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EX-31.1 - EXHIBIT 31.1 - SECURITY FEDERAL CORPsfdl-20140630xex311.htm
EXCEL - IDEA: XBRL DOCUMENT - SECURITY FEDERAL CORPFinancial_Report.xls
EX-32 - EXHIBIT 32 - SECURITY FEDERAL CORPsfdl-20140630xex32.htm
EX-31.2 - EXHIBIT 31.2 - SECURITY FEDERAL CORPsfdl-20140630xex312.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 – Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2014
( ) 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, WEST, 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
 
August 13, 2014
 
2,944,001
 




 
 
 
 
PART I.
FINANCIAL INFORMATION (UNAUDITED)
 
PAGE NO.
Item 1.
Financial Statements:
 
3
 
Consolidated Balance Sheets at June 30, 2014 (Unaudited) and December 31, 2013
 
3
 
Consolidated Statements of Income (Unaudited) for the Three and Six Months Ended June 30, 2014 and 2013
 
4
 
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the Three and Six Months Ended June 30, 2014 and 2013
 
5
 
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the Six Months Ended June 30, 2014 and 2013
 
6
 
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2014 and 2013
 
7
 
Notes to Consolidated Financial Statements
 
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
33
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
46
Item 4.
Controls and Procedures
 
47
 
 
 
 
PART II.
OTHER INFORMATION
 
 
Item 1.
Legal Proceedings
 
47
Item 1A.
Risk Factors
 
49
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
49
Item 3.
Defaults Upon Senior Securities
 
49
Item 4.
Mine Safety Disclosures
 
49
Item 5.
Other Information
 
49
Item 6.
Exhibits
 
47
 
Signatures
 
50
 
 
 
 

SCHEDULES OMITTED

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





SECURITY FEDERAL CORPORATION AND SUBSIDIARIES


Part 1. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
 
June 30, 2014
 
December 31, 2013
ASSETS:
 
 
 
Cash And Cash Equivalents
$
12,531,186

 
$
7,629,771

Certificates Of Deposit With Other Banks
2,095,000

 
2,100,395

Investment And Mortgage-Backed Securities:
 
 
 
Available For Sale  (Amortized Cost Of $428,932,644 And $430,241,854 At June 30, 2014 And December 31, 2013, Respectively)
436,810,833

 
431,003,452

Loans Receivable, Net:
 
 
 
Held For Sale
1,384,240

 
1,234,158

Held For Investment  (Net Of Allowance Of $9,112,157 and $10,241,970 At June 30, 2014 And December 31, 2013, Respectively)
345,221,173

 
357,682,507

Total Loans Receivable, Net
346,605,413

 
358,916,665

Accrued Interest Receivable:
 
 
 
Loans
949,305

 
1,031,747

Mortgage-Backed Securities
725,498

 
732,100

Investment Securities
1,504,633

 
1,393,156

Total Accrued Interest Receivable
3,179,436

 
3,157,003

Premises And Equipment, Net
18,485,846

 
17,243,390

Federal Home Loan Bank ("FHLB") Stock, At Cost
4,573,120

 
5,016,600

Repossessed Assets Acquired In Settlement Of Loans
4,131,265

 
3,947,226

Bank Owned Life Insurance
11,000,045

 
11,474,305

Intangible Assets, Net

 
11,970

Goodwill
1,199,754

 
1,199,754

Other Assets
3,709,901

 
7,547,528

Total Assets
$
844,321,799

 
$
849,248,059

LIABILITIES AND SHAREHOLDERS’ EQUITY:
 
 
 
Liabilities:
 
 
 
Deposit Accounts
$
658,423,773

 
$
658,696,772

Advances From FHLB
75,152,312

 
87,740,058

Other Borrowings
9,358,367

 
8,002,739

Junior Subordinated Debentures
5,155,000

 
5,155,000

Advance Payments By Borrowers For Taxes And Insurance
496,259

 
255,364

Senior Convertible Debentures
6,084,000

 
6,084,000

Other Liabilities
5,150,311

 
5,324,046

Total Liabilities
759,820,022

 
771,257,979

Shareholders' Equity:
 
 
 
Serial Preferred Stock, $.01 Par Value; Authorized 200,000 Shares; Issued And Outstanding, 22,000 Shares At June 30, 2014 And December 31, 2013, Respectively
22,000,000

 
22,000,000

Common Stock, $.01 Par Value; Authorized 5,000,000 Shares; Issued 3,144,934 Shares At June 30, 2014 And At December 31, 2013, Respectively
31,449

 
31,449

Additional Paid-In Capital
11,984,475

 
11,978,137

Treasury Stock, At Cost (200,933 Shares At June 30, 2014 And December 31, 2013, Respectively)
(4,330,712
)
 
(4,330,712
)
Accumulated Other Comprehensive Income
4,889,470

 
472,406

Retained Earnings
49,927,095

 
47,838,800

Total Shareholders' Equity
84,501,777

 
77,990,080

Total Liabilities And Shareholders' Equity
$
844,321,799

 
$
849,248,059

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

3


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Interest Income:
 
 
 
 
 
 
 
 
Loans
 
$
4,920,562

 
$
5,524,185

 
$
9,784,050


$
11,109,071

Mortgage-Backed Securities
 
1,640,016

 
1,221,271

 
3,029,134


2,582,447

Investment Securities
 
1,073,905

 
932,545

 
2,011,206


1,688,416

Other
 
2,457

 
1,707

 
6,025


4,043

Total Interest Income
 
7,636,940

 
7,679,708

 
14,830,415


15,383,977

Interest Expense:
 
 
 
 
 
 

 
NOW And Money Market Accounts
 
128,974

 
211,968

 
309,733


444,056

Statement Savings Accounts
 
6,589

 
9,724

 
12,716


20,788

Certificate Accounts
 
500,307

 
674,138

 
1,009,102


1,414,013

FHLB Advances And Other Borrowed Money
 
724,577

 
915,786

 
1,432,292


1,898,891

Senior Convertible Debentures
 
121,680

 
121,680

 
243,360


243,360

Junior Subordinated Debentures
 
25,187

 
25,787

 
50,202


51,597

Total Interest Expense
 
1,507,314

 
1,959,083

 
3,057,405


4,072,705

Net Interest Income
 
6,129,626

 
5,720,625

 
11,773,010


11,311,272

Provision For Loan Losses
 
100,000

 
900,000

 
200,000


2,045,381

Net Interest Income After Provision For Loan Losses
 
6,029,626

 
4,820,625

 
11,573,010


9,265,891

Non-Interest Income:
 
 
 
 
 
 

 
Gain (Loss) On Sale Of Investment Securities
 
(39,485
)
 
369,729

 
44,871


753,780

Gain On Sale Of Loans
 
218,288

 
210,840

 
346,530


395,628

Service Fees On Deposit Accounts
 
284,071

 
278,263

 
560,556


542,094

Commissions From Insurance Agency
 
109,229

 
104,649

 
200,863


244,962

Trust Income
 
141,000

 
135,000

 
246,000


270,000

Bank Owned Life Insurance Income
 
198,537

 
78,000

 
404,364


183,000

Check Card Fee Income
 
233,861

 
222,929

 
444,556


418,122

Community Development Financial Institution ("CDFI") Financial Award Income
 
17,750

 
220,071

 
299,710


636,071

Other
 
168,687

 
123,422

 
320,887


244,228

Total Non-Interest Income
 
1,331,938

 
1,742,903

 
2,868,337


3,687,885

Non-Interest Expense:
 
 
 
 
 
 


Compensation And Employee Benefits
 
2,836,547

 
2,768,450

 
5,683,549


5,589,825

Occupancy
 
474,836

 
487,664

 
975,752


962,978

Advertising
 
142,863

 
70,088

 
243,259


177,731

Depreciation And Maintenance Of Equipment
 
393,270

 
369,760

 
810,776


808,932

Federal Deposit Insurance Corporation ("FDIC") Insurance Premiums
 
178,785

 
196,476

 
364,242


364,198

Amortization Of Intangibles
 

 
12,501

 
11,970


25,002

Net Cost Of Operation Of Other Real Estate Owned
 
254,474

 
341,392

 
523,570


737,761

Prepayment Penalties on FHLB Advances
 

 
85,089

 


238,342

Other
 
1,035,848

 
1,060,192

 
2,030,184


1,999,727

Total General And Administrative Expenses
 
5,316,623

 
5,391,612

 
10,643,302


10,904,496

Income Before Income Taxes
 
2,044,941

 
1,171,916

 
3,798,045


2,049,280

Provision For Income Taxes
 
568,125

 
293,354

 
1,018,709


499,349

Net Income
 
1,476,816

 
878,562

 
2,779,336


1,549,931

Preferred Stock Dividends
 
110,000

 
110,000

 
220,000


220,000

Net Income Available To Common Shareholders
 
$
1,366,816

 
$
768,562

 
$
2,559,336


$
1,329,931

Net Income Per Common Share (Basic)
 
$
0.46

 
$
0.26

 
$
0.87


$
0.45

Net Income Per Common Share (Diluted)
 
$
0.44

 
$
0.26

 
$
0.83


$
0.45

Cash Dividend Per Share On Common Stock
 
$
0.08

 
$
0.08

 
$
0.16


$
0.16

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

 
2,944,001

 
2,944,001


2,944,001

Weighted Average Shares Outstanding (Diluted)
 
3,248,201

 
2,944,001

 
3,248,201


2,944,001

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

4


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

 
 
Three Months Ended June 30,
 
 
2014
 
2013
Net Income
 
$
1,476,816

 
$
878,562

Other Comprehensive Income (Loss)
 
 
 
 
Unrealized Gains (Losses) On Securities:
 
 
 
 
Unrealized Holding Gains (Losses) On Securities Available For Sale, Net Of Taxes Of $1,668,413 And $2,805,077 At June 30, 2014 And 2013, Respectively
 
2,697,666

 
(4,578,780
)
Reclassification Adjustment For (Gains) Losses Included In Net Income, Net Of Taxes Of $(15,004) And $140,497 At June 30, 2014 And 2013, Respectively
 
24,481

 
(229,232
)
Held To Maturity Transfer To Available For Sale, Net Of Taxes of $0 and $530,733 at June 30, 2014 and 2013, Respectively
 

 
865,933

Other Comprehensive Income (Loss)
 
2,722,147

 
(3,942,079
)
Comprehensive Income (Loss)
 
$
4,198,963

 
$
(3,063,517
)


 
 
Six Months Ended June 30,
 
 
2014
 
2013
Net Income
 
$
2,779,336

 
$
1,549,931

Other Comprehensive Income (Loss)
 
 
 
 
Unrealized Gains (Losses) On Securities:
 
 
 
 
Unrealized Holding Gains (Losses) On Securities Available For Sale, Net Of Taxes Of $2,707,233 And $3,363,779 At June 30, 2014 And 2013, Respectively
 
4,444,884

 
(5,490,354
)
Reclassification Adjustment For Gains Included In Net Income, Net Of Taxes Of $17,051 And $286,437 At June 30, 2014 And 2013, Respectively
 
(27,820
)
 
(467,343
)
Held To Maturity Transfer To Available For Sale, Net Of Taxes of $0 and $530,733 at June 30, 2014 and 2013, Respectively
 

 
865,933

Other Comprehensive Income (Loss)
 
4,417,064

 
(5,091,764
)
Comprehensive Income (Loss)
 
$
7,196,400

 
$
(3,541,833
)





SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


5


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
For the Six Months Ended June 30, 2014 and 2013

 
 
 
Preferred
 Stock
 
 
 
 
Warrants
 
 
 
Common
Stock
 
 
Additional
Paid – In
 Capital
 
 
 
Treasury
Stock
 
Accumulated
Other
 Comprehensive Income
 
 
 
Retained
Earnings
 
 
 
 
Total
Balance at December 31, 2012
$
22,000,000

 
$
400,000

 
$
31,449

 
$
11,630,717

 
$
(4,330,712
)
 
$
7,431,310

 
$
45,429,720

 
$
82,592,484

Net Income

 

 

 

 

 

 
1,549,931

 
1,549,931

Other Comprehensive Loss, Net Of Tax

 

 

 

 

 
(5,091,764
)
 

 
(5,091,764
)
Stock Option Compensation Expense

 

 

 
(8,919
)
 

 

 

 
(8,919
)
Cash Dividends On  Preferred

 

 

 

 

 

 
(220,000
)
 
(220,000
)
Cash Dividends On Common

 

 

 

 

 

 
(471,041
)
 
(471,041
)
Balance at June 30, 2013
$
22,000,000

 
$
400,000

 
$
31,449

 
$
11,621,798

 
$
(4,330,712
)
 
$
2,339,546

 
$
46,288,610

 
$
78,350,691



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

 
$
31,449

 
$
11,978,137

 
$
(4,330,712
)
 
$
472,406

 
$
47,838,800

 
$
77,990,080

Net Income

 

 

 

 

 
2,779,336

 
2,779,336

Other Comprehensive Income, Net Of Tax

 

 

 

 
4,417,064

 

 
4,417,064

Stock Option Compensation Expense

 

 
6,338

 

 

 

 
6,338

Cash Dividends On  Preferred

 

 

 

 

 
(220,000
)
 
(220,000
)
Cash Dividends On Common

 

 

 

 

 
(471,041
)
 
(471,041
)
Balance at June 30, 2014
$
22,000,000

 
$
31,449

 
$
11,984,475

 
$
(4,330,712
)
 
$
4,889,470

 
$
49,927,095

 
$
84,501,777


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

6


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
 
Six Months Ended June 30,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
2,779,336

 
$
1,549,931

Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
 
 
 
Depreciation Expense
591,422

 
645,468

Amortization Of Intangible Assets
11,970

 
25,002

Stock Option Compensation (Benefit) Expense
6,338

 
(8,919
)
Discount Accretion And Premium Amortization
2,688,258

 
3,848,810

Provisions For Losses On Loans
200,000

 
2,045,381

Income Accrued On Bank Owned Life Insurance
(150,000
)
 
(183,000
)
Gain On Sales Of Loans
(346,530
)
 
(395,628
)
Gain On Sales Of Mortgage-Backed Securities
(254,538
)
 
(384,051
)
(Gain) Loss On Sales Of Investment Securities
209,667

 
(369,729
)
Gain On Sale Of Real Estate Owned
(64,723
)
 
(991
)
Write Down On Real Estate Owned
405,000

 
574,378

Amortization Of Deferred Fees On Loans
9,345

 
(3,335
)
Proceeds From Sale Of Loans Held For Sale
12,328,927

 
17,376,516

Origination Of Loans Held For Sale
(12,132,479
)
 
(15,685,061
)
(Increase) Decrease In Accrued Interest Receivable:
 
 
 
Loans
82,442

 
(26,295
)
Mortgage-Backed Securities
6,602

 
96,245

Investment Securities
(111,477
)
 
(273,802
)
Increase In Advance Payments By Borrowers
240,895

 
304,934

Other, Net
969,761

 
1,736,408

Net Cash Provided By Operating Activities
7,470,216

 
10,872,262

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
  Purchase Of Mortgage-Backed Securities Available For Sale
(38,071,908
)
 
(48,748,823
)
  Principal Repayments On Mortgage-Backed Securities Available For Sale
15,842,466

 
31,690,621

  Principal Repayments On Mortgage-Backed Securities Held To Maturity

 
942,806

Purchase Of Investment Securities Available For Sale
(18,395,226
)
 
(39,548,282
)
Maturities Of Investment Securities Available For Sale
11,985,537

 
8,692,353

Purchase of Investment Securities Held To Maturity

 
(1,000,000
)
Maturities Of Investment Securities Held To Maturity

 
3,501,978

  Proceeds From Sale of Investment Securities Available For Sale
13,953,153

 
10,875,010

  Proceeds From Sale of Mortgage-Backed Securities Available For Sale
13,351,800

 
20,946,735

Proceeds From Redemption of Certificates Of Deposits With Other Banks

 
250,000

Purchase Of FHLB Stock
(3,671,300
)
 
(2,165,206
)
Redemption Of FHLB Stock
4,114,780

 
3,156,006

Proceeds From Bank Owned Life Insurance
624,260

 

Decrease In Loans Receivable
11,213,029

 
17,536,325

Proceeds From Sale Of Repossessed Assets
514,644

 
4,182,107

Purchase And Improvement Of Premises And Equipment
(1,833,878
)
 
(419,894
)
Proceeds From Sale of Premises and Equipment

 
1,250

Net Cash Provided By Investing Activities
9,627,357

 
9,892,986


7


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited) (Continued)
Six Months Ended June 30,
 
2014
 
2013
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Decrease In Deposit Accounts
$
(272,999
)
 
$
(5,256,308
)
Proceeds From FHLB Advances
141,215,000

 
60,900,000

Repayment Of FHLB Advances
(153,802,746
)
 
(74,608,520
)
Increase in Other Borrowings, Net
1,355,628

 
322,568

Dividends To Preferred Stock Shareholders
(220,000
)
 
(220,000
)
Dividends To Common Stock Shareholders
(471,041
)
 
(471,041
)
Net Cash Used By Financing Activities
(12,196,158
)
 
(19,333,301
)
Net Increase In Cash And Cash Equivalents
4,901,415

 
1,431,947

Cash And Cash Equivalents At Beginning Of Period
7,629,771

 
7,903,950

Cash And Cash Equivalents At End Of Period
$
12,531,186

 
$
9,335,897

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash Paid During The Period For:
 
 
 
Interest
$
3,089,937

 
$
4,164,419

Income Taxes
$
180,350

 
$
68,419

Supplemental Schedule Of Non Cash Transactions:
 
 
 
Transfers From Loans Receivable To Other Real Estate Owned
$
1,038,960

 
$
2,782,523

Transfers From Investment Securities Held To Maturity To Available For Sale
$

 
$
49,907,323

Transfers From Mortgage-Backed Securities Held To Maturity To Available For Sale
$

 
$
22,100,000

 
 
 
 

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 financial statements appearing in Security Federal Corporation’s (the “Company”) 2013 Annual Report to Shareholders which was filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2013 (“2013 10-K”) when reviewing interim financial statements.  The Company changed its fiscal year from March 31 to December 31 effective January 17, 2013. The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the entire fiscal year.

2. Principles of Consolidation

The accompanying 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, health, and home insurance.  SFINS has a wholly owned subsidiary, Collier Jennings Financial Corporation which has as subsidiaries Security Federal Insurance Technologies, Inc. and Security Federal Premium Pay Plans Inc. (the “Collier Jennings Companies”). 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, 2013 included in our 2013 Annual Report to Shareholders.  Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, and, as such, have a greater possibility of producing results that could be materially different than originally reported.  We consider these accounting policies to be critical accounting policies.  The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances.  Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

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

9



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



3. Critical Accounting Policies, Continued

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

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

4. Earnings Per Common Share

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

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

The following table provides a reconciliation of net income to net income available to common shareholders for the periods presented:
  
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Earnings Available To Common Shareholders:
 
 
 
 
 
 
 
Net Income

$1,476,816

 

$878,562

 

$2,779,336

 

$1,549,931

Preferred Stock Dividends
110,000

 
110,000

 
220,000

 
220,000

Net Income Available To Common Shareholders

$1,366,816

 

$768,562

 

$2,559,336

 

$1,329,931


10



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements




4. Earnings Per Common Share, Continued

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

 
For the Three Months Ended June 30, 2014
 
For the Six Months Ended June 30, 2014
 
Income
 
Shares
 
Per Share Amounts
 
Income
 
Shares
 
Per Share Amounts
Basic EPS

$1,366,816

 
2,944,001

 

$0.46

 

$2,559,336

 
2,944,001

 

$0.87

Effect of Dilutive Securities:
 
 
 
 
 
 
 
 
 
 
 
Senior Convertible Debentures
75,422

 
304,200

 
(0.02)

 
150,883

 
304,200

 
(0.04)

Diluted EPS

$1,442,238

 
3,248,201

 

$0.44

 

$2,710,219

 
3,248,201

 

$0.83


There were no dilutive securities or options for the three and six months ended June 30, 2013, therefore no reconciliation is provided for these periods.

5. Stock-Based Compensation

Certain officers and directors of the Company participate in an incentive and non-qualified stock option plan. Options are granted at exercise prices not less than the fair value of the Company’s common stock on the date of the grant. The following is a summary of the activity under the Company’s stock option plans for the periods presented:
 
Three Months Ended June 30,
 
2014
 
2013
 
Shares
 
Weighted Average Exercise Price
 
Shares
 
Weighted Average Exercise Price
 
 
 
 
Balance, Beginning of Period
50,500

 
$22.49
 
68,400

 
$22.63
Options Granted

 
 

 
Options Exercised

 
 

 
Options Forfeited
(3,000
)
 
23.83
 

 
Balance, End Of Period
47,500

 
$22.41
 
68,400

 
$22.63

 
Six Months Ended June 30,
 
2014
 
2013
 
Shares
 
Weighted Average Exercise Price
 
Shares
 
Weighted Average Exercise Price
 
 
 
 
Balance, Beginning of Period
61,500

 
$22.49
 
68,400

 
$22.63
Options Granted

 
 

 
Options Exercised

 
 

 
Options Forfeited
(14,000
)
 
22.74
 

 
Balance, End Of Period
47,500

 
$22.41
 
68,400

 
$22.63
 
 
 
 
 
 
 
 
Options Exercisable
32,600

 
 
 
47,500

 
 
 
 
 
 
 
 
 
 
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 June 30, 2014, the Company had the following options outstanding:
 
 
 
 
 
 
 
Grant Date
 
Outstanding Options
 
Option Price
 
Expiration Date
 
 
 
 
 
 
 
01/01/05
 
18,000
 
$20.55
 
12/31/14
 
 
 
 
 
 
 
01/01/06
 
3,500
 
$23.91
 
01/01/16
 
 
 
 
 
 
 
08/24/06
 
3,500
 
$23.03
 
08/24/16
 
 
 
 
 
 
 
05/24/07
 
2,000
 
$24.34
 
05/24/17
 
 
 
 
 
 
 
07/09/07
 
1,000
 
$24.61
 
07/09/17
 
 
 
 
 
 
 
10/01/07
 
2,000
 
$24.28
 
10/01/17
 
 
 
 
 
 
 
01/01/08
 
13,000
 
$23.49
 
01/01/18
 
 
 
 
 
 
 
05/19/08
 
2,500
 
$22.91
 
05/19/18
 
 
 
 
 
 
 
07/01/08
 
2,000
 
$22.91
 
07/01/18

None of the options outstanding at June 30, 2014 or 2013 had an exercise price below the average market price during the three or six month periods ended June 30, 2014 or 2013. Therefore, these options were not deemed to be dilutive to earnings per share in those periods.

6. Stock Warrants

In conjunction with its participation in the U.S. Department of the Treasury’s (“U.S. Treasury”) Capital Purchase Program, the Company sold a warrant to the U.S. Treasury to purchase 137,966 shares of the Company’s common stock at $19.57 per share. The warrant had a 10-year term and was immediately exercisable upon issuance.

On July 31, 2013, the Company repurchased its outstanding warrant at a fair market value of $50,000 from the U.S. Treasury. As a result of the transaction the warrant was canceled which reduced warrants outstanding by $400,000 and increased additional paid in capital by $350,000.

12



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



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

The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment and mortgage-backed securities available for sale are as follows:
 
June 30, 2014
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair value
FHLB Securities
$
14,325,249

 
$
100,255

 
$
421,073

 
$
14,004,431

Federal Farm Credit Bank ("FFCB") Securities
5,750,000

 

 
137,495

 
5,612,505

Fannie Mae ("FNMA") And Freddie Mac ("FHLMC") Bonds
996,457

 
791

 

 
997,248

Small Business Administration
   (“SBA”) Bonds
95,497,940

 
1,822,916

 
271,402

 
97,049,454

Tax Exempt Municipal Bonds
58,330,018

 
1,776,888

 
352,949

 
59,753,957

Mortgage-Backed Securities
253,775,042

 
6,812,674

 
1,499,478

 
259,088,238

Equity Securities
257,938

 
47,062

 

 
305,000

 
$
428,932,644

 
$
10,560,586

 
$
2,682,397

 
$
436,810,833

 
 
 
 
 
 
 
 
 
December 31, 2013
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair value
FHLB Securities
$
13,538,723

 
$
25,695

 
$
893,968

 
$
12,670,450

FFCB Securities
5,750,000

 

 
383,820

 
5,366,180

FNMA And FHLMC Bonds
1,993,473

 

 
18,543

 
1,974,930

SBA Bonds
99,228,708

 
1,914,720

 
319,443

 
100,823,985

Tax Exempt Municipal Bonds
63,590,959

 
410,151

 
2,685,988

 
61,315,122

Mortgage-Backed Securities
245,882,053

 
5,843,365

 
3,128,883

 
248,596,535

Equity Securities
257,938

 

 
1,688

 
256,250

 
$
430,241,854

 
$
8,193,931

 
$
7,432,333

 
$
431,003,452


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 GNMA mortgage-backed securities, which are also backed by the full faith and credit of the United States government.  At June 30, 2014 the Bank held an amortized cost and fair value of $172.6 million and $177.2 million, respectively, in GNMA mortgage-backed securities included in mortgage-backed securities listed above compared to an amortized cost and fair value of $170.4 million and $173.5 million, respectively, at December 31, 2013. 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



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

The amortized cost and fair value of investment and mortgage-backed securities available for sale at June 30, 2014 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
$
321,151

 
$
328,913

One – Five Years
12,647,153

 
12,876,501

Over Five – Ten Years
72,912,189

 
73,784,671

More Than Ten Years
89,277,109

 
90,732,510

Mortgage-Backed Securities
253,775,042

 
259,088,238

 
$
428,932,644

 
$
436,810,833


At June 30, 2014 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 $129.0 million and $132.8 million, respectively, compared to an amortized cost and fair value of $118.3 million and $121.1 million, respectively at December 31, 2013.

The Bank received $13.4 million and $10.9 million in gross proceeds from sales of available for sale securities during the three months ended June 30, 2014 and 2013, respectively. As a result, the Bank recognized gross gains of $168,000 and $370,000 respectively, and gross losses of $207,000 and zero respectively, for the three months ended June 30. 2014 and 2013.

The Bank received $27.3 million and $31.8 million in gross proceeds from sales of available for sale securities during the six months ended June 30, 2014 and 2013, respectively. As a result, the Bank recognized gross gains of $477,000 and $754,000, respectively, and gross losses of $432,000 and zero, respectively, for the six months ended June 30, 2014 and 2013.

The following tables show gross unrealized losses and fair value, aggregated by investment category, and length of time that the individual available for sale securities have been in a continuous unrealized loss position at the dates indicated.
 
June 30, 2014
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
FHLB Securities
$

 
$

 
$
7,577,335

 
$
421,073

 
$
7,577,335

 
$
421,073

FFCB Securities
4,634,994

 
115,006

 
977,511

 
22,489

 
5,612,505

 
137,495

SBA Bonds
15,275,676

 
132,635

 
7,622,202

 
138,767

 
22,897,878

 
271,402

Tax Exempt Municipal Bond
4,442,890

 
44,641

 
19,923,138

 
308,308

 
24,366,028

 
352,949

Mortgage-Backed Securities
39,386,204

 
1,187,371

 
22,734,106

 
312,107

 
62,120,310

 
1,499,478

 
$
63,739,764

 
$
1,479,653

 
$
58,834,292

 
$
1,202,744

 
$
122,574,056

 
$
2,682,397


14



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



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

 
December 31, 2013
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
FHLB Securities
$
10,288,110

 
$
651,608

 
$
1,757,640

 
$
242,360

 
$
12,045,750

 
$
893,968

FFCB Securities
4,435,070

 
314,930

 
931,110

 
68,890

 
5,366,180

 
383,820

FNMA Bonds
1,974,930

 
18,543

 

 

 
1,974,930

 
18,543

SBA Bonds
12,183,961

 
288,678

 
3,541,453

 
30,765

 
15,725,414

 
319,443

Tax Exempt Municipal Bond
39,848,206

 
2,556,014

 
2,008,272

 
129,974

 
41,856,478

 
2,685,988

Mortgage-Backed Securities
88,516,030

 
2,756,216

 
6,436,369

 
372,667

 
94,952,399

 
3,128,883

Equity Securities

 

 
101,250

 
1,688

 
101,250

 
1,688

 
$
157,246,307

 
$
6,585,989

 
$
14,776,094

 
$
846,344

 
$
172,022,401

 
$
7,432,333


Securities classified as available for sale are recorded at fair market value.  At both June 30, 2014 and December 31, 2013, 11.4% of the unrealized losses, representing 38 and 11 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.

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

On June 30, 2013, the Company transferred all of its investment and mortgage-backed securities classified as held to maturity to available for sale. Based on changes in the current rate environment, management elected this change in an effort to more effectively manage the investment portfolio, including subsequently selling some securities that were formerly classified as held to maturity. The amortized cost of the securities that were transferred totaled $72.0 million and the net unrealized gain related to these securities totaled $1.4 million on the date of the transfer. As a result of the transfer and subsequent sales, the Company believes it has tainted its held to maturity classification and judgment will be required in the future in determining when circumstances have changed such that management can assert with a great degree of credibility that it has the intent and ability to hold debt securities to maturity.








15



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



9.    Loans Receivable, Net

Loans receivable, net, consisted of the following as of the dates shown:
 
 
 
 
 
June 30, 2014
 
December 31, 2013
Residential Real Estate Loans
$
78,147,843

 
$
83,004,482

Consumer Loans
50,497,661

 
52,205,901

Commercial Business
8,964,667

 
7,775,098

Commercial Real Estate
219,384,091

 
228,399,555

Total Loans Held For Investment
356,994,262

 
371,385,036

Loans Held For Sale
1,384,240

 
1,234,158

Total Loans Receivable, Gross
358,378,502

 
372,619,194

Less:
 
 
 
Allowance For Loan Losses
9,112,157

 
10,241,970

Loans In Process
2,649,601

 
3,465,072

Deferred Loan Fees (Costs)
11,331

 
(4,513
)
 
11,773,089

 
13,702,529

Total Loans Receivable, Net
$
346,605,413

 
$
358,916,665


Changes in the allowance for loan losses for the three and six months ended June 30, 2014 and 2013 are summarized as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Balance At Beginning Of Period
$
9,845,755

 
$
11,105,226

 
$
10,241,970

 
$
11,318,371

Provision For Loan Losses
100,000

 
900,000

 
200,000

 
2,045,381

Charge Offs
(1,016,477
)
 
(1,081,851
)
 
(1,794,052
)
 
(2,467,311
)
Recoveries
182,879

 
83,904

 
464,239

 
110,838

Total Allowance For Loan Losses
$
9,112,157

 
$
11,007,279

 
$
9,112,157

 
$
11,007,279


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 the least risky in terms of determining the allowance for loan losses. Substandard loans are considered the most risky category. 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 other two categories fall in between these two grades.

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

16



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



9.    Loans Receivable, Net, Continued

 
Credit Quality Measures
June 30, 2014
 
Pass
 
 
Caution
 
Special
Mention
 
 
Substandard
 
 
Total Loans
Residential Real Estate
$
68,998,207

 
$
2,496,195

 
$
397,203

 
$
6,256,238

 
$
78,147,843

Consumer
48,319,721

 
1,065,653

 
137,931

 
974,356

 
50,497,661

Commercial Business
8,023,461

 
244,286

 
119,067

 
577,853

 
8,964,667

Commercial Real Estate
130,972,537

 
35,222,429

 
36,515,818

 
16,673,307

 
219,384,091

Total
$
256,313,926

 
$
39,028,563

 
$
37,170,019

 
$
24,481,754

 
$
356,994,262


 
Credit Quality Measures
December 31, 2013
 
Pass
 
 
Caution
 
Special
Mention
 
 
Substandard
 
 
Total Loans
Residential Real Estate
$
74,505,587

 
$
890,902

 
$
403,138

 
$
7,204,855

 
$
83,004,482

Consumer
50,370,640

 
843,799

 
143,649

 
847,813

 
52,205,901

Commercial Business
6,807,620

 
368,019

 
524,928

 
74,531

 
7,775,098

Commercial Real Estate
135,793,150

 
43,252,464

 
25,581,235

 
23,772,706

 
228,399,555

Total
$
267,476,997

 
$
45,355,184

 
$
26,652,950

 
$
31,899,905

 
$
371,385,036


The following table presents an age analysis of past due balances by category at June 30, 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
$

 
$
1,071,054

 
$
4,403,170

 
$
5,474,224

 
$
72,673,619

 
$
78,147,843

Consumer
497,092

 
129,718

 
699,496

 
1,326,306

 
49,171,355

 
50,497,661

Commercial
   Business
1,127,249

 
95,713

 
494,736

 
1,717,698

 
7,246,969

 
8,964,667

Commercial
   Real Estate
2,768,652

 
768,166

 
9,884,181

 
13,420,999

 
205,963,092

 
219,384,091

Total
$
4,392,993

 
$
2,064,651

 
$
15,481,583

 
$
21,939,227

 
$
335,055,035

 
$
356,994,262


The following table presents an age analysis of past due balances by category at December 31, 2013:
 
 
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
$

 
$
1,363,132

 
$
4,607,613

 
$
5,970,745

 
$
77,033,737

 
$
83,004,482

Consumer
1,494,429

 
234,878

 
399,062

 
2,128,369

 
50,077,532

 
52,205,901

Commercial
   Business
115,186

 

 
33,055

 
148,241

 
7,626,857

 
7,775,098

Commercial
   Real Estate
5,103,522

 
2,046,666

 
4,972,667

 
12,122,855

 
216,276,700

 
228,399,555

Total
$
6,713,137

 
$
3,644,676

 
$
10,012,397

 
$
20,370,210

 
$
351,014,826

 
$
371,385,036




17



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



9.    Loans Receivable, Net, Continued

At June 30, 2014 and December 31, 2013, the Company did not have any loans that were 90 days or more past due and still accruing interest. Our strategy is to work with our borrowers to reach acceptable payment plans while protecting our interests in the existing collateral.  In the event an acceptable arrangement cannot be reached, we may have to acquire these properties through foreclosure or other means and subsequently sell, develop, or liquidate them.

The following table shows non-accrual loans by category at June 30, 2014 compared to December 31, 2013:

 
At June 30, 2014
 
At December 31, 2013
 
$
 
%
 
Amount
 
Percent (1)
 
Amount
 
Percent (1)
 
Increase (Decrease)
 
Increase (Decrease)
Non-accrual Loans:
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate
$
4,403,170

 
1.24
%
 
$
4,607,613

 
1.25
%
 
$
(204,443
)
 
(4.4
)%
Commercial Business
494,736

 
0.14

 
33,055

 
0.01

 
461,681

 
1,396.7

Commercial Real Estate
9,884,181

 
2.79

 
4,972,667

 
1.35

 
4,911,514

 
98.8

Consumer
699,496

 
0.20

 
399,062

 
0.11

 
300,434

 
75.3

Total Non- accrual Loans
$
15,481,583

 
4.37
%
 
$
10,012,397

 
2.72
%
 
$
5,469,186

 
54.6
 %

(1) PERCENT OF TOTAL LOANS HELD FOR INVESTMENT, NET OF DEFERRED FEES AND LOANS IN PROCESS. 
The following tables show the activity in the allowance for loan losses by category for the periods indicated:
 
 
For the Three Months Ended June 30, 2014
 
 
Residential
Real Estate
 
 
Consumer
 
Commercial
Business
 
Commercial
Real Estate
 
 
Total
Beginning Balance
 
$
1,668,156

 
$
803,868

 
$
369,381

 
$
7,004,350

 
$
9,845,755

Provision
 
(130,818
)
 
29,492

 
142,959

 
58,367

 
100,000

Charge-Offs
 
(165,191
)
 
(13,591
)
 
(17,132
)
 
(820,563
)
 
(1,016,477
)
Recoveries
 
135,134

 
13,977

 
1,370

 
32,398

 
182,879

Ending Balance
 
$
1,507,281

 
$
833,746

 
$
496,578

 
$
6,274,552

 
$
9,112,157


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

 
$
847,777

 
$
426,658

 
$
7,260,892

 
$
10,241,970

Provision
 
(87,312
)
 
156,833

 
67,998

 
62,481

 
200,000

Charge-Offs
 
(247,663
)
 
(208,040
)
 
(17,132
)
 
(1,321,217
)
 
(1,794,052
)
Recoveries
 
135,613

 
37,176

 
19,054

 
272,396

 
464,239

Ending Balance
 
$
1,507,281

 
$
833,746

 
$
496,578

 
$
6,274,552

 
$
9,112,157



18



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



9.    Loans Receivable, Net, Continued
 
 
For the Three Months Ended June 30, 2013
 
 
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