SECURITY FEDERAL CORP - FORM 10-Q

SECURITY FEDERAL CORP - FORM 10-Q - November 12, 2015

Attached files

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - SECURITY FEDERAL CORP	sfdl-20150930xex311.htm
EX-31.2 - EXHIBIT 31.2 - SECURITY FEDERAL CORP	sfdl-20150930xex312.htm
EX-32 - EXHIBIT 32 - SECURITY FEDERAL CORP	sfdl-20150930xex32.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 SEPTEMBER 30, 2015

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD:



FROM:		TO:

COMMISSION FILE NUMBER: 0-16120

SECURITY FEDERAL CORPORATION

(Exact name of registrant as specified in its charter)



	South Carolina		57-0858504
	(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

238 RICHLAND AVENUE NORTHWEST, AIKEN, SOUTH CAROLINA 29801

(Address of principal executive office and Zip Code)

(803) 641-3000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



YES	X	NO

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

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



	Large accelerated filed [ ]		Accelerated filer [ ]
	Non-accelerated filer [ ]		Smaller reporting company [ X ]

Indicate by check mark whether the registrant is a shell corporation (defined in Rule 12b-2 of the Exchange Act).



YES	NO	X

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.




PART I.	FINANCIAL INFORMATION (UNAUDITED)	PAGE NO.
Item 1.	Financial Statements (unaudited):	3
	Consolidated Balance Sheets at September 30, 2015 and December 31, 2014	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2015 and 2014	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014	7
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	46
Item 4.	Controls and Procedures	47

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	48
	Signatures	50

SCHEDULES OMITTED

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Part 1. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets



	September 30, 2015			December 31, 2014
				(Audited)
ASSETS:
Cash And Cash Equivalents	$	8,374,489		$	10,192,702
Certificates Of Deposit With Other Banks	2,095,000			2,095,000
Investment And Mortgage-Backed Securities:
Available For Sale (Amortized Cost Of $381,228,581 And $420,876,924 At September 30, 2015 And December 31, 2014, Respectively)	388,352,231			429,700,540
Held To Maturity (Fair Value Of $30,730,644 And $0 At September 30, 2015 And December 31, 2014, Respectively)	30,847,402			—
Total Investments And Mortgage-Backed Securities	419,199,633			429,700,540
Loans Receivable, Net:
Held For Sale	1,518,631			1,864,999
Held For Investment (Net Of Allowance Of $7,935,023 And $8,357,496 At September 30, 2015 And December 31, 2014, Respectively)	318,236,103			338,009,496
Total Loans Receivable, Net	319,754,734			339,874,495
Accrued Interest Receivable:
Loans	872,962			971,569
Mortgage-Backed Securities	627,431			682,585
Investment Securities	1,531,662			1,408,924
Total Accrued Interest Receivable	3,032,055			3,063,078
Premises And Equipment, Net	19,548,390			18,233,226
Federal Home Loan Bank ("FHLB") Stock, At Cost	2,224,200			3,144,600
Other Real Estate Owned ("OREO")	4,928,998			3,229,710
Bank Owned Life Insurance	16,441,045			11,150,045
Goodwill	1,199,754			1,199,754
Other Assets	4,067,406			3,480,676
Total Assets	$	800,865,704		$	825,363,826
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Liabilities:
Deposit Accounts	$	652,127,017		$	660,115,164
Advances From FHLB	33,280,000			52,900,000
Other Borrowings	7,725,360			8,523,348
Junior Subordinated Debentures	5,155,000			5,155,000
Advance Payments By Borrowers For Taxes And Insurance	596,149			266,352
Senior Convertible Debentures	6,084,000			6,084,000
Other Liabilities	5,448,035			4,884,577
Total Liabilities	710,415,561			737,928,441
Shareholders' Equity:
Serial Preferred Stock, $.01 Par Value; Authorized 200,000 Shares; Issued And Outstanding, 22,000 Shares	22,000,000			22,000,000
Common Stock, $.01 Par Value; Authorized 5,000,000 Shares; Issued And Outstanding Shares, 3,146,407 And 2,945,474, Respectively, At September 30, 2015 And 3,144,934 And 2,944,001, Respectively, At December 31, 2014	31,464			31,449
Additional Paid-In Capital	12,025,663			11,990,813
Treasury Stock, At Cost (200,933 Shares)	(4,330,712		)	(4,330,712		)
Unvested Restricted Stock	(25,358		)	—
Accumulated Other Comprehensive Income	4,746,422			5,476,375
Retained Earnings	56,002,664			52,267,460
Total Shareholders' Equity	90,450,143			87,435,385
Total Liabilities And Shareholders' Equity	$	800,865,704		$	825,363,826

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Interest Income:
Loans	$	4,521,458		$	4,852,458		$	13,680,762		$	14,636,508
Mortgage-Backed Securities	1,259,822			1,538,902			4,037,511			4,568,036
Investment Securities	1,124,683			995,233			3,198,542			3,006,439
Other	1,897			2,345			6,034			8,370
Total Interest Income	6,907,860			7,388,938			20,922,849			22,219,353
Interest Expense:
NOW And Money Market Accounts	103,819			125,749			326,099			435,482
Statement Savings Accounts	7,805			6,821			22,535			19,537
Certificate Accounts	444,385			488,300			1,393,648			1,497,402
FHLB Advances And Other Borrowed Money	296,497			617,271			1,057,485			2,049,563
Senior Convertible Debentures	121,680			121,680			365,040			365,040
Junior Subordinated Debentures	26,279			25,441			77,070			75,643
Total Interest Expense	1,000,465			1,385,262			3,241,877			4,442,667
Net Interest Income	5,907,395			6,003,676			17,680,972			17,776,686
Provision For Loan Losses	(200,000		)	—			(100,000		)	200,000
Net Interest Income After Provision For Loan Losses	6,107,395			6,003,676			17,780,972			17,576,686
Non-Interest Income:
Gain On Sale Of Investment Securities	7,651			142,816			1,676,404			187,687
Gain On Sale Of Loans	191,194			119,041			526,295			465,571
Service Fees On Deposit Accounts	258,522			300,920			790,689			861,476
Commissions From Insurance Agency	139,980			116,894			373,639			317,757
Trust Income	152,200			158,000			449,800			404,000
Bank Owned Life Insurance Income	117,000			75,000			291,000			479,364
Check Card Fee Income	239,739			229,542			719,159			674,098
Grant Income	97,640			183,789			97,640			483,499
Other	164,488			160,304			482,380			481,191
Total Non-Interest Income	1,368,414			1,486,306			5,407,006			4,354,643
Non-Interest Expense:
Compensation And Employee Benefits	3,002,259			2,781,418			8,976,214			8,464,967
Occupancy	481,713			515,881			1,427,424			1,491,633
Advertising	95,226			115,268			290,951			358,527
Depreciation And Maintenance Of Equipment	401,102			408,685			1,263,932			1,219,461
Federal Deposit Insurance Corporation ("FDIC") Insurance Premiums	140,172			177,537			455,985			541,779
Amortization Of Intangibles	—			—			—			11,970
Net Cost (Proceeds) Of Operation Of OREO	(19,713		)	(71,623		)	267,784			451,947
Prepayment Penalties on FHLB Advances	—			—			787,851			—
Other	1,029,201			1,095,710			3,249,451			3,125,894
Total Non-Interest Expense	5,129,960			5,022,876			16,719,592			15,666,178
Income Before Income Taxes	2,345,849			2,467,106			6,468,386			6,265,151
Provision For Income Taxes	601,446			756,466			1,696,268			1,775,175
Net Income	1,744,403			1,710,640			4,772,118			4,489,976
Preferred Stock Dividends	110,000			110,000			330,000			330,000
Net Income Available To Common Shareholders	$	1,634,403		$	1,600,640		$	4,442,118		$	4,159,976
Net Income Per Common Share (Basic)	$	0.56		$	0.54		$	1.51		$	1.41
Net Income Per Common Share (Diluted)	$	0.53		$	0.52		$	1.44		$	1.35
Cash Dividend Per Share On Common Stock	$	0.08		$	0.08		$	0.24		$	0.24
Weighted Average Shares Outstanding (Basic)	2,944,001			2,944,001			2,944,001			2,944,001
Weighted Average Shares Outstanding (Diluted)	3,248,361			3,248,201			3,248,284			3,248,201

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)



	Three Months Ended September 30,
	2015			2014
Net Income	$	1,744,403		$	1,710,640
Other Comprehensive Income (Loss)
Unrealized Gains (Losses) On Securities:
Unrealized Holding Gains (Losses) On Securities Available For Sale, Net Of Taxes Of $979,277 And $(67,172) At September 30, 2015 And 2014, Respectively	1,598,158			(111,155		)
Reclassification Adjustment For Gains Included In Net Income, Net Of Taxes Of $2,907 And $54,270 At September 30, 2015 And 2014, Respectively	(4,744		)	(88,546		)
Amortization Of Unrealized Gains On Available For Sale Securities Transferred to Held To Maturity, Net Of Taxes Of $(22,996) and $0 at September 30, 2015 and 2014, Respectively	(37,584		)	—
Other Comprehensive Income (Loss)	1,555,830			(199,701		)
Comprehensive Income	$	3,300,233		$	1,510,939



	Nine Months Ended September 30,
	2015			2014
Net Income	$	4,772,118		$	4,489,976
Other Comprehensive Income (Loss)
Unrealized Gains On Securities:
Unrealized Holding Gains On Securities Available For Sale, Net Of Taxes Of $220,764 And $2,649,406 At September 30, 2015 And 2014, Respectively	357,366			4,333,729
Reclassification Adjustment For Gains Included In Net Income, Net Of Taxes Of $637,033 And $71,321 At September 30, 2015 And 2014, Respectively	(1,039,371		)	(116,366		)
Amortization Of Unrealized Gains On Available For Sale Securities Transferred to Held To Maturity, Net Of Taxes Of $(29,337) and $0 at September 30, 2015 and 2014, Respectively	(47,948		)	—
Other Comprehensive Income (Loss)	(729,953		)	4,217,363
Comprehensive Income	$	4,042,165		$	8,707,339

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

For the Nine Months Ended September 30, 2015 and 2014



	Preferred Stock		Common Stock		Additional Paid – In Capital		Treasury Stock			Accumulated Other Comprehensive Income		Retained Earnings			Total
Balance at December 31, 2013	$	22,000,000	$	31,449	$	11,978,137	$	(4,330,712	)	$	472,406	$	47,838,800		$	77,990,080
Net Income	—		—		—		—			—		4,489,976			4,489,976
Other Comprehensive Income, Net Of Tax	—		—		—		—			4,217,363		—			4,217,363
Stock Option Compensation Expense	—		—		9,507		—			—		—			9,507
Cash Dividends On Preferred Stock	—		—		—		—			—		(330,000		)	(330,000		)
Cash Dividends On Common Stock	—		—		—		—			—		(706,560		)	(706,560		)
Balance at September 30, 2014	$	22,000,000	$	31,449	$	11,987,644	$	(4,330,712	)	$	4,689,769	$	51,292,216		$	85,670,366



	Preferred Stock		Common Stock		Unvested Restricted Stock			Additional Paid – In Capital		Treasury Stock			Accumulated Other Comprehensive Income			Retained Earnings			Total
Balance at December 31, 2014	$	22,000,000	$	31,449	$	—		$	11,990,813	$	(4,330,712	)	$	5,476,375		$	52,267,460		$	87,435,385
Net Income	—		—		—			—		—			—			4,772,118			4,772,118
Other Comprehensive Loss, Net Of Tax	—		—		—			—		—			(729,953		)	—			(729,953		)
Common Stock Issuance	—		15		(25,358		)	25,343		—			—			—			—
Stock Option Compensation Expense	—		—		—			9,507		—			—			—			9,507
Cash Dividends On Preferred Stock	—		—		—			—		—			—			(330,000		)	(330,000		)
Cash Dividends On Common Stock	—		—		—			—		—			—			(706,914		)	(706,914		)
Balance at September 30, 2015	$	22,000,000	$	31,464	$	(25,358	)	$	12,025,663	$	(4,330,712	)	$	4,746,422		$	56,002,664		$	90,450,143

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)



	Nine Months Ended September 30,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	4,772,118		$	4,489,976
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
Depreciation Expense	914,784			891,142
Amortization Of Intangible Assets	—			11,970
Stock Option Compensation Expense	9,507			9,507
Discount Accretion And Premium Amortization	3,496,657			3,922,542
Provisions For Losses On Loans	(100,000		)	200,000
Income From Bank Owned Life Insurance	(291,000		)	(225,000		)
Gain On Sales Of Loans	(526,295		)	(465,571		)
Gain On Sales Of Mortgage-Backed Securities	(510,702		)	(451,751		)
(Gain) Loss On Sales Of Investment Securities	(1,165,702		)	264,064
Gain On Sale Of OREO	(218,293		)	(193,403		)
Write Down On OREO	174,400			405,000
Gain On Disposal Of Premises And Equipment	(5,647		)	—
Amortization Of Deferred Costs On Loans	47,756			12,775
Proceeds From Sale Of Loans Held For Sale	19,049,761			16,877,096
Origination Of Loans Held For Sale	(18,177,098		)	(17,234,871		)
(Increase) Decrease In Accrued Interest Receivable:
Loans	98,607			46,532
Mortgage-Backed Securities	55,154			11,294
Investment Securities	(122,738		)	(32,392		)
Increase In Advance Payments By Borrowers	329,797			323,250
Other, Net	946,839			1,333,451
Net Cash Provided By Operating Activities	8,777,905			10,195,611

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase Of Mortgage-Backed Securities Available For Sale	(30,816,752		)	(50,417,565		)
Principal Repayments On Mortgage-Backed Securities Available For Sale	21,983,963			24,085,687
Principal Repayments On Mortgage-Backed Securities Held To Maturity	1,780,222			—
Purchase Of Investment Securities Available For Sale	(66,339,293		)	(40,181,576		)
Maturities Of Investment Securities Available For Sale	22,152,393			17,167,888
Proceeds From Sale Of Investment Securities Available For Sale	30,890,194			29,526,067
Proceeds From Sale Of Mortgage-Backed Securities Available For Sale	27,329,862			25,063,634
Purchase Of FHLB Stock	(2,765,900		)	(4,434,480		)
Redemption Of FHLB Stock	3,686,300			5,599,480
Proceeds From (Purchase Of) Bank Owned Life Insurance	(5,000,000		)	624,260
Decrease In Loans Receivable	15,800,516			13,826,634
Proceeds From Sale Of OREO	2,369,726			1,461,940
Purchase And Improvement Of Premises And Equipment	(2,232,816		)	(2,025,581		)
Proceeds From Disposal Of Premises And Equipment	8,516			—
Net Cash Provided By Investing Activities	18,846,931			20,296,388

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES



Consolidated Statements of Cash Flows (Unaudited) (Continued)	Nine Months Ended September 30,
	2015			2014
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease In Deposit Accounts	$	(7,988,147	)	$	(12,232,848	)
Proceeds From FHLB Advances	199,184,000			171,890,000
Repayment Of FHLB Advances	(218,804,000		)	(191,310,058		)
Increase In (Repayment Of) Other Borrowings, Net	(797,988		)	2,778,617
Dividends To Preferred Stock Shareholders	(330,000		)	(330,000		)
Dividends To Common Stock Shareholders	(706,914		)	(706,560		)
Net Cash Used By Financing Activities	(29,443,049		)	(29,910,849		)
Net Increase (Decrease) In Cash And Cash Equivalents	(1,818,213		)	581,150
Cash And Cash Equivalents At Beginning Of Period	10,192,702			7,629,771
Cash And Cash Equivalents At End Of Period	$	8,374,489		$	8,210,921
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During The Period For:
Interest	$	3,288,927		$	4,407,602
Income Taxes	$	1,393,388		$	180,350
Supplemental Schedule Of Non Cash Transactions:
Transfers From Loans Receivable To Other Real Estate Owned	$	4,025,121		$	1,038,960
Transfers Of Mortgage-Backed Securities From Available For Sale To Held To Maturity	$	32,811,452		$	—

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

1. Basis of Presentation

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

2. Principles of Consolidation

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

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

3. Critical Accounting Policies

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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

3. Critical Accounting Policies, Continued

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

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

4. Earnings Per Common Share

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

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

The following table provides a reconciliation of net income to net income available to common shareholders for the periods presented:



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2015		2014		2015		2014
Earnings Available To Common Shareholders:
Net Income		$1,744,403		$1,710,640		$4,772,118		$4,489,976
Preferred Stock Dividends	110,000		110,000		330,000		330,000
Net Income Available To Common Shareholders		$1,634,403		$1,600,640		$4,442,118		$4,159,976

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

4. Earnings Per Common Share, Continued

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



	For the Three Months Ended September 30,
	2015					2014
	Income		Shares	Per Share Amounts		Income			Shares		Per Share Amounts
Basic EPS	$	1,634,403	2,944,001	$	0.56	$	1,600,640		2,944,001		$	0.54
Effect of Dilutive Securities:
Senior Convertible Debentures	75,442		304,200	(0.03)		75,422			304,200		(0.02)
Unvested Restricted Stock	—		160	—		—		—	—	—	—
Diluted EPS	$	1,709,845	3,248,361	$	0.53	$	1,676,062		3,248,201		$	0.52



	For the Nine Months Ended September 30,
	2015					2014
	Income		Shares	Per Share Amounts		Income			Shares		Per Share Amounts
Basic EPS	$	4,442,118	2,944,001	$	1.51	$	4,159,976		2,944,001		$	1.41
Effect of Dilutive Securities:
Senior Convertible Debentures	226,325		304,200	(0.07)		226,325			304,200		(0.06)
Unvested Restricted Stock	—		83	—		—		—	—	—	—
Diluted EPS	$	4,668,443	3,248,284	$	1.44	$	4,386,301		3,248,201		$	1.35

5. Stock-Based Compensation

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



	Three Months Ended September 30,
	2015		2014
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price
Balance, Beginning of Period	29,500	$23.55	47,500	$22.41
Options Granted	—	—	—	—
Options Exercised	—	—	—	—
Options Forfeited	—	—	—	—
Balance, End Of Period	29,500	$23.55	47,500	$22.41

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

5. Stock-Based Compensation, Continued



	Nine Months Ended September 30,
	2015			2014
	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
Balance, Beginning of Period	47,500		$22.41	61,500		$22.49
Options Granted	—		—	—		—
Options Exercised	—		—	—		—
Options Forfeited	(18,000	)	20.55	(14,000	)	22.74
Balance, End Of Period	29,500		$23.55	47,500		$22.41

Options Exercisable	21,100			33,900

Options Available For Grant	50,000			50,000

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



Grant Date	Outstanding Options	Option Price	Expiration Date
01/01/06	3,500	$23.91	01/01/16

08/24/06	3,500	$23.03	08/24/16

05/24/07	2,000	$24.34	05/24/17

07/09/07	1,000	$24.61	07/09/17

10/01/07	2,000	$24.28	10/01/17

01/01/08	13,000	$23.49	01/01/18

05/19/08	2,500	$22.91	05/18/18

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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment and mortgage-backed securities available for sale at the dates indicated are as follows:



	September 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
FHLB Securities	$	5,113,509	$	4,254	$	56,284	$	5,061,479
Federal Farm Credit Bank ("FFCB") Securities	2,000,000		—		10,138		1,989,862
Federal National Mortgage Association ("FNMA") Bonds	997,380		17,281		—		1,014,661
Small Business Administration (“SBA”) Bonds	111,586,926		1,674,338		135,029		113,126,235
Tax Exempt Municipal Bonds	79,370,686		1,897,885		737,204		80,531,367
Mortgage-Backed Securities	181,909,642		4,563,834		135,449		186,338,027
Equity Securities	250,438		40,162		—		290,600
Total Available For Sale	$	381,228,581	$	8,197,754	$	1,074,104	$	388,352,231

	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
FHLB Securities	$	13,317,462	$	83,691	$	154,492	$	13,246,661
FFCB Securities	5,750,000		—		82,006		5,667,994
FNMA Bonds	996,822		7,559		—		1,004,381
SBA Bonds	106,637,400		1,796,943		307,649		108,126,694
Tax Exempt Municipal Bonds	59,960,960		2,579,543		45,080		62,495,423
Mortgage-Backed Securities	233,963,842		5,704,855		815,984		238,852,713
Equity Securities	250,438		56,236		—		306,674
Total Available For Sale	$	420,876,924	$	10,228,827	$	1,405,211	$	429,700,540

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

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



Investment Securities	Amortized Cost		Fair Value
Less Than One Year	$	693,127	$	692,225
One – Five Years	13,170,421		13,414,588
Over Five – Ten Years	63,800,934		64,895,557
More Than Ten Years	121,654,457		123,011,834
Mortgage-Backed Securities	181,909,642		186,338,027
	$	381,228,581	$	388,352,231

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

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

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

The following tables show gross unrealized losses and fair value, aggregated by investment category, and length of time that the individual available for sale securities have been in a continuous unrealized loss position at the dates indicated.



	September 30, 2015
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
FHLB Securities	$	—	$	—	$	1,943,716	$	56,284	$	1,943,716	$	56,284
FFCB Securities	1,989,862		10,138		—		—		1,989,862		10,138
SBA Bonds	18,263,615		53,112		10,312,370		81,917		28,575,985		135,029
Tax Exempt Municipal Bond	37,133,463		734,874		800,502		2,330		37,933,965		737,204
Mortgage-Backed Securities	21,794,606		126,202		1,741,983		9,247		23,536,589		135,449
	$	79,181,546	$	924,326	$	14,798,571	$	149,778	$	93,980,117	$	1,074,104

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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



	December 31, 2014
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
FHLB Securities	$	994,818	$	5,182	$	3,850,690	$	149,310	$	4,845,508	$	154,492
FFCB Securities	—		—		5,667,994		82,006		5,667,994		82,006
SBA Bonds	27,859,461		223,070		4,920,631		84,579		32,780,092		307,649
Tax Exempt Municipal Bond	3,605,319		16,039		1,710,586		29,041		5,315,905		45,080
Mortgage-Backed Securities	34,840,832		208,242		30,899,075		607,742		65,739,907		815,984
	$	67,300,430	$	452,533	$	47,048,976	$	952,678	$	114,349,406	$	1,405,211

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

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

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

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

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



	September 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage-Backed Securities (1)	$	30,847,402	$	23,520	$	140,278	$	30,730,644
Total Held to Maturity	$	30,847,402	$	23,520	$	140,278	$	30,730,644

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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

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

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

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



	September 30, 2015
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-Backed Securities (1)	$	27,759,478	$	140,278	$	—	$	—	$	27,759,478	$	140,278
	$	27,759,478	$	140,278	$	—	$	—	$	27,759,478	$	140,278

^{(1) COMPRISED OF GNMA MORTGAGE-BACKED SECURITIES}

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net

Loans receivable, net, consisted of the following as of the dates shown:



	September 30, 2015		December 31, 2014
Residential Real Estate Loans	$	77,915,013	$	77,282,817
Consumer Loans	50,800,750		50,391,224
Commercial Business Loans	8,974,570		10,564,467
Commercial Real Estate Loans	192,672,048		209,530,209
Total Loans Held For Investment	330,362,381		347,768,717
Loans Held For Sale	1,518,631		1,864,999
Total Loans Receivable, Gross	331,881,012		349,633,716
Less:
Allowance For Loan Losses	7,935,023		8,357,496
Loans In Process	4,153,996		1,379,114
Deferred Loan Fees	37,259		22,611
	12,126,278		9,759,221
Total Loans Receivable, Net	$	319,754,734	$	339,874,495

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Balance At Beginning Of Period	$	7,795,582		$	9,112,157		$	8,357,496		$	10,241,970
Provision For Loan Losses	(200,000		)	—			(100,000		)	200,000
Charge Offs	(441,398		)	(590,942		)	(1,338,358		)	(2,384,994		)
Recoveries	780,839			125,759			1,015,885			589,998
Total Allowance For Loan Losses	$	7,935,023		$	8,646,974		$	7,935,023		$	8,646,974

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net, Continued

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



	Credit Quality Measures
September 30, 2015	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	69,246,501	$	1,140,421	$	514,567	$	7,013,524	$	77,915,013
Consumer	47,428,417		1,868,970		124,082		1,379,281		50,800,750
Commercial Business	7,717,250		689,421		119,000		448,899		8,974,570
Commercial Real Estate	119,340,093		44,502,378		18,993,244		9,836,333		192,672,048
Total	$	243,732,261	$	48,201,190	$	19,750,893	$	18,678,037	$	330,362,381



	Credit Quality Measures
December 31, 2014	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	69,163,911	$	956,976	$	639,638	$	6,522,292	$	77,282,817
Consumer	48,283,560		1,046,624		128,033		933,007		50,391,224
Commercial Business	9,691,685		340,706		202,895		329,181		10,564,467
Commercial Real Estate	125,339,273		32,549,335		35,169,358		16,472,243		209,530,209
Total	$	252,478,429	$	34,893,641	$	36,139,924	$	24,256,723	$	347,768,717

The following tables present an age analysis of past due balances by category at September 30, 2015 and December 31, 2014:



September 30, 2015	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable
Residential Real Estate	$	—	$	1,156,451	$	3,376,784	$	4,533,235	$	73,381,778	$	77,915,013
Consumer	745,482		91,814		410,509		1,247,805		49,552,945		50,800,750
Commercial Business	320,363		—		165,401		485,764		8,488,806		8,974,570
Commercial Real Estate	3,036,311		989,012		3,619,661		7,644,984		185,027,064		192,672,048
Total	$	4,102,156	$	2,237,277	$	7,572,355	$	13,911,788	$	316,450,593	$	330,362,381



December 31, 2014	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable
Residential Real Estate	$	—	$	1,087,299	$	3,061,339	$	4,148,638	$	73,134,179	$	77,282,817
Consumer	1,868,787		91,223		573,644		2,533,654		47,857,570		50,391,224
Commercial Business	162,481		99,784		246,977		509,242		10,055,225		10,564,467
Commercial Real Estate	4,544,813		1,094,701		9,859,689		15,499,203		194,031,006		209,530,209
Total	$	6,576,081	$	2,373,007	$	13,741,649	$	22,690,737	$	325,077,980	$	347,768,717

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net, Continued

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

The following table shows non-accrual loans by category at September 30, 2015 compared to December 31, 2014:



	At September 30, 2015				At December 31, 2014				Increase (Decrease)
	Amount		Percent ⁽¹⁾		Amount		Percent ⁽¹⁾		Amount			%
Non-accrual Loans:
Residential Real Estate	$	3,376,784	1.04	%	$	3,061,339	0.90	%	$	315,445		10.3	%
Commercial Business	165,401		0.05		246,977		0.10		(81,576		)	(33.0	)
Commercial Real Estate	3,619,661		1.11		9,859,689		2.80		(6,240,028		)	(63.3	)
Consumer	410,509		0.13		573,644		0.20		(163,135		)	(28.4	)
Total Non-accrual Loans	$	7,572,355	2.33	%	$	13,741,649	4.00	%	$	(6,169,294	)	(44.9	)%

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

The following tables show the activity in the allowance for loan losses by category for the periods indicated:

For the Three Months Ended September 30, 2015

OUTSTANDING SHARES AT:

Common Stock, par value $0.01 per share

November 12, 2015