SECURITY FEDERAL CORP - FORM 10-Q

SECURITY FEDERAL CORP - FORM 10-Q - May 12, 2016

Attached files

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - SECURITY FEDERAL CORP	sfdl-20160331xex312.htm
EX-31.1 - EXHIBIT 31.1 - SECURITY FEDERAL CORP	sfdl-20160331xex311.htm
EX-32 - EXHIBIT 32 - SECURITY FEDERAL CORP	sfdl-20160331xex32.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10 – Q

(Mark one)

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016

( ) 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 March 31, 2016 and December 31, 2015	3
	Consolidated Statements of Income for the Three Months Ended March 31, 2016 and 2015	4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2016 and 2015	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015	7
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41
Item 4.	Controls and Procedures	42

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	43
	Signatures	45

SCHEDULES OMITTED

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Part 1. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets



	March 31, 2016			December 31, 2015
ASSETS:	Unaudited			Audited
Cash and Cash Equivalents	$	8,392,324		$	8,381,951
Certificates of Deposit with Other Banks	3,445,005			3,445,005
Investment and Mortgage-Backed Securities:
Available For Sale	388,651,412			375,513,870
Held To Maturity (Fair Value of $29,986,883 and $29,681,280 at March 31, 2016 and December 31, 2015, Respectively)	29,946,584			29,873,098
Total Investment and Mortgage-Backed Securities:	418,597,996			405,386,968
Loans Receivable, Net:
Held For Sale	1,171,189			2,462,559
Held For Investment: (Net of Allowance of $8,273,304 and $8,275,133 at March 31, 2016 and December 31, 2015, Respectively)	330,709,360			328,110,170
Total Loans Receivable, Net	331,880,549			330,572,729
Accrued Interest Receivable:
Loans	961,515			886,968
Mortgage-Backed Securities	648,121			614,925
Investment Securities	1,431,631			1,523,200
Total Accrued Interest Receivable	3,041,267			3,025,093
Premises and Equipment, Net	20,293,834			20,116,918
Federal Home Loan Bank ("FHLB") Stock, at Cost	2,055,500			2,214,800
Other Real Estate Owned ("OREO")	2,582,056			4,361,411
Bank Owned Life Insurance	16,705,045			16,573,045
Goodwill	1,199,754			1,199,754
Other Assets	2,831,465			4,449,956
Total Assets	$	811,024,795		$	799,727,630
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Liabilities:
Deposit Accounts	$	661,231,739		$	652,096,545
Advances From FHLB	30,890,000			34,640,000
Other Borrowings	8,707,151			6,411,977
Junior Subordinated Debentures	5,155,000			5,155,000
Advance Payments By Borrowers For Taxes and Insurance	421,233			256,730
Senior Convertible Debentures	6,084,000			6,084,000
Other Liabilities	5,239,643			4,115,956
Total Liabilities	717,728,766			708,760,208
Shareholders' Equity:
Serial Preferred Stock, $.01 Par Value; Authorized 200,000 Shares; Issued and Outstanding Shares, 22,000	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	31,464			31,464
Additional Paid-In Capital	12,030,824			12,028,832
Treasury Stock, at Cost (200,933 Shares)	(4,330,712		)	(4,330,712		)
Unvested Restricted Stock	(25,358		)	(25,358		)
Accumulated Other Comprehensive Income	5,217,871			4,262,361
Retained Earnings	58,371,940			57,000,835
Total Shareholders' Equity	93,296,029			90,967,422
Total Liabilities and Shareholders' Equity	$	811,024,795		$	799,727,630

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)



	Three Months Ended March 31,
	2016			2015
Interest Income:
Loans	$	4,642,108		$	4,537,195
Mortgage-Backed Securities	1,254,401			1,424,353
Investment Securities	1,084,399			985,106
Other	4,510			2,550
Total Interest Income	6,985,418			6,949,204
Interest Expense:
NOW and Money Market Accounts	103,115			118,429
Statement Savings Accounts	7,890			7,120
Certificate Accounts	408,732			479,159
FHLB Advances and Other Borrowed Money	248,659			421,755
Senior Convertible Debentures	121,680			121,680
Junior Subordinated Debentures	29,103			25,078
Total Interest Expense	919,179			1,173,221
Net Interest Income	6,066,239			5,775,983
Provision For Loan Losses	—			100,000
Net Interest Income After Provision For Loan Losses	6,066,239			5,675,983
Non-Interest Income:
Gain on Sale of Investment Securities	258,068			1,486,939
Gain on Sale of Loans	208,966			154,019
Service Fees on Deposit Accounts	240,345			257,516
Commissions From Insurance Agency	169,847			130,112
Trust Income	162,000			148,800
Bank Owned Life Insurance Income	132,000			87,000
Check Card Fee Income	238,142			231,301
Grant Income	265,496			—
Other	152,876			155,320
Total Non-Interest Income	1,827,740			2,651,007
Non-Interest Expense:
Compensation and Employee Benefits	3,330,798			2,987,031
Occupancy	496,718			490,658
Advertising	129,977			96,161
Depreciation and Maintenance of Equipment	476,374			417,245
Federal Deposit Insurance Corporation ("FDIC") Insurance Premiums	133,047			160,221
Net Cost of Operation of OREO	(675,926		)	196,624
Prepayment Penalties on FHLB Advances	247,506			787,851
Other	1,397,450			1,118,804
Total Non-Interest Expense	5,535,944			6,254,595
Income Before Income Taxes	2,358,035			2,072,395
Provision For Income Taxes	641,292			567,768
Net Income	1,716,743			1,504,627
Preferred Stock Dividends	110,000			110,000
Net Income Available To Common Shareholders	$	1,606,743		$	1,394,627
Net Income Per Common Share (Basic)	$	0.55		$	0.47
Net Income Per Common Share (Diluted)	$	0.52		$	0.45
Cash Dividend Per Share On Common Stock	$	0.08		$	0.08
Weighted Average Shares Outstanding (Basic)	2,944,001			2,944,001
Weighted Average Shares Outstanding (Diluted)	3,248,443			3,248,230

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)



	Three Months Ended March 31,
	2016			2015
Net Income	$	1,716,743		$	1,504,627
Other Comprehensive Income
Unrealized Gains on Securities:
Unrealized Holding Gains on Securities Available For Sale, Net of Taxes of $707,595 and $735,658 at March 31, 2016 and 2015, Respectively	1,155,744			1,201,187
Reclassification Adjustment for Gains Included in Net Income, Net of Taxes of $98,066 and $565,037 at March 31, 2016 and 2015, Respectively	(160,002		)	(921,902		)
Amortization of Unrealized Gains on Available For Sale Securities Transfer to Held To Maturity, Net of Taxes of $(24,616) at March 31, 2016	(40,232		)	—
Other Comprehensive Income	955,510			279,285
Comprehensive Income	$	2,672,253		$	1,783,912

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

For the Three Months Ended March 31, 2016 and 2015



	Preferred Stock		Common Stock		Unvested Restricted Stock			Additional Paid – In Capital		Treasury Stock			Accumulated Other Comprehensive Income		Retained Earnings			Total
Balance at December 31, 2015	$	22,000,000	$	31,464	(25,358		)	$	12,028,832	$	(4,330,712	)	$	4,262,361	$	57,000,835		$	90,967,422
Net Income	—		—					—		—			—		1,716,743			1,716,743
Other Comprehensive Income, Net of Tax	—		—					—		—			955,510		—			955,510
Stock Option Compensation Expense	—		—					1,992		—			—		—			1,992
Cash Dividends on Preferred Stock	—		—					—		—			—		(110,000		)	(110,000		)
Cash Dividends on Common Stock	—		—					—		—			—		(235,638		)	(235,638		)
Balance at March 31, 2016	$	22,000,000	$	31,464	$	(25,358	)	$	12,030,824	$	(4,330,712	)	$	5,217,871	$	58,371,940		$	93,296,029



	Preferred Stock		Common Stock		Unvested Restricted Stock			Additional Paid – In Capital		Treasury Stock			Accumulated Other Comprehensive Income		Retained Earnings			Total
Balance at December 31, 2014	$	22,000,000	$	31,449	$	—		$	11,990,813	$	(4,330,712	)	$	5,476,375	$	52,267,460		$	87,435,385
Net Income	—		—		—			—		—			—		1,504,627			1,504,627
Other Comprehensive Income, Net of Tax	—		—		—			—		—			279,285		—			279,285
Common Stock Issuance	—		15		(25,358		)	25,343										—
Stock Option Compensation Expense	—		—		—			3,169		—			—		—			3,169
Cash Dividends on Preferred Stock	—		—		—			—		—			—		(110,000		)	(110,000		)
Cash Dividends on Common Stock	—		—		—			—		—			—		(235,638		)	(235,638		)
Balance at March 31, 2015	$	22,000,000	$	31,464	$	(25,358	)	$	12,019,325	$	(4,330,712	)	$	5,755,660	$	53,426,449		$	88,876,828

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)



	Three Months Ended March 31,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	1,716,743		$	1,504,627
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
Depreciation Expense	343,740			309,913
Stock Option Compensation Expense	1,992			3,169
Discount Accretion and Premium Amortization	1,330,301			1,252,401
Provisions for Losses on Loans	—			100,000
Income From Bank Owned Life Insurance	(132,000		)	(87,000		)
Gain on Sales of Loans	(208,966		)	(154,019		)
Gain on Sales of Mortgage-Backed Securities	—			(358,141		)
Gain on Sales of Investment Securities	(258,068		)	(1,128,798		)
Gain on Sale of OREO	(755,496		)	(57,040		)
Write Down on OREO	40,000			124,400
Amortization of Deferred Fees on Loans	29,269			4,737
Proceeds From Sale of Loans Held For Sale	7,852,627			5,860,686
Origination of Loans Held For Sale	(6,352,291		)	(5,720,512		)
(Increase) Decrease in Accrued Interest Receivable:
Loans	(74,547		)	(58,089		)
Mortgage-Backed Securities	(33,196		)	6,640
Investment Securities	91,569			77,870
Increase in Advance Payments By Borrowers	164,503			147,815
Other, Net	2,092,417			796,189
Net Cash Provided By Operating Activities	5,848,597			2,624,848

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Mortgage-Backed Securities Available For Sale	(17,654,734		)	(15,625,415		)
Principal Repayments on Mortgage-Backed Securities Available For Sale	5,860,554			7,421,481
Proceeds From Sale of Mortgage-Backed Securities Available For Sale	—			7,266,721
Purchase of Mortgage-Backed Securities Held To Maturity	(1,507,125		)	—
Principal Repayments on Mortgage-Backed Securities Held To Maturity	1,303,075			—
Purchase of Investment Securities Available For Sale	(10,273,607		)	(41,533,216		)
Principal Repayments on Investment Securities Available For Sale	4,406,607			—
Maturities of Investment Securities Available For Sale	2,001,279			9,257,293
Proceeds From Sale of Investment Securities Available For Sale	3,185,961			29,095,492
Purchase of FHLB Stock	(1,355,400		)	(868,800		)
Redemption of FHLB Stock	1,514,700			1,817,300
(Increase) Decrease in Loans Receivable	(2,628,459		)	4,137,337
Proceeds From Sale of OREO	2,494,851			263,340
Purchase and Improvement of Premises and Equipment	(520,656		)	(684,789		)
Net Cash Provided By (Used In) Investing Activities	(13,172,954		)	546,744

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES



Consolidated Statements of Cash Flows (Unaudited), Continued

	Three Months Ended March 31,
	2016			2015
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Deposit Accounts	$	9,135,194		$	12,326,393
Proceeds from FHLB Advances	78,030,000			86,670,000
Repayment of FHLB Advances	(81,780,000		)	(105,370,000		)
Proceeds from Other Borrowings, Net	2,295,174			1,816,809
Dividends To Preferred Stock Shareholders	(110,000		)	(110,000		)
Dividends To Common Stock Shareholders	(235,638		)	(235,638		)
Net Cash Provided By (Used In) Financing Activities	7,334,730			(4,902,436		)
Net Increase (Decrease) in Cash and Cash Equivalents	10,373			(1,730,844		)
Cash and Cash Equivalents at Beginning of Period	8,381,951			10,192,702
Cash and Cash Equivalents at End of Period	$	8,392,324		$	8,461,858
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During the Period For:
Interest	$	830,171		$	1,201,870
Income Taxes	$	19,242		$	10,388
Supplemental Schedule of Non Cash Transactions:
Transfers From Loans Receivable to OREO	$	—		$	3,587,840

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 ("U.S. GAAP"); 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”) 2015 Annual Report to Shareholders which was filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 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, 2015 included in our 2015 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. Due to the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

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

While management uses the best information available to make evaluations, future adjustments may be necessary if economic conditions differ substantially from the assumptions used in making these evaluations. The allowance for loan losses is subject to periodic evaluations by our bank regulatory agencies, including the Board of Governors of the Federal Reserve System (“Federal Reserve”), the FDIC and the South Carolina Board of Financial Institutions, that may require adjustments to be made to the allowance based upon the information that is available at the time of their examination.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

3. Critical Accounting Policies, Continued

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 March 31,
	2016		2015
Earnings Available To Common Shareholders:
Net Income		$1,716,743		$1,504,627
Preferred Stock Dividends	110,000		110,000
Net Income Available To Common Shareholders		$1,606,743		$1,394,627

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

4. Earnings Per Common Share, Continued

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



	For the Three Months Ended March 31,
	2016					2015
	Income		Shares	Per Share Amounts		Income		Shares	Per Share Amounts
Basic EPS		$1,606,743	2,944,001		$0.55		$1,394,627	2,944,001		$0.47
Effect of Dilutive Securities:
Senior Convertible Debentures	75,442		304,200	(0.02)		75,442		304,200	(0.02)
Unvested Restricted Stock	—		242	(0.01)		—		29	—
Diluted EPS		$1,682,185	3,248,443		$0.52		$1,470,069	3,248,230		$0.45

5. Stock-Based Compensation

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



	Three Months Ended March 31,
	2016			2015
	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	(3,500	)	23.91	(18,000	)	20.55
Balance, End Of Period	26,000		$23.50	29,500		$23.55

Options Exercisable	20,600		$23.51	18,900		$23.58

Options Available For Grant	50,000			50,000

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

5. Stock-Based Compensation, Continued

At March 31, 2016, the Company had the following options outstanding:



Grant Date	Outstanding Options	Option Price	Expiration Date
08/24/06	3,500	$23.03	08/24/16

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

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

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

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

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

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

None of the options outstanding at March 31, 2016 or 2015 had an exercise price below the average market price during the three month periods ended March 31, 2016 or 2015. Therefore, these options were not deemed to be dilutive to EPS 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:



	March 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
FHLB Securities	$	2,000,000	$	—	$	4,890	$	1,995,110
Federal Home Loan Mortgage Corporation ("FHLMC") & Federal National Mortgage Association ("FNMA") Bonds	1,997,016		18,605		—		2,015,621
Small Business Administration (“SBA”) Bonds	109,797,838		1,692,290		174,456		111,315,672
Tax Exempt Municipal Bonds	74,181,255		3,009,287		209,164		76,981,378
Taxable Municipal Bonds	1,016,098		3,952		—		1,020,050
Mortgage-Backed Securities	191,429,724		4,020,969		432,754		195,017,939
Equity Securities	250,438		55,204		—		305,642
	$	380,672,369	$	8,800,307	$	821,264	$	388,651,412


	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
FHLB Securities	$	2,000,000	$	—	$	67,912	$	1,932,088
Federal Farm Credit Bank ("FFCB") Securities	2,000,000		—		12,064		1,987,936
FNMA Bonds	997,564		6,767		—		1,004,331
SBA Bonds	110,195,113		1,415,464		193,795		111,416,782
Tax Exempt Municipal Bonds	73,499,636		2,770,115		204,132		76,065,619
Mortgage-Backed Securities	180,197,347		3,281,116		681,251		182,797,212
Equity Securities	250,438		59,464		—		309,902
	$	369,140,098	$	7,532,926	$	1,159,154	$	375,513,870

The FHLB, FFCB, FHLMC and FNMA are government sponsored enterprises ("GSEs") and the securities and bonds issued by GSEs are not backed by the full faith and credit of the United States government. SBA bonds are backed by the full faith and credit of the United States government. Included in the tables above and below in mortgage-backed securities are Government National Mortgage Association ("GNMA") mortgage-backed securities, which are also backed by the full faith and credit of the United States government. At March 31, 2016 the Bank held an amortized cost and fair value of $113.5 million and $115.6 million, respectively, in GNMA mortgage-backed securities, which are included in mortgage-backed securities in the table above, compared to an amortized cost and fair value of $116.8 million and $118.5 million, respectively, at December 31, 2015.

Also included in mortgage-backed securities in the tables above and below are private label collateralized mortgage obligation ("CMO") securities. 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 March 31, 2016 the Bank held an amortized cost and fair value of $14.7 million and $14.5 million, respectively, in private label CMO mortgage-backed securities, which are included in mortgage-backed securities in the table above, compared to an amortized cost and fair value of $3.8 million at December 31, 2015.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

The amortized cost and fair value of investment and mortgage-backed securities available for sale at March 31, 2016 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	$	447,262	$	453,157
One – Five Years	16,871,672		17,216,800
Over Five – Ten Years	54,832,074		55,875,165
More Than Ten Years	117,091,637		120,088,351
Mortgage-Backed Securities	191,429,724		195,017,939
	$	380,672,369	$	388,651,412

At March 31, 2016 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 $79.2 million and $76.8 million, respectively, compared to an amortized cost and fair value of $81.0 million and $83.2 million, respectively at December 31, 2015.

The Bank received $3.2 million and $36.4 million, respectively, in gross proceeds from sales of available for sale securities during the three months ended March 31, 2016 and 2015. As a result, the Bank recognized gross gains of $258,000 and $1.5 million, respectively, and gross losses of $0 and $47,000, respectively, for the three months ended March 31, 2016 and 2015.

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



	March 31, 2016
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
FHLB Securities	$	—	$	—	$	1,995,110	$	4,890	$	1,995,110	$	4,890
FFCB Securities	—		—		—		—		—		—
SBA Bonds	16,475,245		89,541		9,238,724		84,915		25,713,969		174,456
Tax Exempt Municipal Bonds	11,246,437		126,569		3,997,850		82,595		15,244,287		209,164
Mortgage-Backed Securities	38,690,737		334,990		8,060,303		97,764		46,751,040		432,754
	$	66,412,419	$	551,100	$	23,291,987	$	270,164	$	89,704,406	$	821,264



	December 31, 2015
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
FHLB Securities	$	—	$	—	$	1,932,088	$	67,912	$	1,932,088	$	67,912
FFCB Securities	1,987,936		12,064		—		—		1,987,936		12,064
SBA Bonds	25,090,453		119,533		7,982,777		74,262		33,073,230		193,795
Tax Exempt Municipal Bonds	13,668,473		175,020		709,800		29,112		14,378,273		204,132
Mortgage-Backed Securities	63,273,417		648,862		1,706,086		32,389		64,979,503		681,251
	$	104,020,279	$	955,479	$	12,330,751	$	203,675	$	116,351,030	$	1,159,154

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

Securities classified as available for sale are recorded at fair market value. At March 31, 2016, 32.9% of the unrealized losses, or 17 individual securities, were in a continuous loss position for 12 months or more. At December 31, 2015, 17.6% of the unrealized losses, or nine individual securities, were 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 a portion may be recognized in other comprehensive income. The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment. There was no OTTI recognized during the three months ended March 31, 2016.

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

The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of held to maturity securities at the dates indicated are as follows:



	March 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage-Backed Securities (1)	$	29,946,584	$	125,776	$	85,477	$	29,986,883
Total Held To Maturity	$	29,946,584	$	125,776	$	85,477	$	29,986,883

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



	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage-Backed Securities (1)	$	29,873,098	$	22,600	$	214,418	$	29,681,280
Total Held To Maturity	$	29,873,098	$	22,600	$	214,418	$	29,681,280

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

Other than the mortgage-backed securities included in the tables above, there were no other investment securities classified as held to maturity at March 31, 2016 and December 31, 2015.

At March 31, 2016, the Bank held GNMA mortgage-backed securities classified as held to maturity that had both an amortized cost and fair value of $19.3 million. The Company has not invested in any private label mortgage-backed securities classified as held to maturity.

At March 31, 2016, both 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 was $24.7 million.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

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

The following tables show gross unrealized losses, fair value and length of time that individual held to maturity securities were in a continuous unrealized loss position at March 31, 2016 and December 31, 2015.



	March 31, 2016
	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)	$	11,964,145	$	85,477	$	—	$	—	$	11,964,145	$	85,477
	$	11,964,145	$	85,477	$	—	$	—	$	11,964,145	$	85,477

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



	December 31, 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)	$	25,484,972	$	214,418	$	—	$	—	$	25,484,972	$	214,418
	$	25,484,972	$	214,418	$	—	$	—	$	25,484,972	$	214,418

^{(1) COMPRISED OF GSEs OR 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.

8. Loans Receivable, Net

Loans receivable, net, consisted of the following at the dates shown below:



	March 31, 2016		December 31, 2015
Residential Real Estate Loans	$	76,642,289	$	76,373,071
Consumer Loans	50,524,091		50,380,289
Commercial Business Loans	12,764,075		12,514,133
Commercial Real Estate Loans	201,166,921		200,083,125
Total Loans Held For Investment	341,097,376		339,350,618
Loans Held For Sale	1,171,189		2,462,559
Total Loans Receivable, Gross	342,268,565		341,813,177
Less:
Allowance For Loan Losses	8,273,304		8,275,133
Loans In Process	2,015,710		2,902,849
Deferred Loan Fees	99,002		62,466
	10,388,016		11,240,448
Total Loans Receivable, Net	$	331,880,549	$	330,572,729

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net, Continued

Changes in the allowance for loan losses for the three months ended March 31, 2016 and 2015 are summarized as follows:



	Three Months Ended March 31,
	2016			2015
Balance at Beginning of Period	$	8,275,133		$	8,357,496
Provision for Loan Losses	—			100,000
Charge Offs	(165,629		)	(619,014		)
Recoveries	163,800			80,435
Total Allowance for Loan Losses	$	8,273,304		$	7,918,917

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

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



	Credit Quality Measures
March 31, 2016	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	68,644,501	$	726,630	$	705,465	$	6,565,693	$	76,642,289
Consumer	46,694,470		2,340,199		80,733		1,408,689		50,524,091
Commercial Business	11,269,150		1,018,999		96,610		379,316		12,764,075
Commercial Real Estate	134,046,088		40,633,981		16,810,815		9,676,037		201,166,921
Total	$	260,654,209	$	44,719,809	$	17,693,623	$	18,029,735	$	341,097,376



	Credit Quality Measures
December 31, 2015	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	67,605,311	$	1,264,415	$	607,336	$	6,896,009	$	76,373,071
Consumer	46,344,056		2,510,519		81,617		1,444,097		50,380,289
Commercial Business	10,519,123		1,465,136		102,046		427,828		12,514,133
Commercial Real Estate	129,242,390		43,863,659		17,304,431		9,672,645		200,083,125
Total	$	253,710,880	$	49,103,729	$	18,095,430	$	18,440,579	$	339,350,618

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net, Continued

The following table presents an age analysis of past due balances by loan category at March 31, 2016:



	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	$	421,074	$	—	$	3,074,983	$	3,496,057	$	73,146,232	$	76,642,289
Consumer	810,449		—		534,872		1,345,321		49,178,770		50,524,091
Commercial Business	401,173		—		153,401		554,574		12,209,501		12,764,075
Commercial Real Estate	3,819,182		666,448		3,921,155		8,406,785		192,760,136		201,166,921
Total	$	5,451,878	$	666,448	$	7,684,411	$	13,802,737	$	327,294,639	$	341,097,376

The following table presents an age analysis of past due balances by loan category at December 31, 2015:



	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans Receivable
Residential Real Estate	$	—	$	1,144,381	$	3,306,675	$	4,451,056	$	71,922,015	$	76,373,071
Consumer	710,881		282,314		575,866		1,569,061		48,811,228		50,380,289
Commercial Business	101,201		—		178,076		279,277		12,234,856		12,514,133
Commercial Real Estate	3,309,287		929,819		2,973,135		7,212,241		192,870,884		200,083,125
Total	$	4,121,369	$	2,356,514	$	7,033,752	$	13,511,635	$	325,838,983	$	339,350,618

At March 31, 2016 and December 31, 2015, the Company did not have any loans that were 90 days or more past due and still accruing interest. Our strategy is to work with our borrowers to reach acceptable payment plans while protecting our interests in the existing collateral. In the event an acceptable arrangement cannot be reached, we may have to acquire these properties through foreclosure or other means and subsequently sell, develop, or liquidate them.

The following table shows non-accrual loans by loan category at March 31, 2016 compared to December 31, 2015:



	At March 31, 2016			At December 31, 2015			$			%
	Amount		Percent ⁽¹⁾	Amount		Percent ⁽¹⁾	Increase (Decrease)			Increase (Decrease)
Non-accrual Loans:
Residential Real Estate	$	3,074,983	0.91%	$	3,306,675	0.98%	$	(231,692	)	(7.0)%
Commercial Business	153,401		0.05	178,076		0.05	(24,675		)	(13.9)
Commercial Real Estate	3,921,155		1.16	2,973,135		0.88	948,020			31.9
Consumer	534,872		0.16	575,866		0.17	(40,994		)	(7.1)
Total Non-accrual Loans	$	7,684,411	2.28%	$	7,033,752	2.08%	$	650,659		9.3%

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes To Consolidated Financial Statements

8. Loans Receivable, Net, Continued

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



	For the Three Months Ended March 31, 2016
	Residential Real Estate		Consumer			Commercial Business		Commercial Real Estate			Total
Beginning Balance	$	1,323,183	$	1,063,153		$	773,948	$	5,114,849		$	8,275,133
Provision	76,520		48,967			29,198		(154,685		)	—
Charge-Offs	—		(94,429		)	—		(71,200		)	(165,629		)
Recoveries	—		24,839			—		138,961			163,800
Ending Balance	$	1,399,703	$	1,042,530		$	803,146	$	5,027,925		$	8,273,304



	For the Three Months Ended March 31, 2015
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	1,392,065		$	886,716		$	159,353		$	5,919,362		$	8,357,496
Provision	7,370			330,931			345,077			(583,378		)	100,000
Charge-Offs	(45,000		)	(120,618		)	(10,947		)	(442,449		)	(619,014		)
Recoveries	—			44,768			3,320			32,347			80,435
Ending Balance	$	1,354,435		$	1,141,797		$	496,803		$	4,925,882		$	7,918,917

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



	Allowance For Loan Losses
March 31, 2016	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	—	$	1,399,703	$	1,399,703
Consumer	2,300		1,040,230		1,042,530
Commercial Business	—		803,146		803,146
Commercial Real Estate	154,300		4,873,625		5,027,925
Total	$	156,600	$	8,116,704	$	8,273,304



	Allowance For Loan Losses
December 31, 2015	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	—	$	1,323,183	$	1,323,183
Consumer	32,300		1,030,853		1,063,153
Commercial Business	—		773,948		773,948
Commercial Real Estate	49,300		5,065,549		5,114,849
Total	$	81,600	$	8,193,533	$	8,275,133

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 for the periods indicated:



	Loans Receivable
March 31, 2016	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	2,690,748	$	73,951,541	$	76,642,289
Consumer	353,775		50,170,316		50,524,091
Commercial Business	153,401		12,610,674		12,764,075
Commercial Real Estate	7,232,851		193,934,070		201,166,921
Total	$	10,430,775	$	330,666,601	$	341,097,376



	Loans Receivable
December 31, 2015	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	2,922,105	$	73,450,966	$	76,373,071
Consumer	372,382		50,007,907		50,380,289
Commercial Business	162,201		12,351,932		12,514,133
Commercial Real Estate

OUTSTANDING SHARES AT:

Common Stock, par value $0.01 per share

May 12, 2016