10-Q 1 sfdl-20140630x10q.htm 10-Q SFDL-2014.06.30-10Q
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
 
 
Residential
Real Estate
 
 
Consumer
 
Commercial
Business
 
Commercial
Real Estate
 
 
Total
Beginning Balance
 
$
1,591,884

 
$
908,393

 
$
542,903

 
$
8,062,046

 
$
11,105,226

Provision
 
156,264

 
66,151

 
(57,981
)
 
735,566

 
900,000

Charge-Offs
 
(82,277
)
 
(96,499
)
 

 
(903,075
)
 
(1,081,851
)
Recoveries
 

 
10,868

 
3,632

 
69,404

 
83,904

Ending Balance
 
$
1,665,871

 
$
888,913

 
$
488,554

 
$
7,963,941

 
$
11,007,279


 
 
For the Six Months Ended June 30, 2013
 
 
Residential
Real Estate
 
 
Consumer
 
Commercial
Business
 
Commercial
Real Estate
 
 
Total
Beginning Balance
 
$
1,521,559

 
$
1,001,271

 
$
618,919

 
$
8,176,622

 
$
11,318,371

Provision
 
255,835

 
(15,662
)
 
(135,047
)
 
1,940,255

 
2,045,381

Charge-Offs
 
(111,523
)
 
(116,075
)
 
(4,436
)
 
(2,235,277
)
 
(2,467,311
)
Recoveries
 

 
19,379

 
9,118

 
82,341

 
110,838

Ending Balance
 
$
1,665,871

 
$
888,913

 
$
488,554

 
$
7,963,941

 
$
11,007,279


The following tables present information related to impaired loans evaluated individually for impairment and collectively evaluated for impairment in the allowance for loan losses:
 
 
Allowance For Loan Losses
June 30, 2014
 
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
 
Total
Residential Real Estate
 
$
145,876

 
$
1,361,405

 
$
1,507,281

Consumer
 
2,600

 
831,146

 
833,746

Commercial Business
 
207,500

 
289,078

 
496,578

Commercial Real Estate
 
482,700

 
5,791,852

 
6,274,552

Total
 
$
838,676

 
$
8,273,481

 
$
9,112,157


 
 
Allowance For Loan Losses
December 31, 2013
 
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
 
Total
Residential Real Estate
 
$
158,791

 
$
1,547,852

 
$
1,706,643

Consumer
 
103,109

 
744,668

 
847,777

Commercial Business
 

 
426,658

 
426,658

Commercial Real Estate
 
840,658

 
6,420,234

 
7,260,892

Total
 
$
1,102,558

 
$
9,139,412

 
$
10,241,970



19



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



9.    Loans Receivable, Net, Continued

The following tables present information related to impaired loans evaluated individually for impairment and collectively evaluated for impairment in loans receivable for the periods indicated:
 
 
Loans Receivable
June 30, 2014
 
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
 
Total
Residential Real Estate
 
$
4,734,446

 
$
73,413,397

 
$
78,147,843

Consumer
 
315,465

 
50,182,196

 
50,497,661

Commercial Business
 
494,736

 
8,469,931

 
8,964,667

Commercial Real Estate
 
22,543,381

 
196,840,710

 
219,384,091

Total
 
$
28,088,028

 
$
328,906,234

 
$
356,994,262

 
 
Loans Receivable
December 31, 2013
 
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
 
Total
Residential Real Estate
 
$
4,838,236

 
$
78,166,246

 
$
83,004,482

Consumer
 
275,491

 
51,930,410

 
52,205,901

Commercial Business
 
19,775

 
7,755,323

 
7,775,098

Commercial Real Estate
 
26,221,312

 
202,178,243

 
228,399,555

Total
 
$
31,354,814

 
$
340,030,222

 
$
371,385,036


Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired management measures impairment and records the loan at fair value. Fair value is estimated using one of the following methods: fair value of the collateral less estimated costs to sale, discounted cash flows, or market value of the loan based on similar debt. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, the Company reviews the most recent appraisal and if it is over 24 months old will request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, management may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. The average balance of impaired loans was $29.8 million for three months ended June 30, 2014 compared to $35.3 million for the three months ended June 30, 2013.


20



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



9.    Loans Receivable, Net, Continued

The following tables are a summary of information related to impaired loans as of June 30, 2014 and December 31, 2013 and for the three and six months ended June 30, 2014 and 2013.
 
 
 
 
At
 
 
 
For the Three Months Ended June 30,
 
 
June 30, 2014
 
2014
 
2013
Impaired Loans
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Invesment
 
Interest
Income
Recognized
 
Average
Recorded
Invesment
 
Interest
Income
Recognized
With No Related Allowance
Recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate
 
$
4,138,338

 
$
4,138,338

 
$

 
$
4,298,141

 
$
14,139

 
$
3,202,717

 
$
3,890

Consumer Loans
 
247,748

 
247,748

 

 
249,210

 

 
300,998

 
2,875

Commercial Business
 
16,089

 
16,089

 

 
16,089

 

 
23,302

 

Commercial Real Estate
 
19,869,021

 
19,869,021

 

 
21,434,443

 
155,690

 
26,980,203

 
180,095

With An Allowance Recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate
 
596,108

 
741,984

 
145,876

 
603,056

 

 
596,933

 
1,938

Consumer Loans
 
67,717

 
70,317

 
2,600

 
67,932

 
839

 

 

Commercial Business
 
478,647

 
686,147

 
207,500

 
483,561

 

 

 

Commercial Real Estate
 
2,674,360

 
3,157,060

 
482,700

 
2,636,348

 
8,384

 
4,191,700

 
26,979

Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate
 
4,734,446

 
4,880,322

 
145,876

 
4,901,197

 
14,139

 
3,799,650

 
5,828

Consumer Loans
 
315,465

 
318,065

 
2,600

 
317,142

 
839

 
300,998

 
2,875

Commercial Business
 
494,736

 
702,236

 
207,500

 
499,650

 

 
23,302

 

Commercial Real Estate
 
22,543,381

 
23,026,081

 
482,700

 
24,070,791

 
164,074

 
31,171,903

 
207,074

Total
 
$
28,088,028

 
$
28,926,704

 
$
838,676

 
$
29,788,780

 
$
179,052

 
$
35,295,853

 
$
215,777





21



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



9.    Loans Receivable, Net, Continued

 
 
For the Six Months Ended June 30,
 
 
2014
 
2013
Impaired Loans
 
Average
Recorded
Invesment
 
Interest
Income
Recognized
 
Average
Recorded
Invesment
 
Interest
Income
Recognized
With No Related Allowance Recorded:
 
 
 
 
 
 
 
 
Residential Real Estate
 
$
4,351,870

 
$
26,355

 
$
3,236,129

 
$
6,087

Consumer Loans
 
250,016

 

 
300,783

 
3,467

Commercial Business
 
16,089

 

 
24,819

 

Commercial Real Estate
 
21,817,619

 
268,199

 
27,549,900

 
506,537

With An Allowance Recorded:
 
 
 
 
 
 
 
 
Residential Real Estate
 
620,314

 

 
596,933

 
9,548

Consumer Loans
 
68,212

 
2,086

 

 

Commercial Business
 
488,387

 

 

 

Commercial Real Estate
 
2,694,448

 
28,374

 
4,216,012

 
63,051

Total
 
 
 
 
 
 
 
 
Residential Real Estate
 
4,972,184

 
26,355

 
3,833,062

 
15,635

Consumer Loans
 
318,228

 
2,086

 
300,783

 
3,467

Commercial Business
 
504,476

 

 
24,819

 

Commercial Real Estate
 
24,512,067

 
296,573

 
31,765,912

 
569,588

Total
 
$
30,306,955

 
$
325,014

 
$
35,924,576

 
$
588,690


 
 
December 31, 2013
Impaired Loans
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
 
Related
Allowance
With No Related Allowance
   Recorded:
 
 
 
 
 
 
Residential Real Estate
 
$
3,936,316

 
$
4,588,645

 
$

Consumer Loans
 
106,197

 
106,198

 

Commercial Business
 
19,775

 
19,775

 

Commercial Real Estate
 
21,810,347

 
26,775,853

 

With An Allowance Recorded:
 
 
 
 
 
 
Residential Real Estate
 
901,920

 
901,920

 
158,791

Consumer Loans
 
169,294

 
169,294

 
103,109

Commercial Business
 

 

 

Commercial Real Estate
 
4,410,965

 
4,954,058

 
840,658

Total
 
 
 
 
 
 
Residential Real Estate
 
4,838,236

 
5,490,565

 
158,791

Consumer Loans
 
275,491

 
275,492

 
103,109

Commercial Business
 
19,775

 
19,775

 

Commercial Real Estate
 
26,221,312

 
31,729,911

 
840,658

Total
 
$
31,354,814

 
$
37,515,743

 
$
1,102,558



22



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



9.    Loans Receivable, Net, Continued

In the course of resolving delinquent loans, the Bank may choose to restructure the contractual terms of certain loans. A troubled debt restructuring ("TDR") is a restructuring in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that it would not otherwise consider (Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 310-40).  The concessions granted on TDRs generally include terms to reduce the interest rate, extend the term of the debt obligation, or modify the payment structure on the debt obligation. The Bank grants such concessions to reassess the borrower’s financial status and develop a plan for repayment.  TDRs included in impaired loans at June 30, 2014 and December 31, 2013 were $11.2 million and $12.4 million, respectively.

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

The following table is a summary of loans restructured as TDRs during the periods indicated:
 
 
For the Three Months Ended June 30, 2014
 
For the Three Months Ended June 30, 2013
Troubled Debt Restructurings
 
 
 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
 
 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
Residential Real Estate
 

 
$

 
$

 

 
$

 
$

Consumer Loans
 

 

 

 

 

 

Commercial Business
 

 

 

 

 

 

Commercial Real Estate
 
1

 
79,072

 
79,072

 
1

 
329,999

 
329,999

Total
 
1

 
$
79,072

 
$
79,072

 
1

 
$
329,999

 
$
329,999


 
 
For the Six Months Ended June 30, 2014
 
For the Six Months Ended June 30, 2013
Troubled Debt Restructurings
 
 
 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
 
 
 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Post-
Modification
Outstanding
Recorded
Investment
Residential Real Estate
 

 
$

 
$

 

 
$

 
$

Consumer Loans
 

 

 

 

 

 

Commercial Business
 

 

 

 

 

 

Commercial Real Estate
 
1

 
79,072

 
79,072

 
4

 
1,651,023

 
1,651,023

Total
 
1

 
$
79,072

 
$
79,072

 
4

 
$
1,651,023

 
$
1,651,023


During the three and six months ended June 30, 2014, the Bank modified one loan that was considered to be a TDR by lowering the interest rate. During the three months ended June 30, 2013, the Bank modified one loan that was considered to be a TDR by lowering the interest rate. This modification enabled the customer to begin making monthly principal and interest payments.

During the six months ended June 30, 2014, five loans totaling $3.0 million that had previously been restructured were in default, four of the loans totaling $2.8 million went into default during the six month period. No loans that had been previously restructured within the last twelve months defaulted during the six months ended June 30, 2014. The Bank considers any loan 30 days or more past due to be in default.


23



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements




9.    Loans Receivable, Net, Continued

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

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

24



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



10. Regulatory Matters

The Federal Reserve and bank regulatory agencies require bank holding companies and financial institutions to maintain capital at adequate levels based on a percentage of assets and off-balance sheet exposures, adjusted for risk weights ranging from 0% to 100%. Under the capital adequacy guidelines, regulatory capital is classified into two tiers. These guidelines require an institution to maintain a certain level of Tier 1 and Tier 2 capital to risk-weighted assets. Tier 1 capital consists of common shareholders' equity, excluding the unrealized gain or loss on securities available for sale, minus certain intangible assets. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% based on the risks believed to be inherent in the type of asset. Tier 2 capital consists of Tier 1 capital plus the general reserve for loan losses, subject to certain limitations. The Bank is required to maintain capital at a minimum level based on total average assets, which is known as the Tier 1 leverage ratio. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that could have a material adverse effect on the Company.  As of June 30, 2014 and December 31, 2013, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action.  The Company and the Bank’s regulatory capital amounts and ratios are as follows as of the dates indicated:
 
 
 
Actual
 
 
 
For Capital Adequacy
 
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in Thousands)
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
SECURITY FEDERAL CORP.
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)
$
73,494

 
19.2
%
 
$
15,335

 
4.0
%
 
N/A

 
N/A

Total Risk-Based Capital
(To Risk Weighted Assets)
86,567

 
22.6
%
 
30,671

 
8.0
%
 
N/A

 
N/A

Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)
73,494

 
8.7
%
 
33,635

 
4.0
%
 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
SECURITY FEDERAL BANK
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)
$
83,486

 
21.8
%
 
$
15,324

 
4.0
%
 
$
22,986

 
6.0
%
Total Risk-Based Capital
(To Risk Weighted Assets)
88,328

 
23.1
%
 
30,468

 
8.0
%
 
38,309

 
10.0
%
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)
83,486

 
9.9
%
 
33,624

 
4.0
%
 
42,031

 
5.0
%
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
SECURITY FEDERAL CORP.
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)
$
70,598

 
17.8
%
 
$
15,894

 
4.0
%
 
 
N/A

 
 
N/A

Total Risk-Based Capital
(To Risk Weighted Assets)
84,529

 
21.3
%
 
31,788

 
8.0
%
 
 
N/A

 
 
N/A

Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)
70,598

 
8.3
%
 
34,079

 
4.0
%
 
 
N/A

 
 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
SECURITY FEDERAL BANK
 
 
 
 
 
 
 
 
 
 
 
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)
$
81,624

 
20.6
%
 
$
15,883

 
4.0
%
 
$
23,825

 
6.0
%
Total Risk-Based Capital
(To Risk Weighted Assets)
86,652

 
21.8
%
 
31,767

 
8.0
%
 
39,709

 
10.0
%
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)
81,624

 
9.6
%
 
34,069

 
4.0
%
 
42,586

 
5.0
%

25



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements




11. Carrying Amounts and Fair Value of Financial Instruments

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

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

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

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. At June 30, 2014, the Company’s investment portfolio was comprised of government and agency bonds, mortgage-backed securities issued by government agencies or GSEs, municipal securities, and two equity investments. The portfolio did not contain any private label mortgage-backed securities. Fair value measurement is based upon prices obtained from third party pricing services who use independent pricing models which rely on a variety of factors including reported trades, broker/dealer quotes, benchmark yields, economic and industry events and other relevant market information. As such, these securities are classified as Level 2.

Mortgage Loans Held for Sale

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

The Company usually delivers to, and receives funding from, the investor within 30 days.  Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts" basis. The Company is not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. As a result of the short-term nature of these derivative


26



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



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

contracts, the fair value of the mortgage loans held for sale in most cases is the same as the value of the loan amount at its origination. These loans are classified as Level 2.

Impaired Loans

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

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

Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2014, most of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The Company records impaired loans as nonrecurring Level 3. As of June 30, 2014 and December 31, 2013, the recorded investment in impaired loans was $28.1 million and $31.4 million, respectively.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 3. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the asset as nonrecurring Level 3. Assets measured at fair value on a recurring basis are as follows as of June 30, 2014:
 
 
Assets:
Quoted Market Price
In Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
FHLB Securities
$

 
$
14,004,431

 
$

FFCB Securities

 
5,612,505

 

FNMA And FHLMC Bonds

 
997,248

 

SBA Bonds

 
97,049,454

 

Tax Exempt Municipal Bonds

 
59,753,957

 

Mortgage-Backed Securities

 
259,088,238

 

Equity Securities

 
305,000

 

Total
$

 
$
436,810,833

 
$


27



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



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

Assets measured at fair value on a recurring basis are as follows as of December 31, 2013:
 
 
Assets:
 
Quoted Market Price
In Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable Inputs
(Level 3)
FHLB Securities
 
$

 
$
12,670,450

 
$

FFCB Securities
 

 
5,366,180

 

FNMA Bonds
 

 
1,974,930

 

SBA Bonds
 

 
100,823,985

 

Tax Exempt Municipal Bonds
 

 
61,315,122

 

Mortgage-Backed Securities
 

 
248,596,535

 

Equity Securities
 

 
256,250

 

Total
 
$

 
$
431,003,452

 
$


There were no liabilities measured at fair value on a recurring basis as of June 30, 2014 or December 31, 2013.

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. The table below presents assets measured at fair value on a nonrecurring basis as of June 30, 2014 and December 31, 2013, aggregated by the level in the fair value hierarchy within which those measurements fall. There were no liabilities measured at fair value on a nonrecurring basis as of June 30, 2014 and December 31, 2013.
 
Assets:
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Balance At June 30, 2014
Mortgage Loans Held For Sale
 
$

 
$
1,384,240

 
$

 
$
1,384,240

Collateral Dependent Impaired Loans (1)
 

 

 
27,249,352

 
27,249,352

Foreclosed Assets
 

 

 
4,131,265

 
4,131,265

Total
 
$

 
$
1,384,240

 
$
31,380,617

 
$
32,764,857


(1) IMPAIRED LOANS ARE REPORTED NET OF SPECIFIC RESERVES OF $838,676 
Assets:
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
Balance At
December 31, 2013
Mortgage Loans Held For Sale
 
$

 
$
1,234,158

 
$

 
$
1,234,158

Collateral Dependent Impaired Loans (1)
 

 

 
30,252,256

 
30,252,256

Foreclosed Assets
 

 

 
3,947,226

 
3,947,226

Total
 
$

 
$
1,234,158

 
$
34,199,482

 
$
35,433,640


(1) IMPAIRED LOANS ARE REPORTED NET OF SPECIFIC RESERVES OF $1,103,000  

28



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



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

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of June 30, 2014, the significant unobservable inputs used in the fair value measurements were as follows:
 
Fair Value
 
 
 
Significant
 
 
 
June 30,
 
Valuation
 
Unobservable
 
 
 
2014
  
Technique
 
Inputs
 
Range
Collateral Dependent Impaired Loans
$
27,249,352

 
Appraised Value
  
Discount Rates/ Discounts to Appraised Values
  
6% - 87%
Foreclosed Assets
4,131,265

 
Appraised Value/Comparable Sales
 
Discount Rates/ Discounts to Appraised Values
 
 
7% - 79%

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


29



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



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

The following tables are a summary of the carrying value and estimated fair value of the Company’s financial instruments as of June 30, 2014 and December 31, 2013 presented in accordance with the applicable accounting guidance.
 
June 30, 2014
 
Carrying
 
Fair Value
(In Thousands)
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash And Cash Equivalents
$
12,531

 
$
12,531

 
$
12,531

 
$

 
$

Certificates Of Deposits With Other Banks
2,095

 
2,095

 

 
2,095

 

Investment And Mortgage-Backed Securities
436,811

 
436,811

 

 
436,811

 

Loans Receivable, Net
346,605

 
338,191

 

 

 
338,191

FHLB Stock
4,573

 
4,573

 
4,573

 

 

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
  Checking, Savings, And Money Market
    Accounts
$
403,774

 
$
403,774

 
$
403,774

 
$

 
$

  Certificate Accounts
254,650

 
255,375

 

 
255,375

 

Advances From FHLB
75,152

 
79,123

 

 
79,123

 

Other Borrowed Money
9,358

 
9,358

 
9,358

 

 

Senior Convertible Debentures
6,084

 
6,084

 

 
6,084

 

Junior Subordinated Debentures
5,155

 
5,155

 

 
5,155

 


 
December 31, 2013
 
Carrying
 
Fair Value
(In Thousands)
Amount
 
Total
 
Level 1
 
Level 2
 
Level 3
Financial Assets:
 
 
 
 
 
 
 
 
 
Cash And Cash Equivalents
$
7,630

 
$
7,630

 
$
7,630

 
$

 
$

Certificates Of Deposits With Other Banks
2,100

 
2,100

 

 
2,100

 

Investment And Mortgage-Backed Securities
431,003

 
431,003

 

 
431,003

 

Loans Receivable, Net
358,917

 
356,623

 

 

 
356,623

FHLB Stock
5,017

 
5,017

 
5,017

 

 

 
 
 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
  Checking, Savings, And Money Market
    Accounts
$
401,813

 
$
401,813

 
$
401,813

 
$

 
$

  Certificate Accounts
256,884

 
257,883

 

 
257,883

 

Advances From FHLB
87,740

 
92,608

 

 
92,608

 

Other Borrowed Money
8,003

 
8,003

 
8,003

 

 

Senior Convertible Debentures
6,084

 
6,084

 

 
6,084

 

Junior Subordinated Debentures
5,155

 
5,155

 

 
5,155

 


At June 30, 2014, the Bank had $46.7 million of off-balance sheet financial commitments.  These commitments are to originate loans and unused consumer lines of credit and credit card lines.  Because these obligations are based on current market rates, if funded, the original principal is considered to be a reasonable estimate of fair value.

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

30



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



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

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

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

12. Accounting and Reporting Changes

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

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

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 15, 2016. The Company will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its financial statements.

In June 2014, the FASB issued guidance which makes limited amendments to the guidance on accounting for certain repurchase agreements. The new guidance (1) requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. The amendments will be effective for the Company for the first interim or annual period beginning after December 15, 2014. The Company will apply the guidance by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company does not expect these amendments to have a material effect on its financial statements.

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



31



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements



13.     Subsequent Events

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

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

32



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


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

Forward-Looking Statements and “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995

This report contains forward-looking statements, which can be identified by the use of words such as “believes,” “intends,” “expects,” “anticipates,” “estimates” or similar expressions. Forward-looking statements include, but are not limited to:
statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:
the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing assets in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our loan loss reserves;
changes in general economic conditions, either nationally or in our market areas;
changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;
fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas;
secondary market conditions for loans and our ability to sell loans in the secondary market;
results of examinations of the Company by the Federal Reserve, and our bank subsidiary by the FDIC and the South Carolina Board of Financial Institutions or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;
legislative or regulatory changes that adversely affect our business including changes in regulatory policies and principles, or the interpretation of regulatory capital, including changes as a result of Basel III, or other rules, and any changes in rules applicable to institutions participating in the U.S. Department of Treasury Community Development Capital Initiative or other rules;
our ability to attract and retain deposits;
increases in premiums for deposit insurance;
our ability to control operating costs and expenses;
our ability to implement our business strategies
the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
difficulties in reducing risks associated with the loans on our balance sheet;
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
computer systems on which we depend could fail or experience a security breach;
our ability to retain key members of our senior management team;
costs and effects of litigation, including settlements and judgments;
our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or we may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto;
increased competitive pressures among financial services companies;
changes in consumer spending, borrowing and savings habits;
the impact of new legislation, including the Jumpstart Out Business Startups Act and Dodd-Frank Wall Street Reform and Consumer Protection Act and the implementing regulations;
the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
our ability to pay dividends on our common and preferred stock;
adverse changes in the securities markets;

33



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

inability of key third-party providers to perform their obligations to us;
changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;
Future legislative changes and our ability to continue to comply with the requirements of the U.S. Department of Treasury’s Community Development Capital Initiative; and
other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this document.

Some of these and other factors are discussed in the Company's 2013 Form 10-K under Item 1A, “Risk Factors.” Such developments could have an adverse impact on our financial position and our results of operations.
 
Any of the forward-looking statements that we make in this quarterly report and in other public statements we make may turn out to be inaccurate as a result of our beliefs and assumptions we make in connection with the factors set forth above or because of other unidentified and unpredictable factors. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. These risks could cause our actual results for 2014 and beyond to differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect the Company’s financial condition, liquidity and operating and stock price performance.

Financial Condition At June 30, 2014 and December 31, 2013

General – Total assets decreased $4,926,000 or 0.6% to $844.3 million at June 30, 2014 from $849.2 million at December 31, 2013. The primary reason for the decrease in total assets was a decrease of $12.3 million and $3.8 million in net loans receivable and other assets, respectively, offset partially by an increase of $5.8 million and $4.9 million in investment and mortgage- backed securities available for sale and cash and cash equivalents, respectively.

Assets – The increases and decreases in total assets were primarily concentrated in the following asset categories:
 
 
 
 
 
 
 
Increase (Decrease)
 
 
June 30, 2014
 
December 31, 2013
 
 
Amount
 
Percent
Cash And Cash Equivalents
$
12,531,186

$
7,629,771

 
$
4,901,415

 
64.2%
Investment And Mortgage-
   Backed Securities –
   Available For Sale
 
436,810,833

 
431,003,452

 
 
5,807,381

 
1.3
Loans Receivable, Net
 
346,605,413

 
358,916,665

 
 
(12,311,252
)
 
(3.4)
Premise And Equipment, Net
 
18,485,846

 
17,243,390

 
 
1,242,456

 
7.2
Bank Owned Life Insurance
 
11,000,045

 
11,474,305

 
 
(474,260
)
 
(4.1)
Intangible Assets, Net
 

 
11,970

 
 
(11,970
)
 
(100.0)
Other Assets
 
3,709,901

 
7,547,528

 
 
(3,837,627
)
 
(50.8)

Cash and cash equivalents increased $4.9 million or 64.2% to $12.5 million at June 30, 2014 from $7.6 million at December 31, 2013. Investment and mortgage-backed securities available for sale increased $5.8 million or 1.3% to $436.8 million at June 30, 2014 from $431.0 million at December 31, 2013.

Loans receivable, net, decreased $12.3 million or 3.4% to $346.6 million at June 30, 2014 from $358.9 million at December 31, 2013. This decrease was a result of increased loan paydowns combined with lower loan demand from creditworthy borrowers. Residential real estate loans decreased $4.9 million or 5.9% to $78.1 million at June 30, 2014 from $83.0 million at December 31, 2013. Consumer loans decreased $1.7 million or 3.3% to $50.5 million at June 30, 2014 compared to $52.2 million at December 31, 2013. Commercial real estate loans decreased $9.0 million or 3.9% to $219.4 million at June 30, 2014 from $228.4 million at December 31, 2013.

Commercial business loans increased $1.2 million or 15.3% to $9.0 million at June 30, 2014 from $7.8 million at December 31, 2013. Loans held for sale increased $150,000 or 12.2% to $1.4 million at June 30, 2014 from $1.2 million at December 31, 2013.

34



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


Premises and equipment, net increased $1.2 million or 7.2% to $18.5 million at June 30, 2014 from $17.2 million at December 31, 2013. The Bank purchased land for $1.3 million during the six months ended June 30, 2014 for a prospective future branch site in Columbia County, Georgia.

Bank owned life insurance decreased $474,000 or 4.1% to $11.0 million at June 30, 2014 compared to $11.5 million at December 31, 2013. The Company redeemed $624,000 in life insurance during the period. This was offset slightly by income from bank owned life insurance totaling $150,000.

Other assets decreased $3.8 million or 50.8% to $3.7 million at June 30, 2014 compared to $7.5 million at December 31, 2013 as a result of deferred taxes related to increased unrealized gains in the investment portfolio.

Liabilities
Deposit Accounts – The balances, weighted average rates and increases and decreases in deposit accounts were as follows:
 
 
 
 
 
 
Balance
 
 
June 30, 2014
 
December 31, 2013
 
Increase (Decrease)
 
 

Balance
 
Weighted Rate
 

Balance
 
Weighted Rate
 

Amount
 

Percent
Demand Accounts:
 
 
 
 
 
 
 
 
 
 
 
 
Checking
$
144,210,745

 
0.03%
$
136,695,876

 
0.04%
$
7,514,869

 
5.50%
Money Market
 
232,990,758

 
0.19
 
240,631,708

 
0.28
 
(7,640,950
)
 
(3.18)
Statement Savings
   Accounts
 
26,572,138

 
0.10
 
24,485,648

 
0.10
 
2,086,490

 
8.52
Total
 
403,773,641

 
0.13
 
401,813,232

 
0.19
 
1,960,409

 
0.49
 
 
 
 
 
 
 
 
 
 
 
 
 
Certificate Accounts
 
 
 
 
 
 
 
 
 
 
 
 
0.00 – 1.99%
 
228,739,893

 
 
 
226,750,180

 
 
 
1,989,713

 
0.88
2.00 – 2.99%
 
24,916,434

 
 
 
28,848,252

 
 
 
(3,931,818)

 
(13.63)
3.00 – 3.99%
 
993,805

 
 
 
1,285,108

 
 
 
(291,303)

 
(22.67)
4.00 – 4.99%
 

 
 
 

 
 
 

 
5.00 – 5.99%
 

 
 
 

 
 
 

 
Total
 
254,650,132

 
0.78
 
256,883,540

 
0.83
 
(2,233,408)

 
(0.87)
Total Deposits
$
658,423,773

 
0.38%
$
658,696,772

 
0.44%
$
(272,999)

 
(0.04)%

Included in the certificate accounts above were $29.6 million and $25.6 million in brokered deposits at June 30, 2014 and December 31, 2013, respectively, with a weighted average interest rate of 1.05% and 1.23%, respectively.

Advances From FHLB – FHLB advances are summarized by contractual year of maturity and weighted average interest rate in the table below:
 
 
 
 
 
 
Balance
 
 
June 30, 2014
 
December 31, 2013
 
Decrease
Fiscal Year Due:
 
Balance
Rate
 
Balance
Rate
 
Balance
 
Percent
2014
$
22,252,312

1.43%
$
34,840,058

1.64%
$
(12,587,746)

 
(36.13)%
2015
 
15,000,000

4.01
 
15,000,000

4.01
 

 
2016
 
20,000,000

4.61
 
20,000,000

4.61
 

 
2017
 
12,900,000

4.38
 
12,900,000

4.38
 

 
2018
 
5,000,000

3.39
 
5,000,000

3.39
 

 
Thereafter
 

 

 

 
Total Advances
$
75,152,312

3.43%
$
87,740,058

3.23%
$
(12,587,746)

 
(14.35)%

35



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


Advances are secured by a blanket collateral agreement with the FHLB pledging the Bank’s portfolio of residential first mortgage loans and investment securities with an amortized cost and fair value of $106.8 million and $103.6 million at June 30, 2014, respectively, and $111.6 million and $102.7 million at December 31, 2013, respectively. Advances are subject to prepayment penalties.

The following table shows at June 30, 2014 FHLB advances that are callable as of the dates indicated. These advances are also included in the above table. All callable advances are callable at the option of the FHLB. If an advance is called, the Bank has the option to pay off the advance without penalty, reborrow funds on different terms, or convert the advance to a three-month floating rate advance tied to LIBOR.
As of June 30, 2014
Borrow Date
 
Maturity Date
 
Amount
 
Int. Rate
 
Type
 
Call Dates
11/23/05
 
11/23/15
$
5,000,000
 
3.993
%
 
Multi-Call
 
5/23/08 and quarterly thereafter
07/11/06
 
07/11/16
 
5,000,000
 
4.800

 
Multi-Call
 
7/11/08 and quarterly thereafter
11/29/06
 
11/29/16
 
5,000,000
 
4.025

 
Multi-Call
 
5/29/08 and quarterly thereafter
05/24/07
 
05/24/17
 
7,900,000
 
4.375

 
Multi-Call
 
5/27/08 and quarterly thereafter
07/25/07
 
07/25/17
 
5,000,000
 
4.396

 
Multi-Call
 
7/25/08 and quarterly thereafter


Other Borrowings – The Bank had $9.4 million and $8.0 million in other borrowings (non-FHLB advances) at June 30, 2014 and December 31, 2013, respectively. These borrowings consist of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts. The repurchase agreements typically mature within one to three days and the interest rate paid on these borrowings floats monthly with money market type rates. At both June 30, 2014 and December 31, 2013, the interest rate paid on the repurchase agreements was 0.15%. The Bank had pledged as collateral for these repurchase agreements investment and mortgage-backed securities with amortized costs and fair values of $15.8 million and $16.3 million, respectively, at June 30, 2014 and $14.8 million and $15.4 million, respectively, at December 31, 2013.

Junior Subordinated Debentures – On September 21, 2006, Security Federal Statutory Trust (the "Trust"), issued and sold fixed and floating rate capital securities of the Trust (the “Capital Securities”). The Trust used the net proceeds from the sale of the Capital Securities to purchase a like amount of junior subordinated debentures (the “Debentures”) of the Company which are reported on the Consolidated Balance Sheets as junior subordinated debentures, generating proceeds of $5.0 million. The Company used the proceeds for general corporate purposes, primarily to provide capital to the Bank. The Capital Securities qualify as Tier 1 capital under Federal Reserve guidelines. The Debentures are the sole assets of the Trust. The Company’s obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the Trust.

The Capital Securities accrue and pay distributions annually at a rate per annum equal to 1.93% at June 30, 2014. Prior to September 2011, one-half of the Capital Securities issued in the transaction had a fixed rate of 6.88% and the remaining half had a floating rate of three-month LIBOR plus 170 basis points. After September 2011, the fixed rate was converted to the floating rate, with all of the Capital Securities having a floating rate of three month LIBOR plus 170 basis points. The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears.

The Company has the right, subject to events of default, to defer payments of interest on the Capital Securities for a period not to exceed 20 consecutive quarterly periods, provided that no extension period may extend beyond the maturity date of December 15, 2036. The Company has no current intention to exercise its right to defer payments of interest on the Capital Securities.

The Capital Securities mature or are mandatorily redeemable upon maturity on December 15, 2036, or upon earlier optional redemption as provided in the indenture. The Company has the right to redeem the Capital Securities in whole or in part.

Convertible Debentures – Effective December 1, 2009, the Company issued $6.1 million in convertible senior debentures. The debentures will mature on December 1, 2029 and accrue interest at the rate of 8.0% per annum until maturity or earlier redemption or repayment. Interest on the debentures is payable on June 1 and December 1 of each year and commenced on June 1, 2010. The

36



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

debentures are convertible into the Company’s common stock at a conversion price of $20 per share at the option of the holder at any time prior to maturity.

The debentures are redeemable, in whole or in part, at the option of the Company at any time on or after December 1, 2019, at a price equal to 100% of the principal amount of the debentures to be purchased plus any accrued and unpaid interest to, but excluding, the date of redemption. The debentures are unsecured general obligations of the Company ranking equal in right of payment to all of our present and future unsecured indebtedness that is not expressly subordinated.

Equity – Shareholders’ equity increased $6.5 million or 8.3% to $84.5 million at June 30, 2014 from $78.0 million at December 31, 2013. Accumulated other comprehensive income, net of tax, comprised primarily of unrealized gains on securities available for sale, net of tax, increased $4.4 million or 935.0% to $4.9 million at June 30, 2014 from $472,000 at December 31, 2013. The Company’s net income available for common shareholders was $2.6 million for the six months ended June 30, 2014, after payment of $220,000 in preferred stock dividends. The Board of Directors of the Company declared common stock dividends totaling $471,000 during the six months ended June 30, 2014. Book value per common share was $21.23 at June 30, 2014 and $19.02 at December 31, 2013.

Results of Operations for the Three Month Periods Ended June 30, 2014 and 2013

Net Income Available to Common Shareholders - Net income available to common shareholders increased $598,000 or 77.8% to $1.4 million or $0.44 per diluted common share for the three months ended June 30, 2014 compared to $769,000 or $0.26 per diluted common share for the three months ended June 30, 2013. The increase in net income available to common shareholders
was primarily the result of an increase in net interest income combined with a decrease in the provision for loan losses. These factors were offset slightly by a decrease in non-interest income.
 
Net Interest Income - The net interest margin on a tax equivalent basis increased 27 basis points to 3.15% for the three months ended June 30, 2014 from 2.88% for the comparable period in 2013 as the decline in the average cost of interest-bearing liabilities outpaced the decline in the average balance of interest-earning assets. Net interest income increased $409,000 or 7.2% to $6.1 million during the three months ended June 30, 2014, compared to $5.7 million for the same period in 2013. During the three months ended June 30, 2014, average interest earning assets decreased $20.9 million or 2.6% to $794.7 million from $815.6 million for the same period in 2013. Average interest-bearing liabilities decreased $33.9 million or 4.6% to $705.2 million for the three months ended June 30, 2014 from $734.1 million for the comparable period in 2013.

Interest Income - Total tax equivalent interest income decreased $68,000 or 0.9% to $7.8 million during the three months ended June 30, 2014 compared to the same period in 2013. This decrease was primarily the result of the decrease in interest-earning assets, particularly loans. Total interest income on loans decreased $604,000 or 10.9% to $4.9 million during the three months ended June 30, 2014 from $5.5 million during the comparable period in 2013 as a result of the average loan portfolio balance decreasing $26.9 million or 7.1% to $354.6 million combined with the yield on the loan portfolio decreasing 24 basis point to 5.55%. Interest income from mortgage-backed securities increased $419,000 or 34.3% to $1.6 million as a result of a 60 basis point increase in the portfolio yield combined with a $7.0 million increase in the average balance. Tax equivalent interest income from investment securities increased $116,000 or 10.8% to $1.2 million as a result of an increase of 26 basis points in the yield combined with an increase of $16.4 million in the average balance of the investment securities portfolio.

The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the three months ended June 30, 2014 and 2013:

37



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

 
Three Months Ended June 30,
 
 
2014
 
2013
 
 
 
 
 



Average Balance
 




Yield(1)
 
 



Average Balance
 




Yield(1)
 
Increase (Decrease) In Interest And Dividend Income From 2013
 
Loans Receivable, Net
$
354,583,836
 
5.55
%
 
$
381,504,531

 
5.79
%
$
(603,623)

 
Mortgage-Backed Securities
 
256,386,601
 
2.56

 
 
249,395,337

 
1.96

 
418,745

 
Investment Securities(2)
 
181,028,201
 
2.64

 
 
181,332,991

 
2.38

 
116,227

 
Overnight Time And
   Certificates of Deposit
 
2,666,342
 
0.37

 
 
3,362,167

 
0.20

 
750

 
Total Interest-Earning Assets
$
794,664,980
 
3.90
%
 
$
815,595,026

 
3.84
%
$
(67,901)

 
(1) Annualized
(2) Tax equivalent basis is calculated using an effective tax rate of 34% and amounted to $119,706 and $144,839 for the
quarters ended June 30, 2014 and 2013, respectively.

Interest Expense - Total interest expense decreased $452,000 or 23.1% to $1.5 million during the three months ended June 30, 2014 compared to $2.0 million for the same period in 2013. The decrease in total interest expense was attributable to decreases in interest rates paid and a $33.9 million decrease in the average balance of interest-bearing liabilities. Interest expense on deposits decreased $260,000 or 29.0% to $636,000 during the three months ended June 30, 2014 compared to $896,000 for the same period in 2013. The decrease was attributable to a 16 basis point decrease in the cost of deposit accounts combined with a $14.7 million decrease in average interest-bearing deposits to $607.2 million for the three months ended June 30, 2014 compared to $621.9 million for the three months ended June 30, 2013. The decrease was concentrated in the certificate accounts, which decreased $16.0 million or 5.8% to $258.9 million during the three months ended June 30, 2014 compared to $274.8 million for the same period in 2013. The Bank has been competing less aggressively for time deposits in its local area and focusing instead on core deposits, or non time deposits.

Interest expense on FHLB advances and other borrowings decreased $191,000 or 20.9% to $725,000 during the three months ended June 30, 2014 from $916,000 for the same period in 2013. The average balance of FHLB advances and other borrowed money decreased $19.2 million or 18.1% to $86.7 million during the three months ended June 30, 2014 from $105.9 million for the same period in 2013. The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the three months ended June 30, 2014 and 2013.
 
Three Months Ended June 30,
 
2014
 
2013
 
 
 
 
Average Balance
 



Yield(1)
 
 
Average Balance
 



Yield(1)
 
Decrease In Interest Expense From 2013
Now And Money Market
   Accounts

$
321,842,988

 
0.16%
 
$
322,708,180

 
0.26%
$
(82,994
)
Statement Savings Accounts
 
26,478,968

 
0.10
 
 
24,356,240

 
0.16
 
(3,135
)
Certificates Accounts
 
258,855,596

 
0.77
 
 
274,844,828

 
0.98
 
(173,831
)
FHLB Advances And
   Other Borrowed Money
 
86,734,189

 
3.34
 
 
105,920,679

 
3.46
 
(191,209
)
Junior Subordinated Debentures
 
5,155,000

 
1.95
 
 
5,155,000

 
2.00
 
(600
)
Senior Convertible Debentures
 
6,084,000

 
8.00
 
 
6,084,000

 
8.00
 

Total Interest-Bearing Liabilities
$
705,150,741

 
0.86%
 
$
739,068,927

 
1.06%
$
(451,769
)
(1) Annualized

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

38



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

and external loan reviews. The adequacy of the allowance for loan losses is reviewed monthly by the Asset Classification Committee and quarterly by the Board of Directors.

Management’s monthly review of the adequacy of the allowance includes three main components. The first component is an analysis of loss potential in various homogeneous segments of the portfolio based on historical trends and the risk inherent in each category. Previously, management applied a five year historical loss ratio to each loan category to estimate the inherent loss in these pooled loans. However, as a result of the decline in economic conditions and the unprecedented increases in delinquencies and charge offs experienced by the industry, the Company no longer considers five year historical losses relevant indicators of future losses. Management began applying 12 to 24 month historical loss ratios to each loan category to more accurately project losses in the near future.

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

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

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

Net charge-offs were $834,000 or 0.23% of gross loans during the three months ended June 30, 2014 compared to $998,000 or 0.26% of gross loans for the same three month period in 2013. The provision for loan losses was $100,000 for the quarter ended June 30, 2014 compared to $900,000 for the same quarter in the prior year. The following table details selected activity associated with the allowance for loan losses for the three months ended June 30, 2014 and 2013:

 
 
Three Months Ended June 30,
 
 
2014
 
2013
Beginning Balance
$
9,845,755

$
11,105,226

Provision
 
100,000

 
900,000

Charge-offs
 
(1,016,477)

 
(1,081,851)

Recoveries
 
182,879

 
83,904

Ending Balance
$
9,112,157

$
11,007,279

 
 
 
 
 
Allowance For Loan Losses As A Percentage Of Gross Loans Receivable, Held For Investment At The End Of The Period
 
2.6
%
 
2.9
%
Allowance For Loan Losses As A Percentage Of Impaired Loans At
  The End Of The Period
 
32.5
%
 
31.9
%
Impaired Loans
$
28,088,028

$
34,527,535

Gross Loans Receivable, Held For Investment And Held For Sale
$
358,378,502

$
387,126,732

Total Loans Receivable, Net
$
346,605,413

$
374,049,099


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


39



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

Non-Interest Income - Non-interest income decreased $411,000 or 23.6% to $1.3 million for the three months ended June 30, 2014, compared to $1.7 million for the three months ended June 30, 2013. The following table provides a detailed analysis of the changes in the components of non-interest income:
 
Three Months Ended June 30,
 
Increase (Decrease)
 
 
2014
 
 
2013
 
 
Amounts
 
 
Percent
Gain (Loss) On Sale Of Investments
$
(39,485
)
 
$
369,729

 
$
(409,214)

 
 
(110.7)%
Gain On Sale Of Loans
 
218,288

 
 
210,840

 
 
7,448

 
 
3.5
Service Fees On Deposit Accounts
 
284,071

 
 
278,263

 
 
5,808

 
 
2.1
Commissions From Insurance Agency
 
109,229

 
 
104,649

 
 
4,580

 
 
4.4
Income From Cash Value Of
   Life Insurance
 
198,537

 
 
78,000

 
 
120,537

 
 
154.5
Trust Income
 
141,000

 
 
135,000

 
 
6,000

 
 
4.4
Check Card Fee Income
 
233,861

 
 
222,929

 
 
10,932

 
 
4.9
CDFI Financial Award Income
 
17,750

 
 
220,071

 
 
(202,321
)
 
 
(91.9)
Other
 
168,687

 
 
123,422

 
 
45,265

 
 
36.7
Total Non-Interest Income
$
1,331,938
 
$
1,742,903

 
$
(410,965)

 
 
(23.6)%

The loss on sale of investments was $39,000 during the quarter ended June 30, 2014, a decrease of $409,000 or 110.7% compared to a gain of $370,000 for the same period last year. The loss resulted from the sale of 12 investments during the quarter ended June 30, 2014 compared to seven investments during the same period in 2013. Management elected to sell a portion of the Bank's investments that were anticipated to perform poorly when rates rise. These investments were replaced with alternative investments that perform better in a rising rate environment.

Income from cash value of life insurance increased $121,000 or 154.5% to $199,000 during the quarter ended June 30, 2014 from $78,000 for the same period in 2013. The Company recognized $124,000 in death benefits in 2014 in addition to $75,000 in income related to changes in the cash surrender value of the bank owned life insurance.

CDFI financial award income decreased $202,000 or 91.9% during the three months ended June 30, 2014, compared to the same period in 2013.

General And Administrative Expenses –For the quarter ended June 30, 2014, non-interest expense decreased $75,000 or 1.4% to $5.3 million compared to $5.4 million for the same period in 2013. The decrease in non-interest expense was primarily a result of a decrease in the prepayment penalties on FHLB advances and net cost of operation of other real estate owned. The following table provides a detailed analysis of the changes in the components of general and administrative expenses:
 
Three Months Ended June 30,
 
Increase (Decrease)
 
 
2014
 
 
2013
 
 
Amounts
 
 
Percent
Compensation And Employee Benefits
$
2,836,547

 
$
2,768,450

 
$
68,097

 
 
2.5%
Occupancy
 
474,836

 
 
487,664

 
 
(12,828
)
 
 
(2.6)
Advertising
 
142,863

 
 
70,088

 
 
72,775

 
 
103.8
Depreciation And Maintenance
Of Equipment
 
393,270

 
 
369,760

 
 
23,510

 
 
6.4
FDIC Insurance Premiums
 
178,785

 
 
196,476

 
 
(17,691
)
 
 
(9.0)
Amortization of Intangibles
 

 
 
12,501

 
 
(12,501
)
 
 
(100.0)
Net Cost Of Operation Of Other Real
Estate Owned
 
254,474

 
 
341,392

 
 
(86,918
)
 
 
(25.5)
Prepayment Penalties on FHLB Advances
 

 
 
85,089

 
 
(85,089
)
 
 
(100.0)
Other
 
1,035,848

 
 
1,060,192

 
 
(24,344
)
 
 
(2.3)
Total General And Administrative
   Expenses

$
5,316,623

 
$
5,391,612

 
$
(74,989
)
 
 
(1.4)%


40



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

Compensation and employee benefits expenses increased $68,000, or 2.5% to $2.8 million for the three months ended June 30, 2014 compared to the same period last year. The Company recognized $100,000 in accrued bonuses during the three months ended June 30, 2014 related to a new incentive compensation plan offered to employees during the year. Occupancy expense decreased $13,000 or 2.6% to $475,000 for the three months ended June 30, 2014 compared to $488,000 for the three months ended June 30, 2013. Depreciation and maintenance of equipment increased $24,000 or 6.4% during the same period.

Net cost of operation of other real estate owned decreased $87,000 or 25.5% to $254,000 during the quarter ended June 30, 2014 from $341,000 during the quarter ended June 30, 2013. This amount includes all expenses associated with other real estate owned including write-down in value and gain or loss on sales incurred during the period. Other real estate owned was $4.1 million at June 30, 2014 compared to $4.8 million at June 30, 2013.

The Company incurred a prepayment penalty of $85,000 for paying down FHLB advances during the three months ended June 30, 2013. The Company elected to prepay these higher rate advances to lower cost of funds. The Company did not prepay any advances during the three months ended June 30, 2014.

Other expenses decreased $24,000, or 2.3% to $1.0 million for the three month period ended June 30, 2014 compared to $1.1 million for the same period in the prior year. Other expenses include legal, professional, and consulting expenses, stationary and office supplies and other miscellaneous expenses.

Provision For Income Taxes – The provision for income taxes increased $275,000 or 93.7% to $568,000 for the three months ended June 30, 2014 from $293,000 for the same period one year ago. Income before income taxes was $2.0 million and $1.2 million for the three months ended June 30, 2014 and 2013, respectively. The Company’s combined federal and state effective income tax rate for the current quarter was 27.8% compared to 25.0% for the same quarter one year ago.

Results of Operations for the Six Month Periods Ended June 30, 2014 and 2013

Net Income Available to Common Shareholders - Net income available to common shareholders increased $1.2 million or 92.4% to $2.6 million for the six months ended June 30, 2014 compared to $1.3 million for the six months ended June 30, 2013. The increase in net income was primarily the result of an increase of $462,000 in net interest income combined with a decrease of $1.8 million in the provision for loan losses. These factors were offset slightly by a decrease of $820,000 in non-interest income.

Net Interest Income - The net interest margin increased 20 basis points to 3.03% for the six months ended June 30, 2014 from 2.83% for the comparable period in 2013. As a result, net interest income increased $462,000 or 4.1% to $11.8 million during the six months ended June 30, 2014, compared to $11.3 million for the same period in 2013. During the six months ended June 30, 2014, average interest earning assets decreased $21.3 million or 2.6% to $794.7 million while average interest-bearing liabilities decreased $34.2 million or 4.6% to $707.8 million from $742.1 million for the six months ended June 30, 2013.
Interest Income - Total interest income decreased $554,000 or 3.6% to $14.8 million during the six months ended June 30, 2014 from $15.4 million for the same period in 2013. This decrease is the result of the decrease in interest-earning assets. Total interest income on loans decreased $1.3 million or 11.9% to $9.8 million during the six months ended June 30, 2014 from $11.1 million for the same period in 2013 as a result of the average loan portfolio balance decreasing $31.4 million or 8.1% to $356.0 million from $387.4 million for the same period in 2013 and the yield on the loan portfolio decreasing 24 basis points to 5.50%. Interest income from mortgage-backed securities increased $447,000 or 17.3% to $3.0 million as a result of a 32 basis point increase in the portfolio yield combined with a $5.1 million or 2.1% increase in the average balance. Tax equivalent interest income from investment securities increased $327,000 or 16.9% to $2.3 million as a result of an increase of 26 basis points in the yield combined with an increase of $8.0 million or 4.6% in the average balance of the investment securities portfolio.
The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the six months ended June 30, 2014 and 2013:

41



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

 
Six Months Ended June 30,
 
 
2014
 
2013
 
 
 
 
 
 



Average Balance
 




Yield(1)
 
 



Average Balance
 




Yield(1)
 
 
Increase (Decrease) In Interest And Dividend Income From 2013
 
Loans Receivable, Net
$
355,979,382
 
5.50
%
 
$
387,353,900
 
5.74
%
 
$
(1,325,021)

 
Mortgage-Backed Securities
 
252,847,394
 
2.40

 
 
247,726,224
 
2.08

 
 
446,687

 
Investment Securities(2)
 
182,978,094
 
2.47

 
 
175,000,872
 
2.21

 
 
326,644

 
Overnight Time And
   Certificates of Deposit
 
2,884,270
 
0.42

 
 
5,871,124
 
0.14

 
 
1,982

 
Total Interest-Earning Assets
$
794,689,140
 
3.79
%
 
$
815,952,120
 
3.83
%
 
$
(549,708)

 
(1) Annualized
(2) Tax equivalent basis is calculated using an effective tax rate of 38% and was $247,238 and $243,384 for the six
months ended June 30, 2014 and 2013, respectively.

Interest Expense - Total interest expense decreased $1.0 million or 24.9% to $3.1 million during the six months ended June 30, 2014 compared to $4.1 million for the same period last year. The decrease in total interest expense is attributable to decreases in interest rates paid and a $34.2 million decrease in the average balance of interest-bearing liabilities. Interest expense on deposits decreased $547,000 or 29.1% to $1.3 million during the six months ended June 30, 2014 compared to $1.9 million for the same period last year. The decrease was attributable to a 16 basis point decrease in the cost of deposit accounts combined with a $12.5 million decrease in average interest-bearing deposits to $609.2 million for the six month period ended June 30, 2014 when compared to $621.6 million for the six month period ended June 30, 2013. The decrease was concentrated in the certificate accounts, which decreased $18.9 million or 6.8% to $259.9 million during the six months ended June 30, 2014 compared to the same period in 2013. Interest expense on advances and other borrowings decreased $467,000 or 24.6% to $1.4 million during the six months ended June 30, 2014. The average balance of FHLB advances and other borrowed money decreased $21.8 million or 19.9% to $87.4 million during the six months ended June 30, 2014 from $109.2 million for the same period last year.

The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the six months ended June 30, 2014 and 2013:
 
Six Months Ended June 30,
 
2014
 
2013
 
 
 
 



Average Balance
 




Yield(1)
 
 



Average Balance
 




Yield(1)
 
Decrease In Interest Expense From 2013
Now And Money Market
   Accounts

$
323,584,744

 
0.19%
 
$
319,221,712

 
0.28%
$
(134,323
)
Statement Savings Accounts
 
25,688,599

 
0.10
 
 
23,665,732

 
0.18
 
(8,072
)
Certificates Accounts
 
259,885,905

 
0.78
 
 
278,736,209

 
1.01
 
(404,911
)
FHLB Advances And
   Other Borrowed Money
 
87,431,287

 
3.28
 
 
109,187,416

 
3.48
 
(466,599
)
Junior Subordinated Debentures
 
5,155,000

 
1.95
 
 
5,155,000

 
2.00
 
(1,395
)
Senior Convertible Debentures
 
6,084,000

 
8.00

 
 
6,084,000

 
8.00

 

Total Interest-Bearing Liabilities
$
707,829,535

 
0.86
%
 
$
742,050,069

 
1.10
%
$
(1,015,300
)
(1) Annualized

Provision for Loan Losses - The provision for loan losses was $200,000 for the six months ended June 30, 2014 compared to $2.0 million for the same period in the prior year. The decrease in the provision for loan losses is attributable to a decline in net charge offs. Net charge offs for the six months ended June 30, 2014 declined $1.1 million or 43.6% to $1.3 million from $2.4 million during the comparable period in 2013.

42



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

The following table details selected activity associated with the allowance for loan losses for the six months ended June 30, 2014 and 2013:

 
 
Six Months Ended June 30,
 
 
2014
 
2013
Beginning Balance
$
10,241,970
$
11,318,371
Provision
 
200,000
 
2,045,381
Charge-offs
 
(1,794,052)
 
(2,467,311)
Recoveries
 
464,239
 
110,838
Ending Balance
$
9,112,157
$
11,007,279

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

Non-Interest Income - Non-interest income decreased $820,000 or 22.2% to $2.9 million for the six months ended June 30, 2014, compared to $3.7 million for the six months ended June 30, 2013. The following table provides a detailed analysis of the changes in the components of non-interest income:
 
Six Months Ended June 30,
 
Increase (Decrease)
 
 
2014
 
 
2013
 
 
Amounts
 
 
Percent
Gain On Sale Of Investments
$
44,871

 
$
753,780

 
$
(708,909)

 
 
(94.0)%
Gain On Sale Of Loans
 
346,530

 
 
395,628

 
 
(49,098
)
 
 
(12.4)
Service Fees On Deposit Accounts
 
560,556

 
 
542,094

 
 
18,462

 
 
3.4
Income From Cash Value Of
   Life Insurance
 
404,364

 
 
183,000

 
 
221,364

 
 
121.0
Commissions From Insurance
   Agency
 
200,863

 
 
244,962

 
 
(44,099
)
 
 
(18.0)
Trust Income
 
246,000

 
 
270,000

 
 
(24,000
)
 
 
(8.9)
Check Card Fee Income
 
444,556

 
 
418,122

 
 
26,434

 
 
6.3
CDFI Financial Award Income
 
299,710

 
 
636,071

 
 
(336,361
)
 
 
(52.9)
Other
 
320,887

 
 
244,228

 
 
76,659

 
 
31.4
Total Non-Interest Income
$
2,868,337

 
$
3,687,885

 
$
(819,548)

 
 
(22.2)%

Gain on sale of investments was $45,000 during the six months ended June 30, 2014 a decrease of $709,000 or 94.0% compared to $754,000 during the same period last year. The gain resulted from the sale of 21 investments during the period compared to 12 in the comparable period of 2013. Gain on sale of loans decreased $49,000 or 12.4% to $347,000 during the six months ended June 30, 2014 compared to $396,000 for the same period last year.

Income from the cash value of life insurance increased $221,000 or 121.0% to $404,000 for the six months ended June 30, 2014 compared to $183,000 for the same period in 2013. The Bank recognized $254,000 in death benefits in 2014 in addition to $150,000 in income related to changes in the cash surrender value of the bank owned life insurance policies.

CDFI financial award income decreased $336,000 or 52.9% during the six months ended June 30, 2014 compared to the same period in 2013. The Bank received a CDFA award in 2013 in recognition of its commitment to community development. The CDFA award totaled $1.5 million, of which $271,000 in income remains to be recognized as the microloans are funded.

General And Administrative Expenses – For the six months ended June 30, 2014, non-interest expense decreased $261,000 or 2.4% to $10.6 million compared to $10.9 million for the same period in 2013. The decrease in non-interest expense is primarily a result of a decrease in net cost of operation of other real estate owned and prepayment penalties on FHLB advances during the six months ended June 30, 2014 offset partially by an increase in compensation and employee benefits and advertising expenses. The following table provides a detailed analysis of the changes in the components of general and administrative expenses:

43



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

 
Six Months Ended June 30,
 
Increase (Decrease)
 
 
2014
 
 
2013
 
 
Amounts
 
 
Percent
Compensation And Employee Benefits
$
5,683,549

 
$
5,589,825

 
$
93,724

 
 
1.7%
Occupancy
 
975,752

 
 
962,978

 
 
12,774

 
 
1.3
Advertising
 
243,259

 
 
177,731

 
 
65,528

 
 
36.9
Depreciation And Maintenance Of Equipment
 
810,776

 
 
808,932

 
 
1,844

 
 
0.2
FDIC Insurance Premiums
 
364,242

 
 
364,198

 
 
44

 
 
0.0
Amortization of Intangibles
 
11,970

 
 
25,002

 
 
(13,032
)
 
 
(52.1)
Net Cost Of Operation Of Other Real
Estate Owned
 
523,570

 
 
737,761

 
 
(214,191
)
 
 
(29.0)
Prepayment Penalties On FHLB Advances
 

 
 
238,342

 
 
(238,342
)
 
 
(100.0)
Other
 
2,030,184

 
 
1,999,727

 
 
30,457

 
 
1.5
Total General And Administrative
   Expenses

$
10,643,302

 
$
10,904,496

 
$
(261,194
)
 
 
(2.4)%

Net cost of operation of other real estate owned decreased $214,000 or 29.0% to $524,000 for the six months ended June 30, 2014 from $738,000 during the six months ended June 30, 2013. Other real estate owned was $4.1 million at June 30, 2014 compared to $4.8 million at June 30, 2013.

The Company incurred a prepayment penalty of $238,000 for paying down FHLB advances during the six months ended June 30, 2013. As part of the Company's strategy, management elected to replace some higher rate advances with lower rate callable certificates of deposit. The Company did not prepay any FHLB advances during the six months ended June 30, 2014.

Compensation and employee benefits expenses were at $5.7 million for the six months ended June 30, 2014, increasing $94,000 or 1.7% from $5.6 million during the same period last year. The Company recognized $100,000 in accrued bonuses during the six months ended June 30, 2014 related to a new incentive compensation plan offered to employees during the year compared to none in 2013.

Provision For Income Taxes – The provision for income taxes increased $519,000 or 104.0% to $1.0 million for the six months ended June 30, 2014 from $499,000 for the same period one year ago. Income before income taxes was $3.8 million and $2.0 million for the six months ended June 30, 2014 and 2013, respectively. The Company’s combined federal and state effective income tax rate for the six months ended June 30, 2014 was 26.8% compared to 24.4% for the same period in 2013.







44



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

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

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

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

During the six months ended June 30, 2014 loan repayments exceeded loan disbursements resulting in a $12.3 million or 3.4% decrease in total net loans receivable. During the six months ended June 30, 2014, deposits decreased $273,000 and FHLB advances decreased $12.6 million. The Bank had $179.4 million in additional borrowing capacity at the FHLB at the end of the period. At June 30, 2014, the Bank had $152.6 million of certificates of deposit maturing within one year. Based on previous experience, the Bank anticipates a significant portion of these certificates will be renewed on maturity.

At June 30, 2014, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action with total risk based, Tier 1 risk based and Tier 1 leverage ratios of 23.1%, 21.8% and 9.9%, respectively. To be categorized as “well capitalized” the Bank must maintain minimum total risk based, Tier 1 risk based and Tier 1 leverage ratios of 10%, 6% and 5%, respectively. There are no current conditions or events that management believes would change the Company’s or the Bank’s category.

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

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at June 30, 2014.




(Dollars in thousands)


Within
One
Month
 

After One
Through
Three
Months
 
After
Three
Through
Twelve
Months
 



Within
One Year
 

Greater
Than
One
Year
 




Total
Unused Lines Of Credit
$
43

 
$
249

 
$
10,562

 
$
10,854

 
$
34,453

 
$
45,307

Standby Letters Of Credit
630

 
134

 
620

 
1,384

 
11

 
1,395

Total
$
673

 
$
383

 
$
11,182

 
$
12,238

 
$
34,464

 
$
46,702



45


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

For the three and six months ended June 30, 2014, the Bank's interest rate spread, defined as the average yield on interest bearing assets less the average rate paid on interest bearing liabilities was 3.05% and 2.93% respectively.

46


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES


Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a - 15(e) of the Securities Exchange Act of 1934 (“Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management as of the end of the period covered by this quarterly report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that at June 30, 2014 the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms. There have been no significant changes in our internal controls over financial reporting during the quarter ended June 30, 2014 that have materially affected or are reasonably likely to affect our internal controls over financial reporting.

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

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

Item 1A    Risk Factors
There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Item 2    Unregistered Sales of Equity Securities and Use Of Proceeds

None

Item 3    Defaults Upon Senior Securities
None

Item 4    Mine Safety Disclosures

Not applicable

Item 5    Other Information
None

Item 6    Exhibits


47


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

3.1
Articles of Incorporation, as amended (1)
3.2
Articles of Amendment, including Certificate of Designation relating to the Company’s Fixed Rate Cumulative Perpetual Preferred Stock Series B (2)
3.3
Amended and Restated Bylaws (3)
4.1
Form of Stock Certificate of the Company and other instruments defining the rights of security holders, including indentures (4)
4.2
Form of Stock Certificate for the Series B Preferred Shares (2)
4.3
Warrant to purchase shares of the Company’s common stock dated December 19, 2008 (5)
4.4
Form of Indenture with respect to the Company’s 8.0% Convertible Senior Debentures Due 2029 (6)
4.5
Specimen Convertible Senior Debenture Due 2029 (6)
4.6
Letter Agreement dated September 29, 2010 between Security Federal Corporation and the United States Department of the Treasury, including the Exchange Agreement – Standard Terms, with respect to the exchange of the Series A Fixed Rate Cumulative Perpetual Preferred Stock for the Series B Fixed Rate Cumulative Perpetual Preferred Stock (2)
4.7
Letter Agreement dated September 29, 2010 between Security Federal Corporation and the United States Department of the Treasury, including the Securities Purchase Agreement – Standard Terms, with respect to the purchase of the Series B Fixed Rate Cumulative Perpetual Preferred Stock (2)
10.1
1993 Salary Continuation Agreements (7)
10.2
Amendment One to 1993 Salary Continuation Agreements (8)
10.3
Form of 2006 Salary Continuation Agreement (9)
10.4
1999 Stock Option Plan (10)
10.5
2002 Stock Option Plan (11)
10.6
2006 Stock Option Plan (12)
10.7
2008 Equity Incentive Plan (13)
10.8
Form of incentive stock option agreement and non-qualified stock option agreement pursuant to the 2006 Stock Option Plan (12)
10.9
2004 Employee Stock Purchase Plan (14)
10.10
Incentive Compensation Plan (7)
10.11
Form of Security Federal Bank Salary Continuation Agreement (9)
10.12
Form of Security Federal Split Dollar Agreement (9)
10.13
Form of Compensation Modification Agreement (5)
14
Code of Ethics (15)
25
Form T-1; Statement Eligibility of Trustee (6)
31.1
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
101
The following materials from Security Federal Corporation’s Quarterly Report on Form 10-Q for the quarter     ended June 30, 2014, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets;     (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income (Loss); (d) Consolidated Statements of Changes in Shareholders’Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements (16)
_____________
(1)
Filed on June 26, 1998, as an exhibit to the Company’s Proxy Statement and incorporated herein by reference.
(2)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on September 30, 2010.    
(3)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 19, 2011.
(4)
Filed on August 12, 1987, as an exhibit to the Company’s Registration Statement on Form 8-A and incorporated herein by reference.
(5)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on December 23, 2008.
(6)
Filed on July 13, 2009 as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-160553) and incorporated herein by reference.
(7)
Filed on June 28, 1993, as an exhibit to the Company’s Annual Report on Form 10-KSB and incorporated herein by reference.
(8)
Filed as an exhibit to the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 1993 and incorporated herein by reference.

48


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

(9)
Filed on May 24, 2006 as an exhibit to the Company’s Current Report on Form 8-K dated May 18, 2006 and incorporated herein by reference.
(10)
Filed on March 2, 2000, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference
(11)
Filed on January 3, 2003, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference.
(12)
Filed on August 22, 2006, as an exhibit to the Company's Registration Statement on Form S-8 (Registration Statement No. 333-136813) and incorporated herein by reference.
(13)
Filed on November 12, 2008, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference.
(14)
Filed on June 18, 2004, as an exhibit to the Company’s Proxy Statement and incorporated herein by reference.
(15)
Filed on June 29, 2006, as an exhibit to the Company’s Annual Report on Form 10-K and incorporated herein by reference.
(16)
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section
18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those     sections.




49



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes To Consolidated Financial Statements




Signatures

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date:
August 13, 2014
 
By:
/s/J. Chris Verenes
 
J. Chris Verenes
 
Chief Executive Officer
 
Duly Authorized Representative

Date:
August 13, 2014
 
By:
/s/Jessica T. Cummins
 
Jessica T. Cummins
 
Chief Financial Officer
 
Duly Authorized Representative









50


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

EXHIBIT INDEX

31.1
Certifications of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2
Certifications of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32
Certifications of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
101
The following materials from Security Federal Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income (Loss); (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements




51