SFDL 10-Q
Security Federal Corp (SFDL)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark one)
FOR THE QUARTERLY PERIOD ENDED
OR
FOR THE TRANSITION PERIOD:
| FROM: | TO: |
COMMISSION FILE NUMBER:
SECURITY FEDERAL CORPORATION
(Exact name of registrant as specified in its charter)
| | | |||
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
(Address of principal executive office and Zip Code)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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.
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.)
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 filer | ☐ | Smaller reporting company | | |||
| | ☒ | 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
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 | November 13, 2023 | |
| PAGE NO. |
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| Item 1. |
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| Consolidated Balance Sheets at September 30, 2023 and December 31, 2022 |
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| Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2023 and 2022 |
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| Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 |
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| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 3. |
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| Item 4. |
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| PART II. |
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| Item 1. |
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| Item 1A. |
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| Item 2. |
Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities |
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| Item 3. |
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| Item 4. |
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| Item 5. |
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| Item 6. |
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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
| September 30, 2023 | December 31, 2022 | |||||||
| (Unaudited) | (Audited) | |||||||
| ASSETS: | ||||||||
| Cash and Cash Equivalents | $ | $ | ||||||
| Certificates of Deposit with Other Banks | ||||||||
| Investments: | ||||||||
| Available For Sale ("AFS") | ||||||||
| Held To Maturity ("HTM") Net of Allowance for Credit Losses of $ (Fair Value of $ and $ at September 30, 2023 and December 31, 2022, Respectively) | ||||||||
| Total Investments | ||||||||
| Loans Receivable, Net: | ||||||||
| Held For Sale | ||||||||
| Held For Investment (Net of Allowance for Credit Losses of $ and $ at September 30, 2023 and December 31, 2022, Respectively) | ||||||||
| Total Loans Receivable, Net | ||||||||
| Accrued Interest Receivable: | ||||||||
| Loans | ||||||||
| Investments | ||||||||
| Total Accrued Interest Receivable | ||||||||
| Operating Lease Right-of-Use ("ROU") Assets | ||||||||
| Land Held for Sale | ||||||||
| Premises and Equipment, Net | ||||||||
| Federal Home Loan Bank ("FHLB") Stock, at Cost | ||||||||
| Other Real Estate Owned ("OREO") | ||||||||
| Bank Owned Life Insurance ("BOLI") | ||||||||
| Goodwill | ||||||||
| Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES: | ||||||||
| Deposit Accounts | $ | $ | ||||||
| Borrowings from Federal Reserve Bank ("FRB") | ||||||||
| Other Borrowings | ||||||||
| Junior Subordinated Debentures | ||||||||
| Subordinated Debentures | ||||||||
| Operating Lease Liabilities | ||||||||
| Other Liabilities | ||||||||
| Total Liabilities | $ | $ | ||||||
| SHAREHOLDERS’ EQUITY: | ||||||||
| Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP, $ Par Value; Shares Authorized, Issued and Outstanding at September 30, 2023 and December 31, 2022 | $ | $ | ||||||
| Common Stock, $ Par Value; Shares Authorized; and Shares Issued and and Shares Outstanding at September 30, 2023 and December 31, 2022, Respectively | ||||||||
| Additional Paid-In Capital ("APIC") | ||||||||
| Treasury Stock, at Cost; and Shares Outstanding at September 30, 2023 and December 31, 2022, Respectively | ( | ) | ( | ) | ||||
| Accumulated Other Comprehensive Loss ("AOCI") | ( | ) | ( | ) | ||||
| Retained Earnings | ||||||||
| Total Shareholders' Equity | $ | $ | ||||||
| Total Liabilities and Shareholders' Equity | $ | $ | ||||||
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, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
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| Interest Income: |
||||||||||||||||
| Loans |
$ | $ | $ | $ | ||||||||||||
| Investments |
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| Other |
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| Total Interest Income |
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| Interest Expense: |
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| Deposits |
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| FHLB Advances and Other Borrowed Money |
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| Subordinated Debentures |
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| Junior Subordinated Debentures |
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| Total Interest Expense |
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| Net Interest Income |
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| Provision for Credit Losses |
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| Net Interest Income After Provision for Credit Losses |
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| Non-Interest Income: |
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| Gain on Sale of Loans |
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| Service Fees on Deposit Accounts |
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| Commissions From Insurance Agency |
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| Trust Income |
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| BOLI Income |
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| ATM and Check Card Fee Income |
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| Grant Income |
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| Other |
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| Total Non-Interest Income |
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| Non-Interest Expense: |
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| Compensation and Employee Benefits |
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| Occupancy |
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| Advertising |
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| Depreciation and Maintenance of Equipment |
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| FDIC Insurance Premiums |
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| Write-down of Land Held for Sale |
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| Consulting |
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| Debit Card Expenses |
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| Data Processing |
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| Other |
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| Total Non-Interest Expense |
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| Income Before Income Taxes |
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| Provision for Income Taxes |
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| Net Income |
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| Net Income Per Common Share (Basic) |
$ | $ | $ | $ | ||||||||||||
| Cash Dividend Per Share on Common Stock |
$ | $ | $ | $ | ||||||||||||
| Weighted Average Shares Outstanding (Basic) |
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
| Three Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net Income | $ | $ | ||||||
| Other Comprehensive Loss: | ||||||||
| Unrealized Holding Losses on Investments AFS, Net of Tax Benefit of $() and $() at September 30, 2023 and 2022, Respectively | ( | ) | ( | ) | ||||
| Amortization of Unrealized Losses on Investments AFS Transferred to Investments HTM, Net of Tax Expense of $ and $ at September 30, 2023 and 2022, Respectively | ||||||||
| Other Comprehensive Loss, Net of Tax | ( | ) | ( | ) | ||||
| Comprehensive Loss | $ | ( | ) | $ | ( | ) | ||
| Nine Months Ended September 30, | ||||||||
| 2023 | 2022 | |||||||
| Net Income | $ | $ | ||||||
| Other Comprehensive Loss: | ||||||||
| Unrealized Holding Losses on Investments AFS, Net of Tax Benefit of $() and $() at September 30, 2023 and 2022, Respectively | ( | ) | ( | ) | ||||
| Amortization of Unrealized Losses on Investments AFS Transferred to Investments HTM, Net of Tax Expense of $ and $ at September 30, 2023 and 2022, Respectively | ||||||||
| Other Comprehensive Loss, Net of Tax | ( | ) | ( | ) | ||||
| Comprehensive Income (Loss) | $ | $ | ( | ) | ||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
For the Three and Nine Months Ended September 30, 2023 and 2022
| Preferred Stock |
Common Stock |
APIC |
Treasury Stock |
AOCI (Loss) |
Retained Earnings |
Total |
||||||||||||||||||||||
| Balance at December 31, 2021 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||
| Net Income |
||||||||||||||||||||||||||||
| Other Comprehensive Loss, Net of Tax |
( |
) | ( |
) | ||||||||||||||||||||||||
| Cash Dividends on Common Stock |
( |
) | ( |
) | ||||||||||||||||||||||||
| Balance at March 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||||||||
| Net Income |
||||||||||||||||||||||||||||
| Other Comprehensive Loss, Net of Tax |
( |
) | ( |
) | ||||||||||||||||||||||||
| Preferred Stock issuance |
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| Cash Dividends on Common Stock |
( |
) | ( |
) | ||||||||||||||||||||||||
| Balance at June 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||||||||
| Net Income |
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| Other Comprehensive Loss, Net of Tax |
( |
) | ( |
) | ||||||||||||||||||||||||
| Cash Dividends on Common Stock |
( |
) | ( |
) | ||||||||||||||||||||||||
| Balance at September 30, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||||||||
| Preferred Stock |
Common Stock |
APIC |
Treasury Stock |
AOCI (Loss) |
Retained Earnings |
Total |
||||||||||||||||||||||
| Balance at December 31, 2022 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||||||||
| Adoption of ASU 2016-13 |
( |
) | ( |
) | ||||||||||||||||||||||||
| Net Income |
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| Other Comprehensive Income, Net of Tax |
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| Employee Stock Purchase Plan |
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| Cash Dividends on Common Stock |
( |
) | ( |
) | ||||||||||||||||||||||||
| Balance at March 31, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||||||||
| Net Income |
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| Other Comprehensive Loss, Net of Tax |
( |
) | ( |
) | ||||||||||||||||||||||||
| Employee Stock Purchase Plan |
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| Cash Dividends on Common Stock |
( |
) | ( |
) | ||||||||||||||||||||||||
| Balance at June 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||||||||
| Net Income |
||||||||||||||||||||||||||||
| Other Comprehensive Loss, Net of Tax |
( |
) | ( |
) | ||||||||||||||||||||||||
| Purchase of Treasury Stock |
( |
) | ( |
) | ||||||||||||||||||||||||
| Employee Stock Purchase Plan |
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| Cash Dividends on Common Stock |
( |
) | ( |
) | ||||||||||||||||||||||||
| Balance at September 30, 2023 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | $ | |||||||||||||||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
| Nine Months Ended |
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| September 30, |
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| 2023 |
2022 |
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| CASH FLOWS FROM OPERATING ACTIVITIES: |
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| Net Income |
$ | $ | |||||||
| Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: |
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| Depreciation Expense |
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| Discount Accretion and Premium Amortization, net |
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| Provision for Credit Losses |
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| Earnings on BOLI |
( |
) | ( |
) | |||||
| Gain on Sales of Loans |
( |
) | ( |
) | |||||
| Write-down of Land Held for Sale |
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| Loss on Sale of Land Held for Sale |
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| Write-down of OREO |
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| Gain on Sale of OREO |
( |
) | |||||||
| Amortization of Operating Lease ROU Assets |
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| Proceeds From Sale of Loans Held For Sale |
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| Origination of Loans Held For Sale |
( |
) | ( |
) | |||||
| Increase in Accrued Interest Receivable |
( |
) | ( |
) | |||||
| Change in Other Assets |
( |
) | |||||||
| Change in Lease Liabilities and Other Liabilities |
|||||||||
| Net Cash Provided By Operating Activities |
$ | $ | |||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
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| Purchase of Investments AFS |
$ | ( |
) | $ | ( |
) | |||
| Proceeds from Paydowns and Maturities of Investments AFS |
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| Purchase of Investments HTM |
( |
) | ( |
) | |||||
| Proceeds from Paydowns and Maturities of Investments HTM |
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| Purchase of FHLB Stock |
( |
) | ( |
) | |||||
| Redemption of FHLB Stock |
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| Increase in Loans Receivable |
( |
) | ( |
) | |||||
| Proceeds from Sale of Land Held for Sale |
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| Proceeds from Sale of OREO |
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| Purchase and Improvement of Premises and Equipment |
( |
) | ( |
) | |||||
| Net Cash Used By Investing Activities |
$ | ( |
) | $ | ( |
) | |||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
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| Increase in Deposit Accounts |
$ | $ | |||||||
| (Decrease) Increase in Other Borrowings, Net |
( |
) | |||||||
| Proceeds from FRB Borrowings |
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| Repayment of FRB Borrowings |
( |
) | ( |
) | |||||
| Purchase of Treasury Stock |
( |
) | |||||||
| Issuance of Preferred Stock |
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| Proceeds from Employee Stock Purchase Plan |
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| Repurchase of Subordinated Debenture |
( |
) | |||||||
| Dividends to Common Stock Shareholders |
( |
) | ( |
) | |||||
| Net Cash Provided By Financing Activities |
$ | $ | |||||||
| Net Increase (Decrease) in Cash and Cash Equivalents |
( |
) | |||||||
| Cash and Cash Equivalents at Beginning of Period |
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| Cash and Cash Equivalents at End of Period |
$ | $ | |||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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| Cash Paid for Interest |
$ | $ | |||||||
| Cash Paid for Taxes |
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| Non-Cash Transactions: |
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| Other Comprehensive Loss |
( |
) | ( |
) | |||||
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
NOTE 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”) 2022 Annual Report to Shareholders which was filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 10-K”) when reviewing interim financial statements. The unaudited consolidated results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023 or any other period. 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.
NOTE 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 Investments, Inc. ("SFINV") and Security Federal Insurance, Inc. (“SFINS”). SFINV was formed to hold investment securities and allow for better management of the securities portfolio. SFINS is an insurance agency offering auto, business, and home insurance. 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.
NOTE 3 - SUMMARY OF SIGNIFICANT 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, 2022 included in our 2022 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. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the following:
Accounting Standards Adopted in 2023
On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Accounting Standards Codification (“ASC”) 326. This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses.
In addition, CECL made changes to the accounting for AFS debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on AFS debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell.
The Company adopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption of CECL included an increase in the allowance for credit losses on loans of $
The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.
Allowance for Credit Losses – Held to Maturity Securities
Management measures expected credit losses on HTM debt securities on a collective basis by major security type. Accrued interest receivable on HTM debt securities totaled $
All mortgage-backed securities issued by government-sponsored corporations are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The state and local governments securities held by the Company are highly rated by major rating agencies.As a result,
Allowance for Credit Losses – Available for Sale Securities
For investments AFS, management evaluates all securities in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.
If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.
Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an AFS security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At September 30, 2023, there was
Accrued interest receivable on investments AFS totaled $
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to loans is reported in accrued interest receivable on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments.
The accrual of interest is generally discontinued when a loan becomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on contractual terms of the loan. A loan is considered past due when a scheduled payment has not been received 30 days after the contractual due date.
All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured.
Allowance for Credit Losses - Loans
The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses.
The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.
The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified the following portfolio segments:
Real Estate
| • | Construction - Construction loans consist of loans to construct a borrower’s primary or secondary residence or vacant land upon which the owner intends to construct a dwelling at a future date. These loans are typically secured by undeveloped or partially developed land in anticipation of completing construction of a 1-4 family residential property. There is risk these construction and development projects can experience delays and cost overruns exceeding the borrower’s financial ability to complete the project. Such cost overruns can result in foreclosure of partially completed and unmarketable collateral. In addition, construction loans consist of loans to finance land for development of commercial or residential real property and construction of multifamily apartments or other commercial properties. These loans are highly dependent on the supply and demand for commercial real estate as well as the demand for newly constructed residential homes and lots acquired for development. Deterioration in demand could result in decreased collateral values, which could make repayments of outstanding loans difficult for customers. |
| • | Residential Mortgage - Residential mortgages consist of loans to purchase or refinance the borrower’s primary dwelling, second residence or vacation home and are often secured by 1-4 family residential property. Significant and rapid declines in real estate values can result in borrowers having debt levels in excess of the current market value of the collateral. |
| • | Commercial - Owner occupied commercial mortgages consist of loans to purchase or re-finance owner occupied nonresidential properties. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Commercial mortgages secured by owner occupied properties are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination. While these loans are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation. Non-owner occupied commercial mortgages consist of loans to purchase or refinance investment nonresidential properties. Typically, non-owner occupied commercial real estate loans are secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate. The primary risk associated with non-owner occupied commercial mortgage loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. While these loans are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation. |
Commercial and Agricultural - Commercial business loans consist of loans or lines of credit to finance accounts receivable, inventory or other general business needs, business credit cards, and lease financing agreements for equipment, vehicles, or other assets. The primary risk associated with commercial and industrial and lease financing loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be unable to service the debt consistent with the contractual terms of the loan or lease.
Consumer loans
| • | Home equity - Home equity loans consist of home equity lines of credit and other lines of credit secured by first or second liens on the borrower’s primary residence. These loans are secured by both senior and junior liens on the residential real estate and are particularly susceptible to declining collateral values. |
| • | Other - Consumer loans consist of loans to finance unsecured home improvements, student loans, automobiles and revolving lines of credit that can be secured or unsecured. The value of the underlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the collateral. |
The Company calculates the allowance for credit losses on loans for each pool of loans using a remaining life loss methodology with a two quarter reasonable and supportable forecast period and an immediate reversion period. Management believes that the Company’s historical loss experience provides the best basis for its assessment of expected credit losses on loans to determine the allowance for credit losses. The Company uses its own internal data to measure historical credit loss experience within the loan pools with similar risk characteristics over an economic cycle. The Company then forecasts the calculated historical loss rates over the calculated remaining life of loans by pool.
Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and include adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in underlying collateral, external factors and economic conditions not already captured.
Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting date adjusted for selling costs as appropriate.
Allowance for Credit Losses – Unfunded Commitments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company records an allowance for credit losses - unfunded commitments unless the commitments to extend credit are unconditionally cancellable, through a charge to provision for unfunded commitments, which is included in the provision for credit losses in the Company’s consolidated income statements. The allowance for credit losses - unfunded commitments is estimated by loan segment at each balance sheet date under CECL using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for credit losses - unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.
In January 2023, the Company adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, for public business entities, the guidance requires disclosure of current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. The Company adopted the guidance using the modified retrospective method. Upon adoption of this guidance, the Company no longer establishes a specific reserve for modifications to borrowers experiencing financial difficulty. Instead, these modifications are included in their respective cohort and a historical loss rate is applied to the current loan balance to arrive at the quantitative baseline portion of the allowance. The difference between the allowance previously determined and the current allowance was not material to the Company’s financial statements.
Recent Accounting Pronouncements
The following is a summary of recent authoritative pronouncements that could affect accounting, reporting, and disclosure of financial information by the Company:
In December 2022, the Financial Accounting Standards Board (“FASB”) issued amendments to extend the period of time preparers can use the reference rate reform relief guidance under ASC Topic 848 from December 31, 2022, to December 31, 2024, to address the fact that all London Interbank Offered Rate ("LIBOR") tenors were not discontinued as of December 31, 2021, and some tenors would not be published until June 2023. The amendments are effective immediately for all entities and are applied prospectively. These amendments did not have a material effect on the Company's consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting authorities are not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
NOTE 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 computed similar to 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
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| Income | Shares | EPS | Income | Shares | EPS | |||||||||||||||||||
| Basic EPS | $ | $ | $ | $ | ||||||||||||||||||||
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| Income | Shares | EPS | Income | Shares | EPS | |||||||||||||||||||
| Basic EPS | $ | $ | $ | $ | ||||||||||||||||||||
NOTE 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 September 30, 2023 and 2022, the Company had
NOTE 6 - INVESTMENTS, AVAILABLE FOR SALE ("AFS")
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investments AFS at the dates indicated were as follows:
| September 30, 2023 | ||||||||||||||||
| Amortized | Gross Unrealized | Gross Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Student Loan Pools | $ | $ | $ | ( | ) | $ | ||||||||||
| Small Business Administration (“SBA”) Bonds | ( | ) | ||||||||||||||
| Tax Exempt Municipal Bonds | ( | ) | ||||||||||||||
| Taxable Municipal Bonds | ( | ) | ||||||||||||||
| Mortgage-Backed Securities ("MBS") | ( | ) | ||||||||||||||
| Total Investments AFS | $ | $ | $ | ( | ) | $ | ||||||||||
| December 31, 2022 | ||||||||||||||||
| Amortized | Gross Unrealized | Gross Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Student Loan Pools | $ | $ | $ | ( | ) | $ | ||||||||||
| SBA Bonds | ( | ) | ||||||||||||||
| Tax Exempt Municipal Bonds | ( | ) | ||||||||||||||
| Taxable Municipal Bonds | ( | ) | ||||||||||||||
| MBS | ( | ) | ||||||||||||||
| Total Investments AFS | $ | $ | $ | ( | ) | $ | ||||||||||
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. The majority of the MBS included in the tables above and below are issued or guaranteed by an agency of the United States government such as Ginnie Mae, or by Government Sponsored Entities ("GSEs"), including Fannie Mae and Freddie Mac. Ginnie Mae MBS are backed by the full faith and credit of the United States government, while those issued by GSEs are not. Also included in MBS in the tables above and below are private label 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, 2023, the Company held an amortized cost and fair value of $
The amortized cost and fair value of investments AFS at September 30, 2023, 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 MBS 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, 2023 | ||||||||
| Investments AFS: | Amortized Cost | Fair Value | ||||||
| One Year or Less | $ | $ | ||||||
| After One – Five Years | ||||||||
| After Five – Ten Years | ||||||||
| More Than Ten Years | ||||||||
| MBS AFS | ||||||||
| Total AFS | $ | $ | ||||||
At September 30, 2023, the amortized cost and fair value of investments AFS pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were $
There were
The following table shows the gross unrealized losses and estimated fair value of investments AFS for which an allowance for credit losses has not been recorded aggregated by category and length of time that securities have been in a continuous unrealized loss position at September 30, 2023.
| September 30, 2023 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| Student Loan Pools | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| SBA Bonds | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Tax Exempt Municipal Bonds | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Taxable Municipal Bonds | ( | ) | ( | ) | ||||||||||||||||||||
| MBS | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||
The following table shows the gross unrealized losses and estimated fair value of investments AFS aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2022.
| December 31, 2022 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| Student Loan Pools | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
| SBA Bonds | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Tax Exempt Municipal Bonds | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Taxable Municipal Bonds | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| MBS | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||
Investments classified as AFS are recorded at fair market value. At September 30, 2023 and December 31, 2022,
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, unrealized losses have not been recognized into income. The Company reviews its investment securities portfolio at least quarterly and more frequently when economic conditions warrant, assessing whether an allowance for credit loss is deemed necessary.
Accrued interest receivable on investments AFS totaled $
NOTE 7 - INVESTMENTS, HELD TO MATURITY ("HTM")
The Company’s investments HTM portfolio is recorded at amortized cost. The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investments HTM at the date indicated were as follows:
| September 30, 2023 | ||||||||||||||||
| Amortized | Gross Unrealized | Gross Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| US Treasury Bonds | $ | $ | $ | ( | ) | $ | ||||||||||
| FHLB Bond | ( | ) | ||||||||||||||
| Student Loan Pools | ||||||||||||||||
| SBA Bonds | ||||||||||||||||
| Taxable Municipal Bonds | ( | ) | ||||||||||||||
| MBS | ( | ) | ||||||||||||||
| Total Investments HTM | $ | $ | $ | ( | ) | $ | ||||||||||
| December 31, 2022 | ||||||||||||||||
| Amortized | Gross Unrealized | Gross Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| US Treasury Bonds | $ | $ | $ | ( | ) | $ | ||||||||||
| FHLB Bond | ( | ) | ||||||||||||||
| Student Loan Pools | ( | ) | ||||||||||||||
| SBA Bonds | ||||||||||||||||
| Taxable Municipal Bonds | ( | ) | ||||||||||||||
| MBS | ( | ) | ||||||||||||||
| Total Investments HTM | $ | $ | $ | ( | ) | $ | ||||||||||
At September 30, 2023 and December 31, 2022,
The estimate of expected credit losses on investments HTM is primarily based on the ratings assigned to the securities by debt rating agencies and the average of the annual historical loss rates associated with those ratings. The Company then multiplies those loss rates, as adjusted for any modifications to reflect current conditions and reasonable and supportable forecasts as considered necessary, by the remaining lives of each individual security to arrive at a lifetime expected loss amount. Additionally, private label CMO securities which are not explicitly or implicitly guaranteed by the U.S. government are evaluated utilizing underlying pool data such as historical loss rates, loan-to-value ratios and credit enhancement data.
All mortgage-backed securities issued by government-sponsored corporations are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The state and local governments securities held by the Company are highly rated by major rating agencies.
As a result of the analysis, there was
As of September 30, 2023, there were
Accrued interest receivable on HTM debt securities totaled $
The following tables show gross unrealized losses, fair value, and length of time that individual investments HTM have been in a continuous unrealized loss position at the dates indicated.
| September 30, 2023 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| US Treasury Bonds | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||
| FHLB Bond | ( | ) | ( | ) | ||||||||||||||||||||
| Taxable Municipal Bonds | ( | ) | ( | ) | ||||||||||||||||||||
| MBS | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||
| Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
| Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||||
| US Treasury Bonds | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | ||||||||||||||
| FHLB Bond | ( | ) | ( | ) | ||||||||||||||||||||
| Student Loan Pools | ( | ) | ( | ) | ||||||||||||||||||||
| Taxable Municipal Bonds | ( | ) | ( | ) | ||||||||||||||||||||
| MBS | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||
At September 30, 2023, the amortized cost and fair value of investments HTM that were pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were $
NOTE 8 - LOANS RECEIVABLE, NET
Loans receivable, net, consisted of the following as of the dates indicated below:
| September 30, 2023 | December 31, 2022 | |||||||
| Real Estate Loans: | ||||||||
| Construction | $ | $ | ||||||
| Residential Mortgage | ||||||||
| Commercial | ||||||||
| Commercial and Agricultural Loans | ||||||||
| Consumer Loans: | ||||||||
| Home Equity Lines of Credit (HELOC) | ||||||||
| Other Consumer | ||||||||
| Total Loans Held for Investment, Gross | ||||||||
| Less: | ||||||||
| Allowance for Credit Losses | ||||||||
| Deferred Loan Fees | ||||||||
| Total Loans Receivable, Net | $ | $ | ||||||
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 credit 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 credit losses. Loans that are graded as substandard are considered to have the most risk. These loans typically have an identified weakness or weaknesses and are inadequately protected by the net worth of the borrower or collateral value. All loans 90 days or more past due are automatically classified in this category. The caution and special mention categories fall in between the pass and substandard grades and consist of loans that do not currently expose the Company to sufficient risk to warrant adverse classification but possess weaknesses.
The following table presents the Company's recorded investment in loans by credit quality indicators by year of origination as of September 30, 2023.
| Term Loans by Year of Origination | ||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving | Total | |||||||||||||||||||||||||
| Real Estate - Construction | ||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Caution | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Current period gross write-offs | ||||||||||||||||||||||||||||||||
| Real Estate - Mortgage | ||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||
| Caution | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Current period gross write-offs | ||||||||||||||||||||||||||||||||
| Real Estate - Commercial | ||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||
| Caution | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Current period gross write-offs | ||||||||||||||||||||||||||||||||
| Commercial and Agricultural | ||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||
| Caution | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Current period gross write-offs | ||||||||||||||||||||||||||||||||
| Home Equity Lines of Credit | ||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||
| Caution | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Current period gross write-offs | ||||||||||||||||||||||||||||||||
| Other Consumer | ||||||||||||||||||||||||||||||||
| Pass | ||||||||||||||||||||||||||||||||
| Caution | ||||||||||||||||||||||||||||||||
| Special Mention | ||||||||||||||||||||||||||||||||
| Substandard | ||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||
| Current period gross write-offs | ||||||||||||||||||||||||||||||||
| Total Loans | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The table below summarizes the balance within each risk category by loan type, excluding loans held for sale, at December 31, 2022.
| December 31, 2022 | Pass | Caution | Special Mention | Substandard | Total Loans | |||||||||||||||
| Construction Real Estate | $ | $ | $ | $ | $ | |||||||||||||||
| Residential Real Estate | ||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||
| Commercial and Agricultural | ||||||||||||||||||||
| Consumer HELOC | ||||||||||||||||||||
| Other Consumer | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
Past Due and Nonaccrual Loans
The tables below present an age analysis of past due balances by loan category at the dates indicated.
| September 30, 2023 | ||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | 90 Days or | Total Past | Total Loans | ||||||||||||||||||||
| Past Due | Past Due | More Past Due | Due | Current | Receivable | |||||||||||||||||||
| Construction Real Estate | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Residential Real Estate | ||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Commercial and Agricultural | ||||||||||||||||||||||||
| Consumer HELOC | ||||||||||||||||||||||||
| Other Consumer | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||
| 30-59 Days | 60-89 Days | 90 Days or | Total Past | Total Loans | ||||||||||||||||||||
| Past Due | Past Due | More Past Due | Due | Current | Receivable | |||||||||||||||||||
| Construction Real Estate | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Residential Real Estate | ||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Commercial and Agricultural | ||||||||||||||||||||||||
| Consumer HELOC | ||||||||||||||||||||||||
| Other Consumer | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
At September 30, 2023 and December 31, 2022, the Company did 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 nonaccrual loans by category at the dates indicated.
| CECL | Incurred Loss | |||||||||||||||
| September 30, 2023 | December 31, 2022 | |||||||||||||||
| Nonaccrual Loans | Nonaccrual Loans | Total | ||||||||||||||
| with No Allowance | with an Allowance | Nonaccrual Loans | Nonaccrual Loans | |||||||||||||
| Construction Real Estate | $ | $ | $ | $ | ||||||||||||
| Residential Real Estate | ||||||||||||||||
| Commercial Real Estate | ||||||||||||||||
| Commercial and Agricultural | ||||||||||||||||
| Consumer HELOC | ||||||||||||||||
| Other Consumer | ||||||||||||||||
| Total Nonaccrual Loans | $ | $ | $ | $ | ||||||||||||
The Company did recognize any interest income on nonaccrual loans during the nine months ended September 30, 2023.
The following table represents the accrued interest receivables written off by reversing interest income during the three and nine months ended September 30, 2023:
| For the Three Months Ended | ||||
| September 30, 2023 | ||||
| Construction Real Estate | $ | |||
| Residential Real Estate | ||||
| Commercial Real Estate | ||||
| Commercial and Agricultural | ||||
| Consumer HELOC | ||||
| Other Consumer | ||||
| Total Loans | $ | |||
| For the Nine Months Ended | ||||
| September 30, 2023 | ||||
| Construction Real Estate | $ | |||
| Residential Real Estate | ||||
| Commercial Real Estate | ||||
| Commercial and Agricultural | ||||
| Consumer HELOC | ||||
| Other Consumer | ||||
| Total Loans | $ | |||
Allowance for Credit Losses
The following table shows the activity in the allowance for credit losses on loans by category for the three and nine months ended September 30, 2023 under the CECL methodology:
| Three Months Ended September 30, 2023 | ||||||||||||||||||||||||||||
| Real Estate | Consumer | |||||||||||||||||||||||||||
| Commercial and | ||||||||||||||||||||||||||||
| Construction | Residential | Commercial | Agricultural | HELOC | Other | Total | ||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| (Reversal of) Provision for Credit Losses | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Charge-Offs | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||||||
| Real Estate | Consumer | |||||||||||||||||||||||||||
| Commercial and | ||||||||||||||||||||||||||||
| Construction | Residential | Commercial | Agricultural | HELOC | Other | Total | ||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Adjustment to Allowance for Credit Loss on adoption of ASU 2016-13 | ( | ) | ||||||||||||||||||||||||||
| (Reversal of) Provision for Credit Losses | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Charge-Offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
The Company has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans:
| • | Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate. |
| • | Construction real estate loans are typically secured by commercial and residential lots. | |
| • | Commercial and agricultural business loans are primarily secured by business equipment, furniture and fixtures, inventory and receivables. | |
| • | Residential real estate loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage. |
| • | Home equity lines of credit are generally secured by second mortgages on residential real estate property. |
| • | Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral. |
The following table summarizes the amortized cost of collateral dependent loans:
| September 30, 2023 | ||||
| Construction Real Estate | $ | |||
| Residential Real Estate | ||||
| Commercial Real Estate | ||||
| Commercial and Agricultural | ||||
| Consumer HELOC | ||||
| Total Loans | $ | |||
Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the Incurred Loss methodology. The following table shows the activity in the allowance for loan losses by category for the three and nine months ended September 30, 2022:
| Three Months Ended September 30, 2022 | ||||||||||||||||||||||||||||
| Real Estate | Consumer | |||||||||||||||||||||||||||
| Commercial and | ||||||||||||||||||||||||||||
| Construction | Residential | Commercial | Agricultural | HELOC | Other | Total | ||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| (Reversal of) Provision for Loan Losses | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Charge-Offs | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||||||
| Real Estate | Consumer | |||||||||||||||||||||||||||
| Commercial and | ||||||||||||||||||||||||||||
| Construction | Residential | Commercial | Agricultural | HELOC | Other | Total | ||||||||||||||||||||||
| Beginning Balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| (Reversal of) Provision for Loan Losses | ( | ) | ( | ) | ||||||||||||||||||||||||
| Charge-Offs | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||
| Ending Balance | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Prior to the adoption of ASU 2016-13, loans were considered impaired when, based on current information and events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans include loans on nonaccrual status and accruing troubled debt restructurings. When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of global cash flow sufficient to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value. Non-accrual commercial loans under $
Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which case interest was recognized on a cash basis.
The table below summarizes the impaired loan balances evaluated individually and collectively for impairment within the allowance for loan losses and loans receivable balances at December 31, 2022:
| Allowance For Loan Losses | Loans Receivable | |||||||||||||||||||||||
| December 31, 2022 | Individually Evaluated For Impairment | Collectively Evaluated For Impairment | Total | Individually Evaluated For Impairment | Collectively Evaluated For Impairment | Total | ||||||||||||||||||
| Construction Real Estate | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Residential Real Estate | ||||||||||||||||||||||||
| Commercial Real Estate | ||||||||||||||||||||||||
| Commercial and Agricultural | ||||||||||||||||||||||||
| Consumer HELOC | ||||||||||||||||||||||||
| Other Consumer | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| December 31, 2022 | ||||||||||||
| Recorded | Unpaid Principal | Related | ||||||||||
| Impaired Loans | Investment | Balance | Allowance | |||||||||
| Construction Real Estate | $ | $ | $ | |||||||||
| Residential Real Estate | ||||||||||||
| Commercial Real Estate | ||||||||||||
| Commercial and Agricultural | ||||||||||||
| Consumer HELOC | ||||||||||||
| Other Consumer | ||||||||||||
| Total | $ | $ | $ | |||||||||
| Three Months Ended September 30, | ||||||||
| 2022 | ||||||||
| Average Recorded | Interest Income | |||||||
| Impaired Loans | Investment | Recognized | ||||||
| Construction Real Estate | $ | $ | ||||||
| Residential Real Estate | ||||||||
| Commercial Real Estate | ||||||||
| Commercial and Agricultural | ||||||||
| Consumer HELOC | ||||||||
| Other Consumer | ||||||||
| Total | $ | $ | ||||||
| Nine Months Ended September 30, | ||||||||
| 2022 | ||||||||
| Average Recorded | Interest Income | |||||||
| Impaired Loans | Investment | Recognized | ||||||
| Construction Real Estate | $ | $ | ||||||
| Residential Real Estate | ||||||||
| Commercial Real Estate | ||||||||
| Commercial and Agricultural | ||||||||
| Consumer HELOC | ||||||||
| Other Consumer | ||||||||
| Total | $ | $ | ||||||
Modifications to Borrowers Experiencing Financial Difficulty
The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.
Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.
In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. As such multiple types of modifications may have been made on the same loan within the current reporting period each much be reported. The combination is at least two of the following: a term extension, principal forgiveness, and interest rate reduction.
Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.
The Company had
As of September 30, 2023 and 2022, there were
Allowance for Credit Losses - Unfunded Commitments
The Company maintains an allowance for credit losses - unfunded commitments for credit exposures such as unfunded balances for existing lines of credit and commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e., commitment cannot be canceled at any time). The allowance for credit losses - unfunded commitments is adjusted through the provision for (reversal of) credit losses. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans, and are discussed in this Note 8. The allowance for credit losses - unfunded commitments of $
The following tables present the balance and activity in the allowance for credit losses - unfunded loan commitments for the three and nine months ended September 30, 2023.
| Three Months Ended September 30, 2023 | ||||
| Allowance for Credit Losses - Unfunded Commitments | ||||
| Beginning Balance | $ | |||
| Reversal of provision for unfunded commitments | ( | ) | ||
| Ending Balance | $ | |||
| Nine Months Ended September 30, 2023 | ||||
| Allowance for Credit Losses - Unfunded Commitments | ||||
| Beginning Balance | $ | |||
| Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13 | ||||
| Reversal of provision for unfunded commitments | ( | ) | ||
| Ending Balance | $ | |||
NOTE 9 - DEPOSITS
Deposits outstanding at the dates indicated are summarized below by account type as follows:
| Deposit Account Type | September 30, 2023 | December 31, 2022 | ||||||
| Checking | $ | $ | ||||||
| Money Market | ||||||||
| Savings | ||||||||
| Certificates of Deposit | ||||||||
| Total | $ | $ | ||||||
The Company had $
Certificates of deposits that met or exceeded the FDIC insurance limit of $250,000 were $
The amounts and scheduled maturities of certificates of deposit at the dates indicated were as follows:
| September 30, 2023 | December 31, 2022 | |||||||
| Within 1 Year | $ | $ | ||||||
| After 1 Year, Within 2 Years | ||||||||
| After 2 Years, Within 3 Years | ||||||||
| After 3 Years, Within 4 Years | ||||||||
| After 4 Years, Within 5 Years | ||||||||
| Total Certificates of Deposit | $ | $ | ||||||
NOTE 10 - BORROWINGS
The Company had $
During the third quarter of 2023, the Company entered the FRB’s Borrower-In-Custody (BIC) program, which allows for the pledging of various loan types to secure FRB borrowings. As of September 30, 2023, the Company had pledged loan collateral for FRB borrowings with an amortized cost and collateral value of $
The Company had $
There were
NOTE 11 - SUBORDINATED DEBENTURES
Junior Subordinated Debentures
In September 2006, Security Federal Statutory Trust (the "Trust"), issued and sold fixed and floating rate capital securities of the Trust (the “Capital Securities”). The Trust used the net proceeds from the sale of the Capital Securities to purchase a like amount of junior subordinated debentures (the “Debentures”) of the Company which are reported on the Consolidated Balance Sheets as junior subordinated debentures. The Capital Securities accrue and pay distributions at a floating rate of three month LIBOR plus
The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears. The Capital Securities mature or are mandatorily redeemable upon maturity on December 15, 2036, or upon earlier optional redemption as provided in the indenture. The Company has had the right to redeem the Capital Securities in whole or in part since September 15, 2011.
Subordinated Debentures
In November 2019, the Company sold and issued to certain institutional investors $
The 10-Year Notes have a stated maturity of November 22, 2029, and bear interest at a fixed rate of
The 15-Year Notes have a stated maturity of November 22, 2034, and bear interest at a fixed rate of
As a result of the discontinuation of LIBOR effective June 30, 2023, the Company is currently determining an appropriate benchmark replacement for LIBOR on the Notes. The Company expects the replacement benchmark to be materially consistent with the three-month LIBOR.
The Notes are payable semi-annually in arrears on June 1 and December 1 of each year commencing June 1, 2020.
The Notes are not subject to redemption at the option of the holder and may be redeemed by the Company only under certain limited circumstances prior to November 22, 2024, with respect to the 10-Year Notes, and November 22, 2029, with respect to the 15-Year Notes. The Company may redeem the 10-Year Notes and the 15-Year Notes at its option, in whole at any time, or in part from time to time, after November 22, 2024 and November 22, 2029, respectively. The Notes are unsecured, subordinated obligations of the Company and rank junior in right to payment to the Company’s current and future senior indebtedness, and each Note is equal in right to payment with respect to the other Notes.
The Notes have been structured to qualify as Tier 2 capital for the Company under applicable regulatory guidelines. The Company used the net proceeds from the sale of the Notes to fund the redemption of the convertible senior debentures and for general corporate purposes to support future growth.
During the year ended December 31, 2022 the Company repurchased $
NOTE 12 - REGULATORY MATTERS
The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Under the FDIC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.
The Company is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company's subsidiary banks to be well-capitalized under the prompt corrective action regulations.
Based on its capital levels at September 30, 2023, the Bank exceeded all regulatory capital requirements as of that date. Consistent with the Bank's goals to operate a sound and profitable organization, it is the Bank's policy to maintain a "well-capitalized" status under the regulatory capital categories of the FDIC. Based on capital levels at September 30, 2023, the Bank was considered "well-capitalized" under applicable regulatory requirements. Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's "well-capitalized" status.
The tables below provide the Bank’s regulatory capital requirements and actual results at the dates indicated.
| Actual | For Capital Adequacy | To Be "Well-Capitalized" | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
| September 30, 2023 | (Dollars in Thousands) | |||||||||||||||||||||||
| Tier 1 Risk-Based Core Capital (To Risk Weighted Assets) | $ | % | $ | % | $ | % | ||||||||||||||||||
| Total Risk-Based Capital (To Risk Weighted Assets) | % | % | % | |||||||||||||||||||||
| Common Equity Tier 1 Capital (To Risk Weighted Assets) | % | % | % | |||||||||||||||||||||
| Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets) | % | % | % | |||||||||||||||||||||
| December 31, 2022 | ||||||||||||||||||||||||
| Tier 1 Risk-Based Core Capital (To Risk Weighted Assets) | $ | % | $ | % | $ | % | ||||||||||||||||||
| Total Risk-Based Capital (To Risk Weighted Assets) | % | % | % | |||||||||||||||||||||
| Common Equity Tier 1 Capital (To Risk Weighted Assets) | % | % | % | |||||||||||||||||||||
| Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets) | % | % | % | |||||||||||||||||||||
In addition to the minimum capital requirements, the Bank must maintain a capital conservation buffer, which consists of additional Common Equity Tier 1 capital greater than 2.5% of risk weighted assets above the required minimum levels to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. At September 30, 2023, the Bank’s conservation buffer was
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
GAAP requires the Company to disclose fair value of financial instruments measured at amortized cost on the balance sheet and to measure that fair value using an exit price notion, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. Accounting guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). The following three levels of inputs may be used to measure fair value:
| Level 1 - | Quoted Market Price in Active Markets Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries and money market funds. |
| Level 2 - | Significant Other Observable Inputs Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bonds, corporate debt securities and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts. |
| Level 3 - | Significant Unobservable Inputs Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. |
The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.
Investment Securities AFS
Investments AFS are recorded at fair value on a recurring basis. At September 30, 2023, the Company’s investment portfolio was comprised of student loan pools, government and agency bonds, MBS issued by government agencies or GSEs, private label CMO securities and municipal securities. Fair value measurement is based upon prices obtained from third party pricing services that use independent pricing models which rely on a variety of factors including reported trades, broker/dealer quotes, benchmark yields, economic and industry events and other relevant market information. As a result, these securities are classified as Level 2.
Mortgage Loans Held for Sale
The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with the FHLMC or other investors are carried in the Company’s loans held for sale portfolio. These loans are fixed rate residential loans that have been originated in the Company’s name and have closed. Virtually all these loans have commitments to be purchased by investors and the majority of these loans were locked in by price with the investors on the same day or shortly thereafter that the loan was locked in with the Company’s customers. Therefore, these loans present very little market risk for the Company. The Company usually delivers a commitment to, and receives funding from, the investor within 30 days. Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts" basis. The Company is not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. As a result of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is the same as the value of the loan amount at its origination. These loans are classified as Level 2.
Land Held for Sale
Land held for sale is reported at the lower of the carrying amount or fair value less costs to sell. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral less estimated selling costs. The Company records land held for sale as nonrecurring level 3.
Collateral Dependent Loans
The Company does not record loans held for investment at fair value on a recurring basis. However, from time to time, the Company designates individually evaluated loans with higher risk as collateral dependent loans and an allowance for credit losses is established as necessary. Collateral dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for estimated costs to sell, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.
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. Specifically, as an example, in situations where the collateral on a nonperforming commercial real estate loan is out of the Company’s primary market area, management would typically order an independent appraisal immediately, at the earlier of the date the loan becomes nonperforming or immediately following the determination that the loan is collateral dependent. However, as a second example, on a nonperforming commercial real estate loan where management is familiar with the property and surrounding areas and where the original appraisal value far exceeds the recorded investment in the loan, management may perform an internal analysis whereby the previous appraisal value would be reviewed and adjusted for current conditions including recent sales of similar properties in the area and any other relevant economic trends. These valuations are reviewed at a minimum on a quarterly basis.
Those collateral dependent loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2023, all collateral dependent loans were evaluated based on the fair value of the collateral. Loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The Company records collateral dependent loans as nonrecurring Level 3.
Other Real Estate Owned
Fair value adjustments to OREO are recorded at the lower of the carrying amount of the loan or the fair value of the collateral less selling costs. Any write-downs based on the asset’s fair value at the date of acquisition are charged to the allowance for credit losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of its new cost basis or fair value, net of estimated costs to sell. Foreclosed assets are recorded as nonrecurring Level 3.
Assets measured at fair value on a recurring basis were as follows at the dates indicated:
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| Student Loan Pools | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| SBA Bonds | ||||||||||||||||||||||||
| Tax Exempt Municipal Bonds | ||||||||||||||||||||||||
| Taxable Municipal Bonds | ||||||||||||||||||||||||
| MBS | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. The tables below present assets measured at fair value on a nonrecurring basis at the dates indicated, aggregated by the level in the fair value hierarchy within which those measurements fall.
| September 30, 2023 | ||||||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Mortgage Loans Held For Sale | $ | $ | $ | $ | ||||||||||||
| Collateral Dependent Loans | ||||||||||||||||
| Land Held for Sale | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| Assets: | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Mortgage Loans Held For Sale | $ | $ | $ | $ | ||||||||||||
| Collateral Dependent Loans | ||||||||||||||||
| OREO | ||||||||||||||||
| Land Held for Sale | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
There were no liabilities measured at fair value on a nonrecurring basis at September 30, 2023 or December 31, 2022.
For Level 3 assets measured at fair value on a recurring or non-recurring basis at the dates indicated, the significant unobservable inputs used in the fair value measurements were as follows:
| Range of Inputs | |||||||
| Level 3 Assets | Valuation Technique | Significant Unobservable Inputs | September 30, 2023 | December 31, 2022 | |||
| Land Held for Sale | Appraised Value/Comparable Sales | Discounts to appraised values for estimated holding or selling costs | |||||
| Collateral Dependent Loans | Appraised Value | Discounts to appraised values for estimated holding and/or selling costs or age of appraisal | | - | | | |
| OREO | Appraised Value/Comparable Sales | Discounts to appraised values for estimated holding or selling costs | - | ||||
For assets and liabilities not presented on the balance sheet at fair value, the following methods are used to determine fair value:
Cash and Cash Equivalents—The carrying amount of these financial instruments approximates fair value. All mature within 90 days and do not present unanticipated credit concerns.
Certificates of Deposit with Other Banks—Fair value is based on market prices for similar assets.
Investments HTM—Investments HTM are valued at quoted market prices or dealer quotes.
Loans Receivable, Net—The fair value of loans is estimated using an exit price notion. The exit price notion uses a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument and incorporates other factors such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. The credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the following categories: construction, residential mortgage, commercial real estate, other commercial, HELOCs and other consumer loans. The results are then adjusted to account for credit risk as described above. A further credit risk discount must be applied using a discounted cash flow model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates that better capture inherent credit risk over the lifetime of a loan. This consideration of enhanced credit risk provides an estimated exit price for the Company’s loan portfolio. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values approximate carrying values.
FHLB Stock—The fair value approximates the carrying value.
Deposits—The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.
FHLB Advances and Borrowings from the FRB—Fair value is estimated using discounted cash flows with current market rates for borrowings with similar terms. The Company had no outstanding FHLB advances as of September 30, 2023 or December 31, 2022.
Other Borrowed Money—The carrying value of these short term borrowings approximates fair value.
Subordinated Debentures—The fair value is estimated by discounting the future cash flows using the current rates at which similar debenture offerings with similar terms and maturities would be issued by similar institutions. As discount rates are based on current debenture rates as well as management estimates, the fair values presented may not be indicative of the value negotiated in an actual sale.
Junior Subordinated Debentures—The carrying value of junior subordinated debentures approximates fair value.
The following tables provide a summary of the carrying value and estimated fair value of the Company’s financial instruments at the dates indicated presented in accordance with the applicable accounting guidance.
| September 30, 2023 | Carrying | Fair Value | ||||||||||||||
| Amount | Level 1 | Level 2 | Level 3 | |||||||||||||
| Financial Assets: | Dollars in thousands | |||||||||||||||
| Cash and Cash Equivalents | $ | $ | $ | $ | ||||||||||||
| Certificates of Deposits with Other Banks | ||||||||||||||||
| Investments AFS | ||||||||||||||||
| Investments HTM | ||||||||||||||||
| Loans Receivable, Net | ||||||||||||||||
| FHLB Stock | ||||||||||||||||
| Land Held for Sale | ||||||||||||||||
| Financial Liabilities: | ||||||||||||||||
| Deposits: | ||||||||||||||||
| Checking, Savings & Money Market Accounts | $ | $ | $ | $ | ||||||||||||
| Certificates of Deposits | ||||||||||||||||
| Borrowings from FRB | ||||||||||||||||
| Other Borrowed Money | ||||||||||||||||
| Subordinated Debentures | ||||||||||||||||
| Junior Subordinated Debentures | ||||||||||||||||
| December 31, 2022 | Carrying | Fair Value | ||||||||||||||
| Amount | Level 1 | Level 2 | Level 3 | |||||||||||||
| Financial Assets: | Dollars in thousands | |||||||||||||||
| Cash and Cash Equivalents | $ | $ | $ | $ | ||||||||||||
| Certificates of Deposits with Other Banks | ||||||||||||||||
| Investments AFS | ||||||||||||||||
| Investments HTM | ||||||||||||||||
| Loans Receivable, Net | ||||||||||||||||
| FHLB Stock | ||||||||||||||||
| Land Held for Sale | ||||||||||||||||
| Financial Liabilities: | ||||||||||||||||
| Deposits: | ||||||||||||||||
| Checking, Savings & Money Market Accounts | $ | $ | $ | $ | ||||||||||||
| Certificates of Deposits | ||||||||||||||||
| Borrowings from FRB | ||||||||||||||||
| Other Borrowed Money | ||||||||||||||||
| Subordinated Debentures | ||||||||||||||||
| Junior Subordinated Debentures | ||||||||||||||||
At September 30, 2023, the Company had $
Because no active market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, current interest rates and prepayment trends, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in any of these assumptions used in calculating fair value would also significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has significant assets and liabilities that are not considered financial assets or liabilities including deposit franchise values, loan servicing portfolios, deferred tax liabilities, and premises and equipment.
In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. The Company has used management’s best estimate of fair value on the above assumptions. Thus, the fair values presented may not be the amounts which could be realized in an immediate sale or settlement of the instrument. In addition, any income taxes or other expenses that would be incurred in an actual sale or settlement are not taken into consideration in the fair value presented.
NOTE 14 - NON-INTEREST INCOME
Revenue Recognition - In accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606), revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.
The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Service Fees on Deposit Accounts - The Company earns fees from its deposit customers for account maintenance, transaction-based and overdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts monthly. The performance obligation is satisfied and the fees are recognized monthly as the service period is completed. Transaction-based fees on deposits accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.
ATM and Check Card Fee Income - Check card fee income represents fees earned when a debit card issued by the Company is used. The Company earns interchange fees from debit cardholder transactions through the Mastercard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the card. Certain expenses directly associated with the debit card are recorded on a net basis with the fee income.
Trust Income - Trust income includes monthly advisory fees that are based on assets under management and certain transaction fees that are assessed and earned monthly, concurrently with the investment management services provided to the customer. The Company does not charge performance based fees for its trust services and does not currently have any institutional clients, hedge funds or mutual funds. Although trust income is included within the scope of ASC 606, based on the fees charged by the Company, there were no changes in the accounting for trust income.
Gains/Losses on OREO Sales - Gains/losses on the sale of OREO are included in non-interest expense and are generally recognized when the performance obligation is complete. This is typically the delivery of control over the property to the buyer at the time of each real estate closing.
The following table presents the Company's non-interest income for the periods indicated. All the Company’s revenue from contracts with customers within the scope of ASC 606 is recognized in non-interest income, except for gains on the sale of OREO, which are included in non-interest expense when applicable.
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Non-interest income: | ||||||||||||||||
| Gain on Sale of Loans (1) | $ | $ | $ | $ | ||||||||||||
| Service Fees on Deposit Accounts | ||||||||||||||||
| Commissions From Insurance Agency (1) | ||||||||||||||||
| Trust Income | ||||||||||||||||
| BOLI Income (1) | ||||||||||||||||
| ATM and Check Card Fee Income | ||||||||||||||||
| Grant Income | ||||||||||||||||
| Other (1) | ||||||||||||||||
| Total non-interest income | $ | $ | $ | $ | ||||||||||||
| (1) Not within the scope of ASC 606 |
NOTE 15 - LEASES
The Company has operating leases on six of its branches. During the nine months ended September 30, 2023, the Company made cash payments in the amount of $
At September 30, 2023, maturities of operating lease liabilities for future periods were as follows:
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total undiscounted lease payments | ||||
| Less: effect of discounting | ( | ) | ||
| Present value of estimated lease payments (lease liability) | $ |
NOTE 16 - PREFERRED STOCK
On May 24, 2022, the Company entered into a Letter Agreement (“Agreement”) with the U.S. Department of Treasury under the Emergency Capital Investment Program (“ECIP”). Established by the Consolidated Appropriations Act, 2021, the ECIP was created to encourage low- and moderate-income community financial institutions and minority depository institutions to provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, especially low-income and underserved communities, including counties with persistent poverty, that may be disproportionately impacted by the economic effect of the COVID-19 pandemic by providing direct and indirect capital investments in low- and moderate-income community financial institutions.
Pursuant to the Agreement, the Company agreed to issue and sell
The Preferred Stock may be redeemed at the option of the Company on or after the fifth anniversary of issuance (or earlier in the event of loss of regulatory capital treatment), subject to the approval of the appropriate federal banking regulator and in accordance with the federal banking agencies’ regulatory capital regulations. The Preferred Stock is reported on the Consolidated Balance Sheets as Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP.
NOTE 17 - SUBSEQUENT EVENTS
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed all events occurring through the date the consolidated financial statements were available to be issued and determined that there were no subsequent events requiring accrual or disclosure.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
When we refer to “Security Federal” in this report, we are referring to Security Federal Corporation. When we refer to the “Bank” in this report, we are referring to Security Federal Bank, the wholly owned subsidiary of Security Federal. As used in this report, the terms “we,” “our,” “us,” and “Company” refer to Security Federal Corporation and its consolidated subsidiary, Security Federal Bank, unless the context indicates otherwise.
Forward-Looking Statements and “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995
Certain matters discussed in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risk and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors, including, but not limited to:
| • |
potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth; |
||
| • | changes in the interest rate environment, including the recent increases in the Board of Governors of the Federal Reserve System (the “Federal Reserve”) benchmark rate and duration at which such increased interest rate levels are maintained, which could adversely affect our revenues and expenses, the value of assets and obligations, and the availibility and cost of capital and liquidity; |
| • |
the impact of continuing high inflation and the current and future monetary policies of the Federal Reserve in response thereto; |
| • |
the effects of any federal government shutdown; |
| • |
the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for credit losses and provision for credit losses that may be affected by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing assets in our loan portfolio, and may result in our allowance for credit losses not being adequate to cover actual losses, and require us to materially increase our allowance for credit losses; |
| • |
changes in general economic conditions, either nationally or in our market areas; |
| • |
changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources; |
| • |
unexpected outflows of uninsured deposits may require us to sell investment securities at a loss; |
| • |
the transition away from London Interbank Offered Rate ("LIBOR") toward new interest rate benchmarks; |
| • |
fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; |
| • |
secondary market conditions for loans and our ability to originate loans for sale and sell loans in the secondary market; |
| • | the impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment; |
| • |
results of examinations of the Federal Reserve and the Bank by the Federal Deposit Insurance Corporation ("FDIC") and the South Carolina State Board of Financial Institutions, or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for credit losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings; |
| • |
legislative or regulatory changes that adversely affect our business, including changes in banking, securities and tax law, and in regulatory policies and principles, or the interpretation of regulatory capital or other rules; |
| • |
our ability to attract and retain deposits; |
| • |
our ability to control operating costs and expenses; |
| • |
our ability to implement our business strategies; |
| • |
the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; |
| • |
difficulties in reducing risks associated with the loans on our balance sheet; |
| • |
staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; |
| • |
disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing; |
| • |
our ability to attract and retain key members of our senior management team; |
| • |
costs and effects of litigation, including settlements and judgments; |
| • |
our ability to manage loan delinquency rates; |
| • |
increased competitive pressures among financial services companies; |
| • |
changes in consumer spending, borrowing and savings habits; |
| • |
the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; |
| • |
our ability to pay dividends on our common stock; |
| • |
the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets; |
| • |
inability of key third-party providers to perform their obligations to us; |
| • |
changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods; |
| • |
the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business; |
| • |
other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services; and |
| • |
other risks described elsewhere in this document and in the Company's other reports filed with or furnished to the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”). |
Any of the forward-looking statements that we make in this quarterly report on Form 10-Q and in other public reports and statements we make may turn out to be inaccurate as a result of our beliefs and assumptions we make in connection with the factors set forth above or because of other unidentified and unpredictable factors. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. These factors could cause our actual results for 2023 and beyond to differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect the Company’s consolidated financial condition, consolidated results of operations, liquidity and stock price performance.
Financial Condition at September 30, 2023 and December 31, 2022
Assets - Total assets increased $96.0 million to $1.48 billion at September 30, 2023 from $1.38 billion at December 31, 2022. This increase was primarily due to increases in cash and cash equivalents, investments HTM and loans receivable, net, which were partially offset by a decrease in investments AFS. Changes in total assets are shown below.
| Increase (Decrease) |
||||||||||||||||
| September 30, 2023 |
December 31, 2022 |
$ |
% |
|||||||||||||
| Cash and Cash Equivalents |
$ | 84,223,575 | $ | 28,502,364 | $ | 55,721,211 | 195.5 | % | ||||||||
| Certificates of Deposits with Other Banks |
1,100,045 | 1,100,045 | — | — | ||||||||||||
| Investments AFS |
531,421,573 | 550,148,284 | (18,726,711 | ) | (3.4 | ) | ||||||||||
| Investments HTM |
174,136,215 | 167,437,616 | 6,698,599 | 4.0 | ||||||||||||
| Total Loans Receivable, Net |
598,029,202 | 549,917,170 | 48,112,032 | 8.7 | ||||||||||||
| Accrued Interest Receivable |
5,397,705 | 4,810,674 | 587,031 | 12.2 | ||||||||||||
| OREO |
- | 119,700 | (119,700 | ) | (100.0 | ) | ||||||||||
| Operating Lease ROU Assets |
1,518,473 | 1,860,997 | (342,524 | ) | (18.4 | ) | ||||||||||
| Land Held for Sale |
938,214 | 1,096,614 | (158,400 | ) | (14.4 | ) | ||||||||||
| Premises and Equipment, Net |
28,703,449 | 27,959,793 | 743,656 | 2.7 | ||||||||||||
| FHLB Stock |
921,900 | 650,600 | 271,300 | 41.7 | ||||||||||||
| BOLI |
27,787,273 | 27,318,098 | 469,175 | 1.7 | ||||||||||||
| Goodwill |
1,199,754 | 1,199,754 | — | — | ||||||||||||
| Other Assets |
21,952,627 | 19,244,454 | 2,708,173 | 14.1 | ||||||||||||
| Total Assets |
$ | 1,477,330,005 | $ | 1,381,366,163 | $ | 95,963,842 | 6.9 | % | ||||||||
Cash and cash equivalents increased $55.7 million or 195.5% to $84.2 million at September 30, 2023 compared to $28.5 million at December 31, 2022, as a result of increased deposits and borrowings during the nine months ended September 30, 2023.
Investments HTM increased $6.7 million to $174.1 million at September 30, 2023, from $167.4 million at December 31, 2022, as a result of purchases exceeding paydowns and maturities during the nine months ended September 30, 2023. Investments AFS decreased $18.7 million or 3.4% to $531.4 million at September 30, 2023 from $550.1 million at December 31, 2022 as maturities and principal paydowns of investments AFS exceeded purchases during the nine months ended September 30, 2023. Investments AFS experienced a $4.7 million decrease in fair value during the nine months ended September 30, 2023.
Total loans receivable, net, which includes loans held for sale, increased $48.1 million or 8.7% to $598.0 million at September 30, 2023 from $549.9 million at December 31, 2022, primarily due to an increase in residential mortgage loans originated during the period. All held for investment loan balances increased during the nine months ended September 30, 2023 except for construction loans, which decreased $11.3 million or 10.0% to $101.5 million at September 30, 2023 from $112.8 million at December 31, 2022. Commercial real estate loans increased $4.0 million or 1.6% to $256.2 million at September 30, 2023 from $252.2 million at December 31, 2022. Residential mortgage loans increased $49.9 million or 45.4% to $160.0 million at September 30, 2023 from $110.1 million at December 31, 2022. Consumer home equity lines of credit increased $1.6 million or 5.0% to $33.3 million at September 30, 2023 from $31.7 million at December 31, 2022. Other consumer loans increased $811,000 or 3.4% to $24.4 million at September 30, 2023 from $23.6 million at December 31, 2022. Loans held for sale increased $140,000 or 15.4% to $1.1 million at September 30, 2023 from $913,000 at December 31, 2022.
Premises and equipment, net increased $744,000 or 2.7% to $28.7 million at September 30, 2023 from $28.0 million at December 31, 2022 as a result of our newest branch which opened this year as well as improvements to existing branches.
Other assets increased $2.7 million or 14.1% to $22.0 million at September 30, 2023 from $19.2 million at December 31, 2022.
Liabilities
Deposit Accounts
Total deposits increased $76.0 million or 6.8% to $1.19 billion at September 30, 2023 from December 31, 2022 primarily due to increases in higher cost certificates of deposit and money market accounts, partially offset by decreases in checking and savings accounts. The Bank had $6.5 million and $6.0 million in brokered time deposits at September 30, 2023 and December 31, 2022, respectively. Most of the Bank’s deposits are originated within the Bank’s immediate market area; however, the Bank uses brokered time deposits to manage interest rate risk because they are accessible in bulk at rates typically only slightly higher than those in our market areas. A portion of these brokered time deposits give the Bank a call option that allows the Bank the choice to redeem them early should rates change. In addition, the Bank had $5.0 million in other brokered deposits at both September 30, 2023 and December 31, 2022. At both September 30, 2023 and December 31, 2022, the Bank had no deposit relationships greater than 5% of outstanding deposits. At September 30, 2023, approximately $305.1 million or 25.7% of our $1.19 billion deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank’s regulatory reporting requirements. For additional details of deposits, see “Note 9 – Deposits” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.
Borrowings
The Bank had $69.2 million in borrowings from the Federal Reserve Bank of Atlanta (“FRB”) at September 30, 2023, compared to $44.1 million at December 31, 2022. During the first quarter of 2023, the Bank elected to participate in the Federal Reserve's Bank Term Funding Program (“BTFP”), allowing the Bank to refinance its existing FRB borrowings. The Bank also had $19.0 million in other borrowings at September 30, 2023, compared to $27.6 million and December 31, 2022, which consisted of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts. For additional information, see “Note 10 – Borrowings” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.
At both September 30, 2023 and December 31, 2022, the Company had $5.2 million in junior subordinated debentures and $26.5 million in subordinated debentures outstanding, which are described in more detail in “Note 11 - Subordinated Debentures” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.
Shareholders’ Equity
Shareholders’ equity decreased $1.2 million or 0.8% to $159.0 million at September 30, 2023 from $160.2 million at December 31, 2022. The decrease was attributable to a $1.6 million adjustment to retained earnings related to the adoption of ASC 326 on January 1, 2023, $1.3 million in dividends paid to common shareholders, $292,000 in Company stock repurchases, and a $4.7 increase in accumulated other comprehensive loss, net of tax, during the nine months ended September 30, 2023. The increase in net accumulated other comprehensive loss, net of tax, was related to the unrecognized loss in fair value of investments AFS during the nine months ended September 30, 2023. The decreases in shareholders' equity were partially offset by year to date net income of $6.6 million.
Results of Operations for the Quarters Ended September 30, 2023 and 2022
Net Income
Net income decreased $1.1 million, or 34.2%, to $2.1 million or $0.65 per basic common share for the quarter ended September 30, 2023, compared to $3.2 million or $0.99 per basic common share for the quarter ended September 30, 2022. The decrease in net income was the result of decreases in net interest income and non-interest income combined with higher non-interest expense. Since March 2022, in response to inflation, the Federal Open Market Committee (“FMOC”) of the Federal Reserve has increased the target range for the federal funds rate by 525 basis points, including 25 basis points during the third quarter of 2023, to a range of 5.25% to 5.50% as of September 30, 2023. As the Federal Reserve continues to seek to control inflation without creating a recession, the FOMC has indicated further increases may be implemented during calendar 2023.
Net Interest Income
The following table compares detailed average balances, average yields on interest-earning assets, average costs of interest-bearing liabilities and the resulting changes in interest income and expense for the three months ended September 30, 2023 and 2022. The average balances were derived from the daily balances throughout the periods indicated. The average yields or costs were calculated by dividing the income or expense by the average balance of the corresponding assets or liabilities. Nonaccrual loans are included in earning assets in the following table. Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status. Interest income from non-taxable investments is calculated on a tax equivalent basis, which recognizes the income tax savings when comparing taxable and tax-exempt assets and was calculated using the effective tax rate for the quarters ended September 30, 2023 and 2022.
| Quarter Ended September 30, |
||||||||||||||||||||||||
| 2023 |
2022 |
|||||||||||||||||||||||
| (Dollars in thousands) |
Average Balance |
Interest |
Yield/ Rate (1) |
Average Balance |
Interest |
Yield/ Rate (1) |
||||||||||||||||||
| Interest-Earning Assets: |
||||||||||||||||||||||||
| Loans Receivable, Net |
$ | 600,465 | $ | 8,402 | 5.60 | % | $ | 521,143 | $ | 6,306 | 4.84 | % | ||||||||||||
| Taxable Investments |
694,058 | 7,558 | 4.36 | 741,358 | 4,550 | 2.45 | ||||||||||||||||||
| Non-taxable Investments |
20,557 | 190 | 3.71 | 44,685 | 417 | 3.73 | ||||||||||||||||||
| Deposits with other Banks |
57,387 | 703 | 4.90 | 13,569 | 94 | 2.78 | ||||||||||||||||||
| Total Interest-Earning Assets |
$ | 1,372,467 | $ | 16,853 | 4.91 | % | $ | 1,320,755 | $ | 11,367 | 3.44 | % | ||||||||||||
| Interest-Bearing Liabilities: |
||||||||||||||||||||||||
| Checking, Savings & Money Market Accounts |
$ | 680,025 | $ | 4,190 | 2.46 | % | $ | 700,322 | $ | 540 | 0.31 | % | ||||||||||||
| Certificates Accounts |
228,016 | 1,879 | 3.30 | 139,841 | 136 | 0.39 | ||||||||||||||||||
| Total Interest-Bearing Deposits |
908,041 | 6,069 | 2.67 | 840,163 | 676 | 0.32 | ||||||||||||||||||
| Other Borrowings (2) |
88,215 | 862 | 3.91 | 39,099 | 44 | 0.45 | ||||||||||||||||||
| Junior Subordinated Debentures |
5,155 | 96 | 7.43 | 5,155 | 50 | 3.87 | ||||||||||||||||||
| Subordinated Debentures |
26,500 | 349 | 5.25 | 29,652 | 389 | 5.25 | ||||||||||||||||||
| Total Interest-Bearing Liabilities |
$ | 1,027,911 | $ | 7,376 | 2.87 | % | $ | 914,069 | $ | 1,159 | 0.51 | % | ||||||||||||
| Net Interest Rate Spread |
2.04 | % | 2.93 | % | ||||||||||||||||||||
| Tax Equivalent Net Interest Income/Margin |
$ | 9,477 | 2.76 | % | $ | 10,208 | 3.09 | % | ||||||||||||||||
| Less: tax equivalent adjustment |
31 | 74 | ||||||||||||||||||||||
| Net Interest Income |
$ | 9,446 | $ | 10,134 | ||||||||||||||||||||
| (1) |
Annualized |
| (2) |
Includes FRB borrowings and repurchase agreements. |
Net interest income decreased $688,000 or 6.8% to $9.4 million during the quarter ended September 30, 2023, compared to $10.1 million for the same quarter in 2022. During the quarter ended September 30, 2023, average interest-earning assets increased $51.7 million or 3.9% to $1.37 billion from $1.32 billion for the same quarter in 2022, while average interest-bearing liabilities increased $113.8 million or 12.5% to $1.0 billion for the quarter ended September 30, 2023 from $914.1 million for the comparable quarter in 2022. The Company's net interest margin was 2.76% for the quarter ended September 30, 2023 compared to 3.09% for the comparable quarter in 2022. The Company's net interest spread on a tax equivalent basis was 2.04% for the quarter ended September 30, 2023 compared to 2.93% for the quarter ended September 30, 2022.
Interest Income
Total tax-equivalent interest income increased $5.5 million or 48.3% to $16.9 million for the quarter ended September 30, 2023 compared to $11.4 million for the same period in 2022.
Interest income on loans increased $2.1 million or 33.2% to $8.4 million for the quarter ended September 30, 2023 from $6.3 million for the third quarter of 2022. The increase was the result of a $79.3 million increase in the average loan portfolio balance combined with a 76 basis point increase in the average yield on loans receivable AS ADJUSTABLE-RATE LOAns reset and new loans were originated at higher market interest rates.
Interest income from taxable investments increased $3.0 million or 66.1% to $7.6 million during the quarter ended September 30, 2023, from $4.6 million for the third quarter of 2022, due to a 191 basis point increase in the average yield to 4.36%, reflecting higher market interest rates, which was partially offset by a $47.3 million decrease in the average balance of taxable investments. Tax equivalent interest income from non-taxable investments decreased $227,000 to $190,000 during the quarter ended September 30, 2023 primarily due to a $24.1 million decrease in the average balance of non-taxable investments.
Interest income from deposits with other banks increased $609,000 to $703,000 during the quarter ended September 30, 2023, from $94,000 for the third quarter of 2022, due to a $43.8 million increase in the average balance of these assets combined with a 212 basis point increase in the average yield earned on these assets due to increased market interest rates.
Interest Expense
Total interest expense increased $6.2 million or 536.4% to $7.4 million for the quarter ended September 30, 2023 compared to $1.2 million for the same quarter in 2022 due to an increase in market interest rates combined with a $113.8 million increase in the average balance of these liabilities.
Interest expense on deposits increased $5.4 million to $6.1 million for the quarter ended September 30, 2023, from $676,000 for the third quarter of 2022, due to an increase of 235 basis points in the average cost combined with a $67.9 million increase in the average balance of interest-bearing deposit accounts, reflecting growth in higher cost money market and certificate of deposit accounts. Interest expense on FRB and other borrowings increased $818,000 to $862,000 for the quarter ended September 30, 2023, from $44,000 for the third quarter of 2022, due to a $49.1 million increase in the average balance of these liabilities combined with an increase of 346 basis points in the average cost of these liabilities.
Provision for Credit Losses
The amount of the provision and the adequacy of the allowance for credit losses for loans and unfunded commitments is determined by management’s on-going monthly analysis. The Company has policies and procedures in place for evaluating and monitoring the overall credit quality of the loan portfolio and for timely identification of potential problem loans including internal and external loan reviews. The adequacy of the allowance for credit losses is reviewed monthly by the Asset Classification Committee and quarterly by the Board of Directors. Management’s review of the adequacy of the allowance includes three main components.
On January 1, 2023, the Company adopted Accounting Standards Update 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Accounting Standards Codification 326, which replaced the incurred loss methodology with the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. The transition adjustment of the adoption of CECL included an increase in the allowance for credit losses on loans of $784,000, which is presented as a reduction to total loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $1.2 million, which is recorded within "Other Liabilities." The adoption of CECL had an insignificant impact on the Company's investments HTM and investment AFS portfolios.
The Company did not record any provision for credit losses under the CECL methodology during the quarter ended September 30, 2023, or any provision for loan losses under the Incurred Loss methodology during the quarter ended September 30, 2022. Net recoveries during the third quarter of 2023 were $15,000 compared to net recoveries of $101,000 in the third quarter of 2022. For additional information of the changes in the allowance for credit losses, see “Note 3 – Summary of Significant Accounting Policies", "Note 6 - Investments, Available for Sale", "Note 7 - Investments, Held to Maturity, and “Note 8 - Loans Receivable" of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.
Non-Interest Income
Non-interest income decreased $56,000 or 2.5% to $2.2 million for the quarter ended September 30, 2023 compared to $2.2 million for the quarter ended September 30, 2022. The decrease was primarily due to a $152,000 decrease in gain on sale of loans reflecting the decline in originations of loans held for sale following recent market interest rate increases, which was partially offset by a $94,000 increase in trust income during the quarter ended September 30, 2023 when compared to the quarter ended September 30, 2022. For additional details of the changes in non-interest income, see “Note 14 - Non-Interest Income” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.
Non-Interest Expense
Non-interest expense increased $646,000 or 7.8% to $8.9 million for the quarter ended September 30, 2023 compared to $8.3 million for the quarter ended September 30, 2022. The following table summarizes the changes in non-interest expense:
| Quarter Ended September 30, |
Increase (Decrease) |
|||||||||||||||
| 2023 |
2022 |
$ |
% |
|||||||||||||
| Compensation and Employee Benefits |
$ | 4,962,028 | $ | 5,019,920 | $ | (57,892 | ) | (1.2 | )% | |||||||
| Occupancy |
807,286 | 703,310 | 103,976 | 14.8 | % | |||||||||||
| Advertising |
256,218 | 153,460 | 102,758 | 67.0 | % | |||||||||||
| Depreciation and Maintenance of Equipment |
657,278 | 521,833 | 135,445 | 26.0 | % | |||||||||||
| FDIC Insurance Premiums |
153,732 | 87,858 | 65,874 | 75.0 | % | |||||||||||
| Consulting |
167,583 | 179,318 | (11,735 | ) | (6.5 | )% | ||||||||||
| Debit Card Expense |
347,980 | 307,092 | 40,888 | 13.3 | % | |||||||||||
| Data Processing |
314,329 | 229,906 | 84,423 | 36.7 | % | |||||||||||
| Other |
1,257,359 | 1,074,988 | 182,371 | 17.0 | % | |||||||||||
| Total Non-Interest Expense |
$ | 8,923,793 | $ | 8,277,685 | $ | 646,108 | 7.8 | % | ||||||||
The increase in non-interest expense was primarily due to increases in all non-interest expense line items except for compensation and employee benefits and consulting expense during the third quarter of 2023.
Most of the increases in non-interest expenses during the third quarter of 2023 were due to overall growth of the Company, increased operations and the addition of our newest branch in Augusta, Georgia which opened in April 2023. FDIC insurance premiums increased $66,000 or 75.0% to $154,000 for the quarter ended September 30, 2023, COMPARED TO THE SAME PERIOD IN 2022, due to higher deposit insurance rates applied in 2023 compared to 2022. Other expenses increased $182,000 or 17.0% to $1.3 million for the quarter ended September 30, 2023, compared to the same period in 2022.
Provision For Income Taxes
The provision for income taxes decreased $287,000 or 33.5% to $568,000 for the quarter ended September 30, 2023, from $855,000 for the same period in 2022, due to lower net income before taxes in 2023. Pre-tax net income was $2.7 million for the quarter ended September 30, 2023 compared to $4.1 million for the third quarter of 2022. The Company’s combined federal and state effective income tax rate was 21.1% and 20.9% for the quarters ended September 30, 2023 and 2022, respectively.
Results of Operations for the Nine Months Ended September 30, 2023 and 2022
Net Income
Net income decreased $364,000, or 5.3%, to $6.6 million or $2.02 per basic common share for the nine months ended September 30, 2023, compared to $6.9 million or $2.13 per basic common share for the nine months ended September 30, 2022. The decrease was primarily due to an increase in non-interest expense combined with a decrease in non-interest income, partially offset by an increase in net interest income due to an increase in market interest rates and, to a lesser extent, higher average balances of investments and loans receivable, net.
Net Interest Income
The following table compares detailed average balances, average yields on interest-earning assets, average costs of interest-bearing liabilities and the resulting changes in interest income and expense for the nine months ended September 30, 2023 and 2022. The average balances were derived from the daily balances throughout the periods indicated. The average yields or costs were calculated by dividing the income or expense by the average balance of the corresponding assets or liabilities. Nonaccrual loans are included in earning assets in the following table. Loan yields have been reduced to reflect the negative impact on our earnings of loans on nonaccrual status. Interest income from non-taxable investments is calculated on a tax equivalent basis, which recognizes the income tax savings when comparing taxable and tax-exempt assets and was calculated using the effective tax rate for the nine months ended September 30, 2023 and 2022.
| Nine Months Ended September 30, |
||||||||||||||||||||||||
| 2023 |
2022 |
|||||||||||||||||||||||
| (Dollars in thousands) |
Average Balance |
Interest |
Yield/ Rate (1) |
Average Balance |
Interest |
Yield/ Rate (1) |
||||||||||||||||||
| Interest-Earning Assets: |
||||||||||||||||||||||||
| Loans Receivable, Net |
$ | 589,100 | $ | 23,884 | 5.41 | % | $ | 518,436 | $ | 18,608 | 4.79 | % | ||||||||||||
| Taxable Investments |
695,495 | 21,025 | 4.03 | 696,283 | 9,720 | 1.86 | ||||||||||||||||||
| Non-taxable Investments |
20,802 | 575 | 3.69 | 44,633 | 1,086 | 3.25 | ||||||||||||||||||
| Deposits with other Banks |
32,996 | 1,205 | 4.87 | 18,545 | 151 | 1.08 | ||||||||||||||||||
| Total Interest-Earning Assets |
$ | 1,338,393 | $ | 46,689 | 4.65 | % | $ | 1,277,897 | $ | 29,565 | 3.08 | % | ||||||||||||
| Interest-Bearing Liabilities: |
||||||||||||||||||||||||
| Checking, Savings & Money Market Accounts |
$ | 674,749 | $ | 10,246 | 2.02 | % | $ | 700,580 | $ | 998 | 0.19 | % | ||||||||||||
| Certificates Accounts |
200,626 | 3,910 | 2.60 | 150,670 | 420 | 0.37 | ||||||||||||||||||
| Total Interest-Bearing Deposits |
875,375 | 14,156 | 2.16 | 851,250 | 1,418 | 0.22 | ||||||||||||||||||
| Other Borrowings (2) |
85,820 | 2,313 | 3.59 | 41,374 | 91 | 0.29 | ||||||||||||||||||
| Junior Subordinated Debentures |
5,155 | 266 | 6.89 | 5,155 | 111 | 2.87 | ||||||||||||||||||
| Subordinated Debentures |
26,500 | 1,045 | 5.25 | 29,883 | 1,177 | 5.25 | ||||||||||||||||||
| Total Interest-Bearing Liabilities |
$ | 992,850 | $ | 17,780 | 2.39 | % | $ | 927,662 | $ | 2,797 | 0.40 | % | ||||||||||||
| Net Interest Rate Spread |
2.26 | % | 2.68 | % | ||||||||||||||||||||
| Tax Equivalent Net Interest Income/Margin |
$ | 28,909 | 2.88 | % | $ | 26,768 | 2.79 | % | ||||||||||||||||
| Less: tax equivalent adjustment |
96 | 184 | ||||||||||||||||||||||
| Net Interest Income |
$ | 28,813 | $ | 26,584 | ||||||||||||||||||||
| (1) |
Annualized |
| (2) |
Includes FRB borrowings and repurchase agreements. |
Net interest income increased $2.2 million or 8.4% to $28.8 million during the nine months ended September 30, 2023, compared to $26.6 million for the same period in 2022. During the nine months ended September 30, 2023, average interest-earning assets increased $60.5 million or 4.7% to $1.34 billion from $1.28 billion for the same period in 2022, while average interest-bearing liabilities increased $65.2 million or 7.0% to $992.9 million for the nine months ended September 30, 2023 from $927.7 million for the nine months ended September 30, 2022. The Company's net interest margin was 2.88% for the nine months ended September 30, 2023 compared to 2.79% for the nine months ended September 30, 2022. The Company's net interest spread on a tax equivalent basis was 2.26% for the nine months ended September 30, 2023 compared to 2.68% for the nine months ended September 30, 2022.
Interest Income
Total tax-equivalent interest income increased $17.1 million or 57.9% to $46.7 million for the nine months ended September 30, 2023 compared to $29.6 million for the same period in 2022.
Interest income on loans increased $5.3 million or 28.4% to $23.9 million for the nine months ended September 30, 2023 from $18.6 million for the first nine months of 2022. The increase was the result of a $70.7 million increase in the average loan portfolio balance combined with a 62 basis point increase in the average yield on loans receivable AS ADJUSTABLE-RATE LOANS RESET AND NEW LOANS WERE ORIGINATED AT HIGHER MARKET INTEREST RATES.
Interest income from taxable investments increased $11.3 million or 116.3% to $21.0 million during the nine months ended September 30, 2023 from $9.7 million for the first nine months of 2022, due to a 217 basis point increase in the average yield to 4.03%, REFLECTING HIGHER MARKET INTEREST RATES, which was partially offset by a $788,000 decrease in the average balance of taxable investments. Tax equivalent interest income from non-taxable investments decreased $511,000 to $575,000 during the nine months ended September 30, 2023, due to a $23.8 million decrease in the average balance of non-taxable investments, partially offset by a 44 basis point increase in the average yield to 3.69%.
Interest income from deposits with other banks increased $1.1 million to $1.2 million during the nine months ended September 30, 2023, compared to the same period in 2022, due to a 157 basis point increase in the average yield earned on these assets reflecting higher market rates and, to a lesser extent, a $14.5 million increase in the average balance of these assets.
Interest Expense
Total interest expense increased $15.0 million or 535.5% to $17.8 million for the nine months ended September 30, 2023, compared to $2.8 million for the same period in 2022, due to an increase in market interest rates combined with a $65.2 million increase in the average balance of these liabilities.
Interest expense on deposits increased $12.7 million to $14.2 million for the nine months ended September 30, 2023 from $1.4 million for the first nine months of 2022, due to an increase of 194 basis points in the average cost combined with a $24.1 million increase in the average balance of interest-bearing deposit accounts. Interest expense on FRB and other borrowings increased $2.2 million to $2.3 million during the nine months ended September 30, 2023 compared to the same period in 2022, due to a $44.4 million increase in the average balance of these liabilities combined with an increase of 330 basis points in the average cost of these liabilities. Interest expense on the junior subordinated debentures increased $155,000 due to increased floating interest rates reflecting higher market interest rates.
Provision for Credit Losses
The Company recorded a $221,000 provision for credit losses for the nine months ended September 30, 2023 and no provision for credit losses of the nine months ended September 30, 2022. The Company adopted the CECL methodology effective January 1, 2023. The increase in the provision was primarily due to loan growth. Net recoveries during the nine months ended September 30, 2023 were $10,000 compared to net recoveries of $212,000 during the same period in 2022.
Non-interest income decreased $846,000 or 11.3% to $6.6 million for the nine months ended September 30, 2023 compared to $7.5 million for the nine months ended September 30, 2022. The decrease was primarily due to a $981,000 decrease in gain on sale of loans reflecting the decline in originations of loans held for sale following recent market interest rate increases. In addition, there was no grant income recorded during the nine months ended September 30, 2023 compared to $171,000 for the nine months ended September 30, 2022. These decreases were partially offset by increases in trust income and ATM and check card fee income.
Trust income increased $213,000 or 19.7% to $1.3 million during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, due to an increase in assets under management. ATM and check card fee income increased $179,000 or 8.5% to $2.3 million during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, due to a new interchange service provider that pays the Bank more fees per transaction. For additional details of the changes in non-interest income, see “Note 14 - Non-Interest Income” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.
Non-Interest Expense
Non-interest expense increased $1.6 million or 6.2% to $26.9 million for the nine months ended September 30, 2023 compared to $25.3 million for the nine months ended September 30, 2022. The following table summarizes the changes in non-interest expense:
| Nine Months Ended September 30, |
Increase (Decrease) |
|||||||||||||||
| 2023 |
2022 |
$ |
% |
|||||||||||||
| Compensation and Employee Benefits |
$ | 15,226,913 | $ | 14,981,146 | $ | 245,767 | 1.6 | % | ||||||||
| Occupancy |
2,386,442 | 2,110,746 | 275,696 | 13.1 | % | |||||||||||
| Advertising |
762,614 | 693,389 | 69,225 | 10.0 | % | |||||||||||
| Depreciation and Maintenance of Equipment |
1,843,625 | 1,670,857 | 172,768 | 10.3 | % | |||||||||||
| FDIC Insurance Premiums |
461,541 | 284,083 | 177,458 | 62.5 | % | |||||||||||
| Write-down of Land Held for Sale |
— | 433,077 | (433,077 | ) | (100.0 | )% | ||||||||||
| Consulting |
523,314 | 513,299 | 10,015 | 2.0 | % | |||||||||||
| Debit Card Expense |
1,036,913 | 917,225 | 119,688 | 13.0 | % | |||||||||||
| Data Processing |
942,406 | 732,497 | 209,909 | 28.7 | % | |||||||||||
| Other |
3,679,256 | 2,964,759 | 714,497 | 24.1 | % | |||||||||||
| Total Non-Interest Expense |
$ | 26,863,024 | $ | 25,301,078 | $ | 1,561,946 | 6.2 | % | ||||||||
The increase in non-interest expense was primarily due to increases in compensation and employee benefits, occupancy expense and other non-interest expenses during the first nine months of 2023, which were partially offset by a decrease in write-downs of land held for sale.
Compensation and employee benefits increased $246,000 or 1.6% to $15.2 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, due to general annual cost of living increases, an increase in the number of full time equivalent employees as a result of our newest branch location which opened in Augusta, Georgia, in April 2023, and the overall growth of the Company. Occupancy and other non-interest expenses also increased during the first nine months of 2023 due to increased operations and the addition of our new branch in Augusta, Georgia.
FDIC insurance premiums increased $177,000 or 62.5% to $462,000 for the nine months ended September 30, 2023, compared to the same period in 2022, due to increased deposit insurance rates applied in 2023 compared to 2022.
Provision For Income Taxes
The provision for income taxes decreased $34,000 or 1.9% to $1.8 million for the nine months ended September 30, 2023, from $1.8 million for the same period in 2022, due to lower net income before taxes in 2023. Pre-tax net income was $8.3 million for the nine months ended September 30, 2023 compared to $8.7 million for the first nine months of 2022. The Company’s combined federal and state effective income tax rate was 21.3% and 20.7% for the nine months ended September 30, 2023 and 2022, respectively.
Liquidity Commitments, Capital Resources, and Impact of Inflation and Changing Prices
We actively analyze and manage liquidity with the objective of maintaining an adequate level of liquidity and to ensure the availability of sufficient cash flows to support loan growth, fund deposit withdrawals, fund operations, and satisfy other financial commitments. See the “Consolidated Statements of Cash Flows” contained in Item 1 – Financial Statements, herein.
The Bank's primary sources of funds include deposits, scheduled loan and investment securities repayments, including interest payments, maturities and sales of loans and investment securities, advances from the FRB, and cash flow generated from operations. The sources of funds, together with retained earnings and equity, are used to make loans, acquire investment securities and other assets, and fund continuing operations. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage repayments are greatly influenced by the level of interest rates, economic conditions, and competition. Management believes that the Company’s current liquidity position and its forecasted operating results are sufficient to fund all its existing commitments. The Bank had $173.1 million in unused commitments to extend credit and standby letters of credit at September 30, 2023.
During the nine months ended September 30, 2023, loan disbursements exceeded loan repayments resulting in a $48.1 million or 8.7% increase in total net loans receivable. Also, during the nine months ended September 30, 2023, deposits increased $76.0 million or 6.8%. The Bank had no outstanding FHLB advances at September 30, 2023 with $422.4 million in total borrowing capacity at the FHLB at that date. The Bank had $69.2 million of outstanding borrowings from the BTFP at September 30, 2023, which was collateralized by investments with a fair market value of $329.4 million at that date. The Bank also had a $50.0 million unused Fed Funds facility with Pacific Coast Bankers Bank at September 30, 2023. Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.
The Bank's liquid assets in the form of cash and cash equivalents, certificates of deposits with other banks and investments AFS totaled $616.5 million at September 30, 2023. Certificates of deposit that are scheduled to mature in less than one year from September 30, 2023 totaled $195.1 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.
Security Federal is a separate legal entity from the Bank and must provide for its own liquidity. At September 30, 2023, Security Federal had liquid assets of $27.0 million. In addition to its operating expenses, Security Federal is responsible for paying any dividends declared, if any, to its shareholders, funds paid for Security Federal stock repurchases, and payments on trust-preferred securities and subordinated debentures held at the Company level. Security Federal's main source of funds are dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends. We currently expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board of Directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.13 per share which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, and returning a substantial portion of our cash to our shareholders. Assuming continued payment during 2023 at this rate of $0.13 per share, our average total dividend paid each quarter would be approximately $423,000 based on the number of outstanding shares at September 30, 2023.
In addition, in June 2023, the Company announced that its Board of Directors approved a share repurchase program for the purchase of up to three percent, or approximately 97,612 shares, of the Company’s outstanding common stock as of that date. In general, stock-repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. During the quarter ended September 30, 2023, the Company repurchased 12,700 shares of its common stock at an aggregate cost of $292,000, leaving 84,912 shares available for further repurchase under the June 2023 stock repurchase program at September 30, 2023. The repurchase program does not obligate the Company to purchase any particular number of shares. For additional information, see Part II, Item 2 - “Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities.”
At September 30, 2023, the Bank exceeded all regulatory capital requirements with Common Equity Tier 1 Capital (CET1), Tier 1 leverage-based capital, Tier 1 risk-based capital, and total risk-based capital ratios of 18.1%, 10.1%, 18.1%, and 19.3%, respectively. To be categorized as “well capitalized” under the prompt corrective action provisions the Bank must maintain minimum CET1, total risk based capital, Tier 1 risk-based capital and Tier 1 leverage capital ratios of 6.5%, 10.0%, 8.0% and 5.0%, respectively. In addition to the minimum capital requirements, the Bank must maintain a capital conservation buffer, which consists of additional CET1 capital greater than 2.5% of risk weighted assets above the required minimum levels to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. At September 30, 2023 the Bank’s conservation buffer was 11.3%. For additional details, see “Note 12 - Regulatory Matters” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises principally from interest rate risk inherent in its lending, investment, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Company manages other risks such as credit quality and liquidity risk in the normal course of business, management considers interest rate risk to be its most significant market risk that could potentially have the largest material effect on the Company’s financial condition and results of operations. Other types of market risks such as foreign currency exchange rate risk and commodity price do not arise in the normal course of the Company’s business activities.
The Company’s profitability is affected by fluctuations in the market interest rate. Management’s goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. A sudden and substantial increase or decrease in interest rates may adversely impact the Company’s earnings to the extent that the interest rates on interest-earning assets and interest-bearing liabilities do not change at the same rate, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using a test that measures the impact on net interest income and net portfolio value of an immediate change in interest rates in 100 basis point increments. Net portfolio value is defined as the net present value of assets, liabilities, and off-balance sheet contracts. There were no material changes in information concerning market risk from the information provided in the Company’s 2022 Form 10-K.
For the nine months ended September 30, 2023, the Bank's interest rate spread, defined as the average yield on interest-earning assets less the average rate paid on interest-bearing liabilities, was 2.26%.
Item 4. Controls and Procedures
| (a) |
Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a - 15(e) of the Securities Exchange Act of 1934 (“Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management as of the end of the period covered by this quarterly report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that at September 30, 2023 the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms. |
| (b) |
Changes in Internal Control over Financial Reporting: There have been no significant changes in our internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |
The Company does not expect that its disclosure controls and procedures will prevent all error and or fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
The Company is not engaged in any legal proceedings of a material nature at the present time. From time to time, the Company is a party to legal proceedings in the ordinary course of business wherein it enforces its security interest in mortgage loans it has made.
There have been no material changes in the Risk Factors previously disclosed in Item 1A of the Company's 2022 Form 10-K.
Item 2 Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
(a) Not applicable
(b) Not applicable
(c) The following table summarizes common stock repurchases during the three months ended September 30, 2023:
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Repurchased as Part of Publicly Announced Plan or Program | Maximum Number of Shares that May Yet Be Repurchased Under the Plan or Program (1) | |||||||||||
| July 1, 2023 - July 31, 2023 | 0 | 0 | 97,612 | ||||||||||||
| August 1, 2023 - August 31, 2023 | 12,700 | $ | 23.00 | 12,700 | 84,912 | ||||||||||
| September 1, 2023 - September 30, 2023 | 0 | 0 | 84,912 | ||||||||||||
| Total for the quarter | 12,700 | 12,700 | |||||||||||||
| (1) |
On June 23, 2023, the Company announced that its Board of Directors approved a share repurchase program for the purchase of up to three percent, or approximately 97,612 shares, of the Company’s outstanding common stock as of that date. The June 2023 repurchase program does not have a set expiration date and will expire upon repurchase of the full amount of authorized shares. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. |
Item 3 Defaults Upon Senior Securities
None
Item 4 Mine Safety Disclosures
Not applicable
(a) Nothing to report.
(b) Nothing to report.
(c) Nothing to report.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
| 3.1 |
|
| 3.2 |
|
| 3.3 |
Certificate of Designations Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP (3) |
| 4.1 |
Form of Stock Certificate of the Company and other instruments defining the rights of security holders, including indentures (4) |
| 4.2 |
Form of Certificate for Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP (3) |
| 10.1 |
|
| 10.2 |
|
| 10.3 |
|
| 10.4 |
|
| 31.1 |
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act |
| 31.2 |
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act |
| 32 |
|
| 101 |
The following materials from Security Federal Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income (Loss); (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements |
| 104 |
Cover Page Interactive Data File (formatted in Inline XBRL and included in Exhibit 101) |
(1) Filed on June 26, 1998, as an exhibit to the Company’s Proxy Statement and incorporated herein by reference.
(2) Filed on January 16, 2015 as an exhibit to the Company’s Current Report on Form 8-K dated January 15, 2015 and incorporated herein by reference.
(3) Filed on May 24, 2022 as an exhibit to the Company's Current Report on Form 8-K dated May 18, 2022 and incorporated herein by reference.
(4) Filed on August 12, 1987, as an exhibit to the Company’s Registration Statement on Form 8-A and incorporated herein by reference.
(5) Filed on May 24, 2006 as an exhibit to the Company’s Current Report Statement and incorporated on Form 8-K dated May 18, 2006 and incorporated herein by reference.
(6) Filed on March 28, 2018, as an exhibit to the Company's Proxy Statement dated March 20, 2018 and incorporated herein by reference.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SECURITY FEDERAL CORPORATION | |||||
| Date: |
November 13, 2023 |
By: |
/s/J. Chris Verenes |
||
| J. Chris Verenes | |||||
| Chief Executive Officer | |||||
| Duly Authorized Representative |
| Date: |
November 13, 2023 | By: |
/s/Darrell Rains |
||
| Darrell Rains | |||||
| Chief Financial Officer | |||||
| Duly Authorized Representative |