902
)
 
(52,301
)
Other Comprehensive Income
 
279,285

 
1,694,917

Comprehensive Income
 
$
1,783,912

 
$
2,997,437
































SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


5


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
For the Three Months Ended March 31, 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

 

 

 

 

 
1,302,520

 
1,302,520

Other Comprehensive Income, Net Of Tax

 

 

 

 
1,694,917

 

 
1,694,917

Stock Option Compensation Expense

 

 
3,169

 

 

 

 
3,169

Cash Dividends On Preferred Stock

 

 

 

 

 
(110,000
)
 
(110,000
)
Cash Dividends On Common Stock

 

 

 

 

 
(235,520
)
 
(235,520
)
Balance At
March 31, 2014
$
22,000,000

 
$
31,449

 
$
11,981,306

 
$
(4,330,712
)
 
$
2,167,323

 
$
48,795,800

 
$
80,645,166



 
 
 
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

 

 

 

 

 

 
1,504,627

 
1,504,627

Other Comprehensive Income, Net Of Tax

 

 

 

 

 
279,285

 

 
279,285

Common Stock Issuance

 
15

 
(25,358
)
 
25,343

 
 
 
 
 
 
 

Stock Option Compensation Expense

 

 

 
3,169

 

 

 

 
3,169

Cash Dividends On Preferred Stock

 

 

 

 

 

 
(110,000
)
 
(110,000
)
Cash Dividends On Common Stock

 

 

 

 

 

 
(235,638
)
 
(235,638
)
Balance At
March 31, 2015
$
22,000,000

 
$
31,464

 
$
(25,358
)
 
$
12,019,325

 
$
(4,330,712
)
 
$
5,755,660

 
$
53,426,449

 
$
88,876,828


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

6


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
 
Three Months Ended March 31,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
1,504,627

 
$
1,302,520

Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
 
 
 
Depreciation Expense
309,913

 
298,464

Amortization Of Intangible Assets

 
11,970

Stock Option Compensation Expense
3,169

 
3,169

Discount Accretion And Premium Amortization
1,252,401

 
1,564,137

Provisions For Losses On Loans
100,000

 
100,000

Income From Bank Owned Life Insurance
(87,000
)
 
(205,827
)
Gain On Sales Of Loans
(154,019
)
 
(128,242
)
Gain On Sales Of Mortgage-Backed Securities
(358,141
)
 
(254,538
)
(Gain) Loss On Sales Of Investment Securities
(1,128,798
)
 
170,182

Gain On Sale Of Other Real Estate Owned
(57,040
)
 
(41,845
)
Write Down On Other Real Estate Owned
124,400

 
205,000

Amortization Of Deferred Fees On Loans
4,737

 
6,583

Proceeds From Sale Of Loans Held For Sale
5,860,686

 
3,808,798

Origination Of Loans Held For Sale
(5,720,512
)
 
(5,356,132
)
(Increase) Decrease In Accrued Interest Receivable:
 
 
 
Loans
(58,089
)
 
50,450

Mortgage-Backed Securities
6,640

 
(1,003
)
Investment Securities
77,870

 
122,005

Increase In Advance Payments By Borrowers
147,815

 
90,699

Other, Net
796,189

 
131,449

Net Cash Provided By Operating Activities
2,624,848

 
1,877,839

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
  Purchase Of Mortgage-Backed Securities Available For Sale
(15,625,415
)
 
(25,481,066
)
  Principal Repayments On Mortgage-Backed Securities Available For Sale
7,421,481

 
7,413,707

Purchase Of Investment Securities Available For Sale
(41,533,216
)
 
(5,971,321
)
Maturities Of Investment Securities Available For Sale
9,257,293

 
5,914,950

  Proceeds From Sale of Investment Securities Available For Sale
29,095,492

 
5,132,069

  Proceeds From Sale of Mortgage-Backed Securities Available For Sale
7,266,721

 
8,802,113

Purchase Of FHLB Stock
(868,800
)
 
(2,021,200
)
Redemption Of FHLB Stock
1,817,300

 
2,885,800

Proceeds From Bank Owned Life Insurance

 
484,415

Decrease In Loans Receivable
4,137,337

 
4,611,602

Proceeds From Sale Of Repossessed Assets
263,340

 
155,945

Purchase And Improvement Of Premises And Equipment
(684,789
)
 
(140,046
)
Net Cash Provided By Investing Activities
546,744

 
1,786,968


7


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

 
Three months Ended March 31,
 
2015
 
2014
 
Continued
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Increase In Deposit Accounts
$
12,326,393

 
$
8,386,773

Proceeds From FHLB Advances
86,670,000

 
46,630,000

Repayment Of FHLB Advances
(105,370,000
)
 
(59,084,335
)
Increase in Other Borrowings, Net
1,816,809

 
1,263,649

Dividends To Preferred Stock Shareholders
(110,000
)
 
(110,000
)
Dividends To Common Stock Shareholders
(235,638
)
 
(235,520
)
Net Cash Used By Financing Activities
(4,902,436
)
 
(3,149,433
)
Net Increase (Decrease) In Cash And Cash Equivalents
(1,730,844
)
 
515,374

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

 
7,629,771

Cash And Cash Equivalents At End Of Period
$
8,461,858

 
$
8,145,145

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash Paid During The Period For:
 
 
 
Interest
$
1,201,870

 
$
1,497,977

Income Taxes
$
10,388

 
$
24,100

Supplemental Schedule Of Non Cash Transactions:
 
 
 
Transfers From Loans Receivable To Other Real Estate Owned
$
3,587,840

 
$
892,760


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


8



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements





1. Basis of Presentation

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

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

9



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements




3. Critical Accounting Policies, Continued

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 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 March 31,
 
2015
 
2014
Earnings Available To Common Shareholders:
 
 
 
Net Income

$1,504,627

 

$1,302,520

Preferred Stock Dividends
110,000

 
110,000

Net Income Available To Common Shareholders

$1,394,627

 

$1,192,520


10



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements




4. Earnings Per Common Share, Continued

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

 
For the Three Months Ended March 31,
 
2015
 
 2014
 
Income
 
Shares
 
Per Share Amounts
 
Income
 
Shares
 
Per Share Amounts
Basic EPS

$1,394,627

 
2,944,001

 

$0.47

 

$1,192,520

 
2,944,001

 

$0.41

Effect of Dilutive Securities:
 
 
 
 
 
 
 
 
 
 
 
Senior Convertible Debentures
75,442

 
304,200

 
(0.02)

 
75,422

 
304,200

 
(0.02)

Unvested Restricted Stock

 
29

 

 

 

 

Diluted EPS

$1,470,069

 
3,248,230

 

$0.45

 

$1,267,942

 
3,248,201

 

$0.39




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 March 31,
 
2015
 
2014
 
Shares
 
Weighted Average Exercise Price
 
Shares
 
Weighted Average Exercise Price
Balance, Beginning of Period
47,500

 
$22.41
 
61,500

 
$22.49
Options Granted

 
 

 
Options Exercised

 
 

 
Options Forfeited
(18,000
)
 
20.55
 
(11,000
)
 
22.44
Balance, End Of Period
29,500

 
$23.55
 
50,500

 
$22.49
 
 
 
 
 
 
 
 
Options Exercisable
18,900

 
$23.58
 
34,100

 
$22.02
 
 
 
 
 
 
 
 
Options Available For Grant
50,000

 
 
 
50,000

 
 





11



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements




5. Stock-Based Compensation, Continued

At March 31, 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 March 31, 2015 or 2014 had an exercise price below the average market price during the three month periods ended March 31, 2015 or 2014. Therefore these options were not deemed to be dilutive to earnings per share in those periods.



12



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



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

The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment and mortgage-backed securities available for sale at the dates indicated are as follows:
 
March 31, 2015
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair value
FHLB Securities
$
6,330,671

 
$
55,934

 
$
84,474

 
$
6,302,131

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

 

 
14,978

 
1,985,022

Federal National Mortgage Association ("FNMA") Bonds
997,009

 
15,425

 

 
1,012,434

Small Business Administration (“SBA”) Bonds
118,078,000

 
1,843,851

 
217,508

 
119,704,343

Tax Exempt Municipal Bonds
62,911,065

 
2,061,707

 
374,396

 
64,598,376

Mortgage-Backed Securities
234,661,924

 
6,300,652

 
373,067

 
240,589,509

Equity Securities
250,438

 
60,376

 

 
310,814

 
$
425,229,107

 
$
10,337,945

 
$
1,064,423

 
$
434,502,629

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 
$
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 March 31, 2015 the Bank held an amortized cost and fair value of $160.6 million and $164.7 million, respectively, in GNMA mortgage-backed securities included in mortgage-backed securities in the table 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.




13



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



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

The amortized cost and fair value of investment and mortgage-backed securities available for sale at March 31, 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.
Investment Securities
Amortized Cost
 
Fair Value
Less Than One Year
$
839,750

 
$
847,389

One – Five Years
13,008,988

 
13,299,185

Over Five – Ten Years
62,234,587

 
63,331,124

More Than Ten Years
114,483,858

 
116,435,422

Mortgage-Backed Securities
234,661,924

 
240,589,509

 
$
425,229,107

 
$
434,502,629


At March 31, 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 $119.6 million and $123.8 million, respectively, compared to an amortized cost and fair value of $120.7 million and $124.4 million, respectively at December 31, 2014.

The Bank received $36.4 million and $13.9 million, respectively, in gross proceeds from sales of available for sale securities during the three months ended March 31, 2015 and 2014. As a result, the Bank recognized gross gains of $1.5 million and $309,000, respectively, and gross losses of $47,000 and $224,000, respectively, for the three months ended March 31, 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.
 
March 31, 2015
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
FHLB Securities
$

 
$

 
$
3,915,526

 
$
84,474

 
$
3,915,526

 
$
84,474

FFCB Securities
1,985,022

 
14,978

 

 

 
1,985,022

 
14,978

SBA Bonds
19,333,124

 
153,338

 
6,635,687

 
64,170

 
25,968,811

 
217,508

Tax Exempt Municipal Bond
16,235,174

 
366,102

 
799,429

 
8,294

 
17,034,603

 
374,396

Mortgage-Backed Securities
16,387,777

 
55,636

 
13,180,113

 
317,431

 
29,567,890

 
373,067

 
$
53,941,097

 
$
590,054

 
$
24,530,755

 
$
474,369

 
$
78,471,852

 
$
1,064,423


14



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



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

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

 
$
5,182

 
$
3,850,690

 
$
149,310

 
$
4,845,508

 
$
154,492

FFCB Securities

 

 
5,667,994

 
82,006

 
5,667,994

 
82,006

SBA Bonds
27,859,461

 
223,070

 
4,920,631

 
84,579

 
32,780,092

 
307,649

Tax Exempt Municipal Bond
3,605,319

 
16,039

 
1,710,586

 
29,041

 
5,315,905

 
45,080

Mortgage-Backed Securities
34,840,832

 
208,242

 
30,899,075

 
607,742

 
65,739,907

 
815,984

 
$
67,300,430

 
$
452,533

 
$
47,048,976

 
$
952,678

 
$
114,349,406

 
$
1,405,211


Securities classified as available for sale are recorded at fair market value.  At March 31, 2015 and December 31, 2014, 44.6% and 67.8% of the unrealized losses, representing 13 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 three months ended March 31, 2015.























15



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements




7.    Loans Receivable, Net

Loans receivable, net, consisted of the following as of the dates shown:
 
 
 
 
 
March 31, 2015
 
December 31, 2014
Residential Real Estate Loans
$
76,077,084

 
$
77,282,817

Consumer Loans
50,385,443

 
50,391,224

Commercial Business
8,902,887

 
10,564,467

Commercial Real Estate
204,646,950

 
209,530,209

Total Loans Held For Investment
340,012,364

 
347,768,717

Loans Held For Sale
1,878,844

 
1,864,999

Total Loans Receivable, Gross
341,891,208

 
349,633,716

Less:
 
 
 
Allowance For Loan Losses
7,918,917

 
8,357,496

Loans In Process
1,879,523

 
1,379,114

Deferred Loan Fees (Costs)
34,341

 
22,611

 
9,832,781

 
9,759,221

Total Loans Receivable, Net
$
332,058,427

 
$
339,874,495


Changes in the allowance for loan losses for the three months ended March 31, 2015 and 2014 are summarized as follows:
 
Three Months Ended March 31,
 
2015
 
2014
Balance At Beginning Of Period
$
8,357,496

 
$
10,241,970

Provision For Loan Losses
100,000

 
100,000

Charge Offs
(619,014
)
 
(777,575
)
Recoveries
80,435

 
281,360

Total Allowance For Loan Losses
$
7,918,917

 
$
9,845,755


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.

The following tables list the loan grades used by the Company as credit quality indicators and the balance for each loan category at the dates presented, excluding loans held for sale.

16



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



7.    Loans Receivable, Net, Continued

 
Credit Quality Measures
March 31, 2015
 
Pass
 
 
Caution
 
Special
Mention
 
 
Substandard
 
 
Total Loans
Residential Real Estate
$
67,580,371

 
$
914,752

 
$
1,422,850

 
$
6,159,111

 
$
76,077,084

Consumer
47,467,158

 
1,547,751

 
175,250

 
1,195,284

 
50,385,443

Commercial Business
7,809,979

 
346,482

 
303,389

 
443,037

 
8,902,887

Commercial Real Estate
123,958,229

 
31,959,619

 
36,466,884

 
12,262,218

 
204,646,950

Total
$
246,815,737

 
$
34,768,604

 
$
38,368,373

 
$
20,059,650

 
$
340,012,364


 
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 table presents an age analysis of past due balances by loan category at March 31, 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
$
773,271

 
$
739,422

 
$
2,925,155

 
$
4,437,848

 
$
71,639,236

 
$
76,077,084

Consumer
1,090,070

 
214,442

 
632,978

 
1,937,490

 
48,447,953

 
50,385,443

Commercial
   Business
108,752

 
115,982

 
288,281

 
513,015

 
8,389,872

 
8,902,887

Commercial
   Real Estate
9,402,639

 
1,328,852

 
5,119,394

 
15,850,885

 
188,796,065

 
204,646,950

Total
$
11,374,732

 
$
2,398,698

 
$
8,965,808

 
$
22,739,238

 
$
317,273,126

 
$
340,012,364


The following table presents an age analysis of past due balances by loan category at 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




17



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



7.    Loans Receivable, Net, Continued

At March 31, 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 loan category at March 31, 2015 compared to December 31, 2014:

 
At March 31, 2015
 
At December 31, 2014
 
$
 
%
 
Amount
 
Percent (1)
 
Amount
 
Percent (1)
 
Increase (Decrease)
 
Increase (Decrease)
Non-accrual Loans:
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate
$
2,925,155

 
0.87
%
 
$
3,061,339

 
0.90
%
 
$
(136,184
)
 
(4.4
)%
Commercial Business
288,281

 
0.09

 
246,977

 
0.10

 
41,304

 
16.7

Commercial Real Estate
5,119,394

 
1.51

 
9,859,689

 
2.80

 
(4,740,295
)
 
(48.1
)
Consumer
632,978

 
0.19

 
573,644

 
0.20

 
59,334

 
10.3

Total Non-accrual Loans
$
8,965,808

 
2.66
%
 
$
13,741,649

 
4.00
%
 
$
(4,775,841
)
 
(34.8
)%

(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 loan category for the periods indicated:
 
 
For the Three Months Ended March 31, 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
 
7,370

 
330,931

 
345,077

 
(583,378
)
 
100,000

Charge-Offs
 
(45,000
)
 
(120,618
)
 
(10,947
)
 
(442,449
)
 
(619,014
)
Recoveries
 

 
44,768

 
3,320

 
32,347

 
80,435

Ending Balance
 
$
1,354,435

 
$
1,141,797

 
$
496,803

 
$
4,925,882

 
$
7,918,917

 
 
For the Three Months Ended March 31, 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
 
43,506

 
127,341

 
(74,961
)
 
4,114

 
100,000

Charge-Offs
 
(82,472
)
 
(194,449
)
 

 
(500,654
)
 
(777,575
)
Recoveries
 
479

 
23,199

 
17,684

 
239,998

 
281,360

Ending Balance
 
$
1,668,156

 
$
803,868

 
$
369,381

 
$
7,004,350

 
$
9,845,755




18



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



7.    Loans Receivable, Net, Continued

The following tables present information related to impaired loans evaluated individually and collectively for impairment in the allowance for loan losses:
 
 
Allowance For Loan Losses
March 31, 2015
 
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
 
Total
Residential Real Estate
 
$

 
$
1,354,435

 
$
1,354,435

Consumer
 
248,189

 
893,608

 
1,141,797

Commercial Business
 

 
496,803

 
496,803

Commercial Real Estate
 
125,300

 
4,800,582

 
4,925,882

Total
 
$
373,489

 
$
7,545,428

 
$
7,918,917


 
 
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


The following tables present information related to impaired loans evaluated individually and collectively for impairment in loans receivable for the periods indicated:
 
 
Loans Receivable
March 31, 2015
 
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
 
Total
Residential Real Estate
 
$
2,687,102

 
$
73,389,982

 
$
76,077,084

Consumer
 
461,863

 
49,923,580

 
50,385,443

Commercial Business
 
232,601

 
8,670,286

 
8,902,887

Commercial Real Estate
 
12,316,635

 
192,330,315

 
204,646,950

Total
 
$
15,698,201

 
$
324,314,163

 
$
340,012,364

 
 
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



19



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



7.    Loans Receivable, Net, Continued

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 $18.0 million for three months ended March 31, 2015 compared to $30.2 million for the three months ended March 31, 2014.

The following tables are a summary of information related to impaired loans as of March 31, 2015 and December 31, 2014 and for the three months ended March 31, 2015 and 2014.
 
 
 
 
At
 
 
 
For the Three Months Ended March 31,
 
 
March 31, 2015
 
2015
 
2014
Impaired Loans
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With No Related Allowance
Recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate
 
$
2,687,102

 
$
2,810,291

 
$

 
$
2,924,360

 
$
828

 
$
4,494,249

 
$
12,942

Consumer
 
150,869

 
158,369

 

 
152,271

 
272

 
259,796

 
88

Commercial Business
 
232,601

 
432,601

 

 
235,173

 

 
465,402

 

Commercial Real Estate
 
11,181,568

 
15,430,504

 

 
13,217,496

 
75,944

 
19,096,530

 
157,070

With An Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate
 

 

 

 

 

 
989,513

 

Consumer
 
310,994

 
310,994

 
248,189

 
312,418

 
1,200

 
68,474

 
1,247

Commercial Business
 

 

 

 

 

 
32,638

 

Commercial Real Estate
 
1,135,067

 
1,141,867

 
125,300

 
1,140,637

 
17,128

 
4,751,376

 
47,794

Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate
 
2,687,102

 
2,810,291

 

 
2,924,360

 
828

 
5,483,762

 
12,942

Consumer
 
461,863

 
469,363

 
248,189

 
464,689

 
1,472

 
328,270

 
1,335

Commercial Business
 
232,601

 
432,601

 

 
235,173

 

 
498,040

 

Commercial Real Estate
 
12,316,635

 
16,572,371

 
125,300

 
14,358,133

 
93,072

 
23,847,906

 
204,864

Total
 
$
15,698,201

 
$
20,284,626

 
$
373,489

 
$
17,982,355

 
$
95,372

 
$
30,157,978

 
$
219,141



20



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



7.    Loans Receivable, Net, Continued

 
 
December 31, 2014
Impaired Loans
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
 
Related
Allowance
With No Related Allowance
   Recorded:
 
 
 
 
 
 
Residential Real Estate
 
$
2,519,814

 
$
2,618,003

 
$

Consumer Loans
 
152,029

 
159,529

 

Commercial Business
 
236,030

 
436,030

 

Commercial Real Estate
 
13,721,964

 
18,088,149

 

With An Allowance Recorded:
 
 
 
 
 
 
Consumer Loans
 
66,203

 
66,203

 
2,600

Commercial Real Estate
 
3,551,915

 
3,582,465

 
472,400

Total
 
 
 
 
 
 
Residential Real Estate
 
2,519,814

 
2,618,003

 

Consumer Loans
 
218,232

 
225,732

 
2,600

Commercial Business
 
236,030

 
436,030

 

Commercial Real Estate
 
17,273,879

 
21,670,614

 
472,400

Total
 
$
20,247,955

 
$
24,950,379

 
$
475,000


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 March 31, 2015 and December 31, 2014 were $8.9 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).


21



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



7.    Loans Receivable, Net, Continued

The following table is a summary of loans restructured as TDRs during the periods indicated:
 
 
For the three months Ended March 31, 2015
 
For the three months Ended March 31, 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 Loans
 

 

 

 

 

 

Commercial Business
 

 

 

 

 

 

Commercial Real Estate
 
3

 
840,292

 
840,292

 

 

 

Total
 
3

 
$
840,292

 
$
840,292

 

 
$

 
$


During the three months ended March 31, 2015, the Bank modified three commercial real estate loans that were considered to be 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 months ended March 31, 2015, there were no loans in default that had been restructured within the last twelve months. During the three months ended March 31, 2014, two loans totaling $293,000 that had been previously restructured within the last twelve months defaulted. 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 previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is likely.  If a borrower was materially delinquent on payments prior to the restructuring but shows 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 loan terms before that loan can be placed back on accrual status.  In addition to this payment history, the borrower must demonstrate an ability to continue making payments on the loan prior to restoration of accrual status.

22



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



8. Regulatory Matters

The Federal Reserve and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for various risk weights.

In July 2013, the federal bank regulatory agencies issued final rules to revise their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Basel Ill"). On January 1, 2015, the Basel III rules became effective and include transition provisions which implement certain portions of the rules through January 1, 2019.

As a result beginning January 1, 2015, FDIC regulations require insured state-chartered banks, such as 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%. The CETI ratio is a new regulatory capital ratio required beginning for the quarter ended March 31, 2015. A “well-capitalized” institution must generally maintain capital ratios 200 bps higher than the minimum guidelines. Failure to meet the minimum regulatory capital requirements can lead to certain mandatory and discretionary actions by federal banking regulators that could have a material adverse effect on an institution's financial position.

The Federal Reserve requires Security Federal Corporation to maintain capital adequacy that generally parallels the FDIC requirements.  At March 31, 2015, Security Federal Corporation and Security Federal 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:

23



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



 
 
 
Actual
 
 
 
For Capital Adequacy
 
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in Thousands)
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
SECURITY FEDERAL CORP.
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)
$
86,920

 
23.0
%
 
$
22,700

 
6.0
%
 
N/A

 
N/A

Total Risk-Based Capital
(To Risk Weighted Assets)
91,688

 
24.2
%
 
30,267

 
8.0
%
 
N/A

 
N/A

Common Equity Tier 1 Capital (To Risk Weighted Assets)
59,920

 
15.8
%
 
17,025

 
4.5
%
 
N/A

 
N/A

Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)
86,920

 
10.7
%
 
32,481

 
4.0
%
 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
SECURITY FEDERAL BANK
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)
$
87,322

 
23.1
%
 
$
22,682

 
6.0
%
 
$
30,243

 
8.0
%
Total Risk-Based Capital
(To Risk Weighted Assets)
92,086

 
24.4
%
 
30,243

 
8.0
%
 
37,803

 
10.0
%
Common Equity Tier 1 Capital (To Risk Weighted Assets)
87,322

 
23.1
%
 
17,012

 
4.5
%
 
24,572

 
6.5
%
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)
87,322

 
10.8
%
 
32,471

 
4.0
%
 
40,589

 
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
%

24



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



9. 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 March 31, 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. 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 institutional 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.

25



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



9. 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 March 31, 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 March 31, 2015 and December 31, 2014, the recorded investment in impaired loans was $15.7 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 as of March 31, 2015:

 
 
Assets:
Quoted Market Price
In Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
FHLB Securities
$

 
$
6,302,131

 
$

FFCB Securities

 
1,985,022

 

FNMA Bonds

 
1,012,434

 

SBA Bonds

 
119,704,343

 

Tax Exempt Municipal Bonds

 
64,598,376

 

Mortgage-Backed Securities

 
240,589,509

 

Equity Securities

 
310,814

 

Total
$

 
$
434,502,629

 
$




26



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements




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

Assets measured at fair value on a recurring basis are as follows as of 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 as of March 31, 2015 and 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 as of March 31, 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 as of March 31, 2015 and December 31, 2014.
 
Assets:
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Balance At March 31, 2015
Mortgage Loans Held For Sale
 
$

 
$
1,878,844

 
$

 
$
1,878,844

Collateral Dependent Impaired Loans (1)
 

 

 
15,324,712

 
15,324,712

Foreclosed Assets
 

 

 
6,486,850

 
6,486,850

Total
 
$

 
$
1,878,844

 
$
21,811,562

 
$
23,690,406


(1) IMPAIRED LOANS ARE REPORTED NET OF SPECIFIC RESERVES OF $373,489  
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  








27



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements




9. 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 as of March 31, 2015, the significant unobservable inputs used in the fair value measurements were as follows:
 
Fair Value
 
 
 
Significant
 
 
 
March 31,
 
Valuation
 
Unobservable
 
 
 
2015
  
Technique
 
Inputs
 
Range
Collateral Dependent Impaired Loans
$
15,324,712

 
Appraised Value
  
Discount Rates/ Discounts to Appraised Values
  
0% - 70%
Foreclosed Assets
6,486,850

 
Appraised Value/Comparable Sales
 
Discount Rates/ Discounts to Appraised Values
 
 
12% - 79%

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.











28



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements




9. 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 as of March 31, 2015 and December 31, 2014 presented in accordance with the applicable accounting guidance.
 
March 31, 2015
 
Carrying
 
Fair Value
(In Thousands)
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash And Cash Equivalents
$
8,462

 
$
8,462

 
$
8,462

 
$

 
$

Certificates Of Deposits With Other Banks
2,095

 
2,095

 

 
2,095

 

Investment And Mortgage-Backed Securities
434,503

 
434,503

 

 
434,503

 

Loans Receivable, Net
332,058

 
332,120

 

 

 
332,120

FHLB Stock
2,196

 
2,196

 
2,196

 

 

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
  Checking, Savings, And Money Market
    Accounts
$
415,778

 
$
415,778

 
$
415,778

 
$

 
$

  Certificate Accounts
256,663

 
256,845

 

 
256,845

 

Advances From FHLB
34,200

 
35,978

 

 
35,978

 

Other Borrowed Money
10,340

 
10,340

 
10,340

 

 

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 March 31, 2015, the Bank had $46.1 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 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.  

29



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



9. 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.

10. 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 and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for

30



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



10. Accounting and Reporting Changes, Continued

as secured borrowings. The amendments will be effective for the Company for the first interim or annual period beginning after December 15, 2014. The Company will apply the guidance by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

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

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

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

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


11. 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.
 

31



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, 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;
our ability to pay dividends on our common stock and preferred stock;

32



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

adverse changes in the securities markets;
inability of key third-party providers to perform their obligations to us;
changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; and
other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this document.

Some of these and other factors are discussed in the Company's 2014 Form 10-K under Item 1A, “Risk Factors.” Such developments could have an adverse impact on our financial position and our results of operations.
 
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 March 31, 2015 and December 31, 2014

Assets
Total assets decreased $2.2 million or 0.3% to $823.1 million at March 31, 2015 from $825.4 million at December 31, 2014. The increases and decreases in total assets were primarily concentrated in the following asset categories:
 
 
 
 
 
 
 
Increase (Decrease)
 
 
March 31, 2015
 
December 31, 2014
 
 
Amount
 
Percent
Cash And Cash Equivalents
$
8,461,858

$
10,192,702

 
$
(1,730,844
)
 
(17.0)%
Investment And Mortgage-
   Backed Securities –
   Available For Sale
 
434,502,629

 
429,700,540

 
 
4,802,089

 
1.1
Loans Receivable, Net
 
332,058,427

 
339,874,495

 
 
(7,816,068
)
 
(2.3)
Other Real Estate Owned
 
6,486,850

 
3,229,710

 
 
3,257,140

 
100.8
FHLB Stock
 
2,196,100

 
3,144,600

 
 
(948,500
)
 
(30.2)
Other Assets
 
3,250,342

 
3,480,676

 
 
(230,334
)
 
(6.6)

Cash and cash equivalents decreased $1.7 million or 17.0% to $8.5 million at March 31, 2015 from $10.2 million at December 31, 2014. Investment and mortgage-backed securities available for sale increased $4.8 million or 1.1% to $434.5 million at March 31, 2015 from $429.7 million at December 31, 2014.

Loans receivable, net, decreased $7.8 million or 2.3% to $332.1 million at March 31, 2015 from $339.9 million at December 31, 2014. The decrease was a result of increased loan repayments combined with lower loan demand from creditworthy borrowers. Residential real estate loans decreased $1.2 million or 1.6% to $76.1 million at March 31, 2015 from $77.3 million at December 31, 2014. Consumer loans were $50.4 million at both March 31, 2015 and December 31, 2014. Commercial real estate loans decreased $4.9 million or 2.3% to $204.6 million at March 31, 2015 from $209.5 million at December 31, 2014. Commercial business loans decreased $1.7 million or 15.7% to $8.9 million at March 31, 2015 from $10.6 million at December 31, 2014. Loans held for sale remained unchanged with a balance of $1.9 million at both March 31, 2015 and December 31, 2014.

Other real estate owned ("OREO") increased $3.3 million or 100.8% to $6.5 million at March 31, 2015 from $3.2 million at December 31, 2014. The increase was due to 21 foreclosures during the quarter ended March 31, 2015 with a total book value of $3.6 million offset by OREO sales and writedowns of $206,000 and $124,000, respectively. At March 31, 2015, the OREO balance consisted of the following real estate properties: 25 single-family residences and 34 lots within residential subdivisions located

33



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

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.

FHLB stock decreased $949,000 or 30.2% to $2.2 million at March 31, 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 decreased $230,000 or 6.6% to $3.3 million at March 31, 2015 compared to $3.5 million at December 31, 2014 primarily as a result of a decrease in deferred taxes.

Liabilities
Deposit Accounts – The balances, weighted average rates and increases and decreases in deposit accounts were as follows:
 
 
March 31, 2015
 
December 31, 2014
 
Balance Increase (Decrease)
 
 

Balance
 
Weighted Rate
 

Balance
 
Weighted Rate
 

Amount
 

Percent
Demand Accounts:
 
 
 
 
 
 
 
 
 
 
 
 
Checking
$
151,711,065

 
0.03%
$
143,422,150

 
0.03%
$
8,288,915

 
5.78%
Money Market
 
234,453,345

 
0.16
 
234,819,052

 
0.19
 
(365,707
)
 
(0.16)
Statement Savings
   Accounts
 
29,613,905

 
0.10
 
28,622,933

 
0.10
 
990,972

 
3.46
Total
 
415,778,315

 
0.11
 
406,864,135

 
0.13
 
8,914,180

 
2.19
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificate Accounts:
 
 
 
 
 
 
 
 
 
 
 
 
0.00 – 1.99%
 
235,332,428

 
 
 
227,473,082

 
 
 
7,859,346

 
3.46
2.00 – 2.99%
 
21,330,814

 
 
 
25,605,349

 
 
 
(4,274,535)

 
(16.69)
3.00 – 3.99%
 

 
 
 
172,598

 
 
 
(172,598)

 
(100.00)
4.00 – 4.99%
 

 
 
 

 
 
 

 
5.00 – 5.99%
 

 
 
 

 
 
 

 
Total
 
256,663,242

 
0.75
 
253,251,029

 
0.79
 
3,412,213

 
1.35
Total Deposits
$
672,441,557

 
0.35%
$
660,115,164

 
0.38%
$
12,326,393

 
1.87%

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

Advances From FHLB – FHLB advances are summarized by contractual year of maturity and weighted average interest rate in the table below:
 
 
March 31, 2015
 
December 31, 2014
 
Balance Decrease
Fiscal Year Due:
 
Balance
Rate
 
Balance
Rate
 
Balance
 
Percent
2015
$
10,000,000

3.82%
$
15,000,000

2.61%
$
5,000,000

 
33.33%
2016
 
6,300,000

3.27
 
20,000,000

4.61
 
13,700,000

 
68.50
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
$
34,200,000

3.87%
$
52,900,000

3.87%
$
18,700,000

 
35.35%



34



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

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 $88.4 million and $88.1 million at March 31, 2015 and $99.9 million and $99.3 million at December 31, 2014, respectively. Advances are subject to prepayment penalties. During the quarter ended March 31, 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 March 31, 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 the funds on different terms, or convert the advance to a three-month floating rate advance tied to LIBOR.
As of March 31, 2015
Borrow Date
 
Maturity Date
 
Amount
 
Int. Rate
 
Type
 
Call Dates
11/23/05
 
11/23/15
$
5,000,000
 
3.930
%
 
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 $10.3 million and $8.5 million in other borrowings (non-FHLB advances) at March 31, 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 March 31, 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 $16.2 million and $16.9 million, respectively, at March 31, 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 1.97% at March 31, 2015. The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears. The Capital Securities mature or are mandatorily redeemable upon maturity on December 15, 2036, or upon earlier optional redemption as provided in the indenture. The Company has the right to redeem the Capital Securities in whole or in part.

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

Equity – Shareholders’ equity increased $1.4 million or 1.6% to $88.9 million at March 31, 2015 from $87.4 million at December 31, 2014. Accumulated other comprehensive income, net of tax, comprised entirely of unrealized gains on securities available for sale, net of tax, increased $279,000 or 5.1% to $5.8 million at March 31, 2015 from $5.5 million at December 31, 2014. The Company’s net income available for common shareholders was $1.4 million for the three months ended March 31, 2015, after payment of $110,000 in preferred stock dividends. The Board of Directors of the Company declared common stock dividends totaling $236,000 during the three months ended March 31, 2015. Book value per common share was $22.72 at March 31, 2015 and $22.23 at December 31, 2014.




35



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

Results of Operations for the Three Month Periods Ended March 31, 2015 and 2014

Net Income Available to Common Shareholders - Net income available to common shareholders increased $202,000 or 16.9% to $1.4 million or $0.47 per diluted common share for the three months ended March 31, 2015 compared to $1.2 million or $0.41 per diluted common share for the three months ended March 31, 2014. The increase in net income was primarily the result of increases in net interest income and non-interest income, offset by an increase in non-interest expense.

Net Interest Income - The net interest margin on a tax equivalent basis increased 19 basis points to 3.09% for the three months ended March 31, 2015 from 2.90% for the comparable period in 2014 as the decline in the average cost of interest-bearing liabilities outpaced the decline in the average yield earned on interest-earning assets. Net interest income increased $133,000 or 2.3% to $5.8 million during the three months ended March 31, 2015, compared to $5.6 million during the same period in 2014. During the three months ended March 31, 2015, average interest earning assets decreased $31.8 million or 4.0% to $763.0 million compared to $794.7 million for the same period in 2014, while average interest-bearing liabilities decreased $40.3 million or 5.7% to $670.3 million compared to $710.5 million for the same period in 2014.

Interest Income - Total tax equivalent interest income decreased $244,000 or 3.4% to $6.9 million during the three months ended March 31, 2015 from $7.2 million for 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 $326,000 or 6.7% to $4.5 million during the three months ended March 31, 2015 from $4.9 million during the comparable period in 2014. The decrease was a result of a $20.1 million decrease in the average loan portfolio balance combined with a decrease of six basis points in the loan yield to 5.38% for the quarter ended March 31, 2015 from 5.44% for the same period in 2014. Interest income from mortgage-backed securities increased $35,000 or 2.5% to $1.4 million as a result of a 20 basis point increase in the portfolio yield. Tax equivalent interest income from investment securities increased $48,000 or 5.1% to $985,000 as a result of an increase of nine basis points in the yield combined with an increase of $624,000 in the average balance of the investment securities portfolio.

The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the three months ended March 31, 2015 and 2014:
 
Three Months Ended March 31,
 
 
2015
 
2014
 
 
 
 
 



Average Balance
 




Yield(1)
 
 



Average Balance
 




Yield(1)
 
Increase (Decrease) In Interest And Dividend Income From 2014
 
Loans Receivable, Net
$
337,268,397
 
5.38
%
 
$
357,392,216

 
5.44
%
$
(326,293)

 
Mortgage-Backed Securities
 
234,037,658
 
2.43

 
 
249,268,862

 
2.23

 
35,235

 
Investment Securities(2)
 
185,573,875
 
2.39

 
 
184,949,653

 
2.30

 
47,805

 
Overnight Time And
   Certificates of Deposit
 
6,082,263
 
0.17

 
 
3,104,619

 
0.46

 
(1,018
)
 
Total Interest-Earning Assets
$
762,962,193
 
3.71
%
 
$
794,715,350

 
3.68
%
$
(244,271)

 
(1) Annualized
(2) Tax equivalent basis is calculated using an effective tax rate of 34% and amounted to $124,081 and $127,532 for the
quarters ended March 31, 2015 and 2014, respectively.

Interest Expense - Total interest expense decreased $377,000 or 24.3% to $1.2 million during the three months ended March 31, 2015 compared to $1.6 million for the same period last year. The decrease in total interest expense was attributable to decreases in interest rates paid and a $40.3 million decrease in the average balance of interest-bearing liabilities. Interest expense on deposits decreased $91,000 or 13.1% to $605,000 during the three months ended March 31, 2015 compared to $696,000 for the same period in 2014. The decrease was attributable to a six basis point decrease in the cost of deposit accounts combined with a $3.7 million or 0.6% decrease in average interest-bearing deposits to $607.5 million for the quarter ended March 31, 2015 when compared to $611.2 million for the quarter ended March 31, 2014. The largest decrease was in certificate accounts, which decreased $5.5 million or 2.1% to an average balance of $255.4 million during the three months ended March 31, 2015 compared to $260.9 million for the same period in 2014. The Bank has been competing less aggressively for time deposits in its local area and focusing instead on core deposits, or non time deposits.


36



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

Interest expense on FHLB advances and other borrowings decreased $286,000 or 40.4% to $422,000 during the three months ended March 31, 2015 from $708,000 for the same period in 2014. The average balance of FHLB advances and other borrowed money decreased $36.6 million or 41.5% to $51.5 million during the three months ended March 31, 2015 from $88.1 million for the same period last year. During the quarter ended March 31, 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 three months ended March 31, 2015 and 2014.
 
Three Months Ended March 31,
 
 
 
2015
 
2014
 
Increase (Decrease) In Interest Expense From 2014
 
 
Average Balance
 
Yield(1)
 
 
Average Balance
 
Yield(1)
 
Now And Money Market
   Accounts

$
323,136,179

 
0.23%
 
$
325,345,853

 
0.22%
$
(62,330
)
Statement Savings Accounts
 
28,913,643

 
0.10
 
 
24,889,448

 
0.10
 
993

Certificate Accounts
 
255,441,004

 
0.75
 
 
260,927,661

 
0.78
 
(29,636
)
FHLB Advances And
   Other Borrowed Money
 
51,521,204

 
3.27
 
 
88,136,130

 
3.21
 
(285,960
)
Junior Subordinated Debentures
 
5,155,000

 
1.95
 
 
5,155,000

 
1.94
 
63

Senior Convertible Debentures
 
6,084,000

 
8.00
 
 
6,084,000

 
8.00
 

Total Interest-Bearing Liabilities
$
670,251,030

 
0.70%
 
$
710,538,092

 
0.87%
$
(376,870
)
(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 loan portfolio based on historical trends and the risk inherent in each loan category. Previously, management applied a five year historical loss ratio to each loan category to estimate the inherent loss in these pooled loans. However, as a result of the decline in economic conditions and the unprecedented increases in delinquencies and charge offs experienced by the industry, the Company no longer considers five year historical losses relevant indicators of future losses. As a result, management began applying 12 to 24 month historical loss ratios to each loan category to more accurately project losses in the near future.

The second component of management’s monthly analysis is the specific review and evaluation of significant problem credits identified through the Company’s internal monitoring system. These loans are evaluated for impairment and recorded in accordance with 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.

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.


37



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

Annualized net charge-offs were $2.2 million or 0.64% of gross loans during the quarter ended March 31, 2015 compared to $2.0 million or 0.55% of gross loans for the same three month period in 2014. The provision for loan losses was $100,000 for the both the three months ended March 31, 2015 and 2014. The following table details selected activity associated with the allowance for loan losses for the quarters ended March 31, 2015 and 2014:

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Beginning Balance
$
8,357,496
$
10,241,970
Provision
 
100,000
 
100,000
Charge-offs
 
(619,014)
 
(777,575)
Recoveries
 
80,435
 
281,360
Ending Balance
$
7,918,917
$
9,845,755
 
 
 
 
 
Allowance For Loan Losses As A Percentage Of Gross Loans Receivable, Held For Investment At The End Of The Period
 
2.3%
 
2.7%
Allowance For Loan Losses As A Percentage Of Impaired Loans At
  The End Of The Period
 
50.4%
 
33.0%
Impaired Loans
$
15,698,201
$
29,828,194
Gross Loans Receivable, Held For Investment (1)
$
338,098,500
$
361,917,316
Total Loans Receivable, Net
$
332,058,427
$
354,981,296

(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 $1.1 million or 72.5% to $2.7 million for the quarter ended March 31, 2015, compared to $1.5 million for the quarter ended March 31, 2014. The following table provides a detailed analysis of the changes in the components of non-interest income:
 
Three Months Ended March 31,
 
Increase (Decrease)
 
 
2015
 
 
2014
 
 
Amounts
 
 
Percent
Gain On Sale Of Investments
$
1,486,939

 
$
84,356

 
$
1,402,583

 
 
1,662.7%
Gain On Sale Of Loans
 
154,019

 
 
128,242

 
 
25,777

 
 
20.1
Service Fees On Deposit Accounts
 
257,516

 
 
276,485

 
 
(18,969
)
 
 
(6.9)
Commissions From Insurance Agency
 
130,112

 
 
91,634

 
 
38,478

 
 
42.0
Bank Owned Life Insurance Income
 
87,000

 
 
205,827

 
 
(118,827
)
 
 
(57.7)
Trust Income
 
148,800

 
 
105,000

 
 
43,800

 
 
41.7
Check Card Fee Income
 
231,301

 
 
210,695

 
 
20,606

 
 
9.8
Grant Income
 

 
 
281,960

 
 
(281,960
)
 
 
(100.0)
Other
 
155,320

 
 
152,200

 
 
3,120

 
 
2.0
Total Non-Interest Income
$
2,651,007
 
$
1,536,399

 
$
1,114,608

 
 
72.5%

Gain on sale of investment securities was $1.5 million during the quarter ended March 31, 2015, an increase of $1.4 million or 1,662.7% compared to $84,000 for the same period last year. The net gain resulted from the sale of 32 investment securities during the quarter ended March 31, 2015 compared to the sale of nine investment securities during the same period in 2014.

Income from cash value of life insurance decreased $119,000 or 57.7% to $87,000 during the quarter ended March 31, 2015 from $206,000 for the same period in 2014. The Company did not receive any life insurance proceeds during the quarter ended March 31, 2015 compared to proceeds of $131,000 recognized during the same period in 2014.

38



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

There was no grant income received during the quarter ended March 31, 2015, compared to $282,000 received in the same period of 2014 in recognition of the Company's commitment to community development. The grant was received from the U.S. Treasury's Community Development Financial Institution's Fund in connection with the Company's participation in the U.S. Department of Treasury's Community Development Capital Initiative.

General And Administrative Expenses –For the quarter ended March 31, 2015, non-interest expense increased $928,000 or 17.4% to $6.3 million compared to $5.3 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:

 
Three Months Ended March 31,
 
Increase (Decrease)
 
 
2015
 
 
2014
 
 
Amounts
 
 
Percent
Compensation And Employee Benefits
$
2,987,031

 
$
2,847,002

 
$
140,029

 
 
4.9%
Occupancy
 
490,658

 
 
500,916

 
 
(10,258
)
 
 
(2.0)
Advertising
 
96,161

 
 
100,396

 
 
(4,235
)
 
 
(4.2)
Depreciation And Maintenance
Of Equipment
 
417,245

 
 
417,506

 
 
(261
)
 
 
(0.1)
FDIC Insurance Premiums
 
160,221

 
 
185,457

 
 
(25,236
)
 
 
(13.6)
Amortization of Intangibles
 

 
 
11,970

 
 
(11,970
)
 
 
(100.0)
Net Cost Of Operation Of Other Real
Estate Owned
 
196,624

 
 
269,096

 
 
(72,472
)
 
 
(26.9)
Prepayment Penalties on FHLB Advances
 
787,851

 
 

 
 
787,851

 
 
100.0
Other
 
1,118,804

 
 
994,336

 
 
124,468

 
 
12.5
Total General And Administrative
   Expenses

$
6,254,595

 
$
5,326,679

 
$
927,916

 
 
17.4%

Compensation and employee benefits expenses increased $140,000, or 4.9% to $3.0 million for the quarter ended March 31, 2015 compared to $2.8 million during the same period in 2014. FDIC insurance premiums decreased $25,000 or 13.6% to $160,000 for the quarter ended March 31, 2015 compared to $185,000 for the quarter ended March 31, 2014.

The Company incurred a prepayment penalty of $788,000 for paying down FHLB advances during the three months ended March 31, 2015. The Company elected to prepay these higher rate advances to lower cost of funds. The Company did not prepay any advances during the three months ended March 31, 2014.

Other expenses increased $124,000, or 12.5% to $1.1 million for the quarter ended March 31, 2015 compared to $994,000 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 increased $117,000 or 26.0% to $568,000 for the three months ended March 31, 2015 from $451,000 for the same period one year ago. Income before income taxes was $2.1 million and $1.8 million for the three months ended March 31, 2015 and 2014, respectively. The Company’s combined federal and state effective income tax rate for the current quarter was 27.4% compared to 25.7% for the same quarter one year ago.



39



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 three months ended March 31, 2015 loan repayments exceeded loan disbursements resulting in a $7.8 million or 2.3% decrease in total net loans receivable. During the three months ended March 31, 2015, deposits increased $12.3 million and FHLB advances decreased $18.7 million. The Bank had $213.3 million in additional borrowing capacity at the FHLB at the end of the period. At March 31, 2015, the Bank had $153.1 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 March 31, 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 23.1%, 10.8%, 23.1%, and 24.4%, respectively. To be categorized as “well capitalized” under the prompt corrective action provisions the Bank must maintain minimum CET1, total risk based capital, Tier 1 risk based capital and Tier 1 leverage capital ratios of 6.5%, 10.0%, 8.0% and 5.0%, respectively. e Bank must maintain minimum total risk based, Tier 1 risk based, common equity Tier 1 capital, and Tier 1 leverage ratios of 10.0%, 8.0%, 6.5% 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 15.8%, 10.7%, 23.0%, and 24.2%, respectively, as of March 31, 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 March 31, 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
$
681

 
$
2,602

 
$
12,461

 
$
15,744

 
$
29,598

 
$
45,342

Standby Letters Of Credit

 
510

 
270

 
780

 
23

 
803

Total
$
681

 
$
3,112

 
$
12,731

 
$
16,524

 
$
29,621

 
$
46,145



40


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 months ended March 31, 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 3.01%.

41


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 March 31, 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 March 31, 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.

42


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

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)

43


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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 March 31, 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.
(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.




44



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements




Signatures

Pursuant to the requirement 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:
May 13, 2015
 
By:
/s/J. Chris Verenes
 
J. Chris Verenes
 
Chief Executive Officer
 
Duly Authorized Representative

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









45


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 March 31, 2015, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements




46