Company Quick10K Filing
Quick10K
Security Federal
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-29 Earnings, Exhibits
8-K 2019-06-11 Officers, Exhibits
8-K 2019-04-29 Earnings, Exhibits
8-K 2019-04-18 Shareholder Vote
8-K 2019-02-21 Officers
8-K 2019-01-28 Earnings, Exhibits
8-K 2018-10-29 Earnings, Exhibits
8-K 2018-10-18 Officers, Amend Bylaw, Exhibits
8-K 2018-07-30 Earnings, Exhibits
8-K 2018-04-30 Earnings, Exhibits
8-K 2018-04-19 Shareholder Vote
8-K 2018-03-29 Officers, Exhibits
8-K 2018-01-29 Earnings, Exhibits
SRE Sempra Energy 34,630
MPLX MPLX 24,390
MHK Mohawk Industries 9,620
RMBS Rambus 1,290
ZIOP Ziopharm Oncology 690
DRIV Digital River 14
CANF Can-Fite BioPharma 11
EVHC Envision Healthcare 0
QUES Quest Solution 0
KANP Kaanapali Land 0
SFDL 2019-03-31
Part 1. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii: Other Information
Item 1 Legal Proceedings
Item 1A Risk Factors
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Mine Safety Disclosures
Item 5 Other Information
Item 6 Exhibits
EX-31.1 sfdl-20190331xex311.htm
EX-31.2 sfdl-20190331xex312.htm
EX-32 sfdl-20190331xex32.htm

Security Federal Earnings 2019-03-31

SFDL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 sfdl-20190331x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 – Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019
( ) 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    [ X ]
 
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]
Securities registered pursuant to Section 12(b) of the Act: None
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
 
May 14, 2019
 
2,955,357
 




 
 
 
PART I.
FINANCIAL INFORMATION (UNAUDITED)
PAGE NO.
Item 1.
Financial Statements (unaudited):
3
 
Consolidated Balance Sheets at March 31, 2019 and December 31, 2018
3
 
Consolidated Statements of Income for the Three Months Ended March 31, 2019 and 2018
4
 
Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018
5
 
Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2019 and 2018
6
 
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018
7
 
Notes to Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
41
Item 4.
Controls and Procedures
42
 
 
 
PART II.
OTHER INFORMATION
 
Item 1.
Legal Proceedings
42
Item 1A.
Risk Factors
42
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
42
Item 3.
Defaults Upon Senior Securities
42
Item 4.
Mine Safety Disclosures
42
Item 5.
Other Information
42
Item 6.
Exhibits
43
 
Signatures
44
 
 
 

SCHEDULES OMITTED

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





SECURITY FEDERAL CORPORATION AND SUBSIDIARIES


Part 1. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
 
March 31, 2019
 
December 31, 2018
 
(Unaudited)
 
(Audited)
ASSETS:
 
 
 
Cash and Cash Equivalents
$
19,120,091

 
$
12,705,910

Certificates of Deposit with Other Banks
950,010

 
1,200,010

Investment and Mortgage-Backed Securities:
 
 
 
Available For Sale ("AFS")
402,351,692

 
386,255,837

Held To Maturity ("HTM") (Fair Value of $23,519,093 and $23,249,400 at March 31, 2019 and December 31, 2018, Respectively)
23,437,877

 
23,638,013

Total Investments and Mortgage-Backed Securities
425,789,569

 
409,893,850

Loans Receivable, Net:
 
 
 
Held For Sale
2,436,445

 
1,781,985

Held For Investment (Net of Allowance of $8,798,555 and $9,171,717 at March 31, 2019 and December 31, 2018, Respectively)
426,877,148

 
428,271,532

Total Loans Receivable, Net
429,313,593

 
430,053,517

Accrued Interest Receivable:
 
 
 
Loans
1,329,109

 
1,257,683

Mortgage-Backed Securities
604,260

 
591,849

Investment Securities
1,880,548

 
1,877,844

Total Accrued Interest Receivable
3,813,917

 
3,727,376

Operating Lease Right-of-Use Assets
2,992,371

 

Premises and Equipment, Net
25,219,317

 
24,174,707

Federal Home Loan Bank ("FHLB") Stock, at Cost
1,926,400

 
2,204,000

Other Real Estate Owned ("OREO")
809,341

 
722,442

Bank Owned Life Insurance ("BOLI")
21,372,893

 
21,237,893

Goodwill
1,199,754

 
1,199,754

Other Assets
4,697,041

 
5,494,800

Total Assets
$
937,204,297

 
$
912,614,259

LIABILITIES AND SHAREHOLDERS’ EQUITY:
 
 
 
Liabilities:
 
 
 
Deposit Accounts
$
788,848,166

 
$
767,496,707

Advance Payments By Borrowers for Taxes and Insurance
412,542

 
258,505

Advances From FHLB
26,000,000

 
34,030,000

Other Borrowings
14,044,252

 
10,698,429

Note Payable
1,512,500

 
2,362,500

Junior Subordinated Debentures
5,155,000

 
5,155,000

Senior Convertible Debentures
6,044,000

 
6,064,000

Operating Lease Liabilities
2,996,063

 

Other Liabilities
7,000,524

 
6,030,685

Total Liabilities
$
852,013,047

 
$
832,095,826

Shareholders' Equity:
 
 
 
Common Stock, $.01 Par Value; Authorized 5,000,000 Shares; Issued and Outstanding Shares, 3,156,290 and 2,955,357, Respectively, at March 31, 2019 and 3,154,829 and 2,953,896, Respectively, at December 31, 2018
$
31,563

 
$
31,548

Additional Paid-In Capital
12,267,335

 
12,235,341

Treasury Stock, at Cost (200,933 Shares)
(4,330,712
)
 
(4,330,712
)
Accumulated Other Comprehensive Income (Loss) ("AOCI")
2,790,008

 
(27,909
)
Retained Earnings
74,433,056

 
72,610,165

Total Shareholders' Equity
$
85,191,250

 
$
80,518,433

Total Liabilities and Shareholders' Equity
$
937,204,297

 
$
912,614,259


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

3


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Interest Income:
 
 
 
Loans
$
6,003,502

 
$
5,389,487

Mortgage-Backed Securities
1,549,122

 
1,315,420

Investment Securities
1,413,993

 
1,060,666

Other
64,205

 
8,248

Total Interest Income
9,030,822

 
7,773,821

Interest Expense:
 
 
 
NOW and Money Market Accounts
485,473

 
187,205

Savings Accounts
16,326

 
11,553

Certificate Accounts
912,660

 
537,561

FHLB Advances and Other Borrowed Money
157,110

 
191,022

Note Payable
23,777

 
76,671

Senior Convertible Debentures
120,880

 
121,280

Junior Subordinated Debentures
57,410

 
43,685

Total Interest Expense
1,773,636

 
1,168,977

Net Interest Income
7,257,186

 
6,604,844

Provision For Loan Losses
100,000

 

Net Interest Income After Provision For Loan Losses
7,157,186

 
6,604,844

Non-Interest Income:
 
 
 
Gain on Sale of Investment Securities
290,768

 
436,304

Gain on Sale of Loans
174,283

 
286,003

Service Fees on Deposit Accounts
252,017

 
257,179

Commissions From Insurance Agency
151,300

 
179,225

Trust Income
258,600

 
232,500

BOLI Income
135,000

 
135,000

Check Card Fee Income
342,334

 
307,046

Grant Income
259,615

 

Other
331,915

 
210,763

Total Non-Interest Income
2,195,832

 
2,044,020

Non-Interest Expense:
 
 
 
Compensation and Employee Benefits
4,179,034

 
3,809,124

Occupancy
552,233

 
551,268

Advertising
172,684

 
188,672

Depreciation and Maintenance of Equipment
610,357

 
540,297

Federal Deposit Insurance Corporation ("FDIC") Insurance Premiums
73,176

 
66,786

Net (Recovery) Cost of Operation of OREO
(92,114
)
 
38,733

Other
1,249,145

 
1,324,066

Total Non-Interest Expense
6,744,515

 
6,518,946

Income Before Income Taxes
2,608,503

 
2,129,918

Provision For Income Taxes
519,630

 
399,801

Net Income
2,088,873

 
1,730,117

Net Income Per Common Share (Basic)
$
0.71

 
$
0.59

Net Income Per Common Share (Diluted)
$
0.67

 
$
0.56

Cash Dividend Per Share on Common Stock
$
0.09

 
$
0.09

Weighted Average Shares Outstanding (Basic)
2,954,515

 
2,953,180

Weighted Average Shares Outstanding (Diluted)
3,256,715

 
3,257,532


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

4


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Net Income
$
2,088,873

 
$
1,730,117

Other Comprehensive Income (Loss)
 
 
 
Unrealized Gains (Losses) on Securities:
 
 
 
Unrealized Holding Gains (Losses) on Securities AFS, Net of Taxes of $998,996 and $(896,557) at March 31, 2019 and 2018, Respectively
3,046,017

 
(2,742,899
)
Reclassification Adjustment for Gains Included in Net Income, Net of Taxes of $72,692 and $109,076 at March 31, 2019 and 2018, Respectively
(218,076
)
 
(327,228
)
Amortization of Unrealized Gains on AFS Securities Transferred to HTM, Net of Taxes of $(3,341) and $(10,865) at March 31, 2019 and 2018, Respectively
(10,024
)
 
(25,677
)
Other Comprehensive Income (Loss), Net of Tax
2,817,917

 
(3,095,804
)
Comprehensive Income (Loss)
$
4,906,790

 
$
(1,365,687
)

 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


5


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
For the Three Months Ended March 31, 2019 and 2018

 
 
 
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

 

 

 

 
1,730,117

 
1,730,117

Other Comprehensive Loss, Net of Tax

 

 

 
(3,095,804
)
 

 
(3,095,804
)
Reclassification of stranded tax effects from AOCI to Retained Earnings

 

 

 
611,091

 
(611,091
)
 

Stock Options Exercised
4

 
8,015

 

 

 

 
8,019

Cash Dividends on Common Stock

 

 

 

 
(265,889
)
 
(265,889
)
Balance at March 31, 2018
$
31,543

 
$
12,220,859

 
$
(4,330,712
)
 
$
447,409

 
$
67,930,798

 
$
76,299,897



 
 
 
Common
Stock
 
 
Additional
Paid – In
 Capital
 
 
 
Treasury
Stock
 
AOCI
 
 
 
Retained
Earnings
 
 
 
 
Total
Balance at December 31, 2018
$
31,548

 
$
12,235,341

 
$
(4,330,712
)
 
$
(27,909
)
 
$
72,610,165

 
$
80,518,433

Net Income

 

 

 

 
2,088,873

 
2,088,873

Other Comprehensive Income, Net of Tax

 

 

 
2,817,917

 

 
2,817,917

Employee Stock Purchases
5

 
12,004

 

 

 

 
12,009

Redemption of Convertible Debentures
10

 
19,990

 

 

 

 
20,000

Cash Dividends on Common Stock

 

 

 

 
(265,982
)
 
(265,982
)
Balance at March 31, 2019
$
31,563

 
$
12,267,335

 
$
(4,330,712
)
 
$
2,790,008

 
$
74,433,056

 
$
85,191,250


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

6


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
2,088,873

 
$
1,730,117

Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
 
 
 
Depreciation Expense
390,743

 
358,865

Discount Accretion and Premium Amortization
1,292,404

 
1,466,178

Provision for Loan Losses
100,000

 

Earnings on BOLI
(135,000
)
 
(135,000
)
Gain on Sales of Loans
(174,283
)
 
(286,003
)
Gain on Sales of Mortgage-Backed Securities ("MBS")

 
(181,034
)
Gain on Sales of Investment Securities
(290,768
)
 
(255,270
)
Gain on Sales of OREO
(110,302
)
 
(11,846
)
Write Down on OREO

 
10,000

Amortization of Operating Lease Right-of-Use Assets
98,141

 

Amortization of Deferred Loan Costs
41,739

 
16,384

Proceeds From Sale of Loans Held For Sale
7,131,184

 
10,210,795

Origination of Loans Held For Sale
(7,611,361
)
 
(9,280,320
)
(Increase) Decrease in Accrued Interest Receivable:
 
 
 
Loans
(71,426
)
 
(153,927
)
MBS
(12,411
)
 
44,673

Investment Securities
(2,704
)
 
108,442

Increase in Advance Payments By Borrowers
154,037

 
157,842

Decrease in Other, Net
736,821

 
438,231

Net Cash Provided By Operating Activities
$
3,625,687

 
$
4,238,127

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of MBS AFS
$
(13,971,139
)
 
$
(10,238,188
)
Proceeds from Payments and Maturities of MBS AFS
7,665,227

 
9,160,773

Proceeds from Sale of MBS AFS

 
17,007,024

Proceeds from Payments and Maturities of MBS Held To Maturity ("HTM")
149,162

 
724,785

Purchase of Investment Securities AFS
(21,531,244
)
 
(14,115,856
)
Proceeds from Payments and Maturities of Investment Securities AFS
7,989,484

 
7,736,448

Proceeds from Sale of Investment Securities AFS
6,555,400

 
11,563,456

Proceeds from Payments and Maturities of Investment Securities HTM

 
2,000,000

Proceeds from Redemption of Certificates of Deposits with Other Banks
250,000

 

Purchase of FHLB Stock
(1,698,100
)
 
(2,186,200
)
Redemption of FHLB Stock
1,975,700

 
2,585,300

Decrease (Increase) in Loans Receivable
812,445

 
(26,711,520
)
Proceeds From Sale of OREO
463,603

 
122,261

Purchase and Improvement of Premises and Equipment
(1,435,353
)
 
(401,741
)
Net Cash Used By Investing Activities
$
(12,774,815
)
 
$
(2,753,458
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Increase in Deposit Accounts
$
21,351,459

 
$
14,559,833

Proceeds from FHLB Advances
54,180,000

 
80,660,000

Repayment of FHLB Advances
(62,210,000
)
 
(91,340,000
)
Increase in Other Borrowings, Net
3,345,823

 
2,472,293

Repayment of Note Payable
(850,000
)
 
(2,300,000
)
Proceeds from Employee Stock Options Exercised

 
8,019

Proceeds from Employee Stock Purchases
12,009

 

Dividends to Common Stock Shareholders
(265,982
)
 
(265,889
)
Net Cash Provided By Financing Activities
$
15,563,309

 
$
3,794,256

Net Increase in Cash and Cash Equivalents
6,414,181

 
5,278,925

Cash and Cash Equivalents at Beginning of Period
12,705,910

 
10,319,624

Cash and Cash Equivalents at End of Period
$
19,120,091

 
$
15,598,549

 
 
 
 

7


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

 
 
 
 
Consolidated Statements of Cash Flows (Unaudited) (Continued)
 
 
 
 
 
Three Months Ended March 31,
 
2019
 
2018
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
Cash Paid for Interest
$
1,401,916

 
$
1,033,699

Non-Cash Transactions:
 
 
 
Initial Recognition of Operating Lease Right-of-Use Assets
$
3,090,512

 
$

Initial Recognition of Operating Lease Liabilities
$
3,090,512

 
$

Transfers From Loans Receivable to OREO
$
440,200

 
$
78,600

Other Comprehensive Income (Loss)
$
2,817,917

 
$
(3,095,804
)

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 ("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”) 2018 Annual Report to Shareholders which was filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 10-K”) when reviewing interim financial statements. The unaudited consolidated results of operations for the three months ended March 31, 2019 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, 2018 included in our 2018 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 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 March 31, 2019. All of the options outstanding at March 31, 2018 had an exercise price below the average market price during the three months ended March 31, 2018. Therefore, these options were considered to be dilutive to EPS in that period. Diluted EPS also assumes the convertible debentures were converted into 302,200 and 303,200 shares of common stock at the beginning of the three month periods ended March 31, 2019 and 2018, respectively. 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 March 31,
 
2019
 
2018
 
Income
 
Shares
 
Per Share Amounts
 
Income
 
Shares
 
Per Share Amounts
Basic EPS
$
2,088,873

 
2,954,515

 
$
0.71

 
$
1,730,117

 
2,953,180

 
$
0.59

Effect of Dilutive Securities:
 
 
 
 
 
 
 
 
 
 
 
Stock Options

 

 

 

 
1,152

 

Senior Convertible Debentures
90,660

 
302,200

 
(0.04
)
 
90,960

 
303,200

 
(0.03)

Diluted EPS
$
2,179,533

 
3,256,715

 
$
0.67

 
$
1,821,077

 
3,257,532

 
$
0.56


10



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



 
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. At March 31, 2019, the Company had no remaining options outstanding and there was no activity during the three months ended March 31, 2019.

The following is a summary of the activity under the Company’s stock option plans for the three months ended March 31, 2018:
 
Three Months Ended March 31,
 
2018
 
Shares
 
Weighted Average Exercise Price
 
Balance, Beginning of Period
4,500

 
$22.91
Options Exercised
350

 
22.91
Balance, End of Period
4,150

 
$22.91
 
 
 
 
Options Exercisable
4,150

 
 
 
 
 
 
Options Available For Grant
50,000

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

The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment and mortgage-backed securities available for sale at the dates indicated were as follows:
 
March 31, 2019
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Student Loan Pools
$
23,106,586

 
$
3,230

 
$
198,158

 
$
22,911,658

Small Business Administration (“SBA”) Bonds
124,885,470

 
601,258

 
620,733

 
124,865,995

Tax Exempt Municipal Bonds
57,215,772

 
2,614,780

 
41,776

 
59,788,776

Taxable Municipal Bonds
1,998,145

 
21,833

 
11,393

 
2,008,585

Mortgage-Backed Securities
191,277,150

 
2,203,203

 
858,675

 
192,621,678

Equity Securities
155,000

 

 

 
155,000

Total Available For Sale
$
398,638,123

 
$
5,444,304

 
$
1,730,735

 
$
402,351,692

 
 
 
 
 
 
 
 
 
December 31, 2018
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Student Loan Pools
$
12,934,037

 
$
20,713

 
$
69,249

 
$
12,885,501

SBA Bonds
125,777,016

 
560,352

 
890,837

 
125,446,531

Tax Exempt Municipal Bonds
60,141,164

 
1,518,974

 
329,769

 
61,330,369

Taxable Municipal Bonds
1,998,258

 
3,546

 
23,919

 
1,977,885

Mortgage-Backed Securities
185,291,038

 
1,073,432

 
1,903,919

 
184,460,551

Equity Securities
155,000

 

 

 
155,000

Total Available For Sale
$
386,296,513

 
$
3,177,017

 
$
3,217,693

 
$
386,255,837



11



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



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

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 March 31, 2019, AFS GNMA mortgage-backed securities had an amortized cost and fair value of $78.2 million and $78.7 million, respectively, compared to an amortized cost and fair value of $80.4 million and $80.2 million, respectively, at December 31, 2018.

Also included in mortgage-backed securities in the tables above and below are private label collateralized mortgage obligation ("CMO") securities, which are issued by non-governmental real estate mortgage investment conduits and are not backed by the full faith and credit of the United States government.  At March 31, 2019 the Bank held AFS private label CMO mortgage-backed securities with an amortized cost and fair value of $29.3 million and $29.4 million, respectively, compared to an amortized cost and fair value of $29.7 million and $29.5 million, respectively, at December 31, 2018.

The amortized cost and fair value of investment and mortgage-backed securities available for sale at March 31, 2019 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.
 
March 31, 2019
Investment Securities:
Amortized Cost
 
Fair Value
One Year or Less
$
705,143

 
$
704,499

After One – Five Years
9,216,491

 
9,265,443

After Five – Ten Years
56,550,252

 
56,822,621

More Than Ten Years
140,889,087

 
142,937,451

Mortgage-Backed Securities
191,277,150

 
192,621,678

Total Available For Sale
$
398,638,123

 
$
402,351,692


At March 31, 2019 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 $120.6 million and $121.4 million, respectively, compared to an amortized cost and fair value of $111.8 million and $111.7 million, respectively, at December 31, 2018.

The Company received $6.6 million and $28.6 million in gross proceeds from sales of available for sale securities during the three months ended March 31, 2019 and 2018, respectively. As a result, the Company recognized gross gains of $299,000 and $503,000 during the three months ended March 31, 2019 and 2018, respectively, with $8,000 and $67,000 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.
 
March 31, 2019
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
Student Loan Pools
$
17,131,812

$
168,380

 
$
2,032,349

$
29,778

 
$
19,164,161

$
198,158

SBA Bonds
35,333,244

267,120

 
35,412,231

353,613

 
70,745,475

620,733

Tax Exempt Municipal Bonds


 
3,314,589

41,776

 
3,314,589

41,776

Taxable Municipal Bonds


 
992,670

11,393

 
992,670

11,393

Mortgage-Backed Securities
8,460,843

91,024

 
65,439,351

767,651

 
73,900,194

858,675

 
$
60,925,899

$
526,524

 
$
107,191,190

$
1,204,211

 
$
168,117,089

$
1,730,735



12



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




6. Investment and Mortgage-Backed Securities, Available For Sale, Continued
 
December 31, 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
$
8,384,145

$
69,249

 
$

$

 
$
8,384,145

$
69,249

SBA Bonds
59,496,936

479,955

 
25,054,861

410,882

 
84,551,797

890,837

Tax Exempt Municipal Bonds
4,585,849

91,281

 
9,626,613

238,488

 
14,212,462

329,769

Taxable Municipal Bond


 
980,520

23,919

 
980,520

23,919

Mortgage-Backed Securities
38,168,598

249,050

 
81,947,249

1,654,869

 
120,115,847

1,903,919

 
$
110,635,528

$
889,535

 
$
117,609,243

$
2,328,158

 
$
228,244,771

$
3,217,693


Securities classified as available for sale are recorded at fair market value.  At March 31, 2019 and December 31, 2018, 47.1% and 72.4% of the unrealized losses, representing 86 and 92 individual securities, respectively, consisted of securities in a continuous loss position for 12 months or more. The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature.  The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary. The Company reviews its investment securities portfolio at least quarterly and more frequently when economic conditions warrant, assessing whether there is any indication of other-than-temporary impairment (“OTTI”).

Factors considered in the review include estimated future cash flows, length of time and extent to which market value has been less than cost, the financial condition and near term prospects of the issuer, and our intent and ability to retain the security to allow for an anticipated recovery in market value. If the review determines that there is OTTI, then an impairment loss is recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made, or the Company may recognize a portion in other comprehensive income. The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment. There was no OTTI recognized during the three months ended March 31, 2019.


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

The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of held to maturity securities at the dates indicated below were as follows:
 
March 31, 2019
 
 Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Federal Home Loan Mortgage Corporation ("FHLMC") Bond
$
998,656

 
$

 
$
7,071

 
$
991,585

Mortgage-Backed Securities (1)
22,439,221

 
186,240

 
97,953

 
22,527,508

Total Held To Maturity
$
23,437,877

 
$
186,240

 
$
105,024

 
$
23,519,093

 
 
December 31, 2018
 
 Amortized Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
FHLMC Bond
$
998,541

 
$

 
$
20,564

 
$
977,977

Mortgage-Backed Securities (1)
22,639,472

 
78,281

 
446,330

 
22,271,423

Total Held To Maturity
$
23,638,013

 
$
78,281

 
$
466,894

 
$
23,249,400

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

13



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




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

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 March 31, 2019, the Bank held an amortized cost and fair value of $13.1 million and $13.2 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 $13.3 million and $13.1 million, respectively, at December 31, 2018. The Company has not invested in any private label mortgage-backed securities classified as held to maturity.

At March 31, 2019, 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 $19.6 million and $19.7 million, respectively, compared to an amortized cost and fair value of $19.8 million and $19.4 million, respectively, at December 31, 2018.

The amortized cost and fair value of investment and mortgage-backed securities held to maturity at March 31, 2019 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.
 
March 31, 2019
Investment Securities HTM:
Amortized Cost
 
Fair Value
One – Five Years
$
998,656

 
$
991,585

Mortgage-Backed Securities
22,439,221

 
22,527,508

 Total Held to Maturity
$
23,437,877

 
$
23,519,093


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.
 
March 31, 2019
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
FHLMC Bond
$

$

 
$
991,585

$
7,071

 
$
991,585

$
7,071

Mortgage-Backed Securities (1)


 
10,534,027

97,953

 
10,534,027

97,953

 
$

$

 
$
11,525,612

$
105,024

 
$
11,525,612

$
105,024

(1) COMPRISED OF MORTGAGE-BACKED SECURITIES OF GSEs OR GNMA 
 
December 31, 2018
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
FHLMC Bond
$

$

 
$
977,977

$
20,564

 
$
977,977

$
20,564

Mortgage-Backed Securities (1)


 
16,855,973

446,330

 
16,855,973

446,330

 
$

$

 
$
17,833,950

$
466,894

 
$
17,833,950

$
466,894

(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.


14



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



8.    Loans Receivable, Net

Loans receivable, net, consisted of the following as of the dates indicated below:
 
March 31, 2019
 
December 31, 2018
Residential Real Estate Loans
$
86,508,157

 
$
83,965,416

Consumer Loans
56,212,590

 
56,907,555

Commercial Business Loans
28,427,888

 
28,086,686

Commercial Real Estate Loans
273,552,017

 
275,960,438

Total Loans Held For Investment
444,700,652

 
444,920,095

Loans Held For Sale
2,436,445

 
1,781,985

Total Loans Receivable, Gross
$
447,137,097

 
$
446,702,080

Less:
 
 
 
Allowance For Loan Losses
8,798,555

 
9,171,717

Loans in Process
8,680,994

 
7,225,271

Deferred Loan Fees
343,955

 
251,575

 
17,823,504

 
16,648,563

Total Loans Receivable, Net
$
429,313,593

 
$
430,053,517


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 March 31, 2019 and December 31, 2018.
March 31, 2019
 
Pass
 
 
Caution
 
Special
Mention
 
 
Substandard
 
 
Total Loans
Residential Real Estate
$
77,770,778

 
$
3,657,026

 
$
1,091,391

 
$
3,988,962

 
$
86,508,157

Consumer
45,985,872

 
7,487,826

 
599,885

 
2,139,007

 
56,212,590

Commercial Business
23,245,346

 
4,525,430

 
325,536

 
331,576

 
28,427,888

Commercial Real Estate
203,448,112

 
48,830,506

 
16,260,392

 
5,013,007

 
273,552,017

Total
$
350,450,108

 
$
64,500,788

 
$
18,277,204

 
$
11,472,552

 
$
444,700,652

December 31, 2018
 
Pass
 
 
Caution
 
Special
Mention
 
 
Substandard
 
 
Total Loans
Residential Real Estate
$
75,558,544

 
$
3,369,776

 
$
958,354

 
$
4,078,742

 
$
83,965,416

Consumer
46,948,251

 
6,899,912

 
567,682

 
2,491,710

 
56,907,555

Commercial Business
22,670,318

 
4,708,036

 
339,533

 
368,799

 
28,086,686

Commercial Real Estate
204,197,354

 
45,653,796

 
18,492,785

 
7,616,503

 
275,960,438

Total
$
349,374,467

 
$
60,631,520

 
$
20,358,354

 
$
14,555,754

 
$
444,920,095





15



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 March 31, 2019 and December 31, 2018:
 
March 31, 2019
 
 
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
$
666,320

 
$

 
$
94,128

 
$
760,448

 
$
85,747,709

 
$
86,508,157

Consumer
671,814

 
239,996

 
141,911

 
1,053,721

 
55,158,869

 
56,212,590

Commercial Business
70,744

 
63,631

 
13,108

 
147,483

 
28,280,405

 
28,427,888

Commercial Real Estate
699,591

 

 
2,457,894

 
3,157,485

 
270,394,532

 
273,552,017

Total
$
2,108,469

 
$
303,627

 
$
2,707,041

 
$
5,119,137

 
$
439,581,515

 
$
444,700,652

 
December 31, 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
$

 
$
332,000

 
$
497,713

 
$
829,713

 
$
83,135,703

 
$
83,965,416

Consumer
555,798

 
247,894

 
1,120,462

 
1,924,154

 
54,983,401

 
56,907,555

Commercial Business
205,613

 
106,163

 
18,648

 
330,424

 
27,756,262

 
28,086,686

Commercial Real Estate
1,556,863

 
424,103

 
1,634,770

 
3,615,736

 
272,344,702

 
275,960,438

Total
$
2,318,274

 
$
1,110,160

 
$
3,271,593

 
$
6,700,027

 
$
438,220,068

 
$
444,920,095


At March 31, 2019 and December 31, 2018, the Company did not have any loans that were 90 days or more past due and still accruing interest. The Company's strategy is to work with its borrowers to reach acceptable payment plans while protecting its interests in the existing collateral.  In the event an acceptable arrangement cannot be reached, the Company may have to acquire these properties through foreclosure or other means and subsequently sell, develop, or liquidate them.

The following table shows non-accrual loans by category at March 31, 2019 compared to December 31, 2018:

 
March 31, 2019
 
December 31, 2018
 
$
 
%
 
Amount
 
Percent (1)
 
Amount
 
Percent (1)
 
Increase (Decrease)
 
Increase (Decrease)
Non-accrual Loans:
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate
$
1,756,515

 
0.4
%
 
$
2,084,870

 
0.5
%
 
$
(328,355
)
 
(15.7)%
Consumer
457,267

 
0.1

 
1,274,673

 
0.3

 
$
(817,406
)
 
(64.1)
Commercial Business
118,320

 

 
124,458

 

 
(6,138
)
 
(4.9)
Commercial Real Estate
3,010,259

 
0.7

 
3,564,494

 
0.8

 
(554,235
)
 
(15.5)
Total Non-accrual Loans
$
5,342,361

 
1.2
%
 
$
7,048,495

 
1.5
%
 
$
(1,706,134
)
 
(24.2)%

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








16



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




8.    Loans Receivable, Net, Continued

The following tables show the activity in the allowance for loan losses by category for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31, 2019
 
Residential
Real Estate
 
 
Consumer
 
Commercial
Business
 
Commercial
Real Estate
 
 
Total
Beginning Balance
$
1,191,443

 
$
1,203,593

 
$
923,600

 
$
5,853,081

 
$
9,171,717

Provision for Loan Losses
(12,650
)
 
4,806

 
55,446

 
52,398

 
100,000

Charge-Offs
(34,599
)
 
(130,194
)
 
(1,132
)
 
(400,085
)
 
(566,010
)
Recoveries
3,476

 
43,000

 
14,068

 
32,304

 
92,848

Ending Balance
$
1,147,670

 
$
1,121,205

 
$
991,982

 
$
5,537,698

 
$
8,798,555

 
 
Three Months Ended March 31, 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
(15,445
)
 
(112,933
)
 
138,940

 
(10,562
)
 

Charge-Offs
(11,351
)
 
(17,252
)
 
(21,487
)
 

 
(50,090
)
Recoveries
207

 
27,520

 

 
4,761

 
32,488

Ending Balance
$
1,207,254

 
$
1,042,150

 
$
1,128,680

 
$
4,825,932

 
$
8,204,016

 

The following tables present information related to impaired loans evaluated individually and collectively for impairment in the allowance for loan losses at the dates indicated:
 
Allowance For Loan Losses
March 31, 2019
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
 
Total
Residential Real Estate
$

 
$
1,147,670

 
$
1,147,670

Consumer
72,314

 
1,048,891

 
1,121,205

Commercial Business

 
991,982

 
991,982

Commercial Real Estate
565,000

 
4,972,698

 
5,537,698

Total
$
637,314

 
$
8,161,241

 
$
8,798,555

 
Allowance For Loan Losses
December 31, 2018
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
 
Total
Residential Real Estate
$

 
$
1,191,443

 
$
1,191,443

Consumer
73,662

 
1,129,931

 
1,203,593

Commercial Business

 
923,600

 
923,600

Commercial Real Estate
665,000

 
5,188,081

 
5,853,081

Total
$
738,662

 
$
8,433,055

 
$
9,171,717




17



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




8.    Loans Receivable, Net, Continued

The following tables present information related to impaired loans evaluated individually and collectively for impairment in loans receivable at the dates indicated:
 
Loans Receivable
March 31, 2019
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
 
Total
Residential Real Estate
$
1,345,077

 
$
85,163,080

 
$
86,508,157

Consumer
210,749

 
56,001,841

 
56,212,590

Commercial Business
77,206

 
28,350,682

 
28,427,888

Commercial Real Estate
3,864,888

 
269,687,129

 
273,552,017

Total
$
5,497,920

 
$
439,202,732

 
$
444,700,652

 
Loans Receivable
December 31, 2018
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
 
Total
Residential Real Estate
$
1,700,861

 
$
82,264,555

 
$
83,965,416

Consumer
1,060,043

 
55,847,512

 
56,907,555

Commercial Business
77,206

 
28,009,480

 
28,086,686

Commercial Real Estate
6,526,015

 
269,434,423

 
275,960,438

Total
$
9,364,125

 
$
435,555,970

 
$
444,920,095


Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired management measures the impairment and records the loan at fair value. Fair value is estimated using one of the following methods: fair value of the collateral less estimated costs to sell, discounted cash flows, or market value of the loan based on similar debt. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, the Company reviews the most recent appraisal and, if it is over 24 months old, will request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, management may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. The average balance of impaired loans was $6.7 million for the three months ended March 31, 2019 compared to $8.9 million for the three months ended March 31, 2018.


18



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




8.    Loans Receivable, Net, Continued

The following tables present information related to impaired loans by loan category at March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018. There was no allowance recorded related to any impaired loans at March 31, 2019.
 
March 31, 2019
 
December 31, 2018
Impaired Loans
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
 
Recorded
Investment
Unpaid
Principal
Balance
 
Related
Allowance
With No Related Allowance Recorded:
 
 
 
 
 
 
Residential Real Estate
$
1,345,077

$
1,345,077

$

 
$
1,700,861

$
1,700,861

$

Consumer
138,435

146,735


 
986,380

994,680


Commercial Business
77,206

972,206


 
77,206

972,206


Commercial Real Estate
2,867,898

3,660,285


 
5,084,458

6,116,761


With an Allowance Recorded:
 
 
 
 
 
 
 
Consumer
72,314

72,314

72,314

 
73,662

73,662

73,662

Commercial Real Estate
996,990

1,396,990

565,000

 
1,441,558

1,441,558

665,000

Total
 
 
 
 
 
 
 
Residential Real Estate
1,345,077

1,345,077


 
1,700,861

1,700,861


Consumer
210,749

219,049

72,314

 
1,060,042

1,068,342

73,662

Commercial Business
77,206

972,206


 
77,206

972,206


Commercial Real Estate
3,864,888

5,057,275

565,000

 
6,526,016

7,558,319

665,000

Total
$
5,497,920

$
7,593,607

$
637,314

 
$
9,364,125

$
11,299,728

$
738,662

 
Three Months Ended March 31,
 
2019
 
2018
Impaired Loans
Average
Recorded
Investment
Interest
Income
Recognized
 
Average
Recorded
Investment
Interest
Income
Recognized
With No Related Allowance Recorded:
 
 
 
 
 
Residential Real Estate
$
1,361,079

$

 
$
1,757,575

$

Consumer
984,528


 
180,610


Commercial Business
77,206


 
96,401


Commercial Real Estate
2,884,732

14,247

 
6,625,186

37,207

With an Allowance Recorded:
 
 
 
 
 
Consumer
72,651


 


Commercial Real Estate
1,319,274


 
253,905

340

Total
 
 
 
 
 
Residential Real Estate
1,361,079


 
1,757,575


Consumer
1,057,179


 
180,610


Commercial Business
77,206


 
96,401


Commercial Real Estate
4,204,006

14,247

 
6,879,091

37,547

Total
$
6,699,470

$
14,247

 
$
8,913,677

$
37,547

 


19



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



8.    Loans Receivable, Net, Continued

In the course of resolving delinquent loans, the Company may choose to restructure the contractual terms of certain loans. A troubled debt restructuring ("TDR") is a restructuring in which the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that it would not otherwise consider (Financial Accounting Standards Board ("FASB") ASC Topic 310-40).  The concessions granted on TDRs generally include terms to reduce the interest rate, extend the term of the debt obligation, or modify the payment structure on the debt obligation. The Company grants such concessions to reassess the borrower’s financial status and develop a plan for repayment.  
At the date of modification, TDRs are initially classified as nonaccrual TDRs. TDR loans are returned to accruing status when there is economic substance to the restructuring, there is documented credit evaluation of the borrower's financial condition, the remaining balance is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated sustained repayment performance in accordance with the modified terms for a reasonable period of time (generally a minimum of six months).
 
TDRs included in impaired loans at March 31, 2019 and December 31, 2018 were $1.3 million and $1.4 million, respectively, and the Company had no commitments at these dates to lend additional funds on these loans. There were no new TDRs during the three months ended March 31, 2019 and 2018. At March 31, 2019, one TDR loan with a balance of $363,000 was in default. In comparison, at March 31, 2018, one TDR loan with a balance of $570,000 was in default. There were no TDRs, for which there was a payment default within the first 12 months of the modification during the three months ended March 31, 2019 and 2018. The Bank considers any loan 30 days or more past due to be in default.
The Company's policy with respect to accrual of interest on loans restructured as a TDR follows relevant supervisory guidance.  That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is probable. If a borrower was materially delinquent on payments prior to the restructuring but shows capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward.  Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status.
The Company closely monitors these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms.  If, after previously being classified as a TDR, a loan is restructured a second time, then that loan is automatically placed on nonaccrual status.  The Company's policy with respect to nonperforming loans requires the borrower to make a minimum of six