SECURITY FEDERAL CORP - FORM 10-Q

SECURITY FEDERAL CORP - FORM 10-Q - May 12, 2017

Attached files

Attached files

file	filename
EX-32 - EXHIBIT 32 - SECURITY FEDERAL CORP	sfdl-20170331xex32.htm
EX-31.2 - EXHIBIT 31.2 - SECURITY FEDERAL CORP	sfdl-20170331xex312.htm
EX-31.1 - EXHIBIT 31.1 - SECURITY FEDERAL CORP	sfdl-20170331xex311.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, 2017

( ) 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: 000-16120

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, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.



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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.



YES	NO	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, 2017 and December 31, 2016	3
	Consolidated Statements of Income for the Three Months Ended March 31, 2017 and 2016	4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2017 and 2016	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016	7
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	43
Item 4.	Controls and Procedures	43

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	44
	Signatures	46

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, 2017			December 31, 2016
	(Unaudited)			(Audited)
ASSETS:
Cash and Cash Equivalents	$	28,769,406		$	9,374,549
Certificates of Deposit with Other Banks	1,595,005			2,445,005
Investment and Mortgage-Backed Securities:
Available For Sale	381,474,385			362,059,429
Held To Maturity (Fair Value of $28,327,987 and $25,371,052 at March 31, 2017 and December 31, 2016, Respectively)	28,424,015			25,583,956
Total Investments and Mortgage-Backed Securities	409,898,400			387,643,385
Loans Receivable, Net:
Held For Sale	1,118,752			4,243,907
Held For Investment (Net of Allowance of $8,377,899 and $8,356,231 at March 31, 2017 and December 31, 2016, Respectively)	354,106,000			355,478,939
Total Loans Receivable, Net	355,224,752			359,722,846
Accrued Interest Receivable:
Loans	1,033,774			1,038,444
Mortgage-Backed Securities	571,192			605,474
Investment Securities	1,513,852			1,407,923
Total Accrued Interest Receivable	3,118,818			3,051,841
Premises and Equipment, Net	21,638,757			21,197,684
Federal Home Loan Bank ("FHLB") Stock, at Cost	2,346,200			2,776,500
Other Real Estate Owned ("OREO")	2,055,401			2,721,214
Bank Owned Life Insurance ("BOLI")	17,221,045			17,101,045
Goodwill	1,199,754			1,199,754
Other Assets	5,052,644			5,447,746
Total Assets	$	848,120,182		$	812,681,569
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Liabilities:
Deposit Accounts	$	697,679,921		$	654,103,278
Advance Payments by Borrowers for Taxes and Insurance	440,405			260,580
Advances From FHLB	38,000,000			48,395,000
Other Borrowings	9,786,749			9,338,148
Note Payable	12,000,000			13,000,000
Junior Subordinated Debentures	5,155,000			5,155,000
Senior Convertible Debentures	6,084,000			6,084,000
Other Liabilities	5,998,244			5,233,289
Total Liabilities	775,144,319			741,569,295
Shareholders' Equity:
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	12,036,744			12,036,744
Treasury Stock, at Cost (200,933 Shares)	(4,330,712		)	(4,330,712		)
Unvested Restricted Stock	—			(25,358		)
Accumulated Other Comprehensive Income	1,654,791			1,180,086
Retained Earnings	63,583,576			62,220,050
Total Shareholders' Equity	72,975,863			71,112,274
Total Liabilities And Shareholders' Equity	$	848,120,182		$	812,681,569

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)



	Three Months Ended March 31,
	2017			2016
Interest Income:
Loans	$	4,747,478		$	4,642,108
Mortgage-Backed Securities	1,122,067			1,254,401
Investment Securities	1,113,582			1,084,399
Other	20,198			4,510
Total Interest Income	7,003,325			6,985,418
Interest Expense:
NOW and Money Market Accounts	133,232			103,115
Statement Savings Accounts	9,272			7,890
Certificate Accounts	425,787			408,732
FHLB Advances and Other Borrowed Money	121,284			248,659
Note Payable	111,947			—
Senior Convertible Debentures	121,680			121,680
Junior Subordinated Debentures	34,734			29,103
Total Interest Expense	957,936			919,179
Net Interest Income	6,045,389			6,066,239
Provision For Loan Losses	—			—
Net Interest Income After Provision For Loan Losses	6,045,389			6,066,239
Non-Interest Income:
Gain on Sale of Investment Securities	583,391			258,068
Gain on Sale of Loans	280,368			208,966
Service Fees on Deposit Accounts	240,885			240,345
Commissions From Insurance Agency	153,992			169,847
Trust Income	182,000			162,000
BOLI Income	120,000			132,000
Check Card Fee Income	270,992			238,142
Grant Income	—			265,496
Other	165,721			152,876
Total Non-Interest Income	1,997,349			1,827,740
Non-Interest Expense:
Compensation and Employee Benefits	3,511,487			3,330,798
Occupancy	518,052			496,718
Advertising	135,535			129,977
Depreciation and Maintenance of Equipment	465,564			476,374
Federal Deposit Insurance Corporation ("FDIC") Insurance Premiums	64,674			133,047
Net Benefit of Operation of OREO	(119,104		)	(675,926		)
Prepayment Penalties on FHLB Advances	—			247,506
Other	1,252,730			1,397,450
Total Non-Interest Expense	5,828,938			5,535,944
Income Before Income Taxes	2,213,800			2,358,035
Provision For Income Taxes	585,182			641,292
Net Income	1,628,618			1,716,743
Preferred Stock Dividends	—			110,000
Net Income Available to Common Shareholders	$	1,628,618		$	1,606,743
Net Income Per Common Share (Basic)	$	0.55		$	0.55
Net Income Per Common Share (Diluted)	$	0.52		$	0.52
Cash Dividend Per Share on Common Stock	$	0.09		$	0.08
Weighted Average Shares Outstanding (Basic)	2,944,001			2,944,001
Weighted Average Shares Outstanding (Diluted)	3,248,201			3,248,443

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)



	Three Months Ended March 31,
	2017			2016
Net Income	$	1,628,618		$	1,716,743
Other Comprehensive Income
Unrealized Gains on Securities:
Unrealized Holding Gains on Securities Available For Sale, Net of Taxes of $539,973 and $707,595 at March 31, 2017 and 2016, Respectively	869,685			1,155,744
Reclassification Adjustment for Gains Included in Net Income, Net of Taxes of $221,689 and $98,066 at March 31, 2017 and 2016, Respectively	(361,702		)	(160,002		)
Amortization of Unrealized Gains on Available For Sale Securities Transferred to Held To Maturity, Net of Taxes of $(20,361) and $(24,616) at March 31, 2017 and 2016, Respectively	(33,278		)	(40,232		)
Other Comprehensive Income	474,705			955,510
Comprehensive Income	$	2,103,323		$	2,672,253

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, 2017 and 2016



	Common Stock		Unvested Restricted Stock			Additional Paid – In Capital		Treasury Stock			Accumulated Other Comprehensive Income		Retained Earnings			Total
Balance at December 31, 2016	$	31,464	$	(25,358	)	$	12,036,744	$	(4,330,712	)	$	1,180,086	$	62,220,050		$	71,112,274
Net Income	—		—			—		—			—		1,628,618			1,628,618
Other Comprehensive Income, Net of Tax	—		—			—		—			474,705		—			474,705
Vesting of Restricted Stock	—		25,358			—		—			—		—			25,358
Cash Dividends on Common Stock	—		—			—		—			—		(265,092		)	(265,092		)
Balance at March 31, 2017	$	31,464	$	—		$	12,036,744	$	(4,330,712	)	$	1,654,791	$	63,583,576		$	72,975,863



	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

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)



	Three Months Ended March 31,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	1,628,618		$	1,716,743
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
Depreciation Expense	330,970			343,740
Stock Option Compensation Expense	25,358			1,992
Discount Accretion and Premium Amortization	1,363,031			1,330,301
Income From BOLI	(120,000		)	(132,000		)
Gain on Sales of Loans	(280,368		)	(208,966		)
Gain on Sales of Mortgage-Backed Securities	(284,935		)	—
Gain on Sales of Investment Securities	(298,456		)	(258,068		)
Gain on Sale of OREO	(214,025		)	(755,496		)
Write Down on OREO	18,000			40,000
Amortization of Deferred Costs on Loans	25,899			29,269
Proceeds From Sale of Loans Held For Sale	10,585,391			7,852,627
Origination of Loans Held For Sale	(7,179,868		)	(6,352,291		)
Decrease (Increase) in Accrued Interest Receivable:
Loans	4,670			(74,547		)
Mortgage-Backed Securities	34,282			(33,196		)
Investment Securities	(105,929		)	91,569
Increase in Advance Payments By Borrowers	179,825			164,503
Other, Net	808,495			2,092,417
Net Cash Provided By Operating Activities	6,520,958			5,848,597
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Mortgage-Backed Securities Available For Sale ("AFS")	(6,638,366		)	(17,654,734		)
Proceeds from Payments and Maturities of Mortgage-Backed Securities AFS	9,239,992			5,860,554
Proceeds from Sale of Mortgage-Backed Securities AFS	11,047,043			—
Purchase of Mortgage-Backed Securities Held To Maturity ("HTM")	—			(1,507,125		)
Proceeds from Payments and Maturities of Mortgage-Backed Securities HTM	1,003,401			1,303,075
Purchase of Investment Securities AFS	(42,474,277		)	(10,273,607		)
Proceeds from Payments and Maturities of Investment Securities AFS	5,354,864			6,407,886
Purchase of Investment Securities HTM	(3,997,750		)	—
Proceeds From Sale of Investment Securities Available For Sale	4,256,705			3,185,961
Proceeds From Redemption of Certificates of Deposits with Other Banks	850,000			—
Purchase of FHLB Stock	(2,222,900		)	(1,355,400		)
Redemption of FHLB Stock	2,653,200			1,514,700
(Increase) Decrease in Loans Receivable	1,219,032			(2,628,459		)
Proceeds From Sale of OREO	989,846			2,494,851
Purchase and Improvement of Premises and Equipment	(772,043		)	(520,656		)
Net Cash Used By Investing Activities	(19,491,253		)	(13,172,954		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Deposit Accounts	$	43,576,643		$	9,135,194
Proceeds from FHLB Advances	26,540,000			78,030,000
Repayment of FHLB Advances	(36,935,000		)	(81,780,000		)
Increase in Other Borrowings, Net	448,601			2,295,174
Repayment of Note Payable	(1,000,000		)	—
Dividends to Preferred Stock Shareholders	—			(110,000		)
Dividends to Common Stock Shareholders	(265,092		)	(235,638		)
Net Cash Provided By Financing Activities	32,365,152			7,334,730
Net Increase in Cash and Cash Equivalents	19,394,857			10,373
Cash and Cash Equivalents at Beginning of Period	9,374,549			8,381,951
Cash and Cash Equivalents at End of Period	$	28,769,406		$	8,392,324

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES



Consolidated Statements of Cash Flows (Unaudited) (Continued)

	Three Months Ended March 31,
	2017		2016
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During the Period For:
Interest	$	830,766	$	830,171
Income Taxes	$	—	$	19,242
Supplemental Schedule of Non Cash Transactions:
Transfers From Loans Receivable to OREO	$	128,008	$	—

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”) 2016 Annual Report to Shareholders which was filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2016 (“2016 10-K”) when reviewing interim financial statements.

The unaudited consolidated results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or any other future period. The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect amounts reported in the financial statements. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, fair value of financial instruments, and the valuation of servicing rights.

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”). All significant intercompany balances and transactions between the Company and its subsidiaries have been eliminated in consolidation. 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, 2016 included in our 2016 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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

3. Critical Accounting Policies, Continued

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.

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.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

4. Earnings Per Common Share, Continued

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



	Three Months Ended March 31,
	2017		2016
Earnings Available To Common Shareholders:
Net Income		$1,628,618		$1,716,743
Preferred Stock Dividends	—		110,000
Net Income Available To Common Shareholders		$1,628,618		$1,606,743

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



	Three Months Ended March 31,
	2017					2016
	Income		Shares	Per Share Amounts		Income		Shares	Per Share Amounts
Basic EPS	$	1,628,618	2,944,001	$	0.55	$	1,606,743	2,944,001	$	0.55
Effect of Dilutive Securities:
Senior Convertible Debentures	75,442		304,200	(0.03)		75,442		304,200	(0.03)
Unvested Restricted Stock	—		—	—		—		242	—
Diluted EPS	$	1,704,060	3,248,201	$	0.52	$	1,682,185	3,248,443	$	0.52

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,
	2017		2016
	Shares	Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
	Shares	Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
Balance, Beginning of Period	21,500	$23.57	29,500		$23.55
Options Granted	—	—	—		—
Options Exercised	—	—	—		—
Options Forfeited	—	—	(3,500	)	23.91
Balance, End of Period	21,500	$23.57	26,000		$23.50

Options Exercisable	20,600		20,600

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, 2017, 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 March 31, 2017 or 2016 had an exercise price below the average market price during the three month periods ended March 31, 2017 or 2016. 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:



	March 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
FHLB Bonds	$	998,114	$	—	$	3,364	$	994,750
Small Business Administration (“SBA”) Bonds	125,940,182		829,103		345,028		126,424,257
Tax Exempt Municipal Bonds	80,200,174		1,600,032		1,351,105		80,449,101
Taxable Municipal Bonds	2,020,095		177		9,433		2,010,839
Mortgage-Backed Securities	169,732,288		2,403,910		695,760		171,440,438
Equity Securities	155,000		—		—		155,000
Total Available For Sale	$	379,045,853	$	4,833,222	$	2,404,690	$	381,474,385

	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

FHLB Bonds	$	998,001	$	—	$	1	$	998,000
SBA Bonds	101,280,921		909,361		284,223		101,906,059
Tax Exempt Municipal Bonds	72,248,915		1,185,753		1,899,519		71,535,149
Taxable Municipal Bonds	2,021,192		—		30,062		1,991,130
Mortgage-Backed Securities	183,657,697		2,575,616		972,222		185,261,091
Equity Securities	250,438		117,562		—		368,000
Total Available For Sale	$	360,457,164	$	4,788,292	$	3,186,027	$	362,059,429

The FHLB, Federal National Mortgage Association ("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 March 31, 2017 the Bank held an amortized cost and fair value of $96.8 million and $97.9 million, respectively, in AFS GNMA mortgage-backed securities compared to an amortized cost and fair value of $107.9 million and $109.2 million, respectively, at December 31, 2016.

Also included in mortgage-backed securities in the tables above and below are private label collateralized mortgage obligation ("CMO") securities, which are issued by non-governmental real estate mortgage investment conduits and are not backed by the full faith and credit of the United States government. At March 31, 2017 the Bank held an amortized cost and fair value of $20.1 million and $19.9 million, respectively, in AFS private label CMO mortgage-backed securities, compared to an amortized cost and fair value of $20.0 million and $19.7 million at December 31, 2016.

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, 2017 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	$	496,677	$	499,349
One – Five Years	16,474,007		16,606,032
Over Five – Ten Years	45,181,394		45,572,507
More Than Ten Years	147,161,487		147,356,059
Mortgage-Backed Securities	169,732,288		171,440,438
	$	379,045,853	$	381,474,385

At March 31, 2017 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 $94.8 million and $96.4 million, respectively, compared to an amortized cost and fair value of $75.3 million and $76.9 million, respectively, at December 31, 2016.

During the three months ended March 31, 2017 and 2016, the Bank received $15.3 million and $3.2 million, respectively, in gross proceeds from sales of available for sale securities. As a result, the Bank recognized gross gains of $583,000 and $258,000, respectively, for the three months ended March 31, 2017 and 2016, with no gross losses recognized during the same periods.

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, 2017
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
FHLB Securities	$	994,750	$	3,364	$	—	$	—	$	994,750	$	3,364
SBA Bonds	51,361,256		276,319		8,875,358		68,709		60,236,614		345,028
Tax Exempt Municipal Bonds	37,462,103		1,351,105		—		—		37,462,103		1,351,105
Taxable Municipal Bonds	997,510		9,433		—		—		997,510		9,433
Mortgage-Backed Securities	48,332,597		594,961		11,974,550		100,799		60,307,147		695,760
	$	139,148,216	$	2,235,182	$	20,849,908	$	169,508	$	159,998,124	$	2,404,690



	December 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	$	998,000	$	1	$	—	$	—	$	998,000	$	1
SBA Bonds	28,490,243		228,432		8,212,824		55,791		36,703,067		284,223
Tax Exempt Municipal Bonds	47,405,066		1,899,519		—		—		47,405,066		1,899,519
Taxable Municipal Bonds	1,991,130		30,062		—		—		1,991,130		30,062
Mortgage-Backed Securities	62,738,366		916,699		5,600,262		55,523		68,338,628		972,222
	$	141,622,805	$	3,074,713	$	13,813,086	$	111,314	$	155,435,891	$	3,186,027

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, 2017 and December 31, 2016, 7.0% and 3.5% of the unrealized losses, representing 21 and 15 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 three months ended March 31, 2017.

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:



	March 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
FHLB Bonds	$	2,000,000	$	—	$	7,778	$	1,992,222
FHLMC Bonds	1,997,782		—		5,597		1,992,185
Mortgage-Backed Securities (1)	24,426,233		98,300		180,953		24,343,580
Total Held To Maturity	$	28,424,015	$	98,300	$	194,328	$	28,327,987

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



	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Mortgage-Backed Securities (1)	$	25,583,956	$	63,342	$	276,246	$	25,371,052
Total Held To Maturity	$	25,583,956	$	63,342	$	276,246	$	25,371,052

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

At March 31, 2017, the Bank held an amortized cost and fair value of $15.4 million in HTM GNMA mortgage-backed securities, which are included in the table above, compared to an amortized cost and fair value of $16.3 million and $16.2 million, respectively, at December 31, 2016. The Company has not invested in any private label mortgage-backed securities classified as held to maturity.

At March 31, 2017, 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 $22.0 million and $21.9 million, respectively, compared to an amortized cost and fair value of $23.2 million and $23.0 million, respectively, at December 31, 2016.

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 the dates indicated below.



	March 31, 2017
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
FHLB Bonds	$	1,992,222	$	7,778	$	—	$	—	$	1,992,222	$	7,778
FHLMC Bonds	1,992,185		5,597		—		—		1,992,185		5,597
Mortgage-Backed Securities (1)	16,294,194		180,953		—		—		16,294,194		180,953
	$	20,278,601	$	194,328	$	—	$	—	$	20,278,601	$	194,328

	December 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)	$	15,447,596	$	276,246	$	—	$	—	$	15,447,596	$	276,246
	$	15,447,596	$	276,246	$	—	$	—	$	15,447,596	$	276,246

^{(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:



	March 31, 2017		December 31, 2016
Residential Real Estate Loans	$	76,972,000	$	77,979,909
Consumer Loans	52,757,758		50,667,894
Commercial Business Loans	20,648,029		16,279,177
Commercial Real Estate Loans	215,511,636		222,599,294
Total Loans Held For Investment	365,889,423		367,526,274
Loans Held For Sale	1,118,752		4,243,907
Total Loans Receivable, Gross	367,008,175		371,770,181
Less:
Allowance For Loan Losses	8,377,899		8,356,231
Loans In Process	3,226,665		3,526,064
Deferred Loan Fees	178,859		165,040
	11,783,423		12,047,335
Total Loans Receivable, Net	$	355,224,752	$	359,722,846

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 summarize the loan grades used by the Company to measure the credit quality of gross loans receivable, excluding those held for sale, by loan segment at the dates presented.



	Credit Quality Measures
March 31, 2017	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	68,890,706	$	802,296	$	1,598,816	$	5,680,182	$	76,972,000
Consumer	48,528,533		2,595,900		259,085		1,374,240		52,757,758
Commercial Business	17,779,454		1,533,654		853,788		481,133		20,648,029
Commercial Real Estate	121,152,619		71,200,808		18,199,712		4,958,497		215,511,636
Total	$	256,351,312	$	76,132,658	$	20,911,401	$	12,494,052	$	365,889,423



	Credit Quality Measures
December 31, 2016	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	70,503,057	$	665,235	$	1,082,928	$	5,728,689	$	77,979,909
Consumer	46,818,650		2,591,860		6,357		1,251,027		50,667,894
Commercial Business	14,731,698		1,002,170		50,081		495,228		16,279,177
Commercial Real Estate	127,068,983		71,927,031		18,153,718		5,449,562		222,599,294
Total	$	259,122,388	$	76,186,296	$	19,293,084	$	12,924,506	$	367,526,274

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 March 31, 2017 and December 31, 2016:



March 31, 2017	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	$	1,002,105	$	42,576	$	2,444,727	$	3,489,408	$	73,482,592	$	76,972,000
Consumer	659,784		57,087		384,999		1,101,870		51,655,888		52,757,758
Commercial Business	65,900		—		145,401		211,301		20,436,728		20,648,029
Commercial Real Estate	1,974,866		157,883		3,302,649		5,435,398		210,076,238		215,511,636
Total	$	3,702,655	$	257,546	$	6,277,776	$	10,237,977	$	355,651,446	$	365,889,423



December 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	$	653,858	$	—	$	2,488,158	$	3,142,016	$	74,837,893	$	77,979,909
Consumer	625,178		119,640		241,571		986,389		49,681,505		50,667,894
Commercial Business	536,492		69,256		145,401		751,149		15,528,028		16,279,177
Commercial Real Estate	1,719,758		256,285		2,639,837		4,615,880		217,983,414		222,599,294
Total	$	3,535,286	$	445,181	$	5,514,967	$	9,495,434	$	358,030,840	$	367,526,274

At March 31, 2017 and December 31, 2016, 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 March 31, 2017 compared to December 31, 2016:



	March 31, 2017				December 31, 2016				$			%
	Amount		Percent ⁽¹⁾		Amount		Percent ⁽¹⁾		Increase (Decrease)			Increase (Decrease)
Non-accrual Loans:
Residential Real Estate	$	2,444,727	0.67	%	$	2,488,158	0.68	%	$	(43,431	)	(1.7	)%
Consumer	384,999		0.11		241,571		0.07		143,428			59.4
Commercial Business	145,401		0.04		145,401		0.04		—			—
Commercial Real Estate	3,302,649		0.91		2,639,837		0.73		662,812			25.1
Total Non-accrual Loans	$	6,277,776	1.73	%	$	5,514,967	1.52	%	$	762,809		13.8	%

^{(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 months ended March 31, 2017 and 2016:



	Three Months Ended March 31, 2017
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	1,360,346		$	996,620		$	882,999		$	5,116,266		$	8,356,231
Provision for Loan Losses	110,338			100,554			87,379			(298,271		)	—
Charge-Offs	(6,517		)	(23,611		)	(5,890		)	—			(36,018		)
Recoveries	750			27,141			—			29,795			57,686
Ending Balance	$	1,464,917		$	1,100,704		$	964,488		$	4,847,790		$	8,377,899




	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 for Loan Losses	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

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



	Allowance For Loan Losses
March 31, 2017	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	—	$	1,464,917	$	1,464,917
Consumer	1,295		1,099,409		1,100,704
Commercial Business	—		964,488		964,488
Commercial Real Estate	57		4,847,733		4,847,790
Total	$	1,352	$	8,376,547	$	8,377,899



	Allowance For Loan Losses
December 31, 2016	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	—	$	1,360,346	$	1,360,346
Consumer	1,699		994,921		996,620
Commercial Business	—		882,999		882,999
Commercial Real Estate	12,590		5,103,676		5,116,266
Total	$	14,289	$	8,341,942	$	8,356,231

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

8. Loans Receivable, Net, Continued

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



	Loans Receivable
March 31, 2017	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	2,142,492	$	74,829,508	$	76,972,000
Consumer	166,032		52,591,726		52,757,758
Commercial Business	145,401		20,502,628		20,648,029
Commercial Real Estate	6,182,005		209,329,631		215,511,636
Total	$	8,635,930	$	357,253,493	$	365,889,423



	Loans Receivable
December 31, 2016	Individually Evaluated For Impairment		Collectively Evaluated For Impairment		Total
Residential Real Estate	$	2,181,740	$	75,798,169	$	77,979,909
Consumer	170,552		50,497,342		50,667,894
Commercial Business	145,401		16,133,776		16,279,177
Commercial Real Estate	5,830,341		216,768,953		222,599,294
Total	$	8,328,034	$	359,198,240	$	367,526,274

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired management measures the impairment and records the loan at fair value. Fair value is estimated using one of the following methods: fair value of the collateral less estimated costs to sale, discounted cash flows, or market value of the loan based on similar debt. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, the Company reviews the most recent appraisal and, if it is over 24 months old, will request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, management may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. The average balance of impaired loans was $8.8 million for the three months ended March 31, 2017 compared to $12.5 million for the three months ended March 31, 2016.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

8. Loans Receivable, Net, Continued

The following tables present information related to impaired loans by loan category at March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016.

March 31, 2017

December 31, 2016

Impaired Loans

Recorded

Investment

Unpaid

Principal

Balance

Allowance

Recorded
Investment

Unpaid
Principal
Balance

Related
Allowance

With No Related Allowance Recorded:

OUTSTANDING SHARES AT:

Common Stock, par value $0.01 per share

May 12, 2017