SECURITY FEDERAL CORP - FORM 10-Q

SECURITY FEDERAL CORP - FORM 10-Q - November 14, 2016

Attached files

Attached files

file	filename
EX-32 - EXHIBIT 32 - SECURITY FEDERAL CORP	sfdl-20160930xex32.htm
EX-31.2 - EXHIBIT 31.2 - SECURITY FEDERAL CORP	sfdl-20160930xex312.htm
EX-31.1 - EXHIBIT 31.1 - SECURITY FEDERAL CORP	sfdl-20160930xex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10 – Q

(Mark one)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 September 30, 2016 and December 31, 2015	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2016 and 2015	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2016 and 2015	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015	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, 2016			December 31, 2015
	(Unaudited)			(Audited)
ASSETS:
Cash and Cash Equivalents	$	11,352,028		$	8,381,951
Certificates of Deposit with Other Banks	3,445,005			3,445,005
Investment and Mortgage-Backed Securities:
Available For Sale	380,970,307			375,513,870
Held To Maturity (Fair Value of $28,090,167 and $29,681,280 at September 30, 2016 and December 31, 2015, Respectively)	27,483,390			29,873,098
Total Investments and Mortgage-Backed Securities	408,453,697			405,386,968
Loans Receivable, Net:
Held For Sale	4,143,431			2,462,559
Held For Investment (Net of Allowance of $8,111,111 and $8,275,133 at September 30, 2016 and December 31, 2015, Respectively)	347,675,139			328,110,170
Total Loans Receivable, Net	351,818,570			330,572,729
Accrued Interest Receivable:
Loans	848,627			886,968
Mortgage-Backed Securities	629,809			614,925
Investment Securities	1,432,494			1,523,200
Total Accrued Interest Receivable	2,910,930			3,025,093
Premises and Equipment, Net	20,663,421			20,116,918
Federal Home Loan Bank ("FHLB") Stock, at Cost	2,674,700			2,214,800
Other Real Estate Owned ("OREO")	2,327,345			4,361,411
Bank Owned Life Insurance ("BOLI")	16,969,045			16,573,045
Goodwill	1,199,754			1,199,754
Other Assets	2,110,251			4,449,956
Total Assets	$	823,924,746		$	799,727,630
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Liabilities:
Deposit Accounts	$	650,298,252		$	652,096,545
Advances From FHLB	46,000,000			34,640,000
Other Borrowings	12,597,519			6,411,977
Advance Payments By Borrowers For Taxes and Insurance	635,964			256,730
Junior Subordinated Debentures	5,155,000			5,155,000
Senior Convertible Debentures	6,084,000			6,084,000
Other Liabilities	5,680,730			4,115,956
Total Liabilities	726,451,465			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	12,034,808			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	6,736,410			4,262,361
Retained Earnings	61,026,669			57,000,835
Total Shareholders' Equity	97,473,281			90,967,422
Total Liabilities And Shareholders' Equity	$	823,924,746		$	799,727,630

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,
	2016		2015			2016			2015
Interest Income:
Loans	$	4,912,317	$	4,521,458		$	14,378,826		$	13,680,762
Mortgage-Backed Securities	1,192,792		1,259,822			3,672,252			4,037,511
Investment Securities	1,042,765		1,124,683			3,245,857			3,198,542
Other	4,944		1,897			14,057			6,034
Total Interest Income	7,152,818		6,907,860			21,310,992			20,922,849
Interest Expense:
NOW and Money Market Accounts	102,321		103,819			309,757			326,099
Statement Savings Accounts	8,984		7,805			25,468			22,535
Certificate Accounts	407,283		444,385			1,239,282			1,393,648
FHLB Advances and Other Borrowed Money	132,889		296,497			561,316			1,057,485
Senior Convertible Debentures	121,680		121,680			365,040			365,040
Junior Subordinated Debentures	31,445		26,279			91,002			77,070
Total Interest Expense	804,602		1,000,465			2,591,865			3,241,877
Net Interest Income	6,348,216		5,907,395			18,719,127			17,680,972
Provision For Loan Losses	—		(200,000		)	—			(100,000		)
Net Interest Income After Provision For Loan Losses	6,348,216		6,107,395			18,719,127			17,780,972
Non-Interest Income:
Gain on Sale of Investment Securities	360,425		7,651			772,143			1,676,404
Gain on Sale of Loans	256,918		191,194			657,473			526,295
Service Fees on Deposit Accounts	266,960		258,522			772,341			790,689
Commissions From Insurance Agency	149,529		139,980			441,519			373,639
Trust Income	197,000		152,200			521,000			449,800
BOLI Income	132,000		117,000			396,000			291,000
Check Card Fee Income	247,331		239,739			742,583			719,159
Grant Income	—		97,640			265,496			97,640
Other	170,519		164,488			504,200			482,380
Total Non-Interest Income	1,780,682		1,368,414			5,072,755			5,407,006
Non-Interest Expense:
Compensation and Employee Benefits	3,167,112		3,002,259			9,675,430			8,976,214
Occupancy	502,352		481,713			1,469,602			1,427,424
Advertising	100,251		95,226			343,034			290,951
Depreciation and Maintenance of Equipment	510,645		401,102			1,486,060			1,263,932
Federal Deposit Insurance Corporation ("FDIC") Insurance Premiums	62,163		140,172			322,653			455,985
Net Cost (Benefit) of Operation of OREO	25,991		(19,713		)	(647,990		)	267,784
Prepayment Penalties on FHLB Advances	260,594		—			789,306			787,851
Other	1,065,209		1,029,201			3,485,289			3,249,451
Total Non-Interest Expense	5,694,317		5,129,960			16,923,384			16,719,592
Income Before Income Taxes	2,434,581		2,345,849			6,868,498			6,468,386
Provision For Income Taxes	654,850		601,446			1,805,750			1,696,268
Net Income	1,779,731		1,744,403			5,062,748			4,772,118
Preferred Stock Dividends	110,000		110,000			330,000			330,000
Net Income Available to Common Shareholders	$	1,669,731	$	1,634,403		$	4,732,748		$	4,442,118
Net Income Per Common Share (Basic)	$	0.57	$	0.56		$	1.61		$	1.51
Net Income Per Common Share (Diluted)	$	0.54	$	0.53		$	1.53		$	1.44
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)	3,248,526		3,248,361			3,248,474			3,248,284

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)



	Three Months Ended September 30,
	2016			2015
Net Income	$	1,779,731		$	1,744,403
Other Comprehensive Income (Loss)
Unrealized Gains (Losses) on Securities:
Unrealized Holding Gains (Losses) on Securities Available For Sale, Net of Taxes of $(774,093) and $979,277 at September 30, 2016 and 2015, Respectively	(1,263,332		)	1,598,158
Reclassification Adjustment for Gains Included in Net Income, Net of Taxes of $136,962 and $2,907 at September 30, 2016 and 2015, Respectively	(223,463		)	(4,744		)
Amortization of Unrealized Gains on Available For Sale Securities Transferred to Held To Maturity, Net of Taxes of $(20,270) and $(22,996) at September 30, 2016 and 2015, Respectively	(33,128		)	(37,584		)
Other Comprehensive Income (Loss)	(1,519,923		)	1,555,830
Comprehensive Income	$	259,808		$	3,300,233



	Nine Months Ended September 30,
	2016			2015
Net Income	$	5,062,748		$	4,772,118
Other Comprehensive Income (Loss)
Unrealized Gains on Securities:
Unrealized Holding Gains on Securities Available For Sale, Net of Taxes of $1,861,700 and $220,764 at September 30, 2016 and 2015, Respectively	3,044,091			357,366
Reclassification Adjustment for Gains Included in Net Income, Net of Taxes of $293,415 and $637,033 at September 30, 2016 and 2015, Respectively	(478,728		)	(1,039,371		)
Amortization of Unrealized Gains on Available For Sale Securities Transferred to Held To Maturity, Net of Taxes of $(55,872) and $(29,337) at September 30, 2016 and 2015, Respectively	(91,314		)	(47,948		)
Other Comprehensive Income (Loss)	2,474,049			(729,953		)
Comprehensive Income	$	7,536,797		$	4,042,165

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, 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	—		—		—			—		—			—		5,062,748			5,062,748
Other Comprehensive Income, Net of Tax	—		—		—			—		—			2,474,049		—			2,474,049
Stock Option Compensation Expense	—		—		—			5,976		—			—		—			5,976
Cash Dividends on Preferred Stock	—		—		—			—		—			—		(330,000		)	(330,000		)
Cash Dividends on Common Stock	—		—		—			—		—			—		(706,914		)	(706,914		)
Balance at September 30, 2016	$	22,000,000	$	31,464	$	(25,358	)	$	12,034,808	$	(4,330,712	)	$	6,736,410	$	61,026,669		$	97,473,281



	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,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	5,062,748		$	4,772,118
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
Depreciation Expense	1,053,224			914,784
Stock Option Compensation Expense	5,976			9,507
Discount Accretion and Premium Amortization	4,038,220			3,496,657
Provisions for Losses on Loans	—			(100,000		)
Income From BOLI	(396,000		)	(291,000		)
Gain on Sales of Loans	(657,473		)	(526,295		)
Gain on Sales of Mortgage-Backed Securities	(55,958		)	(510,702		)
Gain on Sales of Investment Securities	(716,185		)	(1,165,702		)
Gain on Sale of OREO	(841,728		)	(218,293		)
Write Down on OREO	40,000			174,400
Gain on Disposal of Premises and Equipment	—			(5,647		)
Amortization of Deferred Costs on Loans	88,054			47,756
Proceeds From Sale of Loans Held For Sale	23,896,772			19,049,761
Origination of Loans Held For Sale	(24,920,171		)	(18,177,098		)
Decrease (Increase) in Accrued Interest Receivable:
Loans	38,341			98,607
Mortgage-Backed Securities	(14,884		)	55,154
Investment Securities	90,706			(122,738		)
Increase in Advance Payments By Borrowers	379,234			329,797
Other, Net	2,244,880			946,839
Net Cash Provided By Operating Activities	9,335,756			8,777,905

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Mortgage-Backed Securities Available For Sale	(37,793,135		)	(30,816,752		)
Principal Repayments on Mortgage-Backed Securities Available For Sale	23,942,058			21,983,963
Proceeds From Sale of Mortgage-Backed Securities Available For Sale	3,082,591			27,329,862
Purchase of Mortgage-Backed Securities Held To Maturity	(1,507,125		)	—
Principal Repayments on Mortgage-Backed Securities Held To Maturity	3,496,657			1,780,222
Purchase of Investment Securities Available For Sale	(30,233,311		)	(66,339,293		)
Principal Repayments on Investment Securities Available For Sale	13,174,779			—
Maturities of Investment Securities Available For Sale	5,227,465			22,152,393
Proceeds From Sale of Investment Securities Available For Sale	18,410,863			30,890,194
Purchase of FHLB Stock	(5,014,800		)	(2,765,900		)
Redemption of FHLB Stock	4,554,900			3,686,300
Purchase of Bank Owned Life Insurance	—			(5,000,000		)
(Increase) Decrease in Loans Receivable	(19,976,753		)	15,800,516
Proceeds From Sale of OREO	3,159,524			2,369,726
Purchase and Improvement of Premises and Equipment	(1,599,727		)	(2,232,816		)
Proceeds From Disposal of Premises and Equipment	—			8,516
Net Cash Provided (Used) By Investing Activities	(21,076,014		)	18,846,931

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES



Consolidated Statements of Cash Flows (Unaudited) (Continued)

	Nine Months Ended September 30,
	2016			2015
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in Deposit Accounts	$	(1,798,293	)	$	(7,988,147	)
Proceeds from FHLB Advances	251,755,000			199,184,000
Repayment of FHLB Advances	(240,395,000		)	(218,804,000		)
Increase (Decrease) in Other Borrowings, Net	6,185,542			(797,988		)
Dividends to Preferred Stock Shareholders	(330,000		)	(330,000		)
Dividends to Common Stock Shareholders	(706,914		)	(706,914		)
Net Cash Provided (Used) By Financing Activities	14,710,335			(29,443,049		)
Net Increase (Decrease) in Cash and Cash Equivalents	2,970,077			(1,818,213		)
Cash and Cash Equivalents at Beginning of Period	8,381,951			10,192,702
Cash and Cash Equivalents at End of Period	$	11,352,028		$	8,374,489
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During the Period For:
Interest	$	2,565,836		$	3,288,927
Income Taxes	$	572,242		$	1,393,388
Supplemental Schedule of Non Cash Transactions:
Transfers From Loans Receivable to OREO	$	323,730		$	4,025,121
Transfers from Mortgage-Backed Securities 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 ("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. 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 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.

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 EPS 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:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Earnings Available To Common Shareholders:
Net Income		$1,779,731		$1,744,403		$5,062,748		$4,772,118
Preferred Stock Dividends	110,000		110,000		330,000		330,000
Net Income Available To Common Shareholders		$1,669,731		$1,634,403		$4,732,748		$4,442,118

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 EPS for the periods indicated.



	Three Months Ended September 30,
	2016					2015
	Income		Shares	Per Share Amounts		Income		Shares	Per Share Amounts
Basic EPS	$	1,669,731	2,944,001	$	0.57	$	1,634,403	2,944,001	$	0.56
Effect of Dilutive Securities:
Senior Convertible Debentures	75,442		304,200	(0.03)		75,442		304,200	(0.03)
Unvested Restricted Stock	—		325	—		—		160	—
Diluted EPS	$	1,745,173	3,248,526	$	0.54	$	1,709,845	3,248,361	$	0.53



	Nine Months Ended September 30,
	2016					2015
	Income		Shares	Per Share Amounts		Income		Shares	Per Share Amounts
Basic EPS	$	4,732,748	2,944,001	$	1.61	$	4,442,118	2,944,001	$	1.51
Effect of Dilutive Securities:
Senior Convertible Debentures	226,325		304,200	(0.07)		226,325		304,200	(0.07)
Unvested Restricted Stock	—		273	(0.01)		—		83	—
Diluted EPS	$	4,959,073	3,248,474	$	1.53	$	4,668,443	3,248,284	$	1.44

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,
	2016			2015
	Shares		Weighted Average Exercise Price	Shares	Weighted Average Exercise Price
	Shares		Weighted Average Exercise Price	Shares	Weighted Average Exercise Price
Balance, Beginning of Period	25,000		$23.50	29,500	$23.55
Options Granted	—		—	—	—
Options Exercised	—		—	—	—
Options Forfeited	(3,500	)	23.03	—	—
Balance, End of Period	21,500		$23.57	29,500	$23.55

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

5. Stock-Based Compensation, Continued



	Nine Months Ended September 30,
	2016			2015
	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	(8,000	)	23.47	(18,000	)	20.55
Balance, End of Period	21,500		$23.57	29,500		$23.55

Options Exercisable	17,800			21,100

Options Available For Grant	50,000			50,000

At September 30, 2016, the Company had the following options outstanding:



Grant Date	Outstanding Options	Option Price	Expiration Date
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	12,000	$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 September 30, 2016 or 2015 had an exercise price below the average market price during the three or nine month periods ended September 30, 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 were as follows:



	September 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Federal National Mortgage Association ("FNMA") Bonds	$	998,131	$	19,550	$	—	$	1,017,681
Small Business Administration (“SBA”) Bonds	100,978,165		1,343,672		123,707		102,198,130
Tax Exempt Municipal Bonds	77,997,989		5,073,181		114,675		82,956,495
Taxable Municipal Bonds	1,014,619		26,041		—		1,040,660
Mortgage-Backed Securities	189,223,545		4,512,200		309,738		193,426,007
Equity Securities	250,438		80,896		—		331,334
Total Available For Sale	$	370,462,887	$	11,055,540	$	548,120	$	380,970,307

	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
Total Available For Sale	$	369,140,098	$	7,532,926	$	1,159,154	$	375,513,870

The FHLB, FFCB, FNMA and the Federal Home Loan Mortgage Corporation (“FHLMC”) 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 September 30, 2016 the Bank held an amortized cost and fair value of $112.4 million and $115.0 million, respectively, in GNMA mortgage-backed securities included in mortgage-backed securities listed 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 September 30, 2016 the Bank held an amortized cost and fair value of $18.6 million and $18.3 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 September 30, 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 maturity groupings set forth in the table below.



Investment Securities	Amortized Cost		Fair Value
Less Than One Year	$	60,932	$	61,202
One – Five Years	17,522,944		17,846,103
Over Five – Ten Years	44,282,485		45,359,270
More Than Ten Years	119,372,981		124,277,725
Mortgage-Backed Securities	189,223,545		193,426,007
	$	370,462,887	$	380,970,307

At September 30, 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 $71.6 million and $74.1 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 $6.9 million and $4.0 million in gross proceeds from sales of available for sale securities during the three months ended September 30, 2016 and 2015, respectively. As a result, the Bank recognized gross gains of $360,000 and $8,000, respectively, for the three months ended September 30, 2016 and 2015, with no gross losses recognized for the same periods.

During the nine months ended September 30, 2016 and 2015, the Bank received $21.5 million and $58.2 million, respectively, in gross proceeds from sales of available for sale securities. As a result, the Bank recognized gross gains of $772,000 and $1.7 million, respectively, and gross losses of $0 and $47,000, respectively, for the nine months ended September 30, 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.



	September 30, 2016
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
SBA Bonds	$	16,016,982	$	79,654	$	6,595,575	$	44,053	$	22,612,557	$	123,707
Tax Exempt Municipal Bonds	8,068,360		114,675		—		—		8,068,360		114,675
Mortgage-Backed Securities	25,294,568		236,812		6,766,526		72,926		32,061,094		309,738
	$	49,379,910	$	431,141	$	13,362,101	$	116,979	$	62,742,011	$	548,120



	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 September 30, 2016 and December 31, 2015, 21.3% and 17.6% of the unrealized losses, representing 13 and nine 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 the Company 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, 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 below were as follows:



	September 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage-Backed Securities (1)	$	27,483,390	$	606,777	$	—	$	28,090,167
Total Held To Maturity	$	27,483,390	$	606,777	$	—	$	28,090,167

^{(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 above, there were no other investment securities classified as held to maturity at September 30, 2016 and December 31, 2015.

At September 30, 2016, the Bank held an amortized cost and fair value of $17.5 million and $17.8 million, respectively in GNMA mortgage-backed securities, which are included in the table above, compared to an amortized cost and fair value of $20.5 million and $20.4 million, respectively, at December 31, 2015. The Company has not invested in any private label mortgage-backed securities classified as held to maturity.

At September 30, 2016, the amortized cost and fair value of mortgage-backed securities held to maturity that were pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were $25.0 million and $25.5 million, respectively, compared to an amortized cost and fair value of $26.0 million and $25.8 million, respectively, at December 31, 2015.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

There were no gross unrealized losses at September 30, 2016. The following table shows gross unrealized losses, fair value, and length of time that individual held to maturity securities were in a continuous unrealized loss position at December 31, 2015.



	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.

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 indicated below:



	September 30, 2016		December 31, 2015
Residential Real Estate Loans	$	81,030,012	$	76,373,071
Consumer Loans	50,686,906		50,380,289
Commercial Business Loans	16,242,394		12,514,133
Commercial Real Estate Loans	211,930,466		200,083,125
Total Loans Held For Investment	359,889,778		339,350,618
Loans Held For Sale	4,143,431		2,462,559
Total Loans Receivable, Gross	364,033,209		341,813,177
Less:
Allowance For Loan Losses	8,111,111		8,275,133
Loans In Process	4,003,973		2,902,849
Deferred Loan Fees	99,555		62,466
	12,214,639		11,240,448
Total Loans Receivable, Net	$	351,818,570	$	330,572,729

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
September 30, 2016	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	73,440,126	$	687,636	$	424,306	$	6,477,944	$	81,030,012
Consumer	47,022,390		2,506,844		7,331		1,150,341		50,686,906
Commercial Business	14,780,095		953,963		54,669		453,667		16,242,394
Commercial Real Estate	116,912,982		72,253,892		15,691,107		7,072,485		211,930,466
Total	$	252,155,593	$	76,402,335	$	16,177,413	$	15,154,437	$	359,889,778



	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 tables present an age analysis of past due balances by category at September 30, 2016 and December 31, 2015:



September 30, 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	$	—	$	1,133,054	$	2,869,815	$	4,002,869	$	77,027,143	$	81,030,012
Consumer	855,472		46,622		283,770		1,185,864		49,501,042		50,686,906
Commercial Business	131,323		43,082		145,401		319,806		15,922,588		16,242,394
Commercial Real Estate	4,645,754		183,888		2,933,751		7,763,393		204,167,073		211,930,466
Total	$	5,632,549	$	1,406,646	$	6,232,737	$	13,271,932	$	346,617,846	$	359,889,778



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 September 30, 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 category at September 30, 2016 compared to December 31, 2015:



	September 30, 2016				December 31, 2015				$			%
	Amount		Percent ⁽¹⁾		Amount		Percent ⁽¹⁾		Increase (Decrease)			Increase (Decrease)
Non-accrual Loans:
Residential Real Estate	$	2,869,815	0.81	%	$	3,306,675	0.98	%	$	(436,860	)	(13.2	)%
Consumer	283,770		0.08		575,866		0.17		(292,096		)	(50.7	)
Commercial Business	145,401		0.04		178,076		0.05		(32,675		)	(18.3	)
Commercial Real Estate	2,933,751		0.82		2,973,135		0.80		(39,384		)	(1.3	)
Total Non-accrual Loans	$	6,232,737	1.75	%	$	7,033,752	2.09	%	$	(801,015	)	(11.4	)%

^{(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 category for the three and nine months ended September 30, 2016 and 2015:



	Three Months Ended September 30, 2016
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	1,462,636		$	1,115,976		$	865,867		$	4,950,735		$	8,395,214
Provision for Loan Losses	31,415			(155,298		)	713,276			(589,393		)	—
Charge-Offs	(137,935		)	(35,312		)	(150,000		)

OUTSTANDING SHARES AT:

Common Stock, par value $0.01 per share

November 14, 2016