SECURITY FEDERAL CORP - FORM 10-Q

SECURITY FEDERAL CORP - FORM 10-Q - August 11, 2017

Attached files

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - SECURITY FEDERAL CORP	sfdl-20170630xex312.htm
EX-31.1 - EXHIBIT 31.1 - SECURITY FEDERAL CORP	sfdl-20170630xex311.htm
EX-32 - EXHIBIT 32 - SECURITY FEDERAL CORP	sfdl-20170630xex32.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 JUNE 30, 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

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 June 30, 2017 and December 31, 2016	3
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2017 and 2016	4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2017 and 2016	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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	47
Item 4.	Controls and Procedures	48

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	48
Item 4.	Mine Safety Disclosures	48
Item 5.	Other Information	48
Item 6.	Exhibits	49
	Signatures	51

SCHEDULES OMITTED

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Part 1. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets



	June 30, 2017			December 31, 2016
	(Unaudited)			(Audited)
ASSETS:
Cash and Cash Equivalents	$	10,990,573		$	9,374,549
Certificates of Deposit with Other Banks	1,425,005			2,445,005
Investment and Mortgage-Backed Securities:
Available For Sale	401,349,864			362,059,429
Held To Maturity (Fair Value of $27,312,340 and $25,371,052 at June 30, 2017 and December 31, 2016, Respectively)	27,196,197			25,583,956
Total Investments and Mortgage-Backed Securities	428,546,061			387,643,385
Loans Receivable, Net:
Held For Sale	3,678,021			4,243,907
Held For Investment (Net of Allowance of $8,202,632 and $8,356,231 at June 30, 2017 and December 31, 2016, Respectively)	356,284,490			355,478,939
Total Loans Receivable, Net	359,962,511			359,722,846
Accrued Interest Receivable:
Loans	848,088			1,038,444
Mortgage-Backed Securities	596,973			605,474
Investment Securities	1,804,007			1,407,923
Total Accrued Interest Receivable	3,249,068			3,051,841
Premises and Equipment, Net	23,131,601			21,197,684
Federal Home Loan Bank ("FHLB") Stock, at Cost	2,667,300			2,776,500
Other Real Estate Owned ("OREO")	1,990,168			2,721,214
Bank Owned Life Insurance ("BOLI")	19,341,045			17,101,045
Goodwill	1,199,754			1,199,754
Other Assets	4,439,183			5,447,746
Total Assets	$	856,942,269		$	812,681,569
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Liabilities:
Deposit Accounts	$	691,423,628		$	654,103,278
Advance Payments By Borrowers For Taxes and Insurance	568,457			260,580
Advances From FHLB	47,726,719			48,395,000
Other Borrowings	12,852,794			9,338,148
Note Payable	11,000,000			13,000,000
Junior Subordinated Debentures	5,155,000			5,155,000
Senior Convertible Debentures	6,084,000			6,084,000
Other Liabilities	5,720,930			5,233,289
Total Liabilities	$	780,531,528		$	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	3,876,814			1,180,086
Retained Earnings	64,796,431			62,220,050
Total Shareholders' Equity	$	76,410,741		$	71,112,274
Total Liabilities And Shareholders' Equity	$	856,942,269		$	812,681,569

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)



	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016
Interest Income:
Loans	$	4,954,962		$	4,824,401	$	9,702,440		$	9,466,509
Mortgage-Backed Securities	1,156,067			1,225,059		2,278,134			2,479,460
Investment Securities	1,292,306			1,118,693		2,405,888			2,203,092
Other	8,311			4,603		28,509			9,113
Total Interest Income	7,411,646			7,172,756		14,414,971			14,158,174
Interest Expense:
NOW and Money Market Accounts	140,974			104,321		274,206			207,436
Statement Savings Accounts	10,002			8,594		19,274			16,484
Certificate Accounts	472,618			423,267		898,405			831,999
FHLB Advances and Other Borrowed Money	123,827			179,768		245,111			428,427
Note Payable	110,904			—		222,851			—
Senior Convertible Debentures	121,680			121,680		243,360			243,360
Junior Subordinated Debentures	37,154			30,454		71,888			59,557
Total Interest Expense	1,017,159			868,084		1,975,095			1,787,263
Net Interest Income	6,394,487			6,304,672		12,439,876			12,370,911
Provision For Loan Losses	—			—		—			—
Net Interest Income After Provision For Loan Losses	6,394,487			6,304,672		12,439,876			12,370,911
Non-Interest Income:
Gain on Sale of Investment Securities	45,148			153,650		628,539			411,718
Gain on Sale of Loans	240,049			191,589		520,417			400,555
Service Fees on Deposit Accounts	260,867			265,036		501,752			505,381
Commissions From Insurance Agency	125,245			122,143		279,237			291,990
Trust Income	186,000			162,000		368,000			324,000
BOLI Income	120,000			132,000		240,000			264,000
Check Card Fee Income	284,624			257,110		555,616			495,252
Grant Income	—			—		—			265,496
Other	171,005			180,805		336,726			333,681
Total Non-Interest Income	1,432,938			1,464,333		3,430,287			3,292,073
Non-Interest Expense:
Compensation and Employee Benefits	3,532,797			3,177,520		7,044,284			6,508,318
Occupancy	574,585			470,532		1,092,637			967,250
Advertising	136,174			112,806		271,709			242,783
Depreciation and Maintenance of Equipment	506,057			499,041		971,621			975,415
Federal Deposit Insurance Corporation ("FDIC") Insurance Premiums	39,515			127,443		104,189			260,490
Net (Benefit) Cost of Operation of OREO	(82,798		)	1,945		(201,902		)	(673,981		)
Prepayment Penalties on FHLB Advances	—			281,206		—			528,712
Other	1,160,373			1,022,630		2,413,103			2,420,080
Total Non-Interest Expense	5,866,703			5,693,123		11,695,641			11,229,067
Income Before Income Taxes	1,960,722			2,075,882		4,174,522			4,433,917
Provision For Income Taxes	482,775			509,608		1,067,957			1,150,900
Net Income	1,477,947			1,566,274		3,106,565			3,283,017
Preferred Stock Dividends	—			110,000		—			220,000
Net Income Available to Common Shareholders	$	1,477,947		$	1,456,274	$	3,106,565		$	3,063,017
Net Income Per Common Share (Basic)	$	0.50		$	0.49	$	1.05		$	1.04
Net Income Per Common Share (Diluted)	$	0.48		$	0.47	$	1.00		$	0.99
Cash Dividend Per Share on Common Stock	$	0.09		$	0.08	$	0.18		$	0.16
Weighted Average Shares Outstanding (Basic)	2,945,474			2,944,001		2,945,083			2,944,001
Weighted Average Shares Outstanding (Diluted)	3,253,559			3,248,444		3,252,332			3,248,445

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)



	Three Months Ended June 30,
	2017			2016
Net Income	$	1,477,947		$	1,566,274
Other Comprehensive Income
Unrealized Gains on Securities:
Unrealized Holding Gains on Securities Available For Sale, Net of Taxes of $1,392,387 and $1,928,197 at June 30, 2017 and 2016, Respectively	2,275,602			3,151,680
Reclassification Adjustment for Gains Included in Net Income, Net of Taxes of $17,156 and $58,387 at June 30, 2017 and 2016, Respectively	(27,992		)	(95,263		)
Amortization of Unrealized Gains on Available For Sale Securities Transferred to Held To Maturity, Net of Taxes of $(15,656) and $(10,986) at June 30, 2017 and 2016, Respectively	(25,587		)	(17,955		)
Other Comprehensive Income	2,222,023			3,038,462
Comprehensive Income	$	3,699,970		$	4,604,736



	Six Months Ended June 30,
	2017			2016
Net Income	$	3,106,565		$	3,283,017
Other Comprehensive Income
Unrealized Gains on Securities:
Unrealized Holding Gains on Securities Available For Sale, Net of Taxes of $1,932,360 and $2,635,791 at June 30, 2017 and 2016, Respectively	3,145,287			4,307,424
Reclassification Adjustment for Gains Included in Net Income, Net of Taxes of $238,845 and $156,453 at June 30, 2017 and 2016, Respectively	(389,694		)	(255,265		)
Amortization of Unrealized Gains on Available For Sale Securities Transferred to Held To Maturity, Net of Taxes of $(36,017) and $(35,602) at June 30, 2017 and 2016, Respectively	(58,865		)	(58,187		)
Other Comprehensive Income	2,696,728			3,993,972
Comprehensive Income	$	5,803,293		$	7,276,989

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

For the Six Months Ended June 30, 2017 and 2016



	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	—		—		—			—		—			—		3,283,017			3,283,017
Other Comprehensive Income, Net of Tax	—		—		—			—		—			3,993,972		—			3,993,972
Stock Option Compensation Expense	—		—		—			3,984		—			—		—			3,984
Cash Dividends on Preferred Stock	—		—		—			—		—			—		(220,000		)	(220,000		)
Cash Dividends on Common Stock	—		—		—			—		—			—		(471,276		)	(471,276		)
Balance at June 30, 2016	$	22,000,000	$	31,464	$	(25,358	)	$	12,032,816	$	(4,330,712	)	$	8,256,333	$	59,592,576		$	97,557,119



	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	—		—			—		—			—		3,106,565			3,106,565
Other Comprehensive Income, Net of Tax	—		—			—		—			2,696,728		—			2,696,728
Vesting of Restricted Stock	—		25,358			—		—			—		—			25,358
Cash Dividends on Common Stock	—		—			—		—			—		(530,184		)	(530,184		)
Balance at June 30, 2017	$	31,464	$	—		$	12,036,744	$	(4,330,712	)	$	3,876,814	$	64,796,431		$	76,410,741

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)



	Six Months Ended June 30,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	3,106,565		$	3,283,017
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
Depreciation Expense	703,826			698,002
Stock Option Compensation Expense	25,358			3,984
Discount Accretion and Premium Amortization	2,800,841			2,660,159
Income From BOLI	(240,000		)	(264,000		)
Gain on Sales of Loans	(520,417		)	(400,555		)
Gain on Sales of Mortgage-Backed Securities	(284,935		)	(46,040		)
Gain on Sales of Investment Securities	(343,603		)	(365,678		)
Gain on Sale of Premises and Equipment	(1,900		)	—
Gain on Sales of OREO	(316,398		)	(781,363		)
Write Down on OREO	18,000			40,000
Amortization of Deferred Loan Costs	82,461			57,977
Proceeds From Sale of Loans Held For Sale	19,294,486			14,835,314
Origination of Loans Held For Sale	(18,208,183		)	(13,654,294		)
Decrease (Increase) in Accrued Interest Receivable:
Loans	190,356			14,871
Mortgage-Backed Securities	8,501			(33,577		)
Investment Securities	(396,084		)	44,419
Increase in Advance Payments By Borrowers	307,877			319,637
Other, Net	(256,176		)	1,824,276
Net Cash Provided By Operating Activities	$	5,970,575		$	8,236,149
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Mortgage-Backed Securities Available For Sale ("AFS")	$	(31,789,116	)	$	(31,230,934	)
Proceeds from Payments and Maturities of Mortgage-Backed Securities AFS	18,660,261			13,928,123
Proceeds From Sale of Mortgage-Backed Securities AFS	11,047,043			2,423,078
Purchase of Mortgage-Backed Securities Held To Maturity ("HTM")	—			(1,507,125		)
Proceeds from Payments and Maturities of Mortgage-Backed Securities HTM	2,092,899			2,613,163
Purchase of Investment Securities AFS	(53,121,373		)	(18,938,907		)
Proceeds from Payments and Maturities of Investment Securities AFS	12,047,600			13,762,177
Proceeds From Sale of Investment Securities AFS	6,434,564			12,158,368
Purchase of Investment Securities HTM	(3,997,750		)	—
Proceeds from Payments and Maturities of Investment Securities HTM	—			—
Proceeds From Redemption of Certificates of Deposits with Other Banks	1,020,000			—
Purchase of FHLB Stock	(3,557,700		)	(2,827,100		)
Redemption of FHLB Stock	3,666,900			2,993,600
Purchase of BOLI	(2,000,000		)	—
Increase in Loans Receivable	(1,214,095		)	(5,444,078		)
Proceeds From Sale of OREO	1,355,528			2,867,121
Purchase and Improvement of Premises and Equipment	(2,637,743		)	(789,711		)
Proceeds From Sale of Premises and Equipment	1,900			—
Net Cash Used By Investing Activities	$	(41,991,082	)	$	(9,992,225	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Deposit Accounts	$	37,320,350		$	5,505,712
Proceeds from FHLB Advances	86,392,719			132,705,000
Repayment of FHLB Advances	(87,061,000		)	(138,235,000		)
Increase in Other Borrowings, Net	3,514,646			2,972,904
Repayment of Note Payable	(2,000,000		)	—
Dividends to Preferred Stock Shareholders	—			(220,000		)
Dividends to Common Stock Shareholders	(530,184		)	(471,276		)
Net Cash Provided By Financing Activities	$	37,636,531		$	2,257,340

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES



Consolidated Statements of Cash Flows (Unaudited) (Continued)

	Six Months Ended June 30,
	2017		2016
Net Increase in Cash and Cash Equivalents	1,616,024		501,264
Cash and Cash Equivalents at Beginning of Period	9,374,549		8,381,951
Cash and Cash Equivalents at End of Period	$	10,990,573	$	8,883,215
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During The Period For:
Interest	$	1,975,575	$	1,857,994
Income Taxes	$	947,000	$	155,242
Supplemental Schedule of Non Cash Transactions:
Transfers From Loans Receivable to OREO	$	326,083	$	142,140

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 six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

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. All significant intercompany transactions and balances have been eliminated in consolidation.

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 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. All of the options outstanding at June 30, 2017 had an exercise price below the average market price during the three and six months ended June 30, 2017. Therefore, these options were considered to be dilutive to EPS in those periods. None of the options outstanding at June 30, 2016 had an exercise price below the average market price during the three or six month periods ended June 30, 2016. Therefore, these options were not deemed to be dilutive to EPS in those periods.

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 June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Earnings Available To Common Shareholders:
Net Income	$	1,477,947	$	1,566,274	$	3,106,565	$	3,283,017
Preferred Stock Dividends	—		110,000		—		220,000
Net Income Available To Common Shareholders	$	1,477,947	$	1,456,274	$	3,106,565	$	3,063,017

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 June 30,
	2017					2016
	Income		Shares	Per Share Amounts		Income		Shares	Per Share Amounts
Basic EPS	$	1,477,947	2,945,474	$	0.50	$	1,456,274	2,944,001	$	0.49
Effect of Dilutive Securities:
Stock Options	—		3,885	—		—		—	—
Senior Convertible Debentures	75,442		304,200	(0.02)		75,442		304,200	(0.02)
Unvested Restricted Stock	—		—	—		—		243	—
Diluted EPS	$	1,553,389	3,253,559	$	0.48	$	1,531,716	3,248,444	$	0.47



	Six Months Ended June 30,
	2017					2016
	Income		Shares	Per Share Amounts		Income		Shares	Per Share Amounts
Basic EPS	$	3,106,565	2,945,083	$	1.05	$	3,063,017	2,944,001	$	1.04
Effect of Dilutive Securities:
Stock Options	—		3,049	—		—		—	—
Senior Convertible Debentures	150,883		304,200	(0.05)		150,883		304,200	(0.04)
Unvested Restricted Stock	—		—	—		—		244	(0.01		)
Diluted EPS	$	3,257,448	3,252,332	$	1.00	$	3,213,900	3,248,445	$	0.99

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 June 30,
	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	26,000		$23.50
Options Granted	—		—	—		—
Options Exercised	—		—	—		—
Options Forfeited	(2,000	)	24.34	(1,000	)	23.49
Balance, End of Period	19,500		$23.49	25,000		$23.50

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

5. Stock-Based Compensation, Continued



	Six Months Ended June 30,
	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	(2,000	)	24.34	(4,500	)	23.82
Balance, End of Period	19,500		$23.49	25,000		$23.50

Options Exercisable	19,100			20,700

Options Available For Grant	50,000			50,000

At June 30, 2017, the Company had the following options outstanding:



Grant Date	Outstanding Options	Option Price	Expiration Date
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

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:



	June 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Small Business Administration (“SBA”) Bonds	$	126,753,533	$	1,197,692	$	161,805	$	127,789,420
Tax Exempt Municipal Bonds	81,369,078		3,217,508		538,589		84,047,997
Taxable Municipal Bonds	2,019,039		8,911		—		2,027,950
Mortgage-Backed Securities	184,945,040		2,729,888		402,231		187,272,697
State Tax Credit	56,800		—		—		56,800
Equity Securities	155,000		—		—		155,000
Total Available For Sale	$	395,298,490	$	7,153,999	$	1,102,625	$	401,349,864

	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 is a government sponsored enterprise ("GSE") 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 June 30, 2017 the Bank held an amortized cost and fair value of $101.1 million and $102.4 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 June 30, 2017 the Bank held an amortized cost and fair value of $29.7 million and $29.7 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, respectively, 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 June 30, 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.



	June 30, 2017
Investment Securities	Amortized Cost		Fair Value
Less Than One Year	$	328,603	$	328,525
One – Five Years	15,445,316		15,603,908
Over Five – Ten Years	53,122,450		53,869,687
More Than Ten Years	141,457,081		144,275,047
Mortgage-Backed Securities	184,945,040		187,272,697
Total Available For Sale	$	395,298,490	$	401,349,864

At June 30, 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 $92.1 million and $93.9 million, respectively, compared to an amortized cost and fair value of $75.3 million and $76.9 million, respectively, at December 31, 2016.

The Bank received $2.2 million and $11.4 million in gross proceeds from sales of available for sale securities during the three months ended June 30, 2017 and 2016, respectively. As a result, the Bank recognized gross gains of $45,000 and $154,000, respectively, for the three months ended June 30, 2017 and 2016, with no gross losses recognized for the same periods.

During the six months ended June 30, 2017 and 2016, the Bank received $17.5 million and $14.6 million, respectively, in gross proceeds from sales of available for sale securities. As a result, the Bank recognized gross gains of $629,000 and $412,000, respectively, with no gross losses recognized for 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.



	June 30, 2017
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
SBA Bonds	$	15,277,479	$	64,891	$	8,979,781	$	96,914	$	24,257,260	$	161,805
Tax Exempt Municipal Bonds	14,089,073		416,583		2,277,880		122,006		16,366,953		538,589
Mortgage-Backed Securities	42,992,095		341,150		9,351,864		61,081		52,343,959		402,231
	$	72,358,647	$	822,624	$	20,609,525	$	280,001	$	92,968,172	$	1,102,625



	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 Bond	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 June 30, 2017 and December 31, 2016, 25.4% 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 six months ended June 30, 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:



	June 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
FHLB Bonds	$	2,000,000	$	—	$	2,744	$	1,997,256
Federal Home Loan Mortgage Corporation (“FHLMC”) Bonds	1,997,886		2,130		374		1,999,642
Mortgage-Backed Securities ⁽¹⁾	23,198,311		154,220		37,089		23,315,442
Total Held To Maturity	$	27,196,197	$	156,350	$	40,207	$	27,312,340

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



	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 MORTGAGE-BACKED SECURITIES OF GSEs OR GNMA}

At June 30, 2017, the Bank held an amortized cost and fair value of $14.5 million and $14.6 million, respectively, in GNMA mortgage-backed securities classified as held to maturity, 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 June 30, 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 $20.8 million and $21.0 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 amortized cost and fair value of investment and mortgage-backed securities held to maturity at June 30, 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.



	June 30, 2017
Investment Securities:	Amortized Cost		Fair Value
One – Five Years	$	3,997,886	$	3,996,898
Mortgage-Backed Securities	23,198,311		23,315,442
Total Held to Maturity	$	27,196,197	$	27,312,340

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



	June 30, 2017
	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
FHLB Bonds	$	1,997,256	$	2,744	$	—	$	—	$	1,997,256	$	2,744
FHLMC Bonds	999,626		374		—		—		999,626		374
Mortgage-Backed Securities ⁽¹⁾	7,640,170		37,089		—		—		7,640,170		37,089
	$	10,637,052	$	40,207	$	—	$	—	$	10,637,052	$	40,207

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



	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 MORTGAGE-BACKED SECURITIES OF GSEs OR GNMA}

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:



	June 30, 2017		December 31, 2016
Residential Real Estate Loans	$	76,954,021	$	77,979,909
Consumer Loans	53,672,884		50,667,894
Commercial Business Loans	22,013,710		16,279,177
Commercial Real Estate Loans	216,564,464		222,599,294
Total Loans Held For Investment	369,205,079		367,526,274
Loans Held For Sale	3,678,021		4,243,907
Total Loans Receivable, Gross	$	372,883,100	$	371,770,181
Less:
Allowance For Loan Losses	8,202,632		8,356,231
Loans In Process	4,569,760		3,526,064
Deferred Loan Fees	148,197		165,040
	12,920,589		12,047,335
Total Loans Receivable, Net	$	359,962,511	$	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 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
June 30, 2017	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	67,467,948	$	2,173,366	$	1,388,484	$	5,924,223	$	76,954,021
Consumer	49,165,277		1,730,399		256,683		2,520,525		53,672,884
Commercial Business	18,551,832		1,959,832		880,216		621,830		22,013,710
Commercial Real Estate	137,546,053		55,142,285		18,313,257		5,562,869		216,564,464
Total	$	272,731,110	$	61,005,882	$	20,838,640	$	14,629,447	$	369,205,079



	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 June 30, 2017 and December 31, 2016:



	June 30, 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	$	—	$	971,976	$	2,643,584	$	3,615,560	$	73,338,461	$	76,954,021
Consumer	431,862		193,376		440,277		1,065,515		52,607,369		53,672,884
Commercial Business	50,343		179,818		180,705		410,866		21,602,844		22,013,710
Commercial Real Estate	849,079		80,509		4,442,010		5,371,598		211,192,866		216,564,464
Total	$	1,331,284	$	1,425,679	$	7,706,576	$	10,463,539	$	358,741,540	$	369,205,079



	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 June 30, 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 June 30, 2017 compared to December 31, 2016:

June 30, 2017

December 31, 2016

Amount

Percent ⁽¹⁾

Amount

Percent ⁽¹⁾

Increase (Decrease)

Non-accrual Loans:

OUTSTANDING SHARES AT:

Common Stock, par value $0.01 per share

August 11, 2017