SFDL 10-Q Quarterly Report Sept. 30, 2015

SFDL 10-Q Quarter ended Sept. 30, 2015

SECURITY FEDERAL CORP

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10-Q 1 sfdl-20150930x10q.htm 10-Q 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10 – Q

(Mark one)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

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

FOR THE TRANSITION PERIOD:



FROM:		TO:

COMMISSION FILE NUMBER: 0-16120

SECURITY FEDERAL CORPORATION

(Exact name of registrant as specified in its charter)



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

238 RICHLAND AVENUE NORTHWEST, AIKEN, SOUTH CAROLINA 29801

(Address of principal executive office and Zip Code)

(803) 641-3000

(Registrant’s telephone number, including area code)

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



YES	X	NO

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

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



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

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



YES	NO	X

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




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

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

SCHEDULES OMITTED

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Part 1. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets



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

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)



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

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)



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



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

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

For the Nine Months Ended September 30, 2015 and 2014



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



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

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)



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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES



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

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

1. Basis of Presentation

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

2. Principles of Consolidation

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

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

3. Critical Accounting Policies

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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

3. Critical Accounting Policies, Continued

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

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

4. Earnings Per Common Share

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

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

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



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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

4. Earnings Per Common Share, Continued

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



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



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

5. Stock-Based Compensation

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



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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

5. Stock-Based Compensation, Continued



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

Options Exercisable	21,100			33,900

Options Available For Grant	50,000			50,000

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



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

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

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

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

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

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

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

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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

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



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

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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

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



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

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

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

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

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



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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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



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

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

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

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

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

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



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

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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

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

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

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



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

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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net

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



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

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



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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net, Continued

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



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



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

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



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



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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net, Continued

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

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



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

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

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



	For the Three Months Ended September 30, 2015
	Residential Real Estate			Consumer			Commercial Business		Commercial Real Estate			Total
Beginning Balance	$	1,310,078		$	1,007,984		$	747,067	$	4,730,453		$	7,795,582
Provision	142,917			199,719			4,565		(547,201		)	(200,000		)
Charge-Offs	(59,996		)	(77,720		)	—		(303,682		)	(441,398		)
Recoveries	782			26,783			564		752,710			780,839
Ending Balance	$	1,393,781		$	1,156,766		$	752,196	$	4,632,280		$	7,935,023



	For the Nine Months Ended September 30, 2015
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	1,392,065		$	886,716		$	159,353		$	5,919,362		$	8,357,496
Provision	106,079			656,424			595,906			(1,458,409		)	(100,000		)
Charge-Offs	(105,912		)	(471,345		)	(10,947		)	(750,154		)	(1,338,358		)
Recoveries	1,549			84,971			7,884			921,481			1,015,885
Ending Balance	$	1,393,781		$	1,156,766		$	752,196		$	4,632,280		$	7,935,023

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net, Continued



	For the Three Months Ended September 30, 2014
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	1,507,281		$	833,746		$	496,578		$	6,274,552		$	9,112,157
Provision	26,596			73,403			36,529			(136,528		)	—
Charge-Offs	(71,701		)	(75,262		)	(3,703		)	(440,276		)	(590,942		)
Recoveries	121			8,440			1,950			115,248			125,759
Ending Balance	$	1,462,297		$	840,327		$	531,354		$	5,812,996		$	8,646,974



	For the Nine Months Ended September 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	(60,716		)	230,236			104,527			(74,047		)	200,000
Charge-Offs	(319,364		)	(283,302		)	(20,835		)	(1,761,493		)	(2,384,994		)
Recoveries	135,734			45,616			21,004			387,644			589,998
Ending Balance	$	1,462,297		$	840,327		$	531,354		$	5,812,996		$	8,646,974

The following tables present information related to impaired loans evaluated individually and collectively for impairment in the allowance for loan losses at the dates indicated:



	Allowance For Loan Losses
September 30, 2015	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	—	$	1,393,781	$	1,393,781
Consumer	10,600		1,146,166		1,156,766
Commercial Business	—		752,196		752,196
Commercial Real Estate	29,300		4,602,980		4,632,280
Total	$	39,900	$	7,895,123	$	7,935,023



	Allowance For Loan Losses
December 31, 2014	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	—	$	1,392,065	$	1,392,065
Consumer	2,600		884,116		886,716
Commercial Business	—		159,353		159,353
Commercial Real Estate	472,400		5,446,962		5,919,362
Total	$	475,000	$	7,882,496	$	8,357,496

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net, Continued

The following tables present information related to impaired loans evaluated individually and collectively for impairment in loans receivable at the dates indicated:



	Loans Receivable
September 30, 2015	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	3,043,675	$	74,871,338	$	77,915,013
Consumer	196,335		50,604,415		50,800,750
Commercial Business	165,401		8,809,169		8,974,570
Commercial Real Estate	10,478,577		182,193,471		192,672,048
Total	$	13,883,988	$	316,478,393	$	330,362,381



	Loans Receivable
December 31, 2014	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	2,519,814	$	74,763,003	$	77,282,817
Consumer	218,232		50,172,992		50,391,224
Commercial Business	236,030		10,328,437		10,564,467
Commercial Real Estate	17,273,879		192,256,330		209,530,209
Total	$	20,247,955	$	327,520,762	$	347,768,717

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired management measures impairment and records the loan at fair value. Fair value is estimated using one of the following methods: fair value of the collateral less estimated costs to sale, discounted cash flows, or market value of the loan based on similar debt. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, the Company reviews the most recent appraisal and if it is over 24 months old will request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, management may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. The average balance of impaired loans was $14.1 million for the three months ended September 30, 2015 compared to $21.2 million for the three months ended September 30, 2014.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net, Continued

The following tables are a summary of information related to impaired loans at September 30, 2015 and December 31, 2014 and for the three and nine months ended September 30, 2015 and 2014 .



			At				At
	September 30, 2015						December 31, 2014
Impaired Loans	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With No Related Allowance Recorded:
Residential Real Estate	$	3,043,675	$	3,182,805	$	—	$	2,519,814	$	2,618,003	$	—
Consumer	96,530		105,030		—		152,029		159,529		—
Commercial Business	165,401		365,401		—		236,030		436,030		—
Commercial Real Estate	10,027,121		12,809,652		—		13,721,964		18,088,149		—
With An Allowance Recorded:
Residential Real Estate	—		—		—		—		—		—
Consumer	99,805		99,805		10,600		66,203		66,203		2,600
Commercial Business	—		—		—		—		—		—
Commercial Real Estate	451,456		458,256		29,300		3,551,915		3,582,465		472,400
Total
Residential Real Estate	3,043,675		3,182,805		—		2,519,814		2,618,003		—
Consumer	196,335		204,835		10,600		218,232		225,732		2,600
Commercial Business	165,401		365,401		—		236,030		436,030		—
Commercial Real Estate	10,478,577		13,267,908		29,300		17,273,879		21,670,614		472,400
Total	$	13,883,988	$	17,020,949	$	39,900	$	20,247,955	$	24,950,379	$	475,000

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net, Continued



	For the Three Months Ended September 30,
	2015				2014
Impaired Loans	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Residential Real Estate	$	3,084,808	$	—	$	2,618,971	$	—
Consumer	97,894		—		161,882		—
Commercial Business	170,601		—		16,089		—
Commercial Real Estate	10,168,004		71,766		16,726,235		98,542
With An Allowance Recorded:
Residential Real Estate	—		—		—		—
Consumer	100,743		1,201		67,239		2,082
Commercial Business	—		—		458,059		—
Commercial Real Estate	452,393		2,303		1,159,433		22,781
Total
Residential Real Estate	3,084,808		—		2,618,971		—
Consumer	198,637		1,201		229,121		2,082
Commercial Business	170,601		—		474,148		—
Commercial Real Estate	10,620,397		74,069		17,885,668		121,323
Total	$	14,074,443	$	75,270	$	21,207,908	$	123,405



	For the Nine Months Ended September 30,
	2015				2014
Impaired Loans	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With No Related Allowance Recorded:
Residential Real Estate	$	3,132,323	$	8,477	$	2,676,070	$	—
Consumer	100,937		247		171,364		—
Commercial Business	198,430		—		16,089		—
Commercial Real Estate	10,510,256		246,219		18,142,478		266,000
With An Allowance Recorded:
Residential Real Estate	—		—		—		—
Consumer	101,435		3,615		67,872		4,168
Commercial Business	—		—		461,206		—
Commercial Real Estate	456,982		15,919		1,173,816		51,156
Total
Residential Real Estate	3,132,323		8,477		2,676,070		—
Consumer	202,372		3,862		239,236		4,168
Commercial Business	198,430		—		477,295		—
Commercial Real Estate	10,967,238		262,138		19,316,294		317,156
Total	$	14,500,363	$	274,477	$	22,708,895	$	321,324

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net, Continued

In the course of resolving delinquent loans, the Bank may choose to restructure the contractual terms of certain loans. A troubled debt restructuring ("TDR") is a restructuring in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that it would not otherwise consider (Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 310-40). The concessions granted on TDRs generally include terms to reduce the interest rate, extend the term of the debt obligation, or modify the payment structure on the debt obligation. The Bank grants such concessions to reassess the borrower’s financial status and develop a plan for repayment. TDRs of $8.1 million and $9.6 million were included in impaired loans at September 30, 2015 and December 31, 2014 , 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 September 30,
	2015					2014
Troubled Debt Restructurings	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Residential Real Estate	—	$	—	$	—	—	$	—	$	—
Consumer	1	36,460		36,460		—	—		—
Commercial Business	—	—		—		—	—		—
Commercial Real Estate	2	32,411		32,411		—	—		—
Total	3	$	68,871	$	68,871	—	$	—	$	—



	For the Nine Months Ended September 30,
	2015					2014
Troubled Debt Restructurings	Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Contracts	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Residential Real Estate	—	$	—	$	—	—	$	—	$	—
Consumer	1	36,460		36,460		—	—		—
Commercial Business	—	—		—		—	—		—
Commercial Real Estate	5	872,703		872,703		1	79,072		79,072
Total	6	$	909,163	$	909,163	1	$	79,072	$	79,072

During the nine months ended September 30, 2015 , the Bank modified six loans as TDRs, three of which were modified during the three months ended September 30, 2015. The Bank lowered the interest rate on two of the loans to allow the borrowers to begin making monthly principal and interest payments on the loans and changed the monthly payment to an interest only payment for an agreed upon period for the other four loans.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net, Continued

There were no loans modified as a TDR during the three months ended September 30, 2014. During the nine months ended September 30, 2014, the Bank modified one loan as a TDR by lowering the interest rate. This modification allowed the borrower to begin making monthly principal and interest payments on the loan.

At September 30, 2015 , three loans totaling $684,000 that had previously been restructured were in default. Two of the loans, with a combined outstanding balance of $555,000 , defaulted during the nine month period ended September 30, 2015 . In comparison, at September 30, 2014 , five loans totaling $2.2 million that had previously been restructured were in default, all of which defaulted during the nine month period September 30, 2014 . One loan that had been previously restructured within the last twelve months defaulted during the nine months ended September 30, 2015 . The Bank considers any loan 30 days or more past due to be in default.

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

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

9. Regulatory Matters

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines of the regulatory framework for prompt corrective action, the Company must meet specific capital adequacy guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by applicable regulatory standards, including the newly implemented Basel III revised capital adequacy standards and relevant provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd Frank Act"), require the Bank to maintain (i) a minimum ratio of Tier 1 capital to average total assets, after certain adjustments, of 4.00%, (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of 6.00%, (iii) a minimum ratio of total-capital to risk-weighted assets of 8.00% and (iv) a minimum ratio of common equity Tier 1 capital ("CETI") to risk-weighted assets of 4.50%. A “well-capitalized” institution must generally maintain capital ratios 200 bps higher than the minimum guidelines.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

9. Regulatory Matters, Continued

The Federal Reserve requires the Company to maintain capital adequacy that generally parallels the FDIC requirements for the Bank. At September 30, 2015 , the Company and the Bank each exceeded all applicable capital requirements. The Company and the Bank’s regulatory capital amounts and ratios are as follows as of the dates indicated:



	Actual				For Capital Adequacy				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in Thousands)
September 30, 2015
SECURITY FEDERAL CORP.
Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	$	89,502	23.6	%	$	22,741	6.0	%	N/A		N/A
Total Risk-Based Capital (To Risk Weighted Assets)	94,276		24.9	%	30,322		8.0	%	N/A		N/A
Common Equity Tier 1 Capital (To Risk Weighted Assets)	62,502		16.5	%	17,056		4.5	%	N/A		N/A
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	89,502		11.2	%	31,989		4.0	%	N/A		N/A

SECURITY FEDERAL BANK
Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	$	87,787	23.2	%	$	22,724	6.0	%	$	30,299	8.0	%
Total Risk-Based Capital (To Risk Weighted Assets)	92,561		24.4	%	30,299		8.0	%	37,874		10.0	%
Common Equity Tier 1 Capital (To Risk Weighted Assets)	87,787		23.2	%	17,043		4.5	%	24,618		6.5	%
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	87,787		11.0	%	31,979		4.0	%	39,974		5.0	%

December 31, 2014
SECURITY FEDERAL CORP.
Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	$	77,746	20.6	%	$	15,073	4.0	%	N/A		N/A
Total Risk-Based Capital (To Risk Weighted Assets)	89,915		23.9	%	30,147		8.0	%	N/A		N/A
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	77,746		9.5	%	32,778		4.0	%	N/A		N/A

SECURITY FEDERAL BANK
Tier 1 Risk-Based Core Capital (To Risk Weighted Assets)	$	87,222	23.2	%	$	15,062	4.0	%	$	22,593	6.0	%
Total Risk-Based Capital (To Risk Weighted Assets)	91,973		24.4	%	30,123		8.0	%	37,654		10.0	%
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets)	87,222		10.6	%	32,792		4.0	%	40,991		5.0	%

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

10. Carrying Amounts and Fair Value of Financial Instruments

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

Accounting guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).



Level 1	Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries and money market funds.
Level 2	Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bonds, corporate debt securities and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts.
Level 3	Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

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

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. At September 30, 2015 , the Company’s investment portfolio was comprised of government and agency bonds, mortgage-backed securities issued by government agencies or GSEs, three private label CMO mortgage-backed securities, municipal securities, and two equity investments. Fair value measurement is based upon prices obtained from third party pricing services who use independent pricing models which rely on a variety of factors including reported trades, broker/dealer quotes, benchmark yields, economic and industry events and other relevant market information. As such, these securities are classified as Level 2.

Mortgage Loans Held for Sale

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

The Company usually delivers to, and receives funding from, the investor within 30 days . Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts" basis. The Company is not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. As a result of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is the same as the value of the loan amount at its origination . These loans are classified as Level 2.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

Impaired Loans

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

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

Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2015 , most of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The Company records impaired loans as nonrecurring Level 3. As of September 30, 2015 and December 31, 2014, the recorded investment in impaired loans was $13.9 million and $20.2 million , respectively.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 3. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the asset as nonrecurring Level 3.

Assets measured at fair value on a recurring basis are as follows at September 30, 2015 :



Assets:	Quoted Market Price In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
FHLB Securities	$	—	$	5,061,479	$	—
FFCB Securities	—		1,989,862		—
FNMA And FHLMC Bonds	—		1,014,661		—
SBA Bonds	—		113,126,235		—
Tax Exempt Municipal Bonds	—		80,531,367		—
Mortgage-Backed Securities	—		186,338,027		—
Equity Securities	—		290,600		—
Total	$	—	$	388,352,231	$	—

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

Assets measured at fair value on a recurring basis were as follows at December 31, 2014:



Assets:	Quoted Market Price In Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
FHLB Securities	$	—	$	13,246,661	$	—
FFCB Securities	—		5,667,994		—
FNMA Bonds	—		1,004,381		—
SBA Bonds	—		108,126,694		—
Tax Exempt Municipal Bonds	—		62,495,423		—
Mortgage-Backed Securities	—		238,852,713		—
Equity Securities	—		306,674		—
Total	$	—	$	429,700,540	$	—

There were no liabilities measured at fair value on a recurring basis at September 30, 2015 or December 31, 2014.

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. The table below presents assets measured at fair value on a nonrecurring basis at September 30, 2015 and December 31, 2014, aggregated by the level in the fair value hierarchy within which those measurements fall. There were no liabilities measured at fair value on a nonrecurring basis at September 30, 2015 or December 31, 2014.



Assets:	Level 1		Level 2		Level 3		Balance At September 30, 2015
Mortgage Loans Held For Sale	$	—	$	1,518,631	$	—	$	1,518,631
Collateral Dependent Impaired Loans ⁽¹⁾	—		—		13,844,088		13,844,088
Foreclosed Assets	—		—		4,928,998		4,928,998
Total	$	—	$	1,518,631	$	18,773,086	$	20,291,717

^{(1) IMPAIRED LOANS ARE REPORTED NET OF SPECIFIC RESERVES OF $} ^39,900



Assets:	Level 1		Level 2		Level 3		Balance At December 31, 2014
Mortgage Loans Held For Sale	$	—	$	1,864,999	$	—	$	1,864,999
Collateral Dependent Impaired Loans ⁽¹⁾	—		—		19,772,955		19,772,955
Foreclosed Assets	—		—		3,229,710		3,229,710
Total	$	—	$	1,864,999	$	23,002,665	$	24,867,664

^{(1) IMPAIRED LOANS ARE REPORTED NET OF SPECIFIC RESERVES OF} ^$475,000

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis at September 30, 2015 , the significant unobservable inputs used in the fair value measurements were as follows:



			Valuation	Significant
	Fair Value		Technique	Unobservable Inputs	Range
Collateral Dependent Impaired Loans	$	13,844,088	Appraised Value	Discount Rates/ Discounts to Appraised Values	0% - 36%
Foreclosed Assets	4,928,998		Appraised Value/Comparable Sales	Discount Rates/ Discounts to Appraised Values	13% - 100%

For assets and liabilities that are not presented on the balance sheet at fair value, the following methods are used to determine the fair value:

Cash and cash equivalents—The carrying amount of these financial instruments approximates fair value. All mature within 90 days and do not present unanticipated credit concerns.

Certificates of deposit with other banks—Fair value is based on market prices for similar assets.

Investment securities held to maturity—Securities held to maturity are valued at quoted market prices or dealer quotes.

Loans Receivable, Net—The fair value of loans are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. As discount rates are based on current loan rates as well as management estimates, the fair values presented may not be indicative of the value negotiated in an actual sale.

FHLB Stock—The fair value approximates the carrying value.

Deposits—The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.

FHLB Advances—Fair value is estimated based on discounted cash flows using current market rates for advances with similar terms.

Other Borrowed Money—The carrying value of these short term borrowings approximates fair value.

Senior Convertible Debentures— The fair value is estimated by discounting the future cash flows using the current rates at which similar debenture offerings with similar terms and maturities would be issued by similar institutions. As discount rates are based on current debenture rates as well as management estimates, the fair values presented may not be indicative of the value negotiated in an actual sale.

Junior Subordinated Debentures—The carrying value of junior subordinated debentures approximates fair value.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

The following tables are a summary of the carrying value and estimated fair value of the Company’s financial instruments at September 30, 2015 and December 31, 2014 presented in accordance with the applicable accounting guidance.



	September 30, 2015
	Carrying		Fair Value
(In Thousands)	Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash And Cash Equivalents	$	8,374	$	8,374	$	8,374	$	—	$	—
Certificates Of Deposits With Other Banks	2,095		2,095		—		2,095		—
Investment And Mortgage-Backed Securities	419,200		419,083		—		419,083		—
Loans Receivable, Net	319,755		318,531		—		—		318,531
FHLB Stock	2,224		2,224		2,224		—		—

Financial Liabilities:
Deposits:
Checking, Savings, And Money Market Accounts	$	414,432	$	414,432	$	414,432	$	—	$	—
Certificate Accounts	237,695		237,934		—		237,934		—
Advances From FHLB	33,280		34,658		—		34,658		—
Other Borrowed Money	7,725		7,725		7,725		—		—
Senior Convertible Debentures	6,084		6,084		—		6,084		—
Junior Subordinated Debentures	5,155		5,155		—		5,155		—



	December 31, 2014
	Carrying		Fair Value
(In Thousands)	Amount		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash And Cash Equivalents	$	10,193	$	10,193	$	10,193	$	—	$	—
Certificates Of Deposits With Other Banks	2,095		2,095		—		2,095		—
Investment And Mortgage-Backed Securities	429,701		429,701		—		429,701		—
Loans Receivable, Net	339,874		340,368		—		—		340,368
FHLB Stock	3,145		3,145		3,145		—		—

Financial Liabilities:
Deposits:
Checking, Savings, And Money Market Accounts	$	406,864	$	406,864	$	406,864	$	—	$	—
Certificate Accounts	253,251		253,300		—		253,300		—
Advances From FHLB	52,900		55,646		—		55,646		—
Other Borrowed Money	8,523		8,523		8,523		—		—
Senior Convertible Debentures	6,084		6,084		—		6,084		—
Junior Subordinated Debentures	5,155		5,155		—		5,155		—

At September 30, 2015 , the Bank had $52.8 million of off-balance sheet financial commitments. These commitments are to originate loans and unused consumer lines of credit and credit card lines. Because these obligations are based on current market rates, if funded, the original principal amount is considered to be a reasonable estimate of fair value.

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

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

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

11. Accounting and Reporting Changes

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

In January 2014, the FASB amended the Investments-Equity Method and Joint Ventures topic of the ASC to address accounting for investments in qualified affordable housing projects. If certain conditions are met, the amendments permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects by amortizing the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizing the net investment performance in the income statement as a component of income tax expense (benefit). If those conditions are not met, the investment should be accounted for as an equity method investment or a cost method investment in accordance with existing accounting guidance. The amendments will be effective for the Company for interim and annual reporting periods beginning after December 15, 2014 and should be applied retrospectively for all periods presented. Early adoption is permitted. The amendments did not have a material effect of the Company's financial statements.

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

In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company for reporting periods beginning after December 31, 2017. The Company will apply the guidance using a modified retrospective approach. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

In June 2014, the FASB issued guidance which makes limited amendments to the guidance on accounting for certain repurchase agreements. The new guidance (1) requires entities to account for repurchase-to-maturity transactions as secured borrowings (rather than as sales with forward repurchase agreements), (2) eliminates accounting guidance on linked repurchase financing transactions, and (3) expands disclosure requirements related to certain transfers of financial assets that are accounted for as sales

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

and certain transfers (specifically, repos, securities lending transactions, and repurchase-to-maturity transactions) accounted for as secured borrowings. The amendments will be effective for the Company for the first interim or annual period beginning after December 15, 2014. The Company will apply the guidance by making a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

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

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

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

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

12. Subsequent Events

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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

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

Forward-Looking Statements

Certain matters discussed in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risk and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors, including, but not limited to:

•

the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be affected by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing assets in our loan portfolio, and may result in our allowance for loan losses not being adequate to cover actual losses, and require us to materially increase our reserves;


•	changes in general economic conditions, either nationally or in our market areas;


•	changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;


•	fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas;


•	secondary market conditions for loans and our ability to sell loans in the secondary market;

•

results of examinations of the Company by the Board of Governors of the Federal Reserve and our bank subsidiary by the Federal Deposit Insurance Corporation and the South Carolina State Board of Financial Institutions, or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings;

•

legislative or regulatory changes that adversely affect our business, or increase capital requirements, including the effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act; changes in regulatory policies and principles, or the interpretation of regulatory capital requirements or other rules, including as a result of Basel III; and any changes in rules affecting our ability to comply with the requirements of the U. S. Department of Treasury Community Development Capital Initiative;


•	our ability to attract and retain deposits;


•	increases in premiums for deposit insurance;


•	our ability to control operating costs and expenses;


•	our ability to implement our business strategies;


•	the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;


•	difficulties in reducing risk 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;

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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


•	our ability to manage loan delinquency rates;


•	increased competitive pressures among financial services companies;


•	changes in consumer spending, borrowing and savings habits;


•	the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;


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


•	adverse changes in the securities markets;


•	inability of key third-party providers to perform their obligations to us;


•	changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; and


•	other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this document.

Some of these and other factors are discussed in the Company's 2014 Form 10-K in Item 1A, “Risk Factors.”

Any of the forward-looking statements that we make in this Form 10-Q and in the other public reports and statements we make may turn out to be wrong because of the inaccurate assumptions we might make because of the factors set forth above or because of other factors we cannot foresee. Because of these and other uncertainties, our actual future results may be materially different from those expressed in any forward-looking statements made by or on our behalf. Therefore, these factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. We undertake no responsibility to update or revise any forward-looking statements.

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

Assets

Total assets decreased $24.5 million or 3.0% to $800.9 million at September 30, 2015 from $825.4 million at December 31, 2014 . The primary reason for the decrease in total assets was a decrease of $20.1 million or 5.9% in net loans receivable. The increases and decreases in total assets were primarily concentrated in the following asset categories:



					Increase (Decrease)
	September 30, 2015		December 31, 2014		Amount			Percent
Cash And Cash Equivalents	$	8,374,489	$	10,192,702	$	(1,818,213	)	(17.8)%
Investment And Mortgage- Backed Securities – Available For Sale	388,352,231		429,700,540		(41,348,309		)	(9.6)
Investment And Mortgage- Backed Securities – Held To Maturity	30,847,402		—		30,847,402			100.0
Loans Receivable, Net	319,754,734		339,874,495		(20,119,761		)	(5.9)
OREO	4,928,998		3,229,710		1,699,288			52.6
Premises And Equipment, Net	19,548,390		18,233,226		1,315,164			7.2
FHLB Stock	2,224,200		3,144,600		(920,400		)	(29.3)
Bank Owned Life Insurance	16,441,045		11,150,045		5,291,000			47.5
Other Assets	4,067,406		3,480,676		586,730			16.9

Cash and cash equivalents decreased $1.8 million or 17.8% to $ 8.4 million at September 30, 2015 from $10.2 million at December 31, 2014 . Investment and mortgage-backed securities available for sale decreased $41.3 million or 9.6% to $388.4 million at September 30, 2015 from $429.7 million at December 31, 2014 due to the sale of 43 available for sale investment securities during the nine months ended September 30, 2015. The Bank also transferred 22 mortgage-backed securities from its available for sale portfolio to its held to maturity portfolio during the nine months ended September 30, 2015. As a result, investment and mortgage-backed securities held to maturity had a balance of $30.8 million at September 30, 2015 compared to no balance at December 31, 2014 .

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Loans receivable, net, decreased $20.1 million or 5.9% to $ 319.8 million at September 30, 2015 from $ 339.9 million at December 31, 2014 . This decrease was concentrated primarily in commercial loans as a result of increased loan repayments combined with lower loan demand from creditworthy borrowers. Commercial real estate loans decreased $16.9 million or 8.0% to $192.7 million at September 30, 2015 from $209.5 million at December 31, 2014 . Commercial business loans decreased $1.6 million or 15.0% to $9.0 million at September 30, 2015 from $10.6 million at December 31, 2014 . Residential real estate loans increased $632,000 or 0.8% to $77.9 million at September 30, 2015 from $77.3 million at December 31, 2014 . Consumer loans increased $410,000 or 0.8% to $50.8 million at September 30, 2015 compared to $50.4 million at December 31, 2014 . Loans held for sale decreased $346,000 or 18.6% to $1.5 million at September 30, 2015 from $1.9 million at December 31, 2014 .

OREO increased $1.7 million or 52.6% to $4.9 million at September 30, 2015 from $3.2 million at December 31, 2014 . The increase was due to 24 foreclosures during the nine months ended September 30, 2015 with a total book value of $3.9 million offset by OREO sales and writedowns of $2.4 million and $174,000, respectively. At September 30, 2015 , the OREO balance consisted of the following real estate properties: 14 single-family residences and 27 lots within residential subdivisions located throughout our market areas in South Carolina and Georgia; 11 parcels of commercial land in South Carolina; one commercial building in South Carolina; and eight lots within a subdivision and adjacent 22.96 acres of land in Aiken, South Carolina.

Premises and equipment, net increased $1.3 million or 7.2% to $19.5 million at September 30, 2015 from $18.2 million at December 31, 2014 . The increase was primarily due to $1.6 million in additions to construction in progress related to the construction of the new branch location in Ballentine, South Carolina, which is scheduled to open later this year.

FHLB stock decreased $920,000 or 29.3% to $2.2 million at September 30, 2015 compared to $3.1 million at December 31, 2014 as a result of stock redemptions by the FHLB of Atlanta. The Bank, as a member of the FHLB of Atlanta, is required to acquire and hold shares of capital stock in the FHLB of Atlanta in an amount equal to a membership component, which is a percentage of total assets, plus a transaction component, which is a percentage of outstanding advances (borrowings) from the FHLB of Atlanta. As total assets and total advances have decreased, so has the Bank’s required investment in FHLB stock. In addition, effective March 20, 2015, the membership component decreased from 0.15% of total assets to 0.09% and the transaction component decreased from 4.50% of outstanding advances to 4.25%.

Other assets increased $587,000 or 16.9% to $4.1 million at September 30, 2015 from $3.5 million at December 31, 2014 . The increase is a result of an increase in net deferred taxes related to decreased unrealized gains in the investment portfolio.

Liabilities

Deposit Accounts – The balances, weighted average rates and increases and decreases in deposit accounts were as follows at the dates indicated below:



	September 30, 2015			December 31, 2014			Increase (Decrease)
	Balance		Weighted Rate	Balance		Weighted Rate	Balance			Percent
Demand Accounts:
Checking	$	154,632,201	0.03%	$	143,422,150	0.03%	$	11,210,051		7.82%
Money Market	229,021,231		0.16	234,819,052		0.19	(5,797,821		)	(2.47)
Statement Savings	30,778,214		0.10	28,622,933		0.10	2,155,281			7.53
Total	414,431,646		0.11	406,864,135		0.13	7,567,511			1.86

Certificate Accounts:
0.00 – 0.99%	172,848,050			185,458,344			(12,610,294		)	(6.80)
1.00 – 1.99%	52,490,571			42,014,738			10,475,833			24.93
2.00 – 2.99%	12,356,750			25,605,349			(13,248,599		)	(51.74)
3.00 – 3.99%	—			172,598			(172,598		)	(100.00)
Total	237,695,371		0.73	253,251,029		0.79	(15,555,658		)	(6.14)
Total Deposits	$	652,127,017	0.34%	$	660,115,164	0.38%	$	(7,988,147	)	(1.21)%

Included in the certificate accounts above were $41.3 million and $38.8 million in brokered deposits at September 30, 2015 and December 31, 2014 , respectively, with a weighted average interest rate of 0.96% and 1.14%, respectively.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Advances From FHLB – FHLB advances are summarized by contractual year of maturity and weighted average interest rate in the table below:



	September 30, 2015			December 31, 2014			Increase (Decrease)
Year Due:	Balance		Rate	Balance		Rate	Balance			Percent
2015	$	7,500,000	2.69%	$	15,000,000	2.61%	$	(7,500,000	)	(50.00)%
2016	7,880,000		2.68	20,000,000		4.61	(12,120,000		)	(60.60)
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	$	33,280,000	3.45%	$	52,900,000	3.87%	$	(19,620,000	)	(37.09)%

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 $84.0 million and $84.2 million at September 30, 2015 , respectively, and $99.9 million and $99.3 million at December 31, 2014 , respectively. Advances are subject to prepayment penalties. During the nine months ended September 30, 2015 , the Bank prepaid three FHLB advances totaling $15.0 million and incurred $788,000 in prepayment penalties in connection with these prepayments.

The following table shows at September 30, 2015 the FHLB advances that are callable at the option of the FHLB as of the dates indicated. These advances are also included in the above table. If an advance is called, the Bank has the option to pay off the advance without penalty, reborrow the funds on different terms, or convert the advance to a three-month floating rate advance tied to the London Interbank Offered Rates ("LIBOR").



As of September 30, 2015
Borrow Date	Maturity Date		Amount	Int. Rate	Type	Call Dates
11/29/06	11/29/16	$	5,000,000	4.03	Multi-Call	5/29/08 and quarterly thereafter
05/24/07	05/24/17		7,900,000	4.38	Multi-Call	5/27/08 and quarterly thereafter
07/25/07	07/25/17		5,000,000	4.40	Multi-Call	7/25/08 and quarterly thereafter

Other Borrowings – The Bank had $7.7 million and $8.5 million in other borrowings (non-FHLB advances) at September 30, 2015 and December 31, 2014 , respectively. These borrowings consist of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts. The repurchase agreements typically mature within one to three days and the interest rate paid on these borrowings floats monthly with money market type rates. At both September 30, 2015 and December 31, 2014 , the interest rate paid on the repurchase agreements was 0.15%. The Bank had pledged as collateral for these repurchase agreements investment and mortgage-backed securities with amortized costs and fair values of $15.2 million and $15.5 million, respectively, at September 30, 2015 and $17.3 million and $18.0 million, respectively, at December 31, 2014 .

Junior Subordinated Debentures – On September 21, 2006, Security Federal Statutory Trust (the "Trust") issued and sold fixed and floating rate capital securities of the Trust (the “Capital Securities”). The Trust used the net proceeds from the sale of the Capital Securities to purchase a like amount of junior subordinated debentures (the “Debentures”) of the Company which are reported on the Consolidated Balance Sheets as junior subordinated debentures. The Capital Securities accrue and pay distributions at a floating rate of three month LIBOR plus 170 basis points annually which was equal to 2.04% at September 30, 2015 . The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears. The Capital Securities mature or are mandatorily redeemable upon maturity on December 15, 2036, or upon earlier optional redemption as provided in the indenture. The Company has the right to redeem the Capital Securities in whole or in part.

Convertible Debentures – Effective December 1, 2009, the Company issued $6.1 million in convertible senior debentures. The debentures will mature on December 1, 2029 and accrue interest at the rate of 8.0% per annum until maturity or earlier redemption or repayment. Interest on the debentures is payable on June 1 and December 1 of each year and commenced on June 1, 2010. The debentures are convertible into the Company’s common stock at a conversion price of $20 per share at the option of the holder at any time prior to maturity. The debentures are redeemable, in whole or in part, at the option of the Company at any time on or after December 1, 2019, at a price equal to 100% of the principal amount of the debentures to be purchased plus any accrued and 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.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Equity – Shareholders’ equity increased $3.0 million or 3.4% to $90.5 million at September 30, 2015 from $87.4 million at December 31, 2014 . Accumulated other comprehensive income, net of tax, comprised primarily of unrealized gains on securities available for sale, net of tax, decreased $730,000 or 13.3% to $4.7 million at September 30, 2015 from $5.5 million at December 31, 2014 . The Company’s net income available for common shareholders was $4.4 million for the nine months ended September 30, 2015 , after payment of $330,000 in preferred stock dividends. The Board of Directors of the Company declared common stock dividends totaling $707,000 during the nine months ended September 30, 2015 . Book value per common share was $22.24 at September 30, 2015 compared to $22.23 at December 31, 2014 .

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

Net Income Available to Common Shareholders - Net income available to common shareholders was $1.6 million or $0.53 per diluted common share for the three months ended September 30, 2015 , an increase of $34,000 or 2.1% compared to the three months ended September 30, 2014 . The increase in net income was primarily the result of a decrease in the provision for loan losses offset by a decrease in non-interest income combined with an increase in non-interest expense.

Net Interest Income - The net interest margin on a tax equivalent basis increased 12 basis points to 3.27% for the three months ended September 30, 2015 from 3.15% for the comparable period in 2014 as the decline in the average cost of interest-bearing liabilities outpaced the decline in the average balance of interest-earning assets. Net interest income decreased $96,000 or 1.6% to $5.9 million during the three months ended September 30, 2015 , compared to $6.0 million for the same period in 2014. During the three months ended September 30, 2015 , average interest earning assets decreased $33.1 million or 4.3% to $745.2 million from $778.2 million for the same period in 2014. Average interest-bearing liabilities decreased $37.7 million or 5.5% to $647.2 million for the three months ended September 30, 2015 from $685.0 million for the comparable period in 2014.

Interest Income - Total tax equivalent interest income decreased $424,000 or 5.6% to $7.1 million during the three months ended September 30, 2015 compared to $7.5 million during the same period in 2014 . This decrease was primarily the result of the decrease in interest-earning assets, particularly loans. Total interest income on loans decreased $331,000 or 6.8% to $4.5 million during the three months ended September 30, 2015 from $4.9 million during the comparable period in 2014 . The decrease was the result of a $28.0 million or 8.1% decrease in the average loan portfolio balance, offset partially by an eight basis point increase in the yield. Interest income from mortgage-backed securities decreased $279,000 or 18.1% to $1.3 million from $1.5 million during the same period in 2014 as a result of a 16 basis point decrease in the portfolio yield combined with an $30.9 million or 12.5% decrease in the average balance. Tax equivalent interest income from investment securities increased $186,000 or 16.6% to $1.3 million as a result of an $23.8 million increase in the average balance of the investment securities portfolio combined with a seven basis point increase in the yield.

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



	Three Months Ended September 30,								Increase (Decrease) In Interest Income
	2015				2014
	Average Balance		Yield ⁽¹⁾		Average Balance		Yield ⁽¹⁾
Loans Receivable, Net	$	318,992,863	5.67	%	$	347,042,171	5.59	%	$	(331,000	)
Mortgage-Backed Securities	217,157,267		2.32		248,093,103		2.48		(279,080		)
Investment Securities ⁽²⁾	204,071,269		2.56		180,227,672		2.49		186,243
Overnight Time And Certificates of Deposit	4,945,029		0.15		2,878,994		0.33		(448		)
Total Interest-Earning Assets	$	745,166,428	3.81	%	$	778,241,940	3.86	%	$	(424,285	)

⁽¹⁾ Annualized

⁽²⁾ Tax equivalent basis is calculated using an effective tax rate of 34% and amounted to $181,592 and $124,799 for the

quarters ended September 30, 2015 and 2014 , respectively.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Interest Expense - Total interest expense decreased $385,000 or 27.8% to $1.0 million during the three months ended September 30, 2015 compared to $1.4 million for the same period in 2014. The decrease in total interest expense was attributable to decreases in interest rates paid and a $37.7 million or 5.5% decrease in the average balance of interest-bearing liabilities. Interest expense on deposits decreased $65,000 or 10.4% to $556,000 during the three months ended September 30, 2015 compared to $621,000 for the same period in 2014. The decrease was attributable to a five basis point decrease in the cost of deposit accounts offset by a $258,000 increase in average interest-bearing deposits to $596.2 million for the three months ended September 30, 2015 compared to $595.9 million for the three months ended September 30, 2014 .

Interest expense on FHLB advances and other borrowings decreased $321,000 or 52.0% to $296,000 during the three months ended September 30, 2015 from $617,000 for the same period in 2014 . This decrease was due to a decrease in the interest rate combined with a $38.0 million or 48.8% decrease in the average balance to $39.8 million during the three months ended September 30, 2015 from $77.8 million for the same period in 2014. The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the three months ended September 30, 2015 and 2014 .



	Three Months Ended September 30,								Increase (Decrease) In Interest Expense
	2015				2014
	Average Balance		Yield ⁽¹⁾		Average Balance		Yield ⁽¹⁾
Now And Money Market Accounts	$	322,814,725	0.13	%	$	317,476,865	0.16	%	$	(21,930	)
Statement Savings Accounts	31,006,921		0.10		27,095,232		0.10		984
Certificate Accounts	242,356,598		0.73		251,348,542		0.78		(43,915		)
FHLB Advances And Other Borrowed Money	39,827,699		2.98		77,792,528		3.17		(320,774		)
Junior Subordinated Debentures	5,155,000		2.04		5,155,000		1.97		838
Senior Convertible Debentures	6,084,000		8.00		6,084,000		8.00		—
Total Interest-Bearing Liabilities	$	647,244,943	0.62	%	$	684,952,167	0.81	%	$	(384,797	)

⁽¹⁾ Annualized

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

Management’s monthly review of the adequacy of the allowance includes three main components. The first component is an analysis of loss potential in various homogeneous segments of the portfolio based on historical trends and the risk inherent in each category. Previously, management applied a five year historical loss ratio to each loan category to estimate the inherent loss in these pooled loans, but determined to apply a 12 to 24 month historical loss ratio to each loan category in light of the decline in the economy. As the economy has recently improved, however, management evaluated the historical loss period being used during the current year and determined a three year historical loss period to be a more conservative and accurate indicator of future trends.

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

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

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

The Bank recorded a negative provision for loan losses of $200,000 for the quarter ended September 30, 2015 compared to no provision for the same quarter in the prior year. The negative provision was the result of an increase in recoveries and a decrease in non-performing assets. The Bank reported net recoveries of $339,000 or 0.42% of gross loans during the three months ended September 30, 2015 compared to net charge-offs of $465,000 or 0.53% of gross loans for the same three month period in 2014 . The following table details selected activity associated with the allowance for loan losses for the three months ended September 30, 2015 and 2014 :



	Three Months Ended September 30,
	2015		2014
Beginning Balance	$	7,795,582	$	9,112,157
Provision	(200,000)		—
Charge-offs	(441,398)		(590,942)
Recoveries	780,839		125,759
Ending Balance	$	7,935,023	$	8,646,974

Allowance For Loan Losses As A Percentage Of Gross Loans Receivable, Held For Investment At The End Of The Period	2.4%		2.5%
Allowance For Loan Losses As A Percentage Of Impaired Loans At The End Of The Period	57.2%		41.5%
Impaired Loans	$	13,883,988	$	20,828,179
Gross Loans Receivable, Held For Investment ⁽¹⁾	$	326,171,126	$	350,704,336
Total Loans Receivable, Net	$	319,754,734	$	344,114,867

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

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

Non-Interest Income - Non-interest income decreased $ 118,000 or 7.9% to $1.4 million for the three months ended September 30, 2015 , compared to $1.5 million for the three months ended September 30, 2014 . The following table provides a detailed analysis of the changes in the components of non-interest income:



	Three Months Ended September 30,				Increase (Decrease)
	2015		2014		Amounts			Percent
Gain On Sale Of Investments	$	7,651	$	142,816	$	(135,165	)	94.6%
Gain On Sale Of Loans	191,194		119,041		72,153			60.6
Service Fees On Deposit Accounts	258,522		300,920		(42,398		)	(14.1)
Commissions From Insurance Agency	139,980		116,894		23,086			19.7
Bank Owned Life Insurance Income	117,000		75,000		42,000			56.0
Trust Income	152,200		158,000		(5,800		)	(3.7)
Check Card Fee Income	239,739		229,542		10,197			4.4
Grant Income	97,640		183,789		(86,149		)	(46.9)
Other	164,488		160,304		4,184			2.6
Total Non-Interest Income	$	1,368,414	$	1,486,306	$	(117,892	)	(7.9)%

Gain on sale of investments was $8,000 during the quarter ended September 30, 2015 , a decrease of $135,000 or 94.6% compared to a gain of $143,000 for the same period in 2014. The decrease is the result of a decrease in investments sold. Two investment securities were sold during the quarter ended September 30, 2015 compared to 20 investment securities during the same period in 2014.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Non-Interest Expense - For the quarter ended September 30, 2015 , non-interest expense increased $107,000 or 2.1% compared to the same period in 2014 . The following table provides a detailed analysis of the changes in the components of non-interest expense:



	Three Months Ended September 30,						Increase (Decrease)
	2015			2014			Amounts			Percent
Compensation And Employee Benefits	$	3,002,259		$	2,781,418		$	220,841		7.9%
Occupancy	481,713			515,881			(34,168		)	(6.6)
Advertising	95,226			115,268			(20,042		)	(17.4)
Depreciation And Maintenance Of Equipment	401,102			408,685			(7,583		)	(1.9)
FDIC Insurance Premiums	140,172			177,537			(37,365		)	(21.0)
Net Cost Of Operation Of OREO	(19,713		)	(71,623		)	51,910			(72.5)
Other	1,029,201			1,095,710			(66,509		)	(6.1)
Total Non-Interest Expense	$	5,129,960		$	5,022,876		$	107,084		2.1%

Compensation and employee benefits expenses increased $221,000 , or 7.9% to $3.0 million for the three months ended September 30, 2015 compared to $2.8 million for the same period last year in part due to cost of living increases. In addition, the Bank has focused on expanding its presence in the Midlands area of South Carolina, which has included increasing its personnel to support its operations within this area.

Net cost of operation of OREO decreased $52,000 or 72.5% to $20,000 during the quarter ended September 30, 2015 from $72,000 during the quarter ended September 30, 2014 . This amount includes all expenses associated with OREO including write-down in value and gain or loss on sales incurred during the period.

Other expenses increased $67,000 , or 6.1% to $1.0 million for the three month period ended September 30, 2015 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 decreased $155,000 or 20.5% to $601,000 for the three months ended September 30, 2015 from $756,000 for the same period one year ago. Income before income taxes was $2.3 million and $2.5 million for the three months ended September 30, 2015 and 2014 , respectively. The Company’s combined federal and state effective income tax rate for the current quarter was 25.6% compared to 30.6% for the same quarter in 2014.

Results of Operations for the Nine Month Periods Ended September 30, 2015 and 2014

Net Income Available to Common Shareholders - Net income available to common shareholders increased $282,000 or 6.8% to $4.4 million for the nine months ended September 30, 2015 compared to $4.2 million for the nine months ended September 30, 2014 . The increase in net income was primarily the result of a $204,000 or 1.2% increase in net interest income after the provision for loan losses combined with a $79,000 or 4.4% decrease in the provision for income taxes.

Net Interest Income - The net interest margin on a tax equivalent basis increased 12 basis points to 3.19% for the nine months ended September 30, 2015 from 3.07% for the comparable period in 2014 . Net interest income decreased $96,000 or 0.5% to $17.7 million for the nine months ended September 30, 2015 compared to $17.8 million for the same period in 2014 . During the nine months ended September 30, 2015 , average interest earning assets decreased $31.2 million or 4.0% to $758.0 million from $789.1 million for the nine months ended September 30, 2014 , while average interest-bearing liabilities decreased $37.9 million or 5.4% to $662.2 million from $700.1 million for the nine months ended September 30, 2014 .

Interest Income - Total tax equivalent interest income decreased $1.2 million or 5.3% to $21.4 million during the nine months ended September 30, 2015 from $22.2 million for the same period in 2014 . This decrease was primarily the result of the decrease in interest-earning assets, particularly loans and mortgage-backed securities. Total interest income on loans decreased $956,000 or 6.5% to $13.7 million during the nine months ended September 30, 2015 from $14.6 million for the same period in 2014 . The decrease was a result of a $25.9 million or 7.3% decrease in the average loan portfolio to $327.1 million from $353.0 million for the same period in 2014 . Interest income from mortgage-backed securities decreased $531,000 or 11.6% to $4.0 million for the

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

nine months ended September 30, 2015 from $4.6 million for the same period in 2014 as a result of an eight basis point decrease in the portfolio yield combined with a $21.6 million or 8.6% decrease in the average balance. Tax equivalent interest income from investment securities increased $288,000 or 8.5% to $3.7 million for the nine months ended September 30, 2015 from $3.4 million for the same period in 2014 as a result of a $14.4 million or 7.9% increase in the average balance of the investment securities portfolio and an increase of two basis points in the yield.

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



	Nine Months Ended September 30,								Increase (Decrease) In Interest Income
	2015				2014
	Average Balance		Yield ⁽¹⁾		Average Balance		Yield ⁽¹⁾
Loans Receivable, Net	$	327,091,312	5.58	%	$	352,966,633	5.53	%	$	(955,746	)
Mortgage-Backed Securities	229,664,849		2.34		251,245,215		2.42		(530,525)
Investment Securities ⁽²⁾	196,423,029		2.49		182,051,212		2.47		287,677
Overnight Time And Certificates of Deposit	4,776,354		0.17		2,882,492		0.39		(2,336		)
Total Interest-Earning Assets	$	757,955,544	3.76	%	$	789,145,552	3.82	%	$	(1,200,930	)

⁽¹⁾ Annualized

⁽²⁾ Tax equivalent basis is calculated using an effective tax rate of 34% and was $467,821 and $372,247 for the nine

months ended September 30, 2015 and 2014 , respectively.

Interest Expense - Interest expense decreased $1.2 million or 27.0% to $3.2 million during the nine months ended September 30, 2015 compared to $4.4 million for the same period in 2014. The decrease in total interest expense is attributable to decreases in interest rates paid and a $37.9 million or 5.4% decrease in the average balance of interest-bearing liabilities. Interest expense on deposits decreased $210,000 or 10.8% to $1.7 million during the nine months ended September 30, 2015 compared to $2.0 million for the same period last year. The decrease was attributable to a five basis point decrease in the cost of deposit accounts combined with a $898,000 or 0.1% decrease in average interest-bearing deposits to $603.8 million for the nine month period ended September 30, 2015 compared to $604.7 million for the nine month period ended September 30, 2014 .

Interest expense on FHLB advances and other borrowings decreased $992,000 or 48.4% to $1.1 million during the nine months ended September 30, 2015 compared to $2.0 million for the same period in 2014. The average balance of FHLB advances and other borrowed money decreased $37.0 million or 44.0% to $47.2 million during the nine months ended September 30, 2015 from $84.2 million for the same period last year. During the nine months ended September 30, 2015 the Bank prepaid $15.0 million in FHLB advances with a weighted average rate of 4.8% in order to reduce interest expense in future periods and improve net interest spread.

The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the nine months ended September 30, 2015 and 2014 :



	Nine Months Ended September 30,								Increase (Decrease) In Interest Expense
	2015				2014
	Average Balance		Yield ⁽¹⁾		Average Balance		Yield ⁽¹⁾
Now And Money Market Accounts	$	323,744,195	0.13%		$	321,526,411	0.18	%	$	(109,383	)
Statement Savings Accounts	30,176,938		0.10		26,162,629		0.10		2,998
Certificates Accounts	249,878,789		0.74		257,008,845		0.78		(103,754		)
FHLB Advances And Other Borrowed Money	47,182,869		2.99		84,183,061		3.25		(992,078		)
Junior Subordinated Debentures	5,155,000		1.99		5,155,000		1.96		1,427
Senior Convertible Debentures	6,084,000		8.00		6,084,000		8.00		—
Total Interest-Bearing Liabilities	$	662,221,791	0.65	%	$	700,119,946	0.85	%	$	(1,200,790	)

⁽¹⁾ Annualized

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Provision for Loan Losses - The Bank reported a negative provision for loan losses of $100,000 for the nine months ended September 30, 2015 compared to a provision expense of $200,000 for the same period in the prior year. The decrease in the provision for loan losses is attributable to a decrease in net charge-offs, which declined $1.5 million or 82.0% to $322,000 for the nine months ended September 30, 2015 from $1.8 million during the comparable period in 2014 . The following table details selected activity associated with the allowance for loan losses for the nine months ended September 30, 2015 and 2014 :



	Nine Months Ended September 30,
	2015		2014
Beginning Balance	$	8,357,496	$	10,241,970
Provision	(100,000)		200,000
Charge-offs	(1,338,358)		(2,384,994)
Recoveries	1,015,885		589,998
Ending Balance	$	7,935,023	$	8,646,974

Non-Interest Income - Non-interest income increased $1.1 million or 24.2% to $5.4 million for the nine months ended September 30, 2015 , compared to $4.4 million for the nine months ended September 30, 2014 . The following table provides a detailed analysis of the changes in the components of non-interest income:



	Nine Months Ended September 30,				Increase (Decrease)
	2015		2014		Amounts			Percent
Gain On Sale Of Investments	$	1,676,404	$	187,687	$	1,488,717		793.2	%
Gain On Sale Of Loans	526,295		465,571		60,724			13.0
Service Fees On Deposit Accounts	790,689		861,476		(70,787		)	(8.2)
Bank Owned Life Insurance Income	291,000		479,364		(188,364		)	(39.3)
Commissions From Insurance Agency	373,639		317,757		55,882			17.6
Trust Income	449,800		404,000		45,800			11.3
Check Card Fee Income	719,159		674,098		45,061			6.7
Grant Income	97,640		483,499		(385,859		)	(79.8)
Other	482,380		481,191		1,189			0.2
Total Non-Interest Income	$	5,407,006	$	4,354,643	$	1,052,363		24.2	%

Gain on sale of investments was $1.7 million during the nine months ended September 30, 2015 , an increase of $ 1.5 million or 793.2% compared to a gain of $188,000 during the same period last year. The increase resulted from the sale of 43 investment securities during the period compared to 41 sold during the comparable period of 2014. The Bank used the gain to offset a $788,000 prepayment penalty on FHLB advances during the nine months ended September 30, 2015.

Bank owned life insurance income decreased $188,000 or 39.3% to $291,000 for the nine months ended September 30, 2015 compared to $479,000 for the same period in 2014. The entire portion of income recognized in 2015 was related to changes in the cash surrender value of the bank owned life insurance policies. For the nine months ended September 30, 2014, the Bank recognized $254,000 in death benefits in addition to $225,000 in income related to changes in the cash surrender value of the bank owned life insurance policies.

Grant income decreased $386,000 or 79.8% to $98,000 for the nine months ended September 30, 2015 compared to $483,000 received during the same period in 2014 from the U.S. Treasury's Community Development Financial Institution's Fund. In 2012, the Bank received a Community Development Financial Assistance ("CDFA") award in recognition of its commitment to community development. The Bank used the CDFA award to fund a new Small Business Microloan program which provides small, short-term loans to small businesses. These microloans help boost the local economy by enabling small businesses to obtain credit not otherwise available to them. The Bank received a total award of $1.5 million to be recognized on a pro-rata basis as the microloans are funded. At September 30, 2015, the Bank had $132,000 in microloans left to be funded.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

Non-Interest Expense – For the nine months ended September 30, 2015 , non-interest expense increased $1,053,000 or 6.7% to $16.7 million compared to $15.7 million for the same period in 2014. The increase in non-interest expense was primarily a result of an increase in salaries and employee benefits expense and prepayment penalties on FHLB advances. The following table provides a detailed analysis of the changes in the components of non-interest expense:



	Nine Months Ended September 30,				Increase (Decrease)
	2015		2014		Amounts			Percent
Compensation And Employee Benefits	$	8,976,214	$	8,464,967	$	511,247		6.0%
Occupancy	1,427,424		1,491,633		(64,209		)	(4.3)
Advertising	290,951		358,527		(67,576		)	(18.8)
Depreciation And Maintenance Of Equipment	1,263,932		1,219,461		44,471			3.6
FDIC Insurance Premiums	455,985		541,779		(85,794		)	(15.8)
Amortization Of Intangibles	—		11,970		(11,970		)	(100.0)
Net Cost Of OREO	267,784		451,947		(184,163		)	(40.7)
Prepayment Penalties On FHLB Advances	787,851		—		787,851			100.0
Other	3,249,451		3,125,894		123,557			4.0
Total Non-Interest Expense	$	16,719,592	$	15,666,178	$	1,053,414		6.7%

Compensation and employee benefits expenses were $9.0 million for the nine months ended September 30, 2015 , an increase of $511,000 or 6.0% from $8.5 million during the same period last year. The increase was due to general cost of living increases combined with increases related to the addition of several new employees hired during the nine months ended September 30, 2015 , including a new area executive to lead the Bank's Midlands area, a new commercial lender in the Midlands area, and additional personnel for the mortgage department. The Company has committed to expanding its presence in the Midlands area of South Carolina and has increased its personnel to support its operations within this area.

Net cost of operation of OREO decreased $184,000 or 40.7% to $268,000 for the nine months ended September 30, 2015 from $452,000 during the nine months ended September 30, 2014. The decrease was primarily due to a reduction in writedowns of OREO, which were $174,000 for the nine months ended September 30, 2015 compared to $405,000 for the same period in 2014.

The Company incurred a prepayment penalty of $788,000 for paying down FHLB advances during the nine months ended September 30, 2015 . The Company elected to prepay these higher rate advances to lower cost of funds. No FHLB advances were prepaid by the Company during the nine months ended September 30, 2014.

Provision For Income Taxes – The provision for income taxes decreased $79,000 or 4.4% to $1.7 million for the nine months ended September 30, 2015 from $1.8 million for the same period in 2014. Income before taxes was $6.5 million and $6.3 million for the nine months ended September 30, 2015 and 2014, respectively. The Company’s combined federal and state effective income tax rate for the nine months ended September 30, 2015 was 26.2% compared to 28.3% for the same period in 2014.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

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

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

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

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

During the nine months ended September 30, 2015 loan repayments exceeded loan originations resulting in a $20.1 million or 5.9% decrease in total net loans receivable. During the nine months ended September 30, 2015 , deposits decreased $8.0 million or 1.2% and FHLB advances decreased $19.6 million or 37.1% . The Bank had $207.5 million in additional borrowing capacity at the FHLB at the end of the period. At September 30, 2015 , the Bank had $149.7 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 September 30, 2015 , the Bank exceeded all regulatory capital requirements with Common Equity Tier 1 Capital (CET1), Tier 1 leverage-based capital, Tier 1 risk-based capital, and total risk-based capital ratios of 23.2% , 11.0% , 23.2% , and 24.4% , respectively. To be categorized as “well capitalized” under the prompt corrective action provisions the Bank must maintain minimum CET1, total risk based capital, Tier 1 risk based capital and Tier 1 leverage capital ratios of 6.5%, 10.0%, 8.0% and 5.0%, respectively.

The Company also exceeded all regulatory capital requirements with CET1, Tier 1 leverage-based capital, Tier 1 risk- based capital and total risk-based capital ratios of 16.5% , 11.2% , 23.6% , and 24.9% , respectively, at September 30, 2015 .

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

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at September 30, 2015 .



(Dollars in thousands)	Within One Month		After One Through Three Months		After Three Through Twelve Months		Within One Year		Greater Than One Year		Total
Unused Lines Of Credit	$	17	$	12	$	12,097	$	12,126	$	39,764	$	51,890
Standby Letters Of Credit	141		88		652		881		16		897
Total	$	158	$	100	$	12,749	$	13,007	$	39,780	$	52,787

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 nine months ended September 30, 2015 , the Bank's interest rate spread, defined as the average yield on interest bearing assets less the average rate paid on interest bearing liabilities was 3.19% and 3.11% respectively.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a - 15(e) of the Securities Exchange Act of 1934 (“Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management as of the end of the period covered by this quarterly report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that at September 30, 2015 the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms. There have been no significant changes in our internal controls over financial reporting during the quarter ended September 30, 2015 that have materially affected or are reasonably likely to affect our internal controls over financial reporting.

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

Part II: Other Information

Item 1 Legal Proceedings

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

Item 1A Risk Factors

There have been no material changes in the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Item 2 Unregistered Sales of Equity Securities and Use Of Proceeds

None

Item 3 Defaults Upon Senior Securities

None

Item 4 Mine Safety Disclosures

Not applicable

Item 5 Other Information

None

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Item 6 Exhibits



3.1		Articles of Incorporation, as amended (1)
3.2		Articles of Amendment, including Certificate of Designation relating to the Company's Fixed Rate Cumulative Perpetual Preferred Stock Series B (2)
3.3		Amended and Restated Bylaws (3)
4.1		Form of Stock Certificate of the Company and other instruments defining the rights of security holders, including indentures (4)
4.2		Form of Certificate for the Series B Preferred Shares (2)
4.3		Form of Indenture with respect to the Company's 8.0% Convertible Senior Debentures Due 2029 (5)
4.4		Specimen Convertible Senior Debenture Due 2029 (5)
4.5		Letter Agreement (including Securities Exchange Agreement B Standard Terms, attached as Exhibit A) dated September 29, 2010 between the Company and the United States Department of the Treasury (2)
4.6		Letter Agreement (including Securities Purchase Agreement B Standard Terms, attached as Exhibit A) dated September 29, 2010 between the Company and the United States Department of the Treasury (2)
10.1		1993 Salary Continuation Agreements (6)
10.2		Amendment One to 1993 Salary Continuation Agreements (7)
10.3		Form of 2006 Salary Continuation Agreement (8)
10.4		Form of Security Federal Split Dollar Agreement (8)
10.5		1999 Stock Option Plan (9)
10.6		2002 Stock Option Plan (10)
10.7		2006 Stock Option Plan (11)
10.8		2008 Equity Incentive Plan (12)
10.9		Form of incentive stock option agreement and non-qualified stock option agreement pursuant to the 2006 Stock Option Plan (11)
10.10		2004 Employee Stock Purchase Plan (13)
10.11		Incentive Compensation Plan (6)
10.12		Form of Compensation Modification Agreement (14)
14		Code of Ethics (15)
25		Subsidiaries of Registrant
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
101		The following materials from Security Federal Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements

_____________


(1)	Filed on June 26, 1998, as an exhibit to the Company’s Proxy Statement and incorporated herein by reference.


(2)	Incorporated by reference to the Company’s Current Report on Form 8-K filed on September 30, 2010.


(3)	Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 16, 2015.


(4)	Filed on August 12, 1987, as an exhibit to the Company’s Registration Statement on Form 8-A and incorporated herein by reference.


(5)	Filed on July 13, 2009 as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-160553) and incorporated herein by reference.


(6)	Filed on June 28, 1993, as an exhibit to the Company’s Annual Report on Form 10-KSB and incorporated herein by reference.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES


(7)	Filed as an exhibit to the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 1993 and incorporated herein by reference.


(8)	Filed on May 24, 2006 as an exhibit to the Company’s Current Report on Form 8-K dated May 18, 2006 and incorporated herein by reference.


(9)	Filed on March 2, 2000, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference


(10)	Filed on January 3, 2003, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference.


(11)	Filed on August 22, 2006, as an exhibit to the Company's Registration Statement on Form S-8 (Registration Statement No. 333-136813) and incorporated herein by reference.


(12)	Filed on November 12, 2008, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference.


(13)	Filed on June 18, 2004, as an exhibit to the Company’s Proxy Statement and incorporated herein by reference.


(14)	Incorporated by reference to the Company's Current Report on Form 8-K filed on December 23, 2008.


(15)	Filed on June 29, 2006, as an exhibit to the Company’s Annual Report on Form 10-K and incorporated herein by reference.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SECURITY FEDERAL CORPORATION



Date:	November 12, 2015	By:	/s/J. Chris Verenes
				J. Chris Verenes
				Chief Executive Officer
				Duly Authorized Representative



Date:	November 12, 2015	By:	/s/Jessica T. Cummins
				Jessica T. Cummins
				Chief Financial Officer
				Duly Authorized Representative

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

EXHIBIT INDEX


31.1	Certifications of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act


31.2	Certifications of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act


32	Certifications of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

101

The following materials from Security Federal Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 , formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements

TABLE OF CONTENTS

Part 1. Financial Information Item 1. Financial Statements Item 2. Management's Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part Ii: Other Information Item 1 Legal Proceedings Item 1A Risk Factors Item 2 Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3 Defaults Upon Senior Securities Item 4 Mine Safety Disclosures Item 5 Other Information Item 6 Exhibits

OUTSTANDING SHARES AT:

Common Stock, par value $0.01 per share

November 12, 2015