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EX-32 - EXHIBIT 32 - SECURITY FEDERAL CORPsfdl-20180630xex32.htm
EX-31.2 - EXHIBIT 31.2 - SECURITY FEDERAL CORPsfdl-20180630xex312.htm
EX-31.1 - EXHIBIT 31.1 - SECURITY FEDERAL CORPsfdl-20180630xex311.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, 2018
( ) 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.
 
CLASS:
 
OUTSTANDING SHARES AT:
 
SHARES:
 
 
Common Stock, par value $0.01 per share
 
August 13, 2018
 
2,953,424
 




 
 
 
PART I.
FINANCIAL INFORMATION (UNAUDITED)
PAGE NO.
Item 1.
Financial Statements (unaudited):
3
 
Consolidated Balance Sheets at June 30, 2018 and December 31, 2017
3
 
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2018 and 2017
4
 
Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended June 30, 2018 and 2017
5
 
Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2018 and 2017
6
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017
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
46
Item 4.
Controls and Procedures
46
 
 
 
PART II.
OTHER INFORMATION
 
Item 1.
Legal Proceedings
47
Item 1A.
Risk Factors
47
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
47
Item 3.
Defaults Upon Senior Securities
47
Item 4.
Mine Safety Disclosures
47
Item 5.
Other Information
47
Item 6.
Exhibits
47
 
Signatures
49
 
 
 

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, 2018
 
December 31, 2017
 
(Unaudited)
 
(Audited)
ASSETS:
 
 
 
Cash and Cash Equivalents
$
17,126,709

 
$
10,319,624

Certificates of Deposit with Other Banks
1,950,010

 
1,950,010

Investment and Mortgage-Backed Securities:
 
 
 
Available For Sale ("AFS")
362,949,939

 
384,973,906

Held To Maturity ("HTM") (Fair Value of $22,894,520 and $27,054,934 at June 30, 2018 and December 31, 2017, Respectively)
23,335,262

 
27,080,970

Total Investments and Mortgage-Backed Securities
386,285,201

 
412,054,876

Loans Receivable, Net:
 
 
 
Held For Sale
2,530,032

 
3,051,950

Held For Investment (Net of Allowance of $8,611,176 and $8,221,618 at June 30, 2018 and December 31, 2017, Respectively)
427,396,320

 
387,441,247

Total Loans Receivable, Net
429,926,352

 
390,493,197

Accrued Interest Receivable:
 
 
 
Loans
1,054,422

 
1,067,657

Mortgage-Backed Securities
544,701

 
589,000

Investment Securities
1,711,551

 
1,699,961

Total Accrued Interest Receivable
3,310,674

 
3,356,618

Premises and Equipment, Net
22,977,953

 
22,797,844

Federal Home Loan Bank ("FHLB") Stock, at Cost
2,500,300

 
2,931,900

Other Real Estate Owned ("OREO")
1,089,103

 
1,115,671

Bank Owned Life Insurance ("BOLI")
20,967,893

 
18,797,893

Goodwill
1,199,754

 
1,199,754

Other Assets
6,384,979

 
3,795,212

Total Assets
$
893,718,928

 
$
868,812,599

LIABILITIES AND SHAREHOLDERS’ EQUITY:
 
 
 
Liabilities:
 
 
 
Deposit Accounts
$
738,506,223

 
$
702,106,619

Advance Payments By Borrowers for Taxes and Insurance
563,939

 
269,761

Advances From FHLB
40,435,000

 
51,680,000

Other Borrowings
14,136,550

 
11,307,161

Note Payable
5,100,000

 
8,500,000

Junior Subordinated Debentures
5,155,000

 
5,155,000

Senior Convertible Debentures
6,064,000

 
6,064,000

Other Liabilities
6,807,049

 
5,806,604

Total Liabilities
$
816,767,761

 
$
790,889,145

Shareholders' Equity:
 
 
 
Common Stock, $.01 Par Value; Authorized 5,000,000 Shares; Issued and Outstanding Shares, 3,154,357 and 2,953,424, Respectively, at June 30, 2018 and 3,153,907 and 2,952,974, Respectively, at December 31, 2017
$
31,544

 
$
31,539

Additional Paid-In Capital
12,223,149

 
12,212,844

Treasury Stock, at Cost (200,933 Shares)
(4,330,712
)
 
(4,330,712
)
Accumulated Other Comprehensive Income ("AOCI")
(457,668
)
 
2,932,122

Retained Earnings
69,484,854

 
67,077,661

Total Shareholders' Equity
$
76,951,167

 
$
77,923,454

Total Liabilities and Shareholders' Equity
$
893,718,928

 
$
868,812,599


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

3


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Interest Income:
 
 
 
 
 
 
 
Loans
$
5,685,638

 
$
4,954,962

 
$
11,075,125

 
$
9,702,440

Mortgage-Backed Securities
1,276,967

 
1,156,067

 
2,592,387

 
2,278,134

Investment Securities
1,057,234

 
1,292,306

 
2,117,900

 
2,405,888

Other
8,908

 
8,311

 
17,156

 
28,509

Total Interest Income
8,028,747

 
7,411,646

 
15,802,568

 
14,414,971

Interest Expense:
 
 
 
 
 
 
 
NOW and Money Market Accounts
262,005

 
140,974

 
449,210

 
274,206

Statement Savings Accounts
12,747

 
10,002

 
24,300

 
19,274

Certificate Accounts
612,197

 
472,618

 
1,149,758

 
898,405

FHLB Advances and Other Borrowed Money
164,848

 
123,827

 
355,870

 
245,111

Note Payable
62,263

 
110,904

 
138,934

 
222,851

Senior Convertible Debentures
121,280

 
121,680

 
242,560

 
243,360

Junior Subordinated Debentures
50,331

 
37,154

 
94,016

 
71,888

Total Interest Expense
1,285,671

 
1,017,159

 
2,454,648

 
1,975,095

Net Interest Income
6,743,076

 
6,394,487

 
13,347,920

 
12,439,876

Provision For Loan Losses

 

 

 

Net Interest Income After Provision For Loan Losses
6,743,076

 
6,394,487

 
13,347,920

 
12,439,876

Non-Interest Income:
 
 
 
 
 
 
 
Gain on Sale of Investment Securities

 
45,148

 
436,304

 
628,539

Gain on Sale of Loans
367,646

 
240,049

 
653,649

 
520,417

Service Fees on Deposit Accounts
250,493

 
260,867

 
507,672

 
501,752

Commissions From Insurance Agency
149,111

 
125,245

 
328,336

 
279,237

Trust Income
243,500

 
186,000

 
476,000

 
368,000

BOLI Income
135,000

 
120,000

 
270,000

 
240,000

Check Card Fee Income
338,611

 
284,624

 
645,657

 
555,616

Other
260,185

 
171,005

 
470,948

 
336,726

Total Non-Interest Income
1,744,546

 
1,432,938

 
3,788,566

 
3,430,287

Non-Interest Expense:
 
 
 
 
 
 
 
Compensation and Employee Benefits
3,842,295

 
3,532,797

 
7,651,419

 
7,044,284

Occupancy
540,175

 
574,585

 
1,091,443

 
1,092,637

Advertising
85,418

 
136,174

 
274,090

 
271,709

Depreciation and Maintenance of Equipment
557,423

 
506,057

 
1,097,720

 
971,621

Federal Deposit Insurance Corporation ("FDIC") Insurance Premiums
66,595

 
39,515

 
133,381

 
104,189

Net Cost (Benefit) of Operation of OREO
(198,493
)
 
(82,798
)
 
(159,760
)
 
(201,902
)
Other
1,346,846

 
1,160,373

 
2,670,912

 
2,413,103

Total Non-Interest Expense
6,240,259

 
5,866,703

 
12,759,205

 
11,695,641

Income Before Income Taxes
2,247,363

 
1,960,722

 
4,377,281

 
4,174,522

Provision For Income Taxes
427,409

 
482,775

 
827,210

 
1,067,957

Net Income
$
1,819,954

 
$
1,477,947

 
$
3,550,071

 
$
3,106,565

Net Income Per Common Share (Basic)
$
0.62

 
$
0.50

 
$
1.20

 
$
1.05

Net Income Per Common Share (Diluted)
$
0.59

 
$
0.48

 
$
1.15

 
$
1.00

Cash Dividend Per Share on Common Stock
$
0.09

 
$
0.09

 
$
0.09

 
$
0.09

Weighted Average Shares Outstanding (Basic)
2,953,412

 
2,945,474

 
2,953,297

 
2,945,083

Weighted Average Shares Outstanding (Diluted)
3,257,017

 
3,253,559

 
3,256,929

 
3,252,332


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

4


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
 
Three Months Ended June 30,
 
2018
 
2017
Net Income
$
1,819,954

 
$
1,477,947

Other Comprehensive (Loss) Income
 
 
 
Unrealized (Losses) Gains on Securities:
 
 
 
Unrealized Holding (Losses) Gains on Securities AFS, Net of Taxes of $(289,726) and $1,392,397 at June 30, 2018 and 2017, Respectively
(884,515
)
 
2,275,602

Reclassification Adjustment for Gains Included in Net Income, Net of Taxes of $17,156 at June 30, 2017

 
(27,992
)
Amortization of Unrealized Gains on AFS Securities Transferred to HTM, Net of Taxes of $(6,854) and $(15,656) at at June 30, 2018 and 2017, Respectively
(20,562
)
 
(25,587
)
Other Comprehensive (Loss) Income
(905,077
)
 
2,222,023

Comprehensive Income
$
914,877

 
$
3,699,970


 
Six Months Ended June 30,
 
2018
 
2017
Net Income
$
3,550,071

 
$
3,106,565

Other Comprehensive (Loss) Income
 
 
 
Unrealized (Losses) Gains on Securities:
 
 
 
Unrealized Holding (Losses) Gains on Securities AFS Net of Taxes of $(1,186,283) and $1,932,360 at June 30, 2018 and 2017, Respectively
(3,627,413
)
 
3,145,287

Reclassification Adjustment for Gains Included in Net Income, Net of Taxes of $109,076 and $238,845 at June 30, 2018 and 2017, Respectively
(327,228
)
 
(389,694
)
Amortization of Unrealized Gains on AFS Securities Transferred to HTM, Net of Taxes of $(17,719) and $(36,017) at June 30, 2018 and 2017, Respectively
(46,240
)
 
(58,865
)
Other Comprehensive (Loss) Income
(4,000,881
)
 
2,696,728

Comprehensive (Loss) Income
$
(450,810
)
 
$
5,803,293


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


5


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
For the Six Months Ended June 30, 2018 and 2017

 
 
 
Common
Stock
 
Unvested Restricted Stock
 
 
Additional
Paid – In
 Capital
 
 
 
Treasury
Stock
 
AOCI
 
 
 
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



 
 
 
Common
Stock
 
 
Additional
Paid – In
 Capital
 
 
 
Treasury
Stock
 
AOCI
 
 
 
Retained
Earnings
 
 
 
 
Total
Balance at December 31, 2017
$
31,539

 
$
12,212,844

 
$
(4,330,712
)
 
$
2,932,122

 
$
67,077,661

 
$
77,923,454

Net Income

 

 

 

 
3,550,071

 
3,550,071

Other Comprehensive Income, Net of Tax

 

 

 
(4,000,881
)
 

 
(4,000,881
)
Reclassification of stranded tax effects from AOCI to Retained Earnings

 

 

 
611,091

 
(611,091
)
 

Stock Options Exercised
5

 
10,305

 

 

 

 
10,310

Cash Dividends on Common Stock

 

 

 

 
(531,787
)
 
(531,787
)
Balance at June 30, 2018
$
31,544

 
$
12,223,149

 
$
(4,330,712
)
 
$
(457,668
)
 
$
69,484,854

 
$
76,951,167


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

6


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
 
Six Months Ended June 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
3,550,071

 
$
3,106,565

Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
 
 
 
Depreciation Expense
704,130

 
703,826

Stock Option Compensation Expense

 
25,358

Discount Accretion and Premium Amortization
2,917,979

 
2,800,841

Earnings on BOLI
(270,000
)
 
(240,000
)
Gain on Sales of Loans
(653,649
)
 
(520,417
)
Gain on Sales of Mortgage-Backed Securities ("MBS")
(181,034
)
 
(284,935
)
Gain on Sales of Investment Securities
(255,270
)
 
(343,603
)
Gain on Sale of Premises and Equipment

 
(1,900
)
Gain on Sales of OREO
(307,316
)
 
(316,398
)
Write Down on OREO
50,000

 
18,000

Amortization of Deferred Loan Costs
39,554

 
82,461

Proceeds From Sale of Loans Held For Sale
24,602,224

 
19,294,486

Origination of Loans Held For Sale
(23,426,657
)
 
(18,208,183
)
(Increase) Decrease in Accrued Interest Receivable:
 
 
 
Loans
13,235

 
190,356

MBS
44,299

 
8,501

Investment Securities
(11,590
)
 
(396,084
)
Increase in Advance Payments By Borrowers
294,178

 
307,877

Other, Net
(340,203
)
 
(256,176
)
Net Cash Provided By Operating Activities
$
6,769,951

 
$
5,970,575

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of MBS AFS
$
(21,859,860
)
 
$
(31,789,116
)
Proceeds from Payments and Maturities of MBS AFS
18,844,610

 
18,660,261

Proceeds from Sale of MBS AFS
17,007,024

 
11,047,043

Proceeds from Payments and Maturities of MBS HTM
1,564,802

 
2,092,899

Purchase of Investment Securities AFS
(27,418,272
)
 
(53,121,373
)
Proceeds from Payments and Maturities of Investment Securities AFS
16,336,240

 
12,047,600

Proceeds from Sale of Investment Securities AFS
11,563,456

 
6,434,564

Purchase of Investment Securities HTM

 
(3,997,750
)
Proceeds from Payments and Maturities of Investment Securities HTM
2,000,000

 

Proceeds from Redemption of Certificates of Deposits with Other Banks

 
1,020,000

Purchase of FHLB Stock
(4,080,600
)
 
(3,557,700
)
Redemption of FHLB Stock
4,512,200

 
3,666,900

Purchase of BOLI
(1,900,000
)
 
(2,000,000
)
Increase in Loans Receivable
(40,310,177
)
 
(1,214,095
)
Proceeds From Sale of OREO
599,434

 
1,355,528

Purchase and Improvement of Premises and Equipment
(884,239
)
 
(2,637,743
)
Proceeds From Sale of Premises and Equipment

 
1,900

Net Cash Used By Investing Activities
$
(24,025,382
)
 
$
(41,991,082
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Increase in Deposit Accounts
$
36,399,604

 
$
37,320,350

Proceeds from FHLB Advances
150,778,000

 
86,392,719

Repayment of FHLB Advances
(162,023,000
)
 
(87,061,000
)
Increase in Other Borrowings, Net
2,829,389

 
3,514,646

Repayment of Note Payable
(3,400,000
)
 
(2,000,000
)
Proceeds from Employee Stock Options Exercised
10,310

 

Dividends to Common Stock Shareholders
(531,787
)
 
(530,184
)
Net Cash Provided By Financing Activities
$
24,062,516

 
$
37,636,531

Net Increase in Cash and Cash Equivalents
6,807,085

 
1,616,024

Cash and Cash Equivalents at Beginning of Period
10,319,624

 
9,374,549

Cash and Cash Equivalents at End of Period
$
17,126,709

 
$
10,990,573


7


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

 
Consolidated Statements of Cash Flows (Unaudited) (Continued)
 
 
 
 
 
Six Months Ended June 30,
 
2018
 
2017
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash Paid During The Period For:
 
 
 
Interest
$
2,450,522

 
$
1,975,575

Income Taxes
$
422,273

 
$
947,000

Supplemental Schedule of Non Cash Transactions:
 
 
 
Transfers From Loans Receivable to OREO
$
315,550

 
$
326,083

Other Comprehensive (Loss) Income
$
(4,000,881
)
 
$
2,696,728


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


8



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”) 2017 Annual Report to Shareholders which was filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 10-K”) when reviewing interim financial statements. The unaudited consolidated results of operations for the six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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 is an insurance agency offering auto, business, health 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 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, 2017 included in our 2017 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.


9



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, 2018 and 2017 had an exercise price below the average market price during the three and six months ended June 30, 2018 and 2017. Therefore, these options were considered to be dilutive to EPS in those periods. Diluted EPS also assumes the convertible debentures were converted as of the beginning of the period. The related interest expense recorded during the period is added back to the EPS numerator while the underlying shares are added to the denominator.

The following tables include a summary of the Company's basic and diluted EPS for the periods indicated.
 
Three Months Ended June 30,
 
2018
 
2017
 
Income
 
Shares
 
Per Share Amounts
 
Income
 
Shares
 
Per Share Amounts
Basic EPS
$
1,819,954

 
2,953,412

 
$
0.62

 
$
1,477,947

 
2,945,474

 
$
0.50

Effect of Dilutive Securities:
 
 
 
 
 
 
 
 
 
 
 
Stock Options

 
405

 

 

 
3,885

 

Senior Convertible Debentures
90,960

 
303,200

 
(0.03
)
 
75,442

 
304,200

 
(0.02)

Diluted EPS
$
1,910,914

 
3,257,017

 
$
0.59

 
$
1,553,389

 
3,253,559

 
$
0.48



10



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




4. Earnings Per Common Share, Continued

 
Six Months Ended June 30,
 
2018
 
2017
 
Income
 
Shares
 
Per Share Amounts
 
Income
 
Shares
 
Per Share Amounts
Basic EPS
$
3,550,071

 
2,953,297

 
$
1.20

 
$
3,106,565

 
2,945,083

 
$
1.05

Effect of Dilutive Securities:
 
 
 
 
 
 
 
 
 
 
 
Stock Options

 
432

 

 

 
3,049

 

Senior Convertible Debentures
181,920

 
303,200

 
(0.05)

 
150,883

 
304,200

 
(0.05)

Diluted EPS
$
3,731,991

 
3,256,929

 
$
1.15

 
$
3,257,448

 
3,252,332

 
$
1.00



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,
 
2018
 
2017
 
Shares
 
Weighted Average Exercise Price
 
Shares
 
Weighted Average Exercise Price
 
 
Balance, Beginning of Period
4,150

 
$22.91
 
21,500

 
$23.57
Options Exercised
(100
)
 
22.91
 

 
Options Forfeited
(2,400
)
 
22.91
 
(2,000
)
 
24.34
Balance, End of Period
1,650

 
$22.91
 
19,500

 
$23.49
 
Six Months Ended June 30,
 
2018
 
2017
 
Shares
 
Weighted Average Exercise Price
 
Shares
 
Weighted Average Exercise Price
 
 
 
 
Balance, Beginning of Period
4,500

 
$22.91
 
21,500

 
$23.57
Options Exercised
(450
)
 
22.91
 

 
Options Forfeited
(2,400
)
 
22.91
 
(2,000
)
 
24.34
Balance, End of Period
1,650

 
$22.91
 
19,500

 
$23.49
 
 
 
 
 
 
 
 
Options Exercisable
1,650

 
 
 
19,100

 
 
 
 
 
 
 
 
 
 
Options Available For Grant
50,000

 
 
 
50,000

 
 

At June 30, 2018, the Company had the following options outstanding:

Grant Date
 
Outstanding Options
 
Option Price
 
Expiration Date
07/01/08
 
1,650
 
$22.91
 
07/01/18

11



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, 2018
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Student Loan Pools
$
12,961,675

 
$
7,029

 
$
108,760

 
$
12,859,944

Small Business Administration (“SBA”) Bonds
115,797,449

 
372,414

 
724,834

 
115,445,029

Tax Exempt Municipal Bonds
60,477,526

 
1,311,392

 
402,930

 
61,385,988

Taxable Municipal Bonds
2,014,601

 

 
45,931

 
1,968,670

Mortgage-Backed Securities
172,137,551

 
1,017,385

 
2,076,428

 
171,078,508

State Tax Credit
56,800

 

 

 
56,800

Equity Securities
155,000

 

 

 
155,000

Total Available For Sale
$
363,600,602

 
$
2,708,220

 
$
3,358,883

 
$
362,949,939

 
 
 
 
 
 
 
 
 
December 31, 2017
 
Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Student Loan Pools
$
8,522,043

 
$
1,288

 
$
1,546

 
$
8,521,785

SBA Bonds
123,324,802

 
1,113,160

 
189,518

 
124,248,444

Tax Exempt Municipal Bonds
59,623,185

 
2,789,233

 
56,851

 
62,355,567

Taxable Municipal Bonds
2,016,833

 

 
19,703

 
1,997,130

Mortgage-Backed Securities
186,732,705

 
1,936,847

 
973,572

 
187,695,980

Equity Securities
155,000

 

 

 
155,000

Total Available For Sale
$
380,374,568

 
$
5,840,528

 
$
1,241,190

 
$
384,973,906


Student Loan Pools are typically 97% guaranteed by the United States government while SBA bonds are 100% 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, 2018, AFS GNMA mortgage-backed securities had an amortized cost and fair value of $78.9 million and $78.7 million, respectively, compared to an amortized cost and fair value of $101.3 million and $102.1 million, respectively, at December 31, 2017.

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, 2018 the Bank held AFS private label CMO mortgage-backed securities with an amortized cost and fair value of $30.0 million and $29.9 million, respectively, compared to an amortized cost and fair value of $26.9 million at December 31, 2017.











12



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, 2018 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, 2018
Investment Securities:
Amortized Cost
 
Fair Value
One Year or Less
$
181,392

 
$
179,717

After One – Five Years
11,200,552

 
11,175,886

After Five – Ten Years
41,198,731

 
41,093,031

More Than Ten Years
138,882,376

 
139,422,797

Mortgage-Backed Securities
172,137,551

 
171,078,508

Total Available For Sale
$
363,600,602

 
$
362,949,939


At June 30, 2018 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 $112.8 million and $112.6 million, respectively, compared to an amortized cost and fair value of $99.2 million and $100.5 million, respectively, at December 31, 2017.

The Bank received $28.6 million and $17.5 million in gross proceeds from sales of available for sale securities during the six months ended June 30, 2018 and 2017, respectively. As a result, the Bank recognized gross gains of $503,000 and $629,000, respectively, with $67,000 and $0 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, 2018
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
Student Loan Pools
$
9,422,577

$
108,760

 
$

$

 
$
9,422,577

$
108,760

SBA Bonds
69,699,835

618,720

 
5,940,904

106,114

 
75,640,739

724,834

Tax Exempt Municipal Bonds
17,010,549

260,006

 
4,209,366

142,924

 
21,219,915

402,930

Taxable Municipal Bonds
1,968,670

45,931

 


 
1,968,670

45,931

Mortgage-Backed Securities
79,481,465

1,377,813

 
33,570,042

698,615

 
113,051,507

2,076,428

 
$
177,583,096

$
2,411,230

 
$
43,720,312

$
947,653

 
$
221,303,408

$
3,358,883

 
December 31, 2017
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
Student Loan Pools
$
7,556,014

$
1,546

 
$

$

 
$
7,556,014

$
1,546

SBA Bonds
24,433,422

151,459

 
5,588,532

38,059

 
30,021,954

189,518

Tax Exempt Municipal Bonds
4,406,162

13,852

 
4,328,229

42,999

 
8,734,391

56,851

Taxable Municipal Bond
1,997,130

19,703

 


 
1,997,130

19,703

Mortgage-Backed Securities
62,574,910

624,772

 
23,612,359

348,800

 
86,187,269

973,572

 
$
100,967,638

$
811,332

 
$
33,529,120

$
429,858

 
$
134,496,758

$
1,241,190



13



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, 2018 and December 31, 2017, 28.2% and 34.6% of the unrealized losses, representing 39 and 30 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, 2018.

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, 2018
 
 Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Federal Home Loan Mortgage Corporation ("FHLMC") Bond
$
998,320

 
$

 
$
27,282

 
$
971,038

Mortgage-Backed Securities (1)
22,336,942

 
81,314

 
494,774

 
21,923,482

Total Held To Maturity
$
23,335,262

 
$
81,314

 
$
522,056

 
$
22,894,520

 
 
December 31, 2017
 
 Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
FHLB Bonds
$
2,000,000

 
$

 
$
2,984

 
$
1,997,016

FHLMC Bond
998,102

 

 
12,588

 
985,514

Mortgage-Backed Securities (1)
24,082,868

 
120,843

 
131,307

 
24,072,404

Total Held To Maturity
$
27,080,970

 
$
120,843

 
$
146,879

 
$
27,054,934

(1) COMPRISED OF MORTGAGE-BACKED SECURITIES OF GSEs OR GNMA 
The FHLB, FHLMC and the Federal National Mortgage Association ("FNMA") are government sponsored enterprises ("GSEs") and the securities and bonds issued by GSEs are not backed by the full faith and credit of the United States government.  At June 30, 2018, the Bank held an amortized cost and fair value of $14.7 million and $14.5 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 $15.9 million and $15.9 million, respectively, at December 31, 2017. The Company has not invested in any private label mortgage-backed securities classified as held to maturity.

At June 30, 2018, 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 $21.4 million and $21.0 million, respectively, compared to an amortized cost and fair value of $22.3 million at December 31, 2017.



14



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, 2018 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, 2018
Investment Securities:
Amortized Cost
 
Fair Value
One – Five Years
$
998,320

 
$
971,038

Mortgage-Backed Securities
22,336,942

 
21,923,482

 Total Held to Maturity
$
23,335,262

 
$
22,894,520


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, 2018
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
FHLMC Bond
$
971,038

$
27,282

 
$

$

 
$
971,038

$
27,282

Mortgage-Backed Securities (1)
17,006,523

432,388

 
2,009,843

62,386

 
19,016,366

494,774

 
$
17,977,561

$
459,670

 
$
2,009,843

$
62,386

 
$
19,987,404

$
522,056

(1) COMPRISED OF MORTGAGE-BACKED SECURITIES OF GSEs OR GNMA 
 
December 31, 2017
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
FHLB Bond
$
1,997,016

$
2,984

 
$

$

 
$
1,997,016

$
2,984

FHLMC Bond
985,514

12,588

 


 
985,514

12,588

Mortgage-Backed Securities (1)
17,645,676

103,387

 
1,284,971

27,920

 
18,930,647

131,307

 
$
20,628,206

$
118,959

 
$
1,284,971

$
27,920

 
$
21,913,177

$
146,879

(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.


15



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, 2018
 
December 31, 2017
Residential Real Estate Loans
$
84,693,200

 
$
81,255,167

Consumer Loans
59,201,868

 
56,761,695

Commercial Business Loans
27,752,848

 
26,777,893

Commercial Real Estate Loans
270,776,940

 
237,814,628

Total Loans Held For Investment
442,424,856

 
402,609,383

Loans Held For Sale
2,530,032

 
3,051,950

Total Loans Receivable, Gross
$
444,954,888

 
$
405,661,333

Less:
 
 
 
Allowance For Loan Losses
8,611,176

 
8,221,618

Loans In Process
6,201,265

 
6,804,533

Deferred Loan Fees
216,095

 
141,985

 
15,028,536

 
15,168,136

Total Loans Receivable, Net
$
429,926,352

 
$
390,493,197


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 tables below summarize the balance within each risk category by loan type, excluding loans held for sale, at June 30, 2018 and December 31, 2017.
June 30, 2018
 
Pass
 
 
Caution
 
Special
Mention
 
 
Substandard
 
 
Total Loans
Residential Real Estate
$
76,696,924

 
$
2,779,039

 
$
1,251,240

 
$
3,965,997

 
$
84,693,200

Consumer
51,714,766

 
4,817,240

 
403,512

 
2,266,350

 
59,201,868

Commercial Business
22,833,596

 
3,719,984

 
708,927

 
490,341

 
27,752,848

Commercial Real Estate
192,444,121

 
48,026,111

 
20,204,804

 
10,101,904

 
270,776,940

Total
$
343,689,407

 
$
59,342,374

 
$
22,568,483

 
$
16,824,592

 
$
442,424,856

December 31, 2017
 
Pass
 
 
Caution
 
Special
Mention
 
 
Substandard
 
 
Total Loans
Residential Real Estate
$
73,225,237

 
$
2,352,536

 
$
1,384,222

 
$
4,293,172

 
$
81,255,167

Consumer
52,249,017

 
1,862,340

 
344,361

 
2,305,977

 
56,761,695

Commercial Business
23,396,550

 
2,066,749

 
767,048

 
547,546

 
26,777,893

Commercial Real Estate
158,232,465

 
53,798,061

 
21,269,279

 
4,514,823

 
237,814,628

Total
$
307,103,269

 
$
60,079,686

 
$
23,764,910

 
$
11,661,518

 
$
402,609,383





16



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, including loans on non-accrual status, by category at June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
 
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
$
384,649

 
$

 
$
584,072

 
$
968,721

 
$
83,724,479

 
$
84,693,200

Consumer
1,075,500

 
101,869

 
34,578

 
1,211,947

 
57,989,921

 
59,201,868

Commercial Business
182,971

 
82,403

 
5,000

 
270,374

 
27,482,474

 
27,752,848

Commercial Real Estate
3,738,004

 
550,734

 
1,446,195

 
5,734,933

 
265,042,007

 
270,776,940

Total
$
5,381,124

 
$
735,006

 
$
2,069,845

 
$
8,185,975

 
$
434,238,881

 
$
442,424,856


 
December 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
$
395,763

 
$

 
$
948,875

 
$
1,344,638

 
$
79,910,529

 
$
81,255,167

Consumer
604,809

 
85,178

 
182,757

 
872,744

 
55,888,951

 
56,761,695

Commercial Business
185,526

 
102,244

 

 
287,770

 
26,490,123

 
26,777,893

Commercial Real Estate
2,207,655

 
364,515

 
1,919,292

 
4,491,462

 
233,323,166

 
237,814,628

Total
$
3,393,753

 
$
551,937

 
$
3,050,924

 
$
6,996,614

 
$
395,612,769

 
$
402,609,383


At June 30, 2018 and December 31, 2017, 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, 2018 compared to December 31, 2017:

 
June 30, 2018
 
December 31, 2017
 
$
 
%
 
Amount
 
Percent (1)
 
Amount
 
Percent (1)
 
Increase (Decrease)
 
Increase (Decrease)
Non-accrual Loans:
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate
$
2,014,008

 
0.5
%
 
$
1,948,524

 
0.5
%
 
$
65,484

 
3.4%
Consumer
200,056

 
0.1

 
318,926

 
0.1

 
$
(118,870
)
 
(37.3)
Commercial Business
83,806

 

 
109,401

 

 
(25,595
)
 
(23.4)
Commercial Real Estate
6,935,604

 
1.6

 
3,340,904

 
0.8

 
3,594,700

 
107.6
Total Non-accrual Loans
$
9,233,474

 
2.2
%
 
$
5,717,755

 
1.5
%
 
$
3,515,719

 
61.5%

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







17



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




8.    Loans Receivable, Net, Continued

The following tables show the activity in the allowance for loan losses by category for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30, 2018
 
Residential
Real Estate
 
 
Consumer
 
Commercial
Business
 
Commercial
Real Estate
 
 
Total
Beginning Balance
$
1,207,254

 
$
1,042,150

 
$
1,128,680

 
$
4,825,932

 
$
8,204,016

Provision for Loan Losses
104,394

 
185,314

 
(40,216
)
 
(249,492
)
 

Charge-Offs
(2,579
)
 
(73,774
)
 
(11,031
)
 
(9,890
)
 
(97,274
)
Recoveries

 
60,084

 

 
444,350

 
504,434

Ending Balance
$
1,309,069

 
$
1,213,774

 
$
1,077,433

 
$
5,010,900

 
$
8,611,176

 
 
Six Months Ended June 30, 2018
 
Residential
Real Estate
 
 
Consumer
 
Commercial
Business
 
Commercial
Real Estate
 
 
Total
Beginning Balance
$
1,233,843

 
$
1,144,815

 
$
1,011,227

 
$
4,831,733

 
$
8,221,618

Provision for Loan Losses
88,949

 
72,381

 
98,724

 
(260,054
)
 

Charge-Offs
(13,930
)
 
(91,026
)
 
(32,518
)
 
(9,890
)
 
(147,364
)
Recoveries
207

 
87,604

 

 
449,111

 
536,922

Ending Balance
$
1,309,069

 
$
1,213,774

 
$
1,077,433

 
$
5,010,900

 
$
8,611,176

 
Three Months Ended June 30, 2017
 
Residential
Real Estate
 
 
Consumer
 
Commercial
Business
 
Commercial
Real Estate
 
 
Total
Beginning Balance
$
1,464,917

 
$
1,100,704

 
$
964,488

 
$
4,847,790

 
$
8,377,899

Provision for Loan Losses
50,008

 
23,765

 
(83,847
)
 
10,074

 

Charge-Offs
(64,986
)
 
(18,244
)
 
1

 
(136,000
)
 
(219,229
)
Recoveries
237

 
16,248

 

 
27,477

 
43,962

Ending Balance
$