SECURITY FEDERAL CORP - FORM 10-Q

SECURITY FEDERAL CORP - FORM 10-Q - November 14, 2018

Attached files

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - SECURITY FEDERAL CORP	sfdl-20180930xex311.htm
EX-32 - EXHIBIT 32 - SECURITY FEDERAL CORP	sfdl-20180930xex32.htm
EX-31.2 - EXHIBIT 31.2 - SECURITY FEDERAL CORP	sfdl-20180930xex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10 – Q

(Mark one)

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 every Interactive Data File required to be submitted 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 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 September 30, 2018 and December 31, 2017	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and 2017	4
	Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2018 and 2017	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2018 and 2017	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 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	47
Item 4.	Controls and Procedures	47

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	48
	Signatures	50

SCHEDULES OMITTED

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Part 1. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets



	September 30, 2018			December 31, 2017
	(Unaudited)			(Audited)
ASSETS:
Cash and Cash Equivalents	$	20,109,901		$	10,319,624
Certificates of Deposit with Other Banks	1,950,010			1,950,010
Investment and Mortgage-Backed Securities:
Available For Sale ("AFS")	373,752,293			384,973,906
Held To Maturity ("HTM") (Fair Value of $21,700,031 and $27,054,934 at September 30, 2018 and December 31, 2017, Respectively)	22,292,027			27,080,970
Total Investments and Mortgage-Backed Securities	396,044,320			412,054,876
Loans Receivable, Net:
Held For Sale	737,098			3,051,950
Held For Investment (Net of Allowance of $8,602,078 and $8,221,618 at September 30, 2018 and December 31, 2017, Respectively)	423,242,690			387,441,247
Total Loans Receivable, Net	423,979,788			390,493,197
Accrued Interest Receivable:
Loans	1,197,332			1,067,657
Mortgage-Backed Securities	577,644			589,000
Investment Securities	1,750,315			1,699,961
Total Accrued Interest Receivable	3,525,291			3,356,618
Premises and Equipment, Net	24,060,662			22,797,844
Federal Home Loan Bank ("FHLB") Stock, at Cost	2,485,700			2,931,900
Other Real Estate Owned ("OREO")	858,242			1,115,671
Bank Owned Life Insurance ("BOLI")	21,102,893			18,797,893
Goodwill	1,199,754			1,199,754
Other Assets	6,918,380			3,795,212
Total Assets	$	902,234,941		$	868,812,599
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Liabilities:
Deposit Accounts	$	750,998,309		$	702,106,619
Advance Payments By Borrowers for Taxes and Insurance	633,625			269,761
Advances From FHLB	39,000,000			51,680,000
Other Borrowings	12,652,270			11,307,161
Note Payable	3,900,000			8,500,000
Junior Subordinated Debentures	5,155,000			5,155,000
Senior Convertible Debentures	6,064,000			6,064,000
Other Liabilities	6,945,324			5,806,604
Total Liabilities	$	825,348,528		$	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 September 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 (Loss) ("AOCI")	(2,364,215		)	2,932,122
Retained Earnings	71,326,647			67,077,661
Total Shareholders' Equity	$	76,886,413		$	77,923,454
Total Liabilities and Shareholders' Equity	$	902,234,941		$	868,812,599

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2018			2017		2018			2017
Interest Income:
Loans	$	5,890,317		$	5,146,669	$	16,965,442		$	14,849,109
Mortgage-Backed Securities	1,351,134			1,274,753		3,943,521			3,552,887
Investment Securities	1,239,798			1,324,104		3,357,698			3,729,992
Other	25,228			6,295		42,384			34,804
Total Interest Income	8,506,477			7,751,821		24,309,045			22,166,792
Interest Expense:
NOW and Money Market Accounts	325,427			151,874		774,637			426,080
Statement Savings Accounts	14,120			10,726		38,420			30,000
Certificate Accounts	706,590			503,505		1,856,348			1,401,910
FHLB Advances and Other Borrowed Money	157,148			164,544		513,018			409,655
Note Payable	51,856			105,762		190,790			328,613
Senior Convertible Debentures	121,280			121,396		363,840			364,756
Junior Subordinated Debentures	53,218			38,975		147,234			110,863
Total Interest Expense	1,429,639			1,096,782		3,884,287			3,071,877
Net Interest Income	7,076,838			6,655,039		20,424,758			19,094,915
Provision For Loan Losses	150,000			100,000		150,000			100,000
Net Interest Income After Provision For Loan Losses	6,926,838			6,555,039		20,274,758			18,994,915
Non-Interest Income:
Gain on Sale of Investment Securities	—			79,363		436,304			707,902
Gain on Sale of Loans	345,396			373,636		999,045			894,053
Service Fees on Deposit Accounts	262,821			274,717		770,493			776,469
Commissions From Insurance Agency	196,817			172,074		525,153			451,311
Trust Income	249,000			186,000		725,000			554,000
BOLI Income	135,000			788,133		405,000			1,028,133
Check Card Fee Income	320,708			282,686		966,365			838,302
Grant Income	318,102			—		318,102			—
Other	241,837			205,524		712,785			542,250
Total Non-Interest Income	2,069,681			2,362,133		5,858,247			5,792,420
Non-Interest Expense:
Compensation and Employee Benefits	4,032,245			3,872,102		11,683,664			10,916,386
Occupancy	586,527			569,024		1,677,970			1,661,661
Advertising	181,663			120,033		455,753			391,742
Depreciation and Maintenance of Equipment	575,750			569,839		1,673,470			1,541,460
Federal Deposit Insurance Corporation ("FDIC") Insurance Premiums	72,837			64,518		206,218			168,707
Net Cost (Benefit) of Operation of OREO	(203,104		)	105,172		(362,864		)	(96,730		)
Other	1,171,664			1,268,449		3,842,576			3,681,552
Total Non-Interest Expense	6,417,582			6,569,137		19,176,787			18,264,778
Income Before Income Taxes	2,578,937			2,348,035		6,956,218			6,522,557
Provision For Income Taxes	471,245			445,133		1,298,455			1,513,090
Net Income	$	2,107,692		$	1,902,902	$	5,657,763		$	5,009,467
Net Income Per Common Share (Basic)	$	0.71		$	0.65	$	1.92		$	1.70
Net Income Per Common Share (Diluted)	$	0.68		$	0.61	$	1.82		$	1.61
Cash Dividend Per Share on Common Stock	$	0.09		$	0.09	$	0.09		$	0.27
Weighted Average Shares Outstanding (Basic)	2,953,424			2,945,474		2,953,340			2,945,215
Weighted Average Shares Outstanding (Diluted)	3,256,624			3,252,436		3,256,540			3,251,666

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive (Loss) Income (Unaudited)



	Three Months Ended September 30,
	2018			2017
Net Income	$	2,107,692		$	1,902,902
Other Comprehensive Loss
Unrealized Losses on Securities:
Unrealized Holding Losses on Securities AFS, Net of Taxes of $(618,602) and $(39,600) at September 30, 2018 and 2017, Respectively	(1,888,549		)	(64,802		)
Reclassification Adjustment for Gains Included in Net Income, Net of Taxes of $30,158 at September 30, 2017	—			(49,205		)
Amortization of Unrealized Gains on AFS Securities Transferred to HTM, Net of Taxes of $(5,999) and $(14,084) at September 30, 2018 and 2017, Respectively	(17,998		)	(23,019		)
Other Comprehensive Loss	(1,906,547		)	(137,026		)
Comprehensive Income	$	201,145		$	1,765,876



	Nine Months Ended September 30,
	2018			2017
Net Income	$	5,657,763		$	5,009,467
Other Comprehensive (Loss) Income
Unrealized (Losses) Gains on Securities:
Unrealized Holding (Losses) Gains on Securities AFS Net of Taxes of $(1,804,885) and $1,892,760 at September 30, 2018 and 2017, Respectively	(5,515,962		)	3,080,485
Reclassification Adjustment for Gains Included in Net Income, Net of Taxes of $109,076 and $269,003 at September 30, 2018 and 2017, Respectively	(327,228		)	(438,899		)
Amortization of Unrealized Gains on AFS Securities Transferred to HTM, Net of Taxes of $(23,718) and $(50,102) at September 30, 2018 and 2017, Respectively	(64,238		)	(81,884		)
Other Comprehensive (Loss) Income	(5,907,428		)	2,559,702
Comprehensive (Loss) Income	$	(249,665	)	$	7,569,169

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

For the Nine Months Ended September 30, 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	—		—			—		—			—		5,009,467			5,009,467
Other Comprehensive Income, Net of Tax	—		—			—		—			2,559,702		—			2,559,702
Vesting of Restricted Stock			25,358			—		—			—		—			25,358
Cash Dividends on Common Stock	—		—			—		—			—		(795,277		)	(795,277		)
Balance at September 30, 2017	$	31,464	$	—		$	12,036,744	$	(4,330,712	)	$	3,739,788	$	66,434,240		$	77,911,524



	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	—		—		—			—			5,657,763			5,657,763
Other Comprehensive Income, Net of Tax	—		—		—			(5,907,428		)	—			(5,907,428		)
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	—		—		—			—			(797,686		)	(797,686		)
Balance at September 30, 2018	$	31,544	$	12,223,149	$	(4,330,712	)	$	(2,364,215	)	$	71,326,647		$	76,886,413

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)



	Nine Months Ended September 30,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	5,657,763		$	5,009,467
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
Depreciation Expense	1,062,542			1,101,900
Stock Option Compensation Expense	—			25,358
Discount Accretion and Premium Amortization	4,271,865			4,190,700
Provisions for Losses on Loans	150,000			100,000
Earnings on BOLI	(405,000		)	(374,000		)
Income Recognized From BOLI Death Benefit	—			(654,133		)
Gain on Sales of Loans	(999,045		)	(894,053		)
Gain on Sales of Mortgage-Backed Securities ("MBS")	(181,034		)	(250,149		)
Gain on Sales of Investment Securities	(255,270		)	(457,752		)
Gain on Sale of Premises and Equipment	—			(1,900		)
Gain on Sales of OREO	(547,685		)	(321,687		)
Write Down on OREO	56,000			68,121
Amortization of Deferred Loan Costs	73,163			127,058
Proceeds From Sale of Loans Held For Sale	38,316,435			33,301,781
Origination of Loans Held For Sale	(35,002,538		)	(29,434,231		)
(Increase) Decrease in Accrued Interest Receivable:
Loans	(129,675		)	102,016
MBS	11,356			17,509
Investment Securities	(50,354		)	(308,595		)
Increase in Advance Payments By Borrowers	363,864			408,911
(Increase) Decrease in Other, Net	(134,725		)	594,400
Net Cash Provided By Operating Activities	$	12,257,662		$	12,350,721
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of MBS AFS	$	(41,314,618	)	$	(42,875,234	)
Proceeds from Payments and Maturities of MBS AFS	28,033,612			28,487,010
Proceeds from Sale of MBS AFS	17,007,024			19,003,897
Proceeds from Payments and Maturities of MBS Held To Maturity ("HTM")	2,536,945			2,836,011
Purchase of Investment Securities AFS	(38,965,898		)	(75,688,312		)
Proceeds from Payments and Maturities of Investment Securities AFS	23,557,323			17,854,087
Proceeds from Sale of Investment Securities AFS	11,563,456			27,825,020
Purchase of Investment Securities HTM	—			(3,997,750		)
Proceeds from Payments and Maturities of Investment Securities HTM	2,000,000			1,000,000
Proceeds from Redemption of Certificates of Deposits with Other Banks	—			1,095,000
Purchase of FHLB Stock	(4,194,300		)	(5,129,700		)
Redemption of FHLB Stock	4,640,500			5,432,500
Purchase of BOLI	(1,900,000		)	(2,000,000		)
Proceeds From BOLI Death Benefit	—			1,463,285
Increase in Loans Receivable	(36,340,156		)	(19,680,925		)
Proceeds From Sale of OREO	1,064,664			1,558,891
Purchase and Improvement of Premises and Equipment	(2,325,360		)	(2,769,640		)
Proceeds From Sale of Premises and Equipment	—			1,900
Net Cash Used By Investing Activities	$	(34,636,808	)	$	(45,583,960	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Deposit Accounts	$	48,891,690		$	47,510,082
Proceeds from FHLB Advances	160,083,000			157,576,000
Repayment of FHLB Advances	(172,763,000		)	(164,971,000		)
Increase in Other Borrowings, Net	1,345,109			3,017,664
Repayment of Note Payable	(4,600,000		)	(3,300,000		)
Purchase of Senior Convertible Debentures	—			(20,000		)
Proceeds from Employee Stock Options Exercised	10,310			—
Dividends to Common Stock Shareholders	(797,686		)	(795,277		)
Net Cash Provided By Financing Activities	$	32,169,423		$	39,017,469

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES



Consolidated Statements of Cash Flows (Unaudited) (Continued)

	Nine Months Ended September 30,
	2018			2017
Net Increase in Cash and Cash Equivalents	9,790,277			5,784,230
Cash and Cash Equivalents at Beginning of Period	10,319,624			9,374,549
Cash and Cash Equivalents at End of Period	$	20,109,901		$	15,158,779

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During The Period For:
Interest	$	3,719,123		$	2,937,283
Income Taxes	$	992,273		$	1,162,000
Supplemental Schedule of Non Cash Transactions:
Transfers From Loans Receivable to OREO	$	315,550		$	491,748
Other Comprehensive (Loss) Income	$	(5,907,428	)	$	2,559,702

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”) 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 nine months ended September 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.

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. There were no stock options outstanding at September 30, 2018. All of the options outstanding at September 30, 2017 had an exercise price below the average market price during the three and nine months ended September 30, 2017. Therefore, these options were considered to be dilutive to EPS in those periods. Diluted EPS also assumes the convertible debentures were converted into 303,200 shares of common stock 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 September 30,
	2018						2017
	Income		Shares	Per Share Amounts			Income		Shares	Per Share Amounts
Basic EPS	$	2,107,692	2,953,424	$	0.71		$	1,902,902	2,945,474	$	0.65
Effect of Dilutive Securities:
Stock Options	—		—	—			—		3,762	(0.01		)
Senior Convertible Debentures	90,960		303,200	(0.03		)	75,266		303,200	(0.02)
Diluted EPS	$	2,198,652	3,256,624	$	0.68		$	1,978,168	3,252,436	$	0.61

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

4. Earnings Per Common Share, Continued



	Nine Months Ended September 30,
	2018					2017
	Income		Shares	Per Share Amounts		Income		Shares	Per Share Amounts
Basic EPS	$	5,657,763	2,953,340	$	1.92	$	5,009,467	2,945,215	$	1.70
Effect of Dilutive Securities:
Stock Options	—		—	—		—		3,251	(0.01		)
Senior Convertible Debentures	272,880		303,200	(0.10)		226,149		303,200	(0.08)
Diluted EPS	$	5,930,643	3,256,540	$	1.82	$	5,235,616	3,251,666	$	1.61

5. Stock-Based Compensation

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



	Three Months Ended September 30,
	2018			2017
	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
Balance, Beginning of Period	1,650		$22.91	19,500		$23.49
Options Forfeited	(1,650	)	22.91	(1,000	)	24.61
Balance, End of Period	—		—	18,500		$23.43



	Nine Months Ended September 30,
	2018			2017
	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
	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	(4,050	)	22.91	(3,000	)	24.43
Balance, End of Period	—		—	18,500		$23.43

Options Exercisable	—			18,500

Options Available For Grant	50,000			50,000

At September 30, 2018, the Company had no options outstanding.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment and mortgage-backed securities available for sale at the dates indicated were as follows:



	September 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Student Loan Pools	$	12,957,559	$	33,076	$	9,096	$	12,981,539
Small Business Administration (“SBA”) Bonds	118,275,224		227,093		1,277,257		117,225,060
Tax Exempt Municipal Bonds	60,381,306		897,641		797,693		60,481,254
Taxable Municipal Bonds	3,007,036		—		66,401		2,940,635
Mortgage-Backed Securities	182,045,631		811,987		2,977,163		179,880,455
State Tax Credit	88,350		—		—		88,350
Equity Securities	155,000		—		—		155,000
Total Available For Sale	$	376,910,106	$	1,969,797	$	5,127,610	$	373,752,293

	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 September 30, 2018, AFS GNMA mortgage-backed securities had an amortized cost and fair value of $82.1 million and $81.5 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 September 30, 2018 the Bank held AFS private label CMO mortgage-backed securities with an amortized cost and fair value of $29.9 million and $29.8 million, respectively, compared to an amortized cost and fair value of $26.9 million at December 31, 2017.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

The amortized cost and fair value of investment and mortgage-backed securities available for sale at September 30, 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.



	September 30, 2018
Investment Securities:	Amortized Cost		Fair Value
One Year or Less	$	1,125,559	$	1,122,015
After One – Five Years	11,035,958		10,987,529
After Five – Ten Years	42,005,204		41,714,850
More Than Ten Years	140,697,754		140,047,444
Mortgage-Backed Securities	182,045,631		179,880,455
Total Available For Sale	$	376,910,106	$	373,752,293

At September 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 $118.9 million and $118 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 $46.8 million in gross proceeds from sales of available for sale securities during the nine months ended September 30, 2018 and 2017, respectively. As a result, the Bank recognized gross gains of $503,000 and $870,000, respectively, with $67,000 and $162,000 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 were in a continuous unrealized loss position at the dates indicated.



	September 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	$	2,057,695	$	9,096	$	—	$	—	$	2,057,695	$	9,096
SBA Bonds	79,678,260		964,997		14,490,089		312,260		94,168,349		1,277,257
Tax Exempt Municipal Bonds	32,933,452		492,761		6,384,426		304,932		39,317,878		797,693
Taxable Municipal Bonds	1,969,285		32,952		971,350		33,449		2,940,635		66,401
Mortgage-Backed Securities	75,412,165		1,211,586		56,908,117		1,765,577		132,320,282		2,977,163
	$	192,050,857	$	2,711,392	$	78,753,982	$	2,416,218	$	270,804,839	$	5,127,610



	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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Securities classified as available for sale are recorded at fair market value. At September 30, 2018 and December 31, 2017, 47.1% and 34.6% of the unrealized losses, representing 64 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 nine months ended September 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:



	September 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Federal Home Loan Mortgage Corporation ("FHLMC") Bond	$	998,434	$	—	$	32,813	$	965,621
Mortgage-Backed Securities ⁽¹⁾	21,293,593		69,733		628,916		20,734,410
Total Held To Maturity	$	22,292,027	$	69,733	$	661,729	$	21,700,031

	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 September 30, 2018, the Bank held an amortized cost and fair value of $13.9 million and $13.5 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 September 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 $20.4 million and $19.9 million, respectively, compared to an amortized cost and fair value of $22.3 million at December 31, 2017.

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 September 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.



	September 30, 2018
Investment Securities:	Amortized Cost		Fair Value
One – Five Years	$	998,434	$	965,621
Mortgage-Backed Securities	21,293,593		20,734,410
Total Held to Maturity	$	22,292,027	$	21,700,031

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.



	September 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	$	—	$	—	$	965,621	$	32,813	$	965,621	$	32,813
Mortgage-Backed Securities ⁽¹⁾	11,070,475		321,204		8,067,582		307,712		19,138,057		628,916
	$	11,070,475	$	321,204	$	9,033,203	$	340,525	$	20,103,678	$	661,729

^{(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.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

8. Loans Receivable, Net

Loans receivable, net, consisted of the following as of the dates indicated below:



	September 30, 2018		December 31, 2017
Residential Real Estate Loans	$	85,193,491	$	81,255,167
Consumer Loans	57,962,835		56,761,695
Commercial Business Loans	27,407,959		26,777,893
Commercial Real Estate Loans	267,568,254		237,814,628
Total Loans Held For Investment	438,132,539		402,609,383
Loans Held For Sale	737,098		3,051,950
Total Loans Receivable, Gross	$	438,869,637	$	405,661,333
Less:
Allowance For Loan Losses	8,602,078		8,221,618
Loans in Process	6,048,974		6,804,533
Deferred Loan Fees	238,797		141,985
	14,889,849		15,168,136
Total Loans Receivable, Net	$	423,979,788	$	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 September 30, 2018 and December 31, 2017.



September 30, 2018	Pass		Caution		Special Mention		Substandard		Total Loans
Residential Real Estate	$	76,083,485	$	3,558,567	$	1,308,296	$	4,243,143	$	85,193,491
Consumer	49,309,083		5,848,589		479,473		2,325,690		57,962,835
Commercial Business	22,569,651		4,135,663		359,785		342,860		27,407,959
Commercial Real Estate	190,029,320		47,269,195		20,101,394		10,168,345		267,568,254
Total	$	337,991,539	$	60,812,014	$	22,248,948	$	17,080,038	$	438,132,539



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

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 September 30, 2018 and December 31, 2017:



	September 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	$	473,728	$	—	$	494,065	$	967,793	$	84,225,698	$	85,193,491
Consumer	275,395		164,359		908,797		1,348,551		56,614,284		57,962,835
Commercial Business	187,558		31,600		5,000		224,158		27,183,801		27,407,959
Commercial Real Estate	1,396,237		406,753		1,980,648		3,783,638		263,784,616		267,568,254
Total	$	2,332,918	$	602,712	$	3,388,510	$	6,324,140	$	431,808,399	$	438,132,539



	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 September 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 September 30, 2018 compared to December 31, 2017:



	September 30, 2018				December 31, 2017				$			%
	Amount		Percent ⁽¹⁾		Amount		Percent ⁽¹⁾		Increase (Decrease)			Increase (Decrease)
Non-accrual Loans:
Residential Real Estate	$	2,246,142	0.5	%	$	1,948,524	0.5	%	$	297,618		15.3%
Consumer	1,181,304		0.3		318,926		0.1		$	862,378		270.4
Commercial Business	83,006		—		109,401		—		(26,395		)	(24.1)
Commercial Real Estate	6,487,224		1.5		3,340,904		0.8		3,146,320			94.2
Total Non-accrual Loans	$	9,997,676	2.3	%	$	5,717,755	1.5	%	$	4,279,921		74.9%

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

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

8. Loans Receivable, Net, Continued

The following tables show the activity in the allowance for loan losses by category for the three and nine months ended September 30, 2018 and 2017:



	Three Months Ended September 30, 2018
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	1,309,069		$	1,213,774		$	1,077,433		$	5,010,900		$	8,611,176
Provision for Loan Losses	128,753			(21,106		)	(144,996		)	187,349			150,000
Charge-Offs	(27,489		)	(27,181		)	—			(117,822		)	(172,492		)
Recoveries	—			8,519			—			4,875			13,394
Ending Balance	$	1,410,333		$	1,174,006		$	932,437		$	5,085,302		$	8,602,078




	Nine Months Ended September 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	217,702			51,275			(46,272		)	(72,705		)	150,000
Charge-Offs	(41,419		)	(118,207		)	(32,518		)	(127,712		)	(319,856		)
Recoveries	207			96,123			—			453,986			550,316
Ending Balance	$	1,410,333		$	1,174,006		$	932,437		$	5,085,302		$	8,602,078



	Three Months Ended September 30, 2017
	Residential Real Estate			Consumer			Commercial Business			Commercial Real Estate			Total
Beginning Balance	$	1,450,176		$	1,122,473		$	880,642		$	4,749,341		$	8,202,632
Provision for Loan Losses	80,766			110,023			(842		)	(89,947		)	100,000
Charge-Offs	(114,869		)	(82,087		)	—			(62,482		)	(259,438		)
Recoveries	1,014			15,392			— </

OUTSTANDING SHARES AT:

Common Stock, par value $0.01 per share

November 14, 2018