Loans receivable, net, consisted of the following as of the dates indicated below:
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 loancredit 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 loancredit 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.
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 | | $ | | % |
| Amount | | Percent (1) | | Amount | | Percent (1) | | Increase (Decrease) | | Increase (Decrease) |
Non-accrual Loans: | | | | | | | | | | | |
Residential Real Estate | $ | 2,551,216 |
| | 0.67 | % | | $ | 2,488,158 |
| | 0.68 | % | | $ | 63,058 |
| | 2.5% |
Consumer | 453,189 |
| | 0.12 |
| | 241,571 |
| | 0.07 |
| | $ | 211,618 |
| | 87.6 |
Commercial Business | 217,700 |
| | 0.06 |
| | 145,401 |
| | 0.04 |
| | 72,299 |
| | 49.7 |
Commercial Real Estate | 4,298,231 |
| | 1.12 |
| | 2,639,837 |
| | 0.73 |
| | 1,658,394 |
| | 62.8 |
Total Non-accrual Loans | $ | 7,520,336 |
| | 1.97 | % | | $ | 5,514,967 |
| | 1.52 | % | | $ | 2,005,369 |
| | 36.4% |
(1) PERCENT OF TOTAL LOANS HELD FOR INVESTMENT, NET OF DEFERRED FEES AND LOANS IN PROCESS.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. Loans Receivable, Net, Continued
The following tables showtable shows non-accrual loans by category at the dates indicated.
| | | | | | | | | | | | | | | | | |
| CECL | | Incurred Loss |
| March 31, 2023 | | December 31, 2022 |
| Nonaccrual Loans with No Allowance | Nonaccrual Loans with an Allowance | Total Nonaccrual Loans | | Nonaccrual Loans |
Construction Real Estate | $ | 217,970 | | $ | — | | $ | 217,970 | | | $ | 114,630 | |
Residential Real Estate | 1,505,185 | | — | | 1,505,185 | | | 1,544,762 | |
Commercial Real Estate | 4,220,087 | | — | | 4,220,087 | | | 4,281,975 | |
Commercial and Agricultural | 101,142 | | — | | 101,142 | | | 112,652 | |
Consumer HELOC | 188,266 | | — | | 188,266 | | | 188,540 | |
Other Consumer | 35,549 | | — | | 35,549 | | | 28,671 | |
Total Nonaccrual Loans | $ | 6,268,199 | | $ | — | | $ | 6,268,199 | | | $ | 6,271,230 | |
The Company did not recognize any interest income on nonaccrual loans during the three months ended March 31, 2023.
The following table represents the accrued interest receivables written off by reversing interest income during the three months ended March 31, 2023:
| | | | | |
| For the Three Months Ended March 31, 2023 |
Construction Real Estate | $ | 2,882 | |
Residential Real Estate | 1,031 | |
Commercial Real Estate | — | |
Commercial and Agricultural | 1,103 | |
Consumer HELOC | — | |
Other Consumer | 143 | |
Total Loans | $ | 5,159 | |
| |
Allowance for Credit Losses
The following table shows the activity in the allowance for credit losses by category for the three months ended March 31, 2023 under the CECL methodology:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 |
| Real Estate | | Consumer | |
| Construction | Residential | Commercial | Commercial and Agricultural | HELOC | Other | Total |
Beginning Balance | $ | 2,323,397 | | $ | 2,124,835 | | $ | 4,804,282 | | $ | 874,092 | | $ | 598,807 | | $ | 452,340 | | $ | 11,177,753 | |
Adjustment to allowance for adoption of ASU 2016-13 | 263,737 | | 461,879 | | (340,492) | | 112,452 | | 107,548 | | 179,070 | | 784,194 | |
Provision for credit losses | (245,136) | | 477,263 | | (204,984) | | 154,789 | | (56,733) | | 39,801 | | 165,000 | |
Charge-Offs | — | | — | | — | | (15,880) | | — | | (34,940) | | (50,820) | |
Recoveries | 3,960 | | 8,400 | | 5,016 | | 5,300 | | 21,904 | | 6,103 | | 50,683 | |
Ending Balance | $ | 2,345,958 | | $ | 3,072,377 | | $ | 4,263,822 | | $ | 1,130,753 | | $ | 671,526 | | $ | 642,374 | | $ | 12,126,810 | |
| | | | | | | |
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
•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 details the amortized cost of collateral dependent loans:
| | | | | |
| March 31, 2023 |
Construction Real Estate | $ | 217,970 | |
Residential Real Estate | 1,062,365 | |
Commercial Real Estate | 4,220,087 | |
Commercial and Agricultural | 31,446 | |
Consumer HELOC | 47,683 | |
| |
Total Loans | $ | 5,579,551 | |
| |
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, 2017March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Real Estate | | Consumer | |
| Construction | Residential | Commercial | Commercial and Agricultural | HELOC | Other | Total |
Beginning Balance | $ | 2,401,196 | | $ | 1,663,423 | | $ | 4,832,440 | | $ | 1,241,828 | | $ | 517,512 | | $ | 430,765 | | $ | 11,087,164 | |
Provision for Loan Losses | (73,215) | | (44,818) | | 81,527 | | (22,242) | | 35,182 | | 23,566 | | — | |
Charge-Offs | — | | — | | — | | — | | — | | (31,871) | | (31,871) | |
Recoveries | 8,602 | | 9,711 | | 18,981 | | 23,333 | | 2,709 | | 10,334 | | 73,670 | |
Ending Balance | $ | 2,336,583 | | $ | 1,628,316 | | $ | 4,932,948 | | $ | 1,242,919 | | $ | 555,403 | | $ | 432,794 | | $ | 11,128,963 | |
Prior to the adoption of ASU 2016-13, loans were considered impaired when, based on current information and 2016: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 $200,000 and non-accrual consumer loans under $100,000 were considered immaterial and are excluded from the impairment review. The tables below include all loans deemed impaired, whether or not individually assessed for impairment. If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral.
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 |
| Residential Real Estate | | Consumer | | Commercial Business | | Commercial Real Estate | | Total |
Beginning Balance | $ | 1,450,176 |
| | $ | 1,122,473 |
| | $ | 880,642 |
| | $ | 4,749,341 |
| | $ | 8,202,632 |
|
Provision for Loan Losses | 80,766 |
| | 110,023 |
| | (842 | ) | | (89,947 | ) | | 100,000 |
|
Charge-Offs | (114,869 | ) | | (82,087 | ) | | — |
| | (62,482 | ) | | (259,438 | ) |
Recoveries | 1,014 |
| | 15,392 |
| | — |
| | 109,588 |
| | 125,994 |
|
Ending Balance | $ | 1,417,087 |
| | $ | 1,165,801 |
| | $ | 879,800 |
| | $ | 4,706,500 |
| | $ | 8,169,188 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
| Residential Real Estate | | Consumer | | Commercial Business | | Commercial Real Estate | | Total |
Beginning Balance | $ | 1,360,346 |
| | $ | 996,620 |
| | $ | 882,999 |
| | $ | 5,116,266 |
| | $ | 8,356,231 |
|
Provision for Loan Losses | 241,112 |
| | 234,342 |
| | 2,690 |
| | (378,144 | ) | | 100,000 |
|
Charge-Offs | (186,372 | ) | | (123,942 | ) | | (5,889 | ) | | (198,482 | ) | | (514,685 | ) |
Recoveries | 2,001 |
| | 58,781 |
| | — |
| | 166,860 |
| | 227,642 |
|
Ending Balance | $ | 1,417,087 |
| | $ | 1,165,801 |
| | $ | 879,800 |
| | $ | 4,706,500 |
| | $ | 8,169,188 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2016 |
| Residential Real Estate | | Consumer | | Commercial Business | | Commercial Real Estate | | Total |
Beginning Balance | $ | 1,462,636 |
| | $ | 1,115,976 |
| | $ | 865,867 |
| | $ | 4,950,735 |
| | $ | 8,395,214 |
|
Provision for Loan Losses | 31,415 |
| | (155,298 | ) | | 713,276 |
| | (589,393 | ) | | — |
|
Charge-Offs | (137,935 | ) | | (35,312 | ) | | (150,000 | ) | | — |
| | (323,247 | ) |
Recoveries | 1,228 |
| | 23,569 |
| | 11,731 |
| | 2,616 |
| | 39,144 |
|
Ending Balance | $ | 1,357,344 |
| | $ | 948,935 |
| | $ | 1,440,874 |
| | $ | 4,363,958 |
| | $ | 8,111,111 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2016 |
| Residential Real Estate | | Consumer | | Commercial Business | | Commercial Real Estate | | Total |
Beginning Balance | $ | 1,323,183 |
| | $ | 1,063,153 |
| | $ | 773,948 |
| | $ | 5,114,849 |
| | $ | 8,275,133 |
|
Provision for Loan Losses | 160,823 |
| | (1,501 | ) | | 805,195 |
| | (964,517 | ) | | — |
|
Charge-Offs | (137,935 | ) | | (189,193 | ) | | (150,000 | ) | | (202,618 | ) | | (679,746 | ) |
Recoveries | 11,273 |
| | 76,476 |
| | 11,731 |
| | 416,244 |
| | 515,724 |
|
Ending Balance | $ | 1,357,344 |
| | $ | 948,935 |
| | $ | 1,440,874 |
| | $ | 4,363,958 |
| | $ | 8,111,111 |
|
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
8. Loans Receivable, Net, Continued
The following tables present information related totable below summarizes the impaired loansloan balances evaluated individually and collectively for impairment inwithin the allowance for loan losses at the dates indicated:
|
| | | | | | | | | | | |
| Allowance For Loan Losses |
September 30, 2017 | Individually Evaluated For Impairment | | Collectively Evaluated For Impairment | | Total |
Residential Real Estate | $ | — |
| | $ | 1,417,087 |
| | $ | 1,417,087 |
|
Consumer | — |
| | 1,165,801 |
| | 1,165,801 |
|
Commercial Business | — |
| | 879,800 |
| | 879,800 |
|
Commercial Real Estate | — |
| | 4,706,500 |
| | 4,706,500 |
|
Total | $ | — |
| | $ | 8,169,188 |
| | $ | 8,169,188 |
|
|
| | | | | | | | | | | |
| Allowance For Loan Losses |
December 31, 2016 | Individually Evaluated For Impairment | | Collectively Evaluated For Impairment | | Total |
Residential Real Estate | $ | — |
| | $ | 1,360,346 |
| | $ | 1,360,346 |
|
Consumer | 1,699 |
| | 994,921 |
| | 996,620 |
|
Commercial Business | — |
| | 882,999 |
| | 882,999 |
|
Commercial Real Estate | 12,590 |
| | 5,103,676 |
| | 5,116,266 |
|
Total | $ | 14,289 |
| | $ | 8,341,942 |
| | $ | 8,356,231 |
|
The following tables present information related to impaired loans evaluated individually and collectively for impairment in loans receivable balances at the dates indicated: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 | $ | — | | $ | 2,323,397 | | $ | 2,323,397 | | | $ | 114,630 | | $ | 112,679,064 | | $ | 112,793,694 | |
Residential Real Estate | — | | 2,124,835 | | 2,124,835 | | | 1,089,308 | | 108,967,665 | | 110,056,973 | |
Commercial Real Estate | — | | 4,804,282 | | 4,804,282 | | | 4,281,702 | | 247,872,773 | | 252,154,475 | |
Commercial and Agricultural | — | | 874,092 | | 874,092 | | | 31,446 | | 30,616,529 | | 30,647,975 | |
Consumer HELOC | — | | 598,807 | | 598,807 | | | 48,792 | | 31,687,884 | | 31,736,676 | |
Other Consumer | — | | 452,340 | | 452,340 | | | — | | 23,598,110 | | 23,598,110 | |
Total | $ | — | | $ | 11,177,753 | | $ | 11,177,753 | | | $ | 5,565,878 | | $ | 555,422,025 | | $ | 560,987,903 | |
|
| | | | | | | | | | | |
| Loans Receivable |
September 30, 2017 | Individually Evaluated For Impairment | | Collectively Evaluated For Impairment | | Total |
Residential Real Estate | $ | 2,260,496 |
| | $ | 76,845,579 |
| | $ | 79,106,075 |
|
Consumer | 224,894 |
| | 56,639,340 |
| | 56,864,234 |
|
Commercial Business | 145,401 |
| | 23,351,372 |
| | 23,496,773 |
|
Commercial Real Estate | 7,259,347 |
| | 220,922,802 |
| | 228,182,149 |
|
Total | $ | 9,890,138 |
| | $ | 377,759,093 |
| | $ | 387,649,231 |
|
|
| | | | | | | | | | | |
| Loans Receivable |
December 31, 2016 | Individually Evaluated For Impairment | | Collectively Evaluated For Impairment | | Total |
Residential Real Estate | $ | 2,181,740 |
| | $ | 75,798,169 |
| | $ | 77,979,909 |
|
Consumer | 170,552 |
| | 50,497,342 |
| | 50,667,894 |
|
Commercial Business | 145,401 |
| | 16,133,776 |
| | 16,279,177 |
|
Commercial Real Estate | 5,830,341 |
| | 216,768,953 |
| | 222,599,294 |
|
Total | $ | 8,328,034 |
| | $ | 359,198,240 |
| | $ | 367,526,274 |
|
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. Loans Receivable, Net, Continued
Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired management measures the impairment and records the loan at fair value. Fair value is estimated using one of the following methods: fair value of the collateral less estimated costs to sell, discounted cash flows, or market value of the loan based on similar debt. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, the Company reviews the most recent appraisal and, if it is over 24 months old, will request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, management may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. The average balance of impaired loans was $10.3 million for the three months ended September 30, 2017 compared to $10.6 million for the three months ended September 30, 2016.
The following tables present information related to impaired loans by loan category at September 30, 2017 and December 31, 20162022 and for the three and nine months ended September 30, 2017 and 2016.March 31, 2022.
| | | | | | | | | | | | | | | |
| December 31, 2022 | | |
Impaired Loans | Recorded Investment | Unpaid Principal Balance | Related Allowance | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Construction Real Estate | $ | 114,630 | | $ | 114,630 | | $ | — | | | | | |
Residential Real Estate | 1,089,308 | | 1,626,308 | | — | | | | | |
Commercial Real Estate | 4,281,702 | | 4,281,702 | | — | | | | | |
Commercial and Agricultural | 31,446 | | 926,446 | | — | | | | | |
Consumer HELOC | 48,792 | | 48,792 | | — | | | | | |
Other Consumer | — | | — | | — | | | | | |
Total | $ | 5,565,878 | | $ | 6,997,878 | | $ | — | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Impaired Loans | Recorded Investment | Unpaid Principal Balance | Related Allowance | | Recorded Investment | Unpaid Principal Balance | Related Allowance |
With No Related Allowance Recorded: | | | | | | |
Residential Real Estate | $ | 2,260,496 |
| $ | 2,720,495 |
| $ | — |
| | $ | 2,181,740 |
| $ | 2,263,240 |
| $ | — |
|
Consumer | 224,894 |
| 252,704 |
| — |
| | 110,114 |
| 118,414 |
| — |
|
Commercial Business | 145,401 |
| 995,401 |
| — |
| | 145,401 |
| 995,401 |
| — |
|
Commercial Real Estate | 7,259,347 |
| 8,740,948 |
| — |
| | 5,424,701 |
| 7,207,688 |
| — |
|
With an Allowance Recorded: | | | | | | | |
Consumer | — |
| — |
| — |
| | 60,438 |
| 60,438 |
| 1,699 |
|
Commercial Real Estate | — |
| — |
| — |
| | 405,640 |
| 418,654 |
| 12,590 |
|
Total | | | | | | | |
Residential Real Estate | 2,260,496 |
| 2,720,495 |
| — |
| | 2,181,740 |
| 2,263,240 |
| — |
|
Consumer | 224,894 |
| 252,704 |
| — |
| | 170,552 |
| 178,852 |
| 1,699 |
|
Commercial Business | 145,401 |
| 995,401 |
| — |
| | 145,401 |
| 995,401 |
| — |
|
Commercial Real Estate | 7,259,347 |
| 8,740,948 |
| — |
| | 5,830,341 |
| 7,626,342 |
| 12,590 |
|
Total | $ | 9,890,138 |
| $ | 12,709,548 |
| $ | — |
| | $ | 8,328,034 |
| $ | 11,063,835 |
| $ | 14,289 |
|
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. Loans Receivable, Net, Continued
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 |
Impaired Loans | Average Recorded Investment | Interest Income Recognized | | Average Recorded Investment | Interest Income Recognized |
With No Related Allowance Recorded: | | | | | |
Residential Real Estate | $ | 2,613,299 |
| $ | 2,226 |
| | $ | 3,319,559 |
| $ | — |
|
Consumer | 240,005 |
| — |
| | 128,751 |
| — |
|
Commercial Business | 145,401 |
| — |
| | 296,401 |
| — |
|
Commercial Real Estate | 7,331,736 |
| 44,296 |
| | 6,180,761 |
| 67,380 |
|
With an Allowance Recorded: | | | | | |
Consumer | — |
| — |
| | 61,581 |
| 772 |
|
Commercial Real Estate | — |
| — |
| | 641,743 |
| 28,534 |
|
Total | | | | | |
Residential Real Estate | 2,613,299 |
| 2,226 |
| | 3,319,559 |
| — |
|
Consumer | 240,005 |
| — |
| | 190,332 |
| 772 |
|
Commercial Business | 145,401 |
| — |
| | 296,401 |
| — |
|
Commercial Real Estate | 7,331,736 |
| 44,296 |
| | 6,822,504 |
| 95,914 |
|
Total | $ | 10,330,441 |
| $ | 46,522 |
| | $ | 10,628,796 |
| $ | 96,686 |
|
|
| | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Impaired Loans | Average Recorded Investment | Interest Income Recognized | | Average Recorded Investment | Interest Income Recognized |
With No Related Allowance Recorded: | | | | | |
Residential Real Estate | $ | 2,939,263 |
| $ | 25,339 |
| | $ | 3,469,066 |
| $ | 8,282 |
|
Consumer | 294,002 |
| — |
| | 294,714 |
| — |
|
Commercial Business | 145,401 |
| — |
| | 301,881 |
| — |
|
Commercial Real Estate | 7,517,744 |
| 159,584 |
| | 8,589,845 |
| 192,017 |
|
With an Allowance Recorded: | | | | | |
Consumer | — |
| — |
| | 62,322 |
| 3,470 |
|
Commercial Real Estate | — |
| — |
| | 652,867 |
| 28,534 |
|
Total | | | | | |
Residential Real Estate | 2,939,263 |
| 25,339 |
| | 3,469,066 |
| 8,282 |
|
Consumer | 294,002 |
| — |
| | 357,036 |
| 3,470 |
|
Commercial Business | 145,401 |
| — |
| | 301,881 |
| — |
|
Commercial Real Estate | 7,517,744 |
| 159,584 |
| | 9,242,712 |
| 220,551 |
|
Total | $ | 10,896,410 |
| $ | 184,923 |
| | $ | 13,370,695 |
| $ | 232,303 |
|
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. Loans Receivable, Net, Continued
In the course of resolving delinquent loans, the Bank may choose to restructure the contractual terms of certain loans. A troubled debt restructuring ("TDR") is a restructuring in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that it would not otherwise consider (Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 310-40). The concessions granted on TDRs generally include terms to reduce the interest rate, extend the term of the debt obligation, or modify the payment structure on the debt obligation. The Bank grants such concessions to reassess the borrower’s financial status and develop a plan for repayment. TDRs included in impaired loans at September 30, 2017 and December 31, 2016 were $4.2 million and $4.6 million, respectively, and the Bank had no commitments at these dates to lend additional funds on these loans.
Loans on nonaccrual status at the date of modification are initially classified as nonaccrual TDRs. Loans on accruing status at the date of concession are initially classified as accruing TDRs if the loan is reasonably assured of repayment and performance is expected in accordance with its modified terms. Such loans may be designated as nonaccrual loans subsequent to the concession date if reasonable doubt exists as to the collection of interest or principal under the restructuring agreement. Nonaccrual TDRs are returned to accruing status when there is economic substance to the restructuring, there is documented credit evaluation of the borrower's financial condition, the remaining balance is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated sustained repayment performance in accordance with the modified terms for a reasonable period of time (generally a minimum of six months).
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| Three Months Ended March 31, 2022 | | |
Impaired Loans | Average Recorded Investment | Interest Income Recognized | | | |
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Construction Real Estate | $ | 18,511 | | $ | — | | | | |
Residential Real Estate | 1,239,308 | | — | | | | |
Commercial Real Estate | 1,038,300 | | — | | | | |
Commercial and Agricultural | 31,446 | | — | | | | |
Consumer HELOC | 96,578 | | — | | | | |
Other Consumer | — | | — | | | | |
Total | $ | 2,424,143 | | $ | — | | | | |
Modifications to Borrowers Experiencing Financial Difficulty
The Bankallowance 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.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 two modified loans with a combined balance of $375,000 at March 31, 2023, compared to two modified loans with a combined balance of $385,000 at December 31, 2022.
The Company did not modify any loans that were considered to be TDRsborrowers experiencing financial difficulty during the ninethree months ended September 30, 2017March 31, 2023 or 2022.
As of March 31, 2023 and 2016. At September 30, 2017, two2022, there were no loans totaling $611,000 that had previously been restructured as TDRs were inmodified with borrowers experiencing financial difficulty for which there was a payment default neither of which had been restructured within the last 12 months. One of these loans, with a balance of $41,000, defaulted during the nine month period ended September 30, 2017. In comparison, at September 30, 2016, six loans totaling $765,000 that had previously been restructured as TDRs were in default, and threemonths of the loans, with a balance of $637,000 defaulted during the nine month period ended September 30, 2016.restructuring date. The BankCompany considers any loan 30 days or more past due to be in default.
Our policyAllowance for Credit Losses - Unfunded Commitments
The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, 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 off-balance sheet credit exposures is adjusted as a provision for (reversal of) credit loss expense. 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 for unfunded loan commitments of $1.0 million and $0 at March 31, 2023 and December 31, 2022, respectively, is separately classified on the balance sheet within "Other Liabilities."
The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the three months ended March 31, 2023.
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| Total Allowance for Credit Losses - Unfunded Commitments | | | |
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| | | | |
Balance, December 31, 2022 | $ | — | | | | |
Adjustment to allowance for unfunded commitments for adoption of ASU 2016-13 | 1,213,614 | | | | |
(Reversal of) provision for unfunded commitments | (165,000) | | | | |
| | | | |
Balance, March 31, 2023 | $ | 1,048,614 | | | | |
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 9 - DEPOSITS
Deposits outstanding at the dates indicated are summarized below by account type as follows:
| | | | | | | | | | | | | | |
Deposit Account Type | | March 31, 2023 | | December 31, 2022 |
Checking | | $ | 474,947,532 | | | $ | 510,983,509 | |
Money Market | | 348,562,043 | | | 348,833,623 | |
Savings | | 102,392,660 | | | 108,237,098 | |
Certificates of Deposit | | 182,771,274 | | | 142,031,066 | |
Total | | $ | 1,108,673,509 | | | $ | 1,110,085,296 | |
The Bank had $5.0 million in brokered deposits, which are included in checking and money market deposits above, at March 31, 2023 and December 31, 2022. In addition, the Bank had $6.0 million and $6.0 million in brokered time deposits, and $68,000 and $98,000, in overdrafts that were reclassified to loans at March 31, 2023 and December 31, 2022, respectively.
Certificates of deposits that met or exceeded the FDIC insurance limit of $250,000 were $49.1 million and $30.3 million at March 31, 2023 and December 31, 2022, respectively. All deposits that met or exceeded the FDIC insurance limit totaled $310.2 million and $350.1 million at March 31, 2023 and December 31, 2022, respectively.
The amounts and scheduled maturities of all certificates of deposit at the dates indicated were as follows:
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Within 1 Year | $ | 133,984,928 | | | $ | 97,163,169 | |
After 1 Year, Within 2 Years | 36,761,162 | | | 31,550,543 | |
After 2 Years, Within 3 Years | 6,189,086 | | | 6,465,582 | |
After 3 Years, Within 4 Years | 2,680,079 | | | 3,177,916 | |
After 4 Years, Within 5 Years | 3,156,019 | | | 3,673,856 | |
| | | |
Total Certificates of Deposit | $ | 182,771,274 | | | $ | 142,031,066 | |
NOTE 10 - BORROWINGS
The Company had $27.8 million and $27.6 million in other borrowings at March 31, 2023 and December 31, 2022, respectively. These borrowings consist of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts. The repurchase agreements typically mature within one to three days and the interest rate paid on these borrowings floats monthly with money market type rates. The interest rate paid on the repurchase agreements was 1.39% at March 31, 2023 compared to 0.75% at December 31, 2022. Collateral pledged by the Company for these repurchase agreements consisted of investments with a combined amortized cost and fair value of $53.0 million and $50.3 million at March 31, 2023 and $52.3 million and $49.8 million at December 31, 2022, respectively.
During the first quarter of 2023, the Bank elected to participate in the Federal Reserve Bank Term Funding Program (“BTFP”), allowing the Bank to refinance its existing borrowings from Federal Reserve Discount Window in order to receive a lower fixed rate. Advances made under the BTFP are for up to one year and will be extended at the one year overnight index swap ("OIS") rate as of the day the advance is made plus 10 basis points. The interest rate will be fixed for the term of the advance on the day the advance is made. To determine the rate, the BTFP will use the fixed OIS rate based on the effective federal funds rate for a one-year maturity.
The Company had $61.4 million in outstanding borrowings under the BTFP with a weighted average borrowing rate of 4.39% at March 31, 2023 compared to $44.1 million in borrowings from the discount window of the Federal Reserve Bank of Atlanta at with a weighted average borrowing rate of 4.50% at December 31, 2022. Depository institutions may borrow from the discount window for periods as long as 90 days, and borrowings are prepayable and renewable by the borrower on a daily basis. At March 31, 2023, the Company had pledged as collateral for these borrowings investment securities with an amortized cost and fair value of $169.5 million and $157.3 million, compared to an amortized cost and fair value of $72.6 million and $69.2 million, respectively, at December 31, 2022, respectively.
There were no outstanding FHLB advances at March 31, 2023 and December 31, 2022. FHLB advances are secured by a blanket collateral agreement with the FHLB by pledging the Bank’s portfolio of residential first mortgage loans and investment securities. The Bank's pledged collateral for FHLB advances had an amortized cost and fair value of $60.8 million and $53.4 million at March 31, 2023, and $70.1 million and $61.1 million at December 31, 2022, respectively.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 170 basis points annually which was equal to 6.57% at March 31, 2023 compared to 6.47% at December 31, 2022. 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.
As of a result of the discontinuation of LIBOR, effective June 30, 2023, the Capital Securities will transition from its floating rate of three month LIBOR plus 170 basis points to a replacement rate which is expected to be the floating rate of three month Secured Overnight Financing Rate ("SOFR") as adjusted by the relevant spread adjustment of 0.26161 plus 170 basis points.
Subordinated Debentures
In November 2019, the Company sold and issued to certain institutional investors $17.5 million in aggregate principal amount of 5.25% fixed-to-floating rate subordinated notes due 2029 (the “10-Year Notes”) and $12.5 million in aggregate principal amount of 5.25% fixed-to-floating rate subordinated notes due 2034 (the “15-Year Notes”, and together with the 10-Year Notes, the “Notes”).
The 10-Year Notes have a stated maturity of November 22, 2029, and bear interest at a fixed rate of 5.25% per year, from and including November 22, 2019 but excluding November 22, 2024. From and including November 22, 2024 to but excluding the maturity date or early redemption date, the interest rate shall reset semi-annually to an interest rate equal to the then-current three-month LIBOR rate plus 369 basis points.
The 15-Year Notes have a stated maturity of November 22, 2034, and bear interest at a fixed rate of 5.25% per year, from and including November 22, 2019 but excluding November 22, 2029. From and including November 22, 2029 to but excluding the maturity date or early redemption date, the interest rate for the 15-Year Notes shall reset semi-annually to an interest rate equal to the then-current three-month LIBOR rate plus 357 basis points. The Notes are payable semi-annually in arrears on June 1 and December 1 of each year commencing June 1, 2020.
Both the 10-Year and 15-Note Year subordinated notes include remedies in the event that LIBOR is discontinued. The Company is currently determining an appropriate benchmark replacement for LIBOR. The Company expects the replacement benchmark to be materially consistent with the three-month LIBOR.
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 accrual of interest on loans restructured as a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms10-Year Notes, and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is probable. If a borrower was materially delinquent on payments prior to the restructuring but shows capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status.
We closely monitor these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. If, after previously being classified as a TDR, a loan is restructured a second time, then that loan is automatically placed on nonaccrual status. Our policyNovember 22, 2029, with respect to nonperforming loans requires the borrower15-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 make a minimumtime, after November 22, 2024 and November 22, 2029, respectively. The Notes are unsecured, subordinated obligations of six consecutive paymentsthe Company and rank junior in accordanceright to payment to the Company’s current and future senior indebtedness, and each Note is equal in right to payment with respect to the modified loan terms before that loan can be placed back on accrual status. In additionother Notes.
The Notes have been structured to this payment history,qualify as Tier 2 capital for the borrower must demonstrateCompany 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 $1.0 million in principal of the 10-Year Notes and $2.5 million in principal of the 15-Year Notes, leaving an abilityaggregate remaining principal balance of $16.5 million and $10.0 million, respectively.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to continue making payments on the loan prior to restoration of accrual status.Consolidated Financial Statements
9. Regulatory Matters
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 Board of Governors of the Federal Reserve.Reserve System (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 $1.0$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. If Security Federal Corporation was subject to regulatory guidelines for bank holding companies with $1.0 billion or more in assets, at September 30, 2017, it would have exceeded all regulatory capital requirements.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
9. Regulatory Matters, Continued
Based on its capital levels at September 30, 2017,March 31, 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, 2017,March 31, 2023, the Bank was considered to be "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 following tables below provide the Company’s and the Bank’s regulatory capital requirements and actual results at the dates indicated below:indicated.
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| Actual | | For Capital Adequacy | | To Be "Well-Capitalized" |
| Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
March 31, 2023 | (Dollars in Thousands) |
| | | | | | | | | | | |
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Tier 1 Risk-Based Core Capital (To Risk Weighted Assets) | $ | 142,406 | | | 17.9% | | $ | 47,863 | | | 6.0% | | $ | 63,817 | | | 8.0% |
Total Risk-Based Capital (To Risk Weighted Assets) | 152,417 | | | 19.1% | | 63,817 | | | 8.0% | | 79,772 | | | 10.0% |
Common Equity Tier 1 Capital (To Risk Weighted Assets) | 142,406 | | | 17.9% | | 35,897 | | | 4.5% | | 51,852 | | | 6.5% |
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets) | 142,406 | | | 10.4% | | 54,811 | | | 4.0% | | 68,513 | | | 5.0% |
December 31, 2022 | | | | | | | | | | | |
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| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
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Tier 1 Risk-Based Core Capital (To Risk Weighted Assets) | $ | 141,452 | | | 17.8% | | $ | 47,714 | | | 6.0% | | $ | 63,619 | | | 8.0% |
Total Risk-Based Capital (To Risk Weighted Assets) | 151,408 | | | 19.0% | | 63,619 | | | 8.0% | | 79,523 | | | 10.0% |
Common Equity Tier 1 Capital (To Risk Weighted Assets) | 141,452 | | | 17.8% | | 35,785 | | | 4.5% | | 51,690 | | | 6.5% |
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets) | 141,452 | | | 10.4% | | 54,372 | | | 4.0% | | 67,965 | | | 5.0% |
|
| | | | | | | | | | | | | | | | | |
| Actual | | For Capital Adequacy | | To Be "Well-Capitalized" |
(Dollars in Thousands) | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
SECURITY FEDERAL CORP. | September 30, 2017 |
Tier 1 Risk-Based Core Capital (To Risk Weighted Assets) | $ | 77,970 |
| | 15.5% | | $ | 30,227 |
| | 6.0% | | N/A | | N/A |
Total Risk-Based Capital (To Risk Weighted Assets) | 84,289 |
| | 16.7% | | 40,303 |
| | 8.0% | | N/A | | N/A |
Common Equity Tier 1 Capital (To Risk Weighted Assets) | 72,970 |
| | 14.5% | | 22,670 |
| | 4.5% | | N/A | | N/A |
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets) | 77,970 |
| | 9.1% | | 34,398 |
| | 4.0% | | N/A | | N/A |
SECURITY FEDERAL BANK | | | | | | | | | | | |
Tier 1 Risk-Based Core Capital (To Risk Weighted Assets) | $ | 88,802 |
| | 17.6% | | $ | 30,218 |
| | 6.0% | | $ | 40,290 |
| | 8.0% |
Total Risk-Based Capital (To Risk Weighted Assets) | 95,121 |
| | 18.9% | | 40,290 |
| | 8.0% | | 50,363 |
| | 10.0% |
Common Equity Tier 1 Capital (To Risk Weighted Assets) | 88,802 |
| | 17.6% | | 22,663 |
| | 4.5% | | 32,736 |
| | 6.5% |
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets) | 88,802 |
| | 10.3% | | 34,393 |
| | 4.0% | | 42,992 |
| | 5.0% |
| |
SECURITY FEDERAL CORP. | December 31, 2016 |
Tier 1 Risk-Based Core Capital (To Risk Weighted Assets) | $ | 73,787 |
| | 16.6% | | $ | 26,714 |
| | 6.0% | | N/A | | N/A |
Total Risk-Based Capital (To Risk Weighted Assets) | 79,383 |
| | 17.8% | | 35,618 |
| | 8.0% | | N/A | | N/A |
Common Equity Tier 1 Capital (To Risk Weighted Assets) | 68,787 |
| | 15.4% | | 20,035 |
| | 4.5% | | N/A | | N/A |
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets) | 73,787 |
| | 9.1% | | 32,548 |
| | 4.0% | | N/A | | N/A |
SECURITY FEDERAL BANK | | | | | | | | | | | |
Tier 1 Risk-Based Core Capital (To Risk Weighted Assets) | $ | 88,139 |
| | 19.8% | | $ | 26,694 |
| | 6.0% | | $ | 35,592 |
| | 8.0% |
Total Risk-Based Capital (To Risk Weighted Assets) | 93,735 |
| | 21.1% | | 35,592 |
| | 8.0% | | 44,490 |
| | 10.0% |
Common Equity Tier 1 Capital (To Risk Weighted Assets) | 88,139 |
| | 19.8% | | 20,021 |
| | 4.5% | | 28,919 |
| | 6.5% |
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets) | 88,139 |
| | 10.8% | | 32,587 |
| | 4.0% | | 40,734 |
| | 5.0% |
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
9. Regulatory Matters, Continued
In addition to the minimum common equity Tier 1 ("CET1"), Tier 1 and total capital ratios,requirements, the Bank now has tomust maintain a capital conservation buffer, consistingwhich consists of additional CET1Common Equity Tier 1 capital greater than 2.5% of risk weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases,repurchasing shares, and paying discretionary bonuses based on percentages of retained income that could be utilized for such actions. The new capitalbonuses. At March 31, 2023, the Bank’s conservation buffer requirement beganwas 11.1%.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and increases each year until fully implementedConsolidated Financial Statements
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
GAAP requires the Company to an amount equal to 2.5% of risk weighted assets in January 2019. At September 30, 2017 the Bank’s CET1 capital exceeded the required capital conservation buffer of 1.25%.
10. Carrying Amounts and Fair Value of Financial Instruments
The Company has adopted accounting guidance which definesdisclose fair value establishes a framework for measuringof financial instruments measured at amortized cost on the balance sheet and to measure that fair value and expands disclosures about fair valueusing 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 generally accepted accounting principles. This guidance applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.
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 has the ability to 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 Available for SaleAFS
Investment securities available for saleInvestments AFS are recorded at fair value on a recurring basis. At September 30, 2017,March 31, 2023, the Company’s investment portfolio was comprised of student loan pools, government and agency bonds, mortgage-backed securitiesMBS issued by government agencies or GSEs, private label CMO mortgage-backed securities and municipal securities, one state tax credit, and one equity investment.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.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. Carrying Amounts and Fair Value of Financial Instruments, Continued
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 of 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.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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, a loan is considered impairedthe Company designates individually evaluated loans with higher risk as collateral dependent loans and an allowance for loancredit losses is established as necessary. LoansCollateral dependent loans are loans for which itthe repayment is probable that payment of interest and principal will notexpected to be made in accordance withprovided substantially through the contractual termsoperation 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 agreement are considered impaired. Once a loanbasis based on the shortfall between the fair value of the loan's collateral, which is identified as impaired, management measures the impairment by determiningadjusted for estimated costs to sell, and amortized cost. If the fair value of the collateral forexceeds the loan.
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 impaired.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 impairedcollateral 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, 2017, our impairedMarch 31, 2023, all collateral dependent loans were generally evaluated based on the fair value of the collateral. Impaired loansLoans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The Company records impairedcollateral dependent loans as nonrecurring Level 3. At September 30, 2017 and December 31, 2016,
Other Real Estate Owned
Fair value adjustments to OREO are recorded at the recorded investment in impaired loans was $9.9 million and $8.3 million, respectively.
Foreclosed Assets
Foreclosed assets are adjusted tolower of carrying amount of the loan or fair value upon transfer of the loanscollateral less selling costs. Any write-downs based on the asset’s fair value at the date of acquisition are charged to foreclosed assets. Subsequently, foreclosed assets arethe allowance for credit losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of carrying valueits new cost basis or fair value. Fair value, is based upon independent market prices, appraised valuesnet of the collateral or management’s estimation of the value of the collateral.estimated costs to sell. Foreclosed assets are recorded as nonrecurring Level 3.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. Carrying Amounts and Fair Value of Financial Instruments, Continued
Assets measured at fair value on a recurring basis were as follows at September 30, 2017 and December 31, 2016:the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Student Loan Pools | $ | — | | | $ | 55,833,826 | | | $ | — | | | $ | — | | | $ | 59,156,982 | | | $ | — | |
SBA Bonds | — | | | 91,696,061 | | | — | | | — | | | 99,629,967 | | | — | |
Tax Exempt Municipal Bonds | — | | | 20,919,512 | | | — | | | — | | | 21,310,328 | | | — | |
Taxable Municipal Bonds | — | | | 52,935,070 | | | — | | | — | | | 50,769,739 | | | — | |
MBS | — | | | 319,685,604 | | | — | | | — | | | 319,281,268 | | | — | |
| | | | | | | | | | | |
Total | $ | — | | | $ | 541,070,073 | | | $ | — | | | $ | — | | | $ | 550,148,284 | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
FHLB Securities | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 998,000 |
| | $ | — |
|
FHLMC Bond | — |
| | 965,646 |
| | — |
| | — |
| | $ | — |
| | — |
|
SBA Bonds | — |
| | 124,803,549 |
| | — |
| | — |
| | 101,906,059 |
| | — |
|
Tax Exempt Municipal Bonds | — |
| | 80,815,027 |
| | — |
| | — |
| | 71,535,149 |
| | — |
|
Taxable Municipal Bonds | — |
| | 2,012,590 |
| | — |
| | — |
| | 1,991,130 |
| | — |
|
Mortgage-Backed Securities | — |
| | 179,834,621 |
| | — |
| | — |
| | 185,261,091 |
| | — |
|
State Tax Credit | — |
| | 56,800 |
| | — |
| | — |
| | — |
| | — |
|
Equity Securities | — |
| | 155,000 |
| | — |
| | — |
| | 368,000 |
| | — |
|
Total | $ | — |
| | $ | 388,643,233 |
| | $ | — |
| | $ | — |
| | $ | 362,059,429 |
| | $ | — |
|
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
There were no liabilities measured at fair value on a recurring basis at September 30, 2017March 31, 2023 or December 31, 2016.2022.
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 September 30, 2017 and December 31, 2016,the dates indicated, aggregated by the level in the fair value hierarchy within which those measurements fall.
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
Assets: | Level 1 | | Level 2 | | Level 3 | | Total |
Mortgage Loans Held For Sale | $ | — | | | $ | 240,841 | | | $ | — | | | $ | 240,841 | |
Collateral Dependent Loans (1) | — | | | — | | | 5,579,551 | | | 5,579,551 | |
Other Real Estate Owned | — | | | — | | | 119,700 | | | 119,700 | |
Land Held for Sale | — | | | — | | | 1,096,614 | | | 1,096,614 | |
Total | $ | — | | | $ | 240,841 | | | $ | 6,795,865 | | | $ | 7,036,706 | |
| | | September 30, 2017 | | December 31, 2022 |
Assets: | Level 1 | | Level 2 | | Level 3 | | Total | Assets: | Level 1 | | Level 2 | | Level 3 | | Total |
Mortgage Loans Held For Sale | $ | — |
| | $ | 1,270,410 |
| | $ | — |
| | $ | 1,270,410 |
| Mortgage Loans Held For Sale | $ | — | | | $ | 913,258 | | | $ | — | | | $ | 913,258 | |
Collateral Dependent Impaired Loans (1) | — |
| | — |
| | 9,890,138 |
| | 9,890,138 |
| |
Foreclosed Assets | — |
| | — |
| | 1,907,637 |
| | 1,907,637 |
| |
Collateral Dependent Loans (1) | | Collateral Dependent Loans (1) | — | | | — | | | 5,565,878 | | | 5,565,878 | |
Other Real Estate Owned | | Other Real Estate Owned | — | | | — | | | 119,700 | | | 119,700 | |
Land Held for Sale | | Land Held for Sale | — | | | — | | | 1,096,614 | | | 1,096,614 | |
Total | $ | — |
| | $ | 1,270,410 |
| | $ | 11,797,775 |
| | $ | 13,068,185 |
| Total | $ | — | | | $ | 913,258 | | | $ | 6,782,192 | | | $ | 7,695,450 | |
|
| | | | | | | | | | | | | | | |
| December 31, 2016 |
Assets: | Level 1 | | Level 2 | | Level 3 | | Total |
Mortgage Loans Held For Sale | $ | — |
| | $ | 4,243,907 |
| | $ | — |
| | $ | 4,243,907 |
|
Collateral Dependent Impaired Loans (1) | — |
| | — |
| | 8,313,745 |
| | 8,313,745 |
|
Foreclosed Assets | — |
| | — |
| | 2,721,214 |
| | 2,721,214 |
|
Total | $ | — |
| | $ | 4,243,907 |
| | $ | 11,034,959 |
| | $ | 15,278,866 |
|
(1) IMPAIRED LOANS ARE REPORTED NET OF SPECIFIC RESERVES OF $14,289 AT DECEMBERReported net of specific reserves. There were no specific reserves at March 31, 2016. THERE WERE NO SPECIFIC RESERVES AT SEPTEMBER 30, 2017.
2023 and December 31, 2022.
There were no liabilities measured at fair value on a nonrecurring basis at September 30, 2017March 31, 2023 or December 31, 2016.
2022.
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis at September 30, 2017,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 | March 31, 2023 | December 31, 2022 |
Land Held for Sale | | Appraised Value/Comparable Sales | Discounts to appraised values for estimated holding or selling costs | 10% | 10% |
Collateral Dependent Loans | | Appraised Value | Discounts to appraised values for estimated holding and/or selling costs or age of appraisal | 8% - 13% | 8% - 13% |
Other Real Estate Owned | | Appraised Value/Comparable Sales | Discounts to appraised values for estimated holding or selling costs | 30% | 30% |
| | | | | |
|
| | | | | | |
| | Valuation | Significant | |
Level 3 Assets | Fair Value | Technique | Unobservable Inputs | Range |
Collateral Dependent Impaired Loans | $ | 9,890,138 |
| Appraised Value | Discount Rates/ Discounts to Appraised Values | 0% - 72% |
Foreclosed Assets | $ | 1,907,637 |
| Appraised Value/Comparable Sales | Discount Rates/ Discounts to Appraised Values | 13% - 100% |
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. Carrying Amounts and Fair Value of Financial Instruments, Continued
For assets and liabilities that are not presented on the balance sheet at fair value, the following methods are used to determine the fair value:
Cash and Cash Equivalents—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—Banks—Fair value is based on market prices for similar assets.
Investment Securities Held to Maturity—SecuritiesHTM—Investment securities held to maturity are valued at quoted market prices or dealer quotes.
Loans Receivable, Net—Net—The fair value of loans areis estimated by discountingusing 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 also 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.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the currentfollowing 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 through the use of 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 at which similar loans would be made to borrowers with similarthat better capture inherent credit ratings andrisk over the lifetime of a loan. This consideration of enhanced credit risk provides an estimated exit price for the same remaining maturities. As discount rates are based on currentCompany’s loan rates as well as management estimates, theportfolio. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values presented may not be indicative of the value negotiated in an actual sale.approximate carrying values.
FHLB Stock—Stock—The fair value approximates the carrying value. No ready market exists for this stock, and it has no quoted market value; however, redemption of this stock has historically been at par value. Accordingly, par value is deemed to be a reasonable estimate of fair value.
Deposits—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—Advances and Borrowings from the FRB—Fair value is estimated based onusing discounted cash flows usingwith current market rates for advancesborrowings with similar terms. The Company had no outstanding FHLB advances as of March 31, 2023 or December 31, 2022.
Other Borrowed Money—Money—The carrying value of these short term borrowings approximates fair value.
Note Payable—The carrying value of the note payable approximates fair value.
Senior Convertible Debentures— 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—Debentures—The carrying value of junior subordinated debentures approximates fair value.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. Carrying Amounts and Fair Value of Financial Instruments, Continued
The following tables provide a summary of the carrying value and estimated fair value of the Company’s financial instruments at September 30, 2017 and December 31, 2016the dates indicated presented in accordance with the applicable accounting guidance.
| | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2023 | Carrying | | Fair Value |
| Amount | | Level 1 | | Level 2 | | Level 3 |
Financial Assets: | Dollars in thousands |
Cash and Cash Equivalents | $ | 24,719 | | | $ | 24,719 | | | $ | — | | | $ | — | |
Certificates of Deposits with Other Banks | 1,100 | | | — | | | 1,100 | | | — | |
Investment Securities AFS | 541,070 | | | — | | | 541,070 | | | — | |
Investment Securities HTM | 180,179 | | | — | | | 175,853 | | | — | |
Loans Receivable, Net | 574,190 | | | — | | | — | | | 557,843 | |
FHLB Stock | 659 | | | 659 | | | — | | | — | |
Land Held for Sale | 1,097 | | | — | | | — | | | 1,097 | |
Financial Liabilities: | | | | | | | |
Deposits: | | | | | | | |
Checking, Savings & Money Market Accounts | $ | 925,902 | | | $ | 925,902 | | | $ | — | | | $ | — | |
Certificates of Deposits | 182,771 | | | — | | | 179,810 | | | — | |
Borrowings from FRB | 61,375 | | | 61,191 | | | — | | | — | |
Other Borrowed Money | 27,818 | | | 27,818 | | | — | | | — | |
Subordinated Debentures | 26,500 | | | — | | | 24,135 | | | — | |
Junior Subordinated Debentures | 5,155 | | | — | | | 5,155 | | | — | |
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| Carrying | | Fair Value |
(In Thousands) | Amount | | Total | | Level 1 | | Level 2 | | Level 3 |
Financial Assets: | | | | | | | | | |
Cash and Cash Equivalents | $ | 15,159 |
| | $ | 15,159 |
| | $ | 15,159 |
| | $ | — |
| | $ | — |
|
Certificates of Deposits with Other Banks | 1,350 |
| | 1,350 |
| | — |
| | 1,350 |
| | — |
|
Investment and Mortgage-Backed Securities | 413,981 |
| | 414,212 |
| | — |
| | 414,212 |
| | — |
|
Loans Receivable, Net | 375,711 |
| | 374,295 |
| | — |
| | — |
| | 374,295 |
|
FHLB Stock | 2,474 |
| | 2,474 |
| | 2,474 |
| | — |
| | — |
|
Financial Liabilities: | | | | | | | | | |
Deposits: | | | | | | | | | |
Checking, Savings & Money Market Accounts | $ | 463,741 |
| | $ | 463,741 |
| | $ | 463,741 |
| | $ | — |
| | $ | — |
|
Certificate Accounts | 237,873 |
| | 236,225 |
| | — |
| | 236,225 |
| | — |
|
Advances from FHLB | 41,000 |
| | 40,775 |
| | — |
| | 40,775 |
| | — |
|
Other Borrowed Money | 12,356 |
| | 12,356 |
| | 12,356 |
| | — |
| | — |
|
Note Payable | 9,700 |
| | 9,700 |
| | — |
| | 9,700 |
| | — |
|
Senior Convertible Debentures | 6,064 |
| | 6,064 |
| | — |
| | 6,064 |
| | — |
|
Junior Subordinated Debentures | 5,155 |
| | 5,155 |
| | — |
| | 5,155 |
| | — |
|
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | Carrying | | Fair Value |
| Amount | | Level 1 | | Level 2 | | Level 3 |
Financial Assets: | Dollars in thousands |
Cash and Cash Equivalents | $ | 28,502 | | | $ | 28,502 | | | $ | — | | | $ | — | |
Certificates of Deposits with Other Banks | 1,100 | | | — | | | 1,100 | | | — | |
Investment Securities AFS | 550,148 | | | — | | | 550,148 | | | — | |
Investment Securities HTM | 167,438 | | | — | | | 161,464 | | | — | |
Loans Receivable, Net | 549,917 | | | — | | | — | | | 528,174 | |
FHLB Stock | 651 | | | 651 | | | — | | | — | |
Land Held for Sale | 1,097 | | | — | | | — | | | 1,097 | |
Financial Liabilities: | | | | | | | |
Deposits: | | | | | | | |
Checking, Savings & Money Market Accounts | $ | 968,054 | | | $ | 968,054 | | | $ | — | | | $ | — | |
Certificates of Deposits | 142,031 | | | — | | | 138,382 | | | — | |
Borrowings from FRB | 44,080 | | | 44,071 | | | — | | | — | |
Other Borrowed Money | 27,588 | | | 27,588 | | | — | | | — | |
Subordinated Debentures | 26,500 | | | — | | | 24,435 | | | — | |
Junior Subordinated Debentures | 5,155 | | | — | | | 5,155 | | | — | |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| Carrying | | Fair Value |
(In Thousands) | Amount | | Total | | Level 1 | | Level 2 | | Level 3 |
Financial Assets: | | | | | | | | | |
Cash and Cash Equivalents | $ | 9,375 |
| | $ | 9,375 |
| | $ | 9,375 |
| | $ | — |
| | $ | — |
|
Certificates of Deposits with Other Banks | 2,445 |
| | 2,445 |
| | — |
| | 2,445 |
| | — |
|
Investment and Mortgage-Backed Securities | 387,643 |
| | 387,430 |
| | — |
| | 387,430 |
| | — |
|
Loans Receivable, Net | 359,723 |
| | 357,457 |
| | — |
| | — |
| | 357,457 |
|
FHLB Stock | 2,777 |
| | 2,777 |
| | 2,777 |
| | — |
| | — |
|
Financial Liabilities: | | | | | | | | | |
Deposits: | | | | | | | | | |
Checking, Savings & Money Market Accounts | $ | 438,559 |
| | $ | 438,559 |
| | $ | 438,559 |
| | $ | — |
| | $ | — |
|
Certificate Accounts | 215,545 |
| | 214,149 |
| | — |
| | 214,149 |
| | — |
|
Advances from FHLB | 48,395 |
| | 48,153 |
| | — |
| | 48,153 |
| | — |
|
Other Borrowed Money | 9,338 |
| | 9,338 |
| | 9,338 |
| | — |
| | — |
|
Note Payable | 13,000 |
| | 13,000 |
| | — |
| | 13,000 |
| | — |
|
Senior Convertible Debentures | 5,155 |
| | 5,155 |
| | — |
| | 5,155 |
| | — |
|
Junior Subordinated Debentures | 6,084 |
| | 6,084 |
| | — |
| | 6,084 |
| | — |
|
At September 30, 2017,March 31, 2023, the Bank had $104.4$165.0 million ofin off-balance sheet financial commitments. These commitments are to originate loans and unused consumer lines of credit and credit card lines. Because these obligations are based on current market rates, if funded, the original principalprincipal amount is considered to be a reasonable estimate of fair value.
Fair value estimates are made on a specific date, based on relevant market data and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale the Bank’s entire holdings of a particular financial instrument.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. Carrying Amounts and Fair Value of Financial Instruments, Continued
Because no active market exists for a significant portion of the Bank’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 Bank 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.
11. Accounting and Reporting Changes
NOTE 14 - NON-INTEREST INCOME
The following is a summary of recent authoritative pronouncements that could affect accounting, reporting, and disclosure of financial information by the Company:Revenue Recognition
In May 2014, the FASB issued guidance to change the recognition ofaccordance with ASU 2014-09, Revenue from Contracts with Customers topic(Topic 606), revenues are recognized when control of the ASC. The core principle of the new guidancepromised goods or services is that an entity should recognize revenue to reflect the transfer of goods and servicestransferred to customers in an amount equal tothat reflects the consideration the entity receives orCompany expects to receive. This guidance also includes expanded disclosure requirementsbe entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a modified retrospective approach. As a bank holding company, key revenue sources, such as interest income have been identified as out ofdetermines are within the scope of this new guidance. The Company’s preliminary analysis suggests thatTopic 606, the adoption of this accounting standard is not expected to haveCompany performs the following five steps: (i) identify the contract(s) with a material impact oncustomer; (ii) identify the Company’s consolidated financial statements. New accounting guidance related to the adoption of this standard continues to be released by the FASB, which could impact the Company’s preliminary analysis of materiality and may change the preliminary conclusions reached as to the application of this new guidance.
In January 2016, the FASB amended the Financial Instruments topic of the ASC to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its consolidated financial statements. Management isperformance obligations in the planning stages of developing processes and procedures to comply withcontract; (iii) determine the disclosures requirements of this ASU, which could impacttransaction price; (iv) allocate the disclosures the Company makes related to fair value of its financial instruments.
In February 2016, the FASB amended the Leases topic of the ASC to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The effect of the adoption will depend on leases at time of adoption. Once adopted, we expect to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities related to certain banking offices and certain equipment under noncancelable operating lease agreements, however, based on current leases the adoption is not expected to have a material impact on the Company's consolidated financial statements.
In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The effective date and impact on the Company's consolidated financial statements for this update are the same as those described in the Revenue from Contracts with Customers topic issued in May 2014 and August 2015 discussed above.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
11. AccountingService Fees on Deposit Accounts
The Bank earns fees from its deposit customers for account maintenance, transaction-based and Reporting Changes, Continuedoverdraft services. Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis 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.
In March 2016,ATM and Check Card Fee Income
Check card fee income represents fees earned when a debit card issued by the FASB issued guidanceBank is used. The Bank 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 simplify several aspectsthe 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 Bank 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 Bank, there were no changes in the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classificationtrust income.
Gains/Losses on OREO Sales
Gains/losses on the statementsale of cash flows. Additionally,OREO are included in non-interest expense and are generally recognized when the guidance simplifies two areas specificperformance obligation is complete. This is typically at delivery of control over the property to entities other than public business entities allowing them apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awardsbuyer at fair value to measuring them at intrinsic value. the time of each real estate closing.
The amendments were effectivefollowing table presents the Company's non-interest income for the Company for annual periods beginning after December 15, 2016 and interim periodsindicated. All of the Company’s revenue from contracts with customers within those annual periods. These amendments did not have a material effectthe scope of ASC 606 is recognized in non-interest income, with the exception of gains on the Company's consolidated financial statements.
In April 2016, the FASB amended the Revenue from Contracts with Customers topicsale of the ASC to clarify guidance related to identifying performance obligations and accounting for licenses of intellectual property. The effective date and impact on the Company's consolidated financial statements for this guidanceOREO, which are the same as those described in the Revenue from Contracts with Customers topic issued in May 2014 and August 2015 discussed above.
In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The effective date and impact on the Company's consolidated financial statements for this guidance are the same as those described in the Revenue from Contracts with Customers topic issued in May 2014 and August 2015 discussed above.
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The guidance significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for all entities beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of identifying required changes to the loan loss estimation models and processes and evaluating the impact of this new guidance. Once adopted, we expect our allowance for loan losses to increase, however, until our evaluation is complete the magnitude of the increase will be unknown.
In August 2016, the FASB amended the Statement of Cash Flows topic of the ASC to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
In January 2017, the FASB amended the Codification for SEC staff announcements made at recent Emerging Issues Task Force (EITF) meetings. The SEC guidance that specifically relates to the Company’s consolidated financial statements was from the September 2016 meeting, where the SEC staff expressed their expectations about the extent of disclosures registrants should make about the effects of the new FASB guidance as well as any amendments issued prior to adoption, in particular on revenue, leases and credit losses on financial instruments in accordance with Staff Accounting Bulletin Topic 11.M. Entities are required to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases where a company cannot reasonably estimate the impact of the adoption, then additional qualitative disclosures should be considered. The Company has adopted the amendments in this guidance and appropriate disclosures have been included in this Note for each recently issued accounting standard.
In March 2017, the FASB issued guidance on Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The guidance shortens the amortization period for certain callable debt securities held at a premium. The amendments will be effective for the Company for reporting periods beginning after December 15, 2018. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
In May 2017, the FASB amended the requirements in the Compensation-Stock Compensation topic of the ASC related to changes to the terms or conditions of a share-based payment award. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
non-interest expense when applicable.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Non-interest income: | | | | | | | |
| | | | | | | |
Gain on Sale of Loans (1) | $ | 193,881 | | | $ | 713,893 | | | | | |
Service Fees on Deposit Accounts | 269,613 | | | 257,491 | | | | | |
Commissions From Insurance Agency (1) | 162,799 | | | 139,504 | | | | | |
Trust Income | 382,208 | | | 364,746 | | | | | |
BOLI Income (1) | 150,204 | | | 157,241 | | | | | |
ATM and Check Card Fee Income | 802,022 | | | 717,267 | | | | | |
| | | | | | | |
Other (1) | 239,650 | | | 253,182 | | | | | |
Total non-interest income | $ | 2,200,377 | | $ | 2,603,324 | | | | |
(1) Not within the scope of ASC 606 | | | | | | | |
11. Accounting
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 15 - LEASES
The Company has operating leases on six of its branches. During the three months ended March 31, 2023, the Company made cash payments in the amount of $128,000 for operating leases. The lease expense recognized during this period was $128,000 and Reporting Changes, Continuedwas recorded in occupancy expense within the Consolidated Statements of Income. The lease liability had a net decrease of $111,000. At March 31, 2023, the Bank had ROU assets of $1.7 million and a lease liability of $1.8 million recorded on its consolidated balance sheet compared to ROU assets of $1.9 million and a lease liability of $1.9 million at December 31, 2022. The lease agreements have maturity dates ranging from 2023 through 2028, some of which include options for multiple five or ten year extensions. At March 31, 2023, the remaining weighted average lease term was 3.86 years and the weighted average discount rate used was 3.2%.
In August 2017,
At March 31, 2023, maturities of operating lease liabilities for future periods were as follows:
| | | | | |
| |
Remainder of 2023 | $ | 389,688 | |
2024 | 522,147 | |
2025 | 474,815 | |
2026 | 363,428 | |
2027 | 149,301 | |
Thereafter | 10,371 | |
Total undiscounted lease payments | 1,909,750 | |
Less: effect of discounting | (116,161) | |
Present value of estimated lease payments (lease liability) | $ | 1,793,589 | |
NOTE 16 - PREFERRED STOCK
On May 24, 2022, the FASB amendedCompany entered into a Letter Agreement (“Agreement”) with the hedge accounting recognitionU.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 presentation requirements in ASC 815moderate-income community financial institutions and minority depository institutions to (1) improveprovide 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 transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. The amendments permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships. In addition, the amendments require an entity to present the earningseconomic effect of the hedging instrumentCOVID-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 82,949 shares of Preferred Stock for an aggregate purchase price of $82.9 million in cash.This ECIP investment is treated as tier 1 capital. The Preferred Stock bears no dividend for the first 24 months following the investment date. Thereafter, the dividend rate will be adjusted, not higher than 2%, based on the lending growth criteria listed in the same income statement line item in whichAgreement. After the earnings effecttenth anniversary of the hedged item is reported. The amendments are effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
Other accounting standards that have been issued or proposed byinvestment date, the FASB or other standards-setting authorities are not expected to have a material impactdividend rate will be fixed based on the Company’s consolidated financial position, resultsaverage annual amount of operationslending in years 2 through 10. Dividends will be payable quarterly in arrears on March 15, June 15, September 15, and December 15.
The Preferred Stock may be redeemed at the option of the Company on or cash flows.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.
12. Subsequent Events
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. Nonrecognized 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 that requiredrequiring accrual or disclosure.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
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 caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as increasing prices and supply chain disruptions, and any governmental or societal responses to new variants of the novel coronavirus disease 2019 (“COVID-19”);
•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 loancredit losses and provision for loancredit 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 loancredit losses not being adequate to cover actual losses, and require us to materially increase our allowance for loancredit 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;
•results of examinations of the Company by the Board of Governors of the Federal Reserve System ("Federal Reserve") and our bank subsidiarythe Bank by the FDICFederal 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 loancredit 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 the effect of the Dodd-Frank Wall Street Reformchanges in banking, securities and Consumer Protection Act; changestax law, and in regulatory policies and principles, or the interpretation of regulatory capital requirements or other rules, including as a result of Basel III;rules;
•our ability to attract and retain deposits;
increases in premiums for deposit insurance;
•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;
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
•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;
computer•disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on which we depend could fail or experience a security breach;the third-party vendors who perform several of our critical processing;
•our ability to 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;
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
•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 servicesservices; and the
•other risks described elsewhere in this document.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”).
Some of these and other factorsforward-looking statements are discussed in the Company's 20162022 Form 10-K as well as other risk factors under Item 1A, “Risk Factors.” Such developments could have an adverse impact on our consolidated financial position and results of operations.
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 risksfactors could cause our actual results for 20172023 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, 2017 and December 31, 2016
Assets
Total assets increased $48.5 million or 6.0% to $861.1 million at September 30, 2017 from $812.7 million at December 31, 2016. Changes in total assets were primarily concentrated in the following asset categories:
|
| | | | | | | | | | | | | |
| | | | | Increase (Decrease) |
| September 30, 2017 | | December 31, 2016 | | Amount | | Percent |
Cash and Cash Equivalents | $ | 15,158,779 |
| | $ | 9,374,549 |
| | $ | 5,784,230 |
| | 61.7% |
Certificates of Deposits with Other Banks | 1,350,005 |
| | 2,445,005 |
| | (1,095,000 | ) | | (44.8) |
Investment and Mortgage-Backed Securities – AFS | 388,643,233 |
| | 362,059,429 |
| | 26,583,804 |
| | 7.3 |
Investment and Mortgage-Backed Securities – HTM | 25,337,966 |
| | 25,583,956 |
| | (245,990 | ) | | (1.0) |
Loans Receivable, Net | 375,711,468 |
| | 359,722,846 |
| | 15,988,622 |
| | 4.4 |
OREO | 1,907,637 |
| | 2,721,214 |
| | (813,577 | ) | | (29.9) |
Premises and Equipment, Net | 22,865,424 |
| | 21,197,684 |
| | 1,667,740 |
| | 7.9 |
FHLB Stock | 2,473,700 |
| | 2,776,500 |
| | (302,800 | ) | | (10.9) |
BOLI | 18,665,893 |
| | 17,101,045 |
| | 1,564,848 |
| | 9.2 |
Other Assets | 4,593,887 |
| | 5,447,746 |
| | (853,859 | ) | | (15.7) |
Cash and cash equivalents increased $5.8 million or 61.7% to $15.2 million at September 30, 2017 from $9.4 million at December 31, 2016. Certificates of deposits with other banks decreased $1.1 million or 44.8% to $1.4 million at September 30, 2017. The decrease was due to the maturity and redemption of six of the Bank's lower yield time deposits with other banks during the first nine months of 2017.
Investment and mortgage-backed securities available for sale increased $26.6 million or 7.3% to $388.6 million at September 30, 2017 from $362.1 million at December 31, 2016. Investment and mortgage-backed securities held to maturity decreased $246,000 or 1.0% to $25.3 million at September 30, 2017 from $25.6 million at December 31, 2016. The Bank purchased 64 investment and mortgage-backed securities classified as available for sale for $118.6 million and three investment securities classified as held to maturity for $4.0 million during the first nine months of 2017.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial Condition at March 31, 2023 and December 31, 2022
Assets - Total assets increased $24.7 million to $1.4 billion at March 31, 2023 from $1.4 billion at December 31, 2022. This increase was primarily due to increases in investments held to maturity ("HTM") and loans receivable, net, which were partially offset by decreases in cash and cash equivalents and investments available for sale ("AFS"). Changes in total assets are shown below.
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Increase (Decrease) |
| March 31, 2023 | | December 31, 2022 | | $ | | % |
Cash and Cash Equivalents | $ | 24,719,440 | | | $ | 28,502,364 | | | $ | (3,782,924) | | | (13.3) | % |
Certificates of Deposits with Other Banks | 1,100,045 | | | 1,100,045 | | | — | | | — | |
Investments AFS | 541,070,073 | | | 550,148,284 | | | (9,078,211) | | | (1.7) | |
Investments HTM | 180,178,508 | | | 167,437,616 | | | 12,740,892 | | | 7.6 | |
Total Loans Receivable, Net | 574,430,550 | | | 549,917,170 | | | 24,513,380 | | | 4.5 | |
Accrued Interest Receivable | 5,359,687 | | | 4,810,674 | | | 549,013 | | | 11.4 | |
OREO | 119,700 | | | 119,700 | | | — | | | — | |
Operating Lease ROU Assets | 1,747,944 | | | 1,860,997 | | | (113,053) | | | (6.1) | |
Land Held for Sale | 1,096,614 | | | 1,096,614 | | | — | | | — | |
Premises and Equipment, Net | 28,674,858 | | | 27,959,793 | | | 715,065 | | | 2.6 | |
FHLB Stock | 658,600 | | | 650,600 | | | 8,000 | | | 1.2 | |
BOLI | 27,468,302 | | | 27,318,098 | | | 150,204 | | | 0.5 | |
Goodwill | 1,199,754 | | | 1,199,754 | | | — | | | — | |
Other Assets | 18,269,716 | | | 19,244,454 | | | (974,738) | | | (5.1) | |
Total Assets | $ | 1,406,093,791 | | | $ | 1,381,366,163 | | | $ | 24,727,628 | | | 1.8% |
Cash and cash equivalents decreased $3.8 million or 13.3% to $24.7 million at March 31, 2023 compared to $28.5 million at December 31, 2022, as a result of the purchase of investments HTM and funding of loans. Investments HTM increased $12.7 million to $180.2 million at March 31, 2023 from $167.4 million at December 31, 2022.
Investments AFS decreased $9.1 million or 1.7% to $541.1 million at March 31, 2023 from $550.1 million at December 31, 2022 as maturities and principal paydowns of investments AFS exceeded purchases during the three months ended March 31, 2023. Additionally, investments AFS experienced a $5.6 million increase in fair value during the three months ended March 31, 2023.
Loans receivable, net, including loans held for sale, increased $16.0$24.5 million or 4.4%4.5% to $375.7$574.4 million at September 30, 2017March 31, 2023 from $359.7$549.9 million at December 31, 2016 as a result2022, primarily due to residential mortgage, commercial real estate, commercial and agricultural loans originated during the period. All held for investment loan balances increased during the first quarter of increased loan originations in all loan categories2023 with the exception of construction loans, held for sale, which decreased $3.0$4.1 million or 70.1%3.6% to $1.3$108.7 million at September 30, 2017March 31, 2023 from $4.2$112.8 million at December 31, 2016. Consumer loans increased $6.2 million or 12.2% to $56.9 million at September 30, 2017 compared to $50.7 million at December 31, 2016. Commercial business loans increased $7.2 million or 44.3% to $23.5 million at September 30, 2017 from $16.3 million at December 31, 2016.2022. Commercial real estate loans increased $5.6$3.2 million or 2.5%1.3% to $228.2$255.3 million at September 30, 2017March 31, 2023 from $222.6$252.2 million at December 31, 2016.2022. Residential real estatemortgage loans increased $1.1$21.9 million or 1.4%19.9% to $79.1$132.0 million at September 30, 2017March 31, 2023 from $78.0$110.1 million at December 31, 2016.
OREO decreased $814,0002022. Consumer HELOC increased $281,000 or 29.9%0.9% to $1.9$32.0 million at September 30, 2017March 31, 2023 from $2.7$31.7 million at December 31, 2016. The decrease was due2022. Other consumer loans increased $588,000 or 2.5% to the sale of 11 OREO properties during the nine months ended September 30, 2017, with a total book value of $1.2 million, offset slightly by the addition of five OREO properties with a book value of $486,000. At September 30, 2017, OREO consisted of the following real estate properties: five single-family residences and 27 lots within residential subdivisions located throughout our market areas in South Carolina and Georgia; five parcels of commercial land in South Carolina; and two commercial buildings in South Carolina.
Premises and equipment, net increased $1.7 million or 7.9% to $22.9$24.2 million at September 30, 2017March 31, 2023 from $21.2$23.6 million at December 31, 2016. The increase was primarily due2022. Loans held for sale, decreased $672,000 or 73.6% to additions related$241,000 at March 31, 2023 from $913,000 at December 31, 2022.
Other assets decreased $975,000 or 5.1% to the construction of the Bank's new branch in Evans, Georgia, which opened in April 2017.
FHLB stock decreased $303,000 or 10.9% to $2.5$18.3 million at September 30, 2017 compared to $2.8March 31, 2023 from $19.2 million at December 31, 2016 as a result of stock redemptions by the FHLB of Atlanta. The Bank, as a member of the FHLB of Atlanta, is required to acquire and hold shares of capital stock in the FHLB of Atlanta in an amount equal to a membership component, which is 0.09% of total assets, plus a transaction component, which is 4.25% of outstanding advances (borrowings) from the FHLB of Atlanta. As the Bank's total advances have decreased, so has its required investment in FHLB stock.
The cash value of BOLI increased $1.6 million or 9.2% to $18.7 million at September 30, 2017 compared to $17.1 million at December 31, 2016 primarily due to the purchase of 15 additional policies for a total of $2.0 million during the first nine months of 2017. BOLI, which earns tax-free yields, is utilized to partially offset the cost of the Company’s employee benefits programs and to provide key person insurance on certain officers of the Company.
Other assets decreased $854,000 or 15.7% to $4.6 million at September 30, 2017 from $5.4 million at December 31, 2016.2022. The decrease was primarily the result of a $1.6$1.4 million decrease in net deferred taxes, which was related to increaseddecreased unrealized gainslosses in the investment portfolio. The decrease in net deferred taxes was offset partially by increases of $444,000 and $320,000 in principal payments receivable on investment securities and prepaid assets, respectively, during, the same period.portfolio at March 31, 2023.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
Liabilities
Deposit Accounts
Total deposits increased $47.5decreased $1.4 million or 7.3%0.1% to $701.6 million$1.11 billion at September 30, 2017 compared to $654.1 million atMarch 31, 2023 from December 31, 2016. Checking2022 due to decreases in checking and certificate deposits accounted for thesavings accounts, partially offset by an increase in higher cost certificates of deposits. The majority of the growth, increasing $25.2Bank’s deposits are originated within the Bank’s immediate market area. The Bank had $6.0 million and $22.3 million, respectively, during 2017. The balances, weighted average rates and increases and decreases in deposit accounts were as followsbrokered time deposits at September 30, 2017both March 31, 2023 and December 31, 2016:
|
| | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 | | Balance Increase (Decrease) |
| Balance | Weighted Rate | | Balance | Weighted Rate | | Amount |
Percent |
Demand Accounts: | | | | | | | | |
Checking | $ | 193,586,490 |
| 0.03% | | $ | 171,133,555 |
| 0.02% | | $ | 22,452,935 |
| 13.1% |
Money Market | 227,880,092 |
| 0.23 | | 230,902,038 |
| 0.20 | | (3,021,946 | ) | (1.3) |
Statement Savings Accounts | 42,273,930 |
| 0.11 | | 36,522,989 |
| 0.10 | | 5,750,941 |
| 15.7 |
Total | $ | 463,740,512 |
| 0.14% | | $ | 438,558,582 |
| 0.12% | | $ | 25,181,930 |
| 5.7% |
Certificate Accounts | | | | | | | | |
0.00 – 0.99% | $ | 137,325,410 |
| | | $ | 148,370,515 |
| | | $ | (11,045,105 | ) | (7.4)% |
1.00 – 1.99% | 99,395,482 |
| | | 66,532,221 |
| | | 32,863,261 |
| 49.4 |
2.00 – 2.99% | 1,151,956 |
| | | 641,960 |
| | | 509,996 |
| 79.4 |
Total | $ | 237,872,848 |
| 0.88% | | $ | 215,544,696 |
| 0.78% | | $ | 22,328,152 |
| 10.4% |
Total Deposits | $ | 701,613,360 |
| 0.39% | | $ | 654,103,278 |
| 0.34% | | $ | 47,510,082 |
| 7.3% |
Included2022. 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 certificate accounts above were $31.5 million and $40.3Bank 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 September 30, 2017both March 31, 2023 and December 31, 2016, respectively, with a weighted average interest rate2022. At March 31, 2023, approximately $310.2 million of 1.21%our $1.11 billion deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies and 1.14%, respectively.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.
Advances From FHLBBorrowings
FHLB advances are summarized by contractual year
The Bank had $61.4 million in borrowings from the Federal Reserve Bank of maturity and weighted average interest rateAtlanta (“FRB”) at March 31, 2023, compared to $44.1 million at December 31, 2022. During the first quarter of 2023, the Bank elected to participate in the table below:
|
| | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 | | Increase (Decrease) |
Year Due: | Balance | Rate | | Balance | Rate | | Balance | Percent |
2017 | $ | — |
| —% | | $ | 15,395,000 |
| 0.76% | | $ | (15,395,000 | ) | (100.0)% |
2018 | 13,000,000 |
| 1.08 | | 18,000,000 |
| 1.06 | | (5,000,000 | ) | (27.8) |
2019 | 20,500,000 |
| 1.39 | | 12,000,000 |
| 1.31 | | 8,500,000 |
| 70.8 |
2020 | 7,500,000 |
| 1.58 | | 3,000,000 |
| 1.38 | | 4,500,000 |
| 150.0 |
Total Advances | $ | 41,000,000 |
| 1.32% | | $ | 48,395,000 |
| 1.05% | | $ | (7,395,000 | ) | (15.3)% |
Advances are secured by a blanket collateral agreement with the FHLB pledging the Bank’s portfolio of residential first mortgage loans and investment securities with an amortized cost and fair value of $74.5 million and $69.5 million at September 30, 2017,respectively, and $73.3 million and $71.1 million at December 31, 2016, respectively.
There were no callable FHLB advances at September 30, 2017. Callable advances are callable at the option of the FHLB. If an advance is called,Federal Reserve Bank Term Funding Program (“BTFP”) program, allowing the Bank has the option to pay off the advance without penalty, re-borrow funds on different terms, or convert the advance to a three-month floating rate advance tied to LIBOR.
Other Borrowings
refinance its existing FRB borrowings. The Bank also had $12.4$27.8 million in other borrowings (non-FHLB advances) at September 30, 2017, an increase of $3.0March 31, 2023, compared to $27.6 million or 32.3% from $9.3 million atand December 31, 2016. These borrowings consist2022, which consisted of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts. The repurchase agreements typically mature within oneFor additional information, see “Note 10 – Borrowings” of the Notes to three days and the interest rate paid on these borrowings floats monthly with money market type rates. Consolidated Financial Statements included in Part I. Item 1 of this report.
At both September 30, 2017March 31, 203 and December 31, 2016,2022, the interest rateCompany 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 increased $6.3 million or 3.9% to $166.5 million at March 31, 2023 from $160.2 million at December 31, 2022. The increase was primarily attributable to year to date net income of $2.7 million combined with a $5.6 million decrease in accumulated other comprehensive loss, net of tax. The decrease in net accumulated other comprehensive loss, net of tax, was related to the unrecognized gain in fair value of investments AFS during the three months ended March 31, 2023. The increases were partially offset by a $1.6 million adjustment to retained earnings related to the adoption of ASC 326 on January 1, 2023 and $423,000 in dividends paid onto common shareholders during the repurchase agreements was 0.15%.three months ended March 31, 2023.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations for the Quarters Ended March 31, 2023 and 2022
Net Income
Net income increased $1.1 million, or 72.6%, to $2.7 million or $0.82 per basic common share for the quarter ended March 31, 2023 compared to $1.5 million or $0.48 per basic common share for the quarter ended March 31, 2022. The Bank had pledgedincrease in net income was primarily due to an increase in net interest income as collateral for these repurchase agreements investmenta result of increased market interest rates and, mortgage-backed securities with amortized coststo a lesser extent, higher average balances of investments and fair values of $16.9 million and $17.3 million, respectively, at September 30, 2017 and $17.6 million and $17.9 million, respectively, at December 31, 2016.
Note Payable
On October 31, 2016,loans receivable, net. Since March 2022, in response to inflation, the Company repurchased all 22,000 shares of its Series B Preferred Stock from the United States Department of the Treasury ("Treasury") for $21.4 million. In connection with the funding of this repurchase, the Company obtained a $14.0 million unsecured term loan from another financial institution. The loan accrues and pays interest quarterly at a floating rate of the Wall Street Journal Prime index minus 30 basis points, which was equal to 3.95% at September 30, 2017. The unpaid principal balance is payable in 11 consecutive quarterly payments of $437,500 each, with a balloon payment equal to the entire remaining principal balance due on October 1, 2019. At September 30, 2017, the remaining principal balance on the loan was $9.7 million.
The note has the following covenants with which the Bank must maintain compliance: the Bank must maintain a "Well Capitalized" rating in accordance with regulatory standards, a Risk-Based Capital Ratio of not less than 12.00%, a “Modified” Texas Ratio of not more than 30.00%, and an annual return on assets of at least 0.60%. The Bank is also required to maintain a loan loss reserve an amount deemed adequate by all federal and state regulatory authorities. Management of the Bank reviews these covenants quarterly for compliance. At September 30, 2017, the Bank was in compliance with all of these covenants.
Junior Subordinated Debentures
On September 21, 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”Open Market Committee (“FMOC”) of the Company which are reported onFederal Reserve has increased the Consolidated Balance Sheets as junior subordinated debentures. The Capital Securities accrue and pay distributions at a floatingtarget range for the federal funds rate of three month LIBOR plus 170by 475 basis points, annually which was equalincluding 50 basis points during the first quarter of 2023, to 3.02% at September 30, 2017. a range of 4.75% to 5.00% as of March 31, 2023. As it seeks to control inflation without creating a recession, the FOMC has indicated further increases are may be implemented during calendar 2023.
Net Interest Income
The distribution rate payablefollowing table compares detailed average balances, average yields on interest-earning assets, average costs of interest-bearing liabilities and the Capital Securities is cumulativeresulting changes in interest income and payable quarterlyexpense for the three months ended March 31, 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 arrears. The Capital Securities mature or are mandatorily redeemable upon maturity on December 15, 2036, or upon earlier optional redemption as providedearning assets in the indenture. The Company hasfollowing table. Loan yields have been reduced to reflect the right to redeemnegative 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 Capital Securities in whole or in part.
Convertible Debentures
Effective December 1, 2009,income tax savings when comparing taxable and tax-exempt assets and was calculated using the Company issued $6.1 million in convertible senior debentures. The debentures will mature on December 1, 2029 and accrue interest at theeffective tax rate of 8.0% per annum until maturity or earlier redemption or repayment. Interest on the debentures is payable on June 1 and December 1 of each year and commenced on June 1, 2010. The debentures are convertible into the Company’s common stock at a conversion price of $20 per share at the option of the holder at any time prior to maturity. The debentures are redeemable, in whole or in part, at the option of the Company at any time on or after December 1, 2019, at a price equal to 100% of the principal amount of the debentures to be purchased plus any accrued and unpaid interest to, but excluding, the date of redemption. The debentures are unsecured general obligations of the Company ranking equal in right of payment to all of our present and future unsecured indebtedness that is not expressly subordinated.
Equity
Shareholders’ equity increased $6.8 million or 9.6% to $77.9 million at September 30, 2017 from $71.1 million at December 31, 2016 primarily due to net income and increased accumulated other comprehensive income, net of tax. The Company’s net income available for common shareholders was $5.0 million for the nine monthsquarters ended September 30, 2017. Accumulated other comprehensive income, net of tax, comprised primarily of unrealized gains on securities available for sale, net of tax, increased $2.6 million or 216.9% to $3.7 million at September 30, 2017 from $1.2 million at DecemberMarch 31, 2016. The Board of Directors of the Company declared common stock dividends totaling $795,000 during the nine months ended September 30, 2017. Book value per common share was $26.45 at September 30, 2017 compared to $24.14 at December 31, 2016.2023 and 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended March 31, | | | |
| 2023 | | 2022 | |
(Dollars in thousands) | Average Balance | Interest | Yield/ Rate (1) | | Average Balance | Interest | Yield/ Rate (1) | |
Interest-Earning Assets: | | | | | | | | | | |
Loans Receivable, Net | $ | 570,125 | | $ | 7,410 | | 5.20 | % | | $ | 516,382 | | $ | 6,097 | | 4.72 | % | | | |
Taxable Investments | 698,974 | | 6,610 | | 3.78 | | | 681,785 | | 2,426 | | 1.42 | | | | |
Non-taxable Investments | 21,087 | | 197 | | 3.74 | | | 24,151 | | 226 | | 3.74 | | | | |
Deposits with other Banks | 3,585 | | 34 | | 3.84 | | | 2,404 | | 2 | | 0.37 | | | | |
Total Interest-Earning Assets | $ | 1,293,771 | | $ | 14,251 | | 4.41 | % | | $ | 1,224,722 | | $ | 8,751 | | 2.86 | % | | | |
Interest-Bearing Liabilities: | | | | | | | | | | |
Checking, Savings & Money Market Accounts | $ | 672,122 | | $ | 2,293 | | 1.36 | % | | $ | 695,774 | | $ | 223 | | 0.13 | % | | | |
Certificates Accounts | 163,806 | | 622 | | 1.52 | | | 160,215 | | 122 | | 0.34 | | | | |
Total Interest-Bearing Deposits | 835,928 | | 2,915 | | 1.39 | | | 855,989 | | 345 | | 0.16 | | | | |
Other Borrowings (2) | 77,501 | | 627 | | 3.24 | | | 49,356 | | 30 | | 0.24 | | | | |
Junior Subordinated Debentures | 5,155 | | 84 | | 6.49 | | | 5,155 | | 26 | | 2.02 | | | | |
Subordinated Debentures | 26,500 | | 348 | | 5.25 | | | 30,000 | | 394 | | 5.25 | | | | |
Total Interest-Bearing Liabilities | $ | 945,084 | | $ | 3,974 | | 1.68 | % | | $ | 940,500 | | $ | 795 | | 0.34 | % | | | |
Net Interest Rate Spread | | | 2.73 | % | | | | 2.52 | % | | | |
Tax Equivalent Net Interest Income/Margin | | $ | 10,277 | | 3.18 | % | | | $ | 7,956 | | 2.60 | % | | | |
Less: tax equivalent adjustment | | 34 | | | | | 51 | | | | | |
Net Interest Income | | $ | 10,243 | | | | | $ | 7,905 | | | | | |
(1) Annualized
(2) Includes Federal Reserve borrowings and repurchase agreements.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of OperationsNet interest income increased $2.3 million or 29.6% to $10.2 million during the quarter ended March 31, 2023, compared to $7.9 million for the Three Month Periods Ended September 30, 2017 and 2016
Net Income Available to Common Shareholders
Net income available to common shareholderssame quarter in 2022. During the quarter ended March 31, 2023, average interest-earning assets increased $233,000 or 14.0% to $1.9$69.0 million or $0.61 per diluted common share5.6% to $1.3 billion from $1.2 billion for the three monthssame quarter in 2022, while average interest-bearing liabilities increased $4.6 million or 0.5% to $945.1 million for the quarter ended September 30, 2017March 31, 2023 from $940.5 million for the comparable quarter in 2022. The Company's net interest margin was 3.18% for the quarter ended March 31, 2023 compared to $1.7 million or $0.54 per diluted common share2.60% for the three months ended September 30, 2016.comparable quarter in 2022. The increase in net income available to common shareholders for the three month period was primarily the result of increases in net interest income and non-interest income combined with the absence of preferred stock dividends. These items were partially offset by increases in the provision for loan losses and non-interest expense.
Net Interest Income
TheCompany's net interest spread on a tax equivalent basis decreased four basis points to 3.35%was 2.73% for the three monthsquarter ended September 30, 2017 from 3.39%March 31, 2023 compared to 2.52% for the comparable period in 2016. Netquarter ended March 31, 2022.
Interest Income
Total tax-equivalent interest income increased $307,000$5.5 million or 4.8%62.8% to $6.7$14.3 million duringfor the three monthsquarter ended September 30, 2017,March 31, 2023 compared to $6.3$8.8 million for the same period in 2016. During the three months ended September 30, 2017, average interest earning assets increased $43.0 million or 5.7% to $798.4 million from $755.4 million for the same period in 2016. Average interest-bearing liabilities increased $48.2 million or 5.5% to $700.7 million for the three months ended September 30, 2017 from $652.5 million for the comparable period in 2016.2022.
Interest Income
The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the three months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change in Average Balance | Increase (Decrease) in Interest Income |
| 2017 | | 2016 | |
(Dollars in thousands) | Average Balance | Yield(1) | | Average Balance | Yield(1) | |
Loans Receivable, Net | $ | 372,993 |
| 5.52 | % | | $ | 347,681 |
| 5.65 | % | | $ | 25,312 |
| $ | 234 |
|
Mortgage-Backed Securities | 206,353 |
| 2.47 | | 219,616 |
| 2.17 | | $ | (13,263 | ) | 82 |
|
Investment Securities(2) | 216,271 |
| 2.80 | | 184,332 |
| 2.66 | | $ | 31,939 |
| 287 |
|
Overnight Time and Certificates of Deposit | 2,783 |
| 0.90 | | 3,726 |
| 0.53 | | $ | (943 | ) | 1 |
|
Total Interest-Earning Assets | $ | 798,400 |
| 3.98 | % | | $ | 755,355 |
| 3.89 | % | | $ | 43,045 |
| $ | 604 |
|
(1)Annualized
(2)Tax equivalent basis recognizes the income tax savings when comparing taxable and tax-exempt assets and was calculated using an effective tax rate of 34%. The tax equivalent adjustment relates to the tax exempt municipal bonds and the state tax credit and was $188,924 and $183,850 for the quarters ended September 30, 2017 and 2016, respectively.
Total tax equivalent interest income increased $604,000 or 8.2% to $7.9 million during the three months ended September 30, 2017 compared to $7.3 million during the same period in 2016. This increase was primarily the result of a $43.0 million or 5.7% increase in average interest-earning assets combined with an increase of nine basis points in the average yield. Total interest income on loans increased $234,000$1.3 million or 4.8%21.5% to $5.1$7.4 million duringfor the three monthsquarter ended September 30, 2017March 31, 2023 from $4.9$6.1 million duringfor the comparable periodfirst quarter of 2022. The increase in 2016. The increaseloan interest income was the result of a $25.3$53.7 million or 7.3% increase in the average loan portfolio balance which was partially offset bycombined with a 1348 basis point decreaseincrease in the average yield. yield on loans receivable.
Interest income from mortgage-backed securitiestaxable investments increased $82,000$4.2 million or 6.9%172.5% to $1.3$6.6 million during the three monthsquarter ended September 30, 2017 due to an increaseMarch 31, 2023 from $2.4 million for the first quarter of 30 basis points in the average portfolio yield offset by a $13.3 million or 6.0% decrease in the average balance. Tax equivalent interest income from investment securities increased $287,000 or 23.3% to $1.5 million during the three months ended September 30, 20172022, due to a $31.9$17.2 million or 17.3% increase in the average balance of the investment securities portfoliotaxable investments combined with a 14236 basis point increase in the yield.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
Interest Expense
The following table compares detailed average balances, cost of funds, and the resulting changes inyield to 3.78%. Tax equivalent interest expense for the three months ended September 30, 2017 and 2016.
|
| | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Change in Average Balance | Increase (Decrease) in Interest Expense |
| 2017 | | 2016 | |
(Dollars in thousands) | Average Balance | Cost(1) | | Average Balance | Cost(1) | |
Now and Money Market Accounts | $ | 343,898 |
| 0.18 | % | | $ | 328,233 |
| 0.12 | % | | $ | 15,665 |
| $ | 50 |
|
Statement Savings Accounts | 41,551 |
| 0.10 | | 35,673 |
| 0.10 | | $ | 5,878 |
| 2 |
|
Certificate Accounts | 232,619 |
| 0.87 | | 222,077 |
| 0.73 | | $ | 10,542 |
| 96 |
|
FHLB Advances and Other Borrowed Money | 60,930 |
| 1.08 | | 55,272 |
| 0.96 | | $ | 5,658 |
| 32 |
|
Note Payable | 10,477 |
| 4.04 | | — |
| — | | $ | 10,477 |
| 106 |
|
Junior Subordinated Debentures | 5,155 |
| 3.02 | | 5,155 |
| 2.44 | | $ | — |
| 8 |
|
Senior Convertible Debentures | 6,069 |
| 8.00 | | 6,084 |
| 8.00 | | $ | (15 | ) | — |
|
Total Interest-Bearing Liabilities | $ | 700,699 |
| 0.63 | % | | $ | 652,494 |
| 0.49 | % | | $ | 48,205 |
| $ | 294 |
|
(1) Annualized
Total interest expense increased $294,000 or 36.3%income from non-taxable investments decreased $29,000 to $1.1 million$197,000 during the three monthsquarter ended September 30, 2017 comparedMarch 31, 2023 due to $805,000 fora decrease in the same period in 2016. The increase in total interest expense was attributableaverage balance of non-taxable investments.
Interest income from deposits with other banks increased $32,000 during the quarter ended March 31, 2023 to increases in interest rates paid and$34,000, due to a $48.2$1.2 million or 7.4% increase in the average balance of interest-bearingthese assets combined with a significant increase in the average yield earned on these assets due to increased market interest rates.
Interest Expense
Total interest expense increased $3.2 million or 399.9% to $4.0 million for the quarter ended March 31, 2023 compared to $795,000 for the same quarter in 2022 due to an increase in market interest rates combined with a $4.6 million increase in the average balance of these liabilities.
Interest expense on deposits increased $148,000 or 28.4%$2.6 million to $666,000 during the three months ended September 30, 2017 compared to $519,000 for the same period in 2016. The increase was attributable to an eight basis point increase in the average cost of deposit accounts combined with a $32.1 million or 5.5% increase in average interest-bearing deposits to $618.1$2.9 million for the three monthsquarter ended September 30, 2017compared to $586.0 millionMarch 31, 2023 from $345,000 for the three months ended September 30, 2016.
Interest expense on FHLB advances and other borrowings increased $32,000 or 23.8% to $165,000 during the three months ended September 30, 2017 from $133,000 for the same period in 2016. The increase was attributablefirst quarter of 2022, due to an increase of 12123 basis points in the average cost, combined withpartially offset by a $5.7$20.1 million or 10.2% increasedecrease in the average balance of FHLB advancesinterest-bearing deposit accounts. Interest expense on FRB and other borrowed money to $60.9 millionborrowings increased $598,000 during the three months ended September 30, 2017 from $55.3quarter due to a $28.1 million forincrease in the same periodbalance of these liabilities combined with an increase of 300 basis points in 2016.the average cost of these liabilities. Interest expense on the junior subordinated debentures increased due to increased floating interest rates reflecting higher market interest rates.
Provision for LoanCredit Losses
The amount of the provision is determined by management’s on-going monthly analysis of the loan portfolio and the adequacy of the allowance for loancredit losses. 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 loancredit losses is reviewed monthly by the Asset Classification Committee and quarterly by the Board of Directors.
Management’s monthly review of the adequacy of the allowance includes three main components.
The first component is an analysis of loss potential in various homogeneous segments of the loan portfolio based on historical trends and the risk inherent in each loan category. Currently, management appliesThe Company calculates the allowance for credit losses for each pool using a four yearremaining 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 ratioexperience provides the best basis for its assessment of expected credit losses to each loan categorydetermine the allowance for credit losses. The Company uses its own internal data to estimatemeasure historical credit loss experience within the inherentpools with similar risk characteristics over an economic cycle. The Company then forecasts the calculated historical loss in these pooled loans.
rates over the calculated remaining life of loans by pool. The second component of management’s monthly analysis is the specific review and evaluation of significant problem creditsindividually evaluated collateral dependent loans identified through the Company’s internal monitoring system. These loans are evaluated for impairmentdo not share common risk characteristics and recorded in accordance with accounting guidance. For each loan deemed impaired, management calculates a specific reserve for the amount in which the recorded investment in the loan exceeds the fair value. This estimate is based on a thorough analysis of the most probable source of repayment, which is typically liquidation of the collateral underlying the loan.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
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 liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. The third component is an analysis of changes in qualitative factors that may affect the portfolio, including but not limited to: relevant economic trends that could impact borrowers’ ability to repay, industry trends, changes in the volume and composition of the portfolio, credit concentrations, or lending policies and the experience and ability of the staff and Board of Directors.
Management also reviews and incorporates certain ratios such as percentage of classified loans, average historical loancredit losses by loan category, delinquency percentages, and the assignment of percentage targets of reserves in each loan category when evaluating the allowance.
Once the analysis is completed, the three components are combined and compared to the allowance amount. Based on this, charges are made to the provision as needed.
Based on the foregoing, no provision for credit losses was recorded for the three months ended March 31, 2022 and 2023.For additional details of the changes in the allowance for credit losses, see “Note 8 - Loans Receivable" of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.
The Company had net charge-offs of $133,000Non-Interest Income
Non-interest income decreased $403,000 or 15.5% to $2.2 million for the quarter ended September 30, 2017March 31, 2023 compared to net charge-offs of $284,000$2.6 million for the same three month periodquarter ended March 31, 2022. The decrease was primarily due to a $520,000 decrease in 2016. There was $100,000gain on sale of loans reflecting the decline in provisionoriginations of loans held for loan losses recordedsale following recent market interest rate increases. In addition, BOLI income and other non-interest income decreased $7,000 and $14,000, respectively, during the quarter ended September 30, 2017March 31, 2023 when compared to no provisionthe quarter ended March 31, 2022. These decreases were partially offset by increases in all other non-interest income line items with the largest increase occurring in ATM and check card fee income, which increased $85,000 or 11.8% to $802,000 during the quarter ended March 31, 2023 when compared to the quarter ended March 31, 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 $436,000 or 5.1% to $9.0 million for the same quarter ended March 31, 2023 compared to $8.6 million for the quarter ended March 31, 2022. The following table summarizes the changes in 2016.non-interest expense:
| | | | | | | | | | | | | | | | | | | | |
| Quarter Ended March 31, | | Increase (Decrease) |
| 2023 | | 2022 | | $ | % |
Compensation and Employee Benefits | $ | 5,240,796 | | | $ | 5,056,620 | | | $ | 184,176 | | 3.6 | % |
Occupancy | 806,434 | | | 712,786 | | | 93,648 | | 13.1 | |
Advertising | 244,595 | | | 260,333 | | | (15,738) | | (6.0) | |
Depreciation and Maintenance of Equipment | 620,156 | | | 720,661 | | | (100,505) | | (13.9) | |
FDIC Insurance Premiums | 90,306 | | | 112,042 | | | (21,736) | | (19.4) | |
| | | | | | |
Write down of Land Held for Sale | — | | | 339,344 | | | (339,344) | | (100.0) | |
| | | | | | |
Consulting | 213,335 | | | 164,750 | | | 48,585 | | 29.5 | |
Debit Card Expense | 336,646 | | | 283,789 | | | 52,857 | | 18.6 | |
| | | | | | |
| | | | | | |
| | | | | | |
Data Processing | 280,036 | | 67,052 | | 212,984 | | 317.6 | |
Other | 1,198,284 | | | 877,467 | | | 320,817 | | 36.6 | |
Total Non-Interest Expense | $ | 9,030,588 | | | $ | 8,594,844 | | | $ | 435,744 | | 5.1 | % |
| | | | | | |
The table below summarizes activity associated withincrease in non-interest expense was primarily due to increases in compensation and employee benefits, occupancy expense and other non-interest expenses during the allowancefirst quarter of 2023, which were partially offset by a decrease in depreciation and maintenance of equipment and a writedown of land held for loan losses for the quarters ended September 30, 2017 and 2016:sale.
|
| | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 |
Beginning Balance | $ | 8,202,632 |
| | $ | 8,395,214 |
|
Provision for Loan Losses | 100,000 |
| | — |
|
Charge-offs | (259,438) |
| | (323,247) |
|
Recoveries | 125,994 |
| | 39,144 |
|
Ending Balance | $ | 8,169,188 |
| | $ | 8,111,111 |
|
| | | |
Allowance For Loan Losses as a % of Gross Loans Receivable, Held For Investment at the End of the Period | 2.1% | | 2.3% |
Allowance For Loan Losses as a % of Impaired Loans at the End of the Period | 82.6% | | 83.2% |
Impaired Loans | $ | 9,890,138 |
| | $ | 9,751,765 |
|
Gross Loans Receivable, Held For Investment (1) | $ | 382,610,246 |
| | $ | 355,786,250 |
|
Total Loans Receivable, Net | $ | 375,711,468 |
| | $ | 351,818,570 |
|
(1) TOTAL LOANS HELD FOR INVESTMENT, NET OF DEFERRED FEES AND LOANS IN PROCESS.
Our strategy is to work with our borrowers to reach acceptable payment plans while protecting our interests in the existing collateral. In the event an acceptable arrangement cannot be reached, we may need to acquire these properties through foreclosure or other means and subsequently sell, develop or liquidate them.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
Non-Interest Income
Non-interest income increased $581,000 or 32.7% to $2.4 million for the three months ended September 30, 2017, compared to $1.8 million for the three months ended September 30, 2016. The following table summarizes the changes in non-interest income:
|
| | | | | | | | | | | | |
| Three Months Ended September 30, | | Increase (Decrease)
|
| 2017 | 2016 | | Amounts | Percent |
Gain on Sale of Investment Securities | $ | 79,363 |
| $ | 360,425 |
| | $ | (281,062 | ) | (78.0 | )% |
Gain on Sale of Loans | 373,636 |
| 256,918 |
| | 116,718 |
| 45.4 |
Service Fees on Deposit Accounts | 274,717 |
| 266,960 |
| | 7,757 |
| 2.9 |
Commissions From Insurance Agency | 172,074 |
| 149,529 |
| | 22,545 |
| 15.1 |
BOLI Income | 788,133 |
| 132,000 |
| | 656,133 |
| 497.1 |
Trust Income | 186,000 |
| 197,000 |
| | (11,000 | ) | (5.6) |
Check Card Fee Income | 282,686 |
| 247,331 |
| | 35,355 |
| 14.3 |
Other | 205,524 |
| 170,519 |
| | 35,005 |
| 20.5 |
Total Non-Interest Income | $ | 2,362,133 |
| $ | 1,780,682 |
| | $ | 581,451 |
| 32.7 | % |
Net gain on sale of investment securities was $79,000 during the quarter ended September 30, 2017, a decrease of $281,000 or 78.0% compared to $360,000 for the same period last year. The decrease resulted from gross losses of $162,000 on the sale of investment securities during the quarter ended September 30, 2017 compared to no gross loss during the third quarter of 2016. Gain on sale of loans increased $117,000 or 45.4% as the dollar volume of loans sold increased due to the increase in originations of loans held for sale.
BOLI income increased $656,000 or 497.1% to $788,000 during the quarter ended September 30, 2017 from $132,000 for the same period in 2016. During the third quarter of 2017, the Bank recognized $654,000 in death benefits in addition to $134,000 in income related to accrued interest credited to the cash surrender value underlying the BOLI policies. The Company did not receive any life insurance proceeds during the third quarter of 2016. The entire portion of income recognized in 2016 was related to changes in the cash surrender value of the policies.
Non-Interest Expense
For the quarter ended September 30, 2017, non-interest expense increased $875,000 or 15.4% to $6.6 million compared to $5.7 million for the same period in 2016. The following table summarizes the changes in non-interest expense:
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Increase (Decrease) |
| 2017 | 2016 | | Amounts | Percent |
Compensation and Employee Benefits | $ | 3,872,102 |
| $ | 3,167,112 |
| | $ | 704,990 |
| 22.3% |
Occupancy | 569,024 |
| 502,352 |
| | 66,672 |
| 13.3 |
Advertising | 120,033 |
| 100,251 |
| | 19,782 |
| 19.7 |
Depreciation and Maintenance of Equipment | 569,839 |
| 510,645 |
| | 59,194 |
| 11.6 |
FDIC Insurance Premiums | 64,518 |
| 62,163 |
| | 2,355 |
| 3.8 |
Net Cost of Operation of OREO | 105,172 |
| 25,991 |
| | 79,181 |
| 304.6 |
Prepayment Penalties on FHLB Advances | — |
| 260,594 |
| | (260,594 | ) | (100.0) |
Other | 1,268,449 |
| 1,065,209 |
| | 203,240 |
| 19.1 |
Total Non-Interest Expense | $ | 6,569,137 |
| $ | 5,694,317 |
| | $ | 874,820 |
| 15.4% |
Compensation and employee benefits expenses increased $705,000,$184,000 or 22.3%3.6% to $3.9$5.2 million for the three monthsquarter ended September 30, 2017March 31, 2023 when compared to $3.2 million for the same period last yearquarter ended March 31, 2022 due to general annual cost of living increases, combined with an increase in the number of full time employees.
equivalent employees as a result of our newest branch added in 2023 and the overall growth of the Company. Occupancy expense and other non-interest expense also increased $67,000 or 13.3%during the first quarter of 2023 due to increased operations and the addition of our Evans, Georgianewest branch which openedlocated in April 2017.Augusta, Georgia.
Provision For Income Taxes
The provision for income taxes increased $375,000 or 102.7% to $739,000 for the quarter ended March 31, 2023 from $365,000 for the same period in 2022 due to higher net income before taxes in 2023. Pre-tax net income was $3.7 million for the quarter ended March 31, 2023 compared to $1.9 million for the first quarter of 2022. The Company’s combined federal and state effective income tax rate was 21.7% and 19.1% for the quarters ended March 31, 2023 and 2022, respectively.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
The Company had a net cost of $105,000 from the operation of OREO properties during the quarter ended September 30, 2017 compared to a net cost of $26,000 during the quarter ended September 30, 2016. This amount includes all expenses associated with OREO including write-down in value and gain or loss on sales incurred during each period. The Company had write-downs of $50,000 during the third quarter of 2017 compared to no write-downs for the same period in 2016.
The Company did not prepay any FHLB advances during the three months ended September 30, 2017, and, therefore, incurred no prepayment penalties during the period. In comparison, the Company prepaid one FHLB advance during the same three month period in 2016 and incurred a prepayment penalty of $261,000. The Company elected to prepay this higher rate advance in order to reduce interest expense in future periods and improve net interest spread.
Other expenses increased $203,000, or 19.1% to $1.3 million for the three month period ended September 30, 2017 compared to $1.1 million for the same period in the prior year. Other expenses include legal, professional and consulting expenses, supplies and other miscellaneous expenses.
Provision For Income Taxes
The provision for income taxes decreased $210,000 or 32.0% to $445,000 for the three months ended September 30, 2017 from $655,000 for the same period one year ago. Income before income taxes was $2.3 million for the three months ended September 30, 2017 compared to $2.4 million for the same three month period in 2016. The Company’s combined federal and state effective income tax rate for the current quarter was 19.0% compared to 26.9% for the same quarter one year ago.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations for the Nine Month Periods Ended September 30, 2017 and 2016
Net Income Available to Common Shareholders
Net income available to common shareholders increased $277,000 or 5.8% to $5.0 million for the nine months ended September 30, 2017 when compared to the same nine month period in 2016. The increase in net income available to common shareholders for the nine month period was primarily the result of increases in net interest income and non-interest income combined with the absence of preferred stock dividends. These items were partially offset by increases in the provision for loan losses and non-interest expense.
Net Interest Income
The net interest spread on a tax equivalent basis decreased seven basis points to 3.28% for the nine months ended September 30, 2017 from 3.35% for the comparable period in 2016. Net interest income increased $376,000 or 2.0% to $19.1 million for the nine months ended September 30, 2017. During the nine months ended September 30, 2017, average interest earning assets increased $31.3 million or 4.2% to $781.9 million from $750.7 million for the nine months ended September 30, 2016. Average interest-bearing liabilities also increased by $37.9 million or 5.8% to $687.9 million for the nine months ended September 30, 2017 from $650.0 million for the same period in 2016.
Interest Income
The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change in Average Balance | Increase (Decrease) in Interest Income |
| 2017 | | 2016 | |
(Dollars in Thousands) | Average Balance | Yield(1) | | Average Balance | Yield(1) | |
Loans Receivable, Net | $ | 363,918 |
| 5.44 | % | | $ | 339,587 |
| 5.65 | % | | $ | 24,331 |
| $ | 470 |
|
Mortgage-Backed Securities | 203,907 |
| 2.32 |
| | 219,104 |
| 2.23 |
| | (15,197 | ) | (119) |
|
Investment Securities(2) | 207,925 |
| 2.74 |
| | 187,918 |
| 2.69 |
| | 20,007 |
| 493 |
|
Overnight Time & Certificates of Deposit | 6,178 | 0.75 |
| | 4,062 | 0.46 |
| | 2,116 |
| 21 |
|
Total Interest-Earning Assets | $ | 781,928 |
| 3.87 | % | | $ | 750,671 |
| 3.88 | % | | $ | 31,257 |
| $ | 865 |
|
(1)Annualized
(2)Tax equivalent basis recognizes the income tax savings when comparing taxable and tax-exempt assets and was calculated using an effective tax rate of 34%. The tax equivalent adjustment relates to the tax exempt municipal bonds and state tax credit and was $550,269 and $540,948 for the nine months ended September 30, 2017 and 2016, respectively.
Total tax equivalent interest income increased $865,000 or 4.0% to $22.7 million during the nine months ended September 30, 2017 from $21.9 million for the same period in 2016. This increase was primarily the result of a $31.3 million or 4.2% increase in average interest earning assets, which was partially offset by a decline of one basis point in the average yield on interest-earning assets. Total interest income on loans increased $470,000 or 3.3% to $14.8 million during the nine months ended September 30, 2017 from $14.4 million for the same period in 2016. The increase was a result of a $24.3 million or 7.2% increase in the average loan portfolio to $363.9 million from $339.6 million for the same period in 2016, which was partially offset by a decrease of 21 basis points in the average yield on loans. Interest income from mortgage-backed securities decreased $119,000 or 3.3% to $3.6 million for the nine months ended September 30, 2017 from $3.7 million for the same period in 2016 as a result of a $15.2 million or 6.9% decrease in the average balance of mortgage-backed securities, which was partially offset by an increase of nine basis points in the average yield. Tax equivalent interest income from investment securities increased $493,000 or 13.0% to $4.3 million for the nine months ended September 30, 2017 from $3.8 million for the same period in 2016 due to a $20.0 million increase in the average balance of investment securities combined with an increase of six basis points in the average yield.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
Interest Expense
The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the nine months ended September 30, 2017 and 2016:
|
| | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | Change in Average Balance | Increase (Decrease) in Interest Expense |
| 2017 | | 2016 | |
(Dollars in Thousands) | Average Balance | Yield(1) | | Average Balance | Yield(1) | |
Now and Money Market Accounts | $ | 340,876 |
| 0.17% | | $ | 327,971 |
| 0.13 | % | | $ | 12,905 |
| $ | 116 |
|
Statement Savings Accounts | 39,796 |
| 0.10 | | 33,970 |
| 0.10 | | 5,826 |
| 5 |
|
Certificates Accounts | 227,674 |
| 0.82 | | 230,563 |
| 0.72 | | (2,889 | ) | 163 |
|
FHLB Advances and Other Borrowed Money | 56,486 |
| 0.97 | | 46,227 |
| 1.62 | | 10,259 |
| (152 | ) |
Note Payable | 11,809 |
| 3.71 | | — |
| — | | 11,809 |
| 329 |
|
Junior Subordinated Debentures | 5,155 |
| 2.87 | | 5,155 |
| 2.35 | | — |
| 20 |
|
Senior Convertible Debentures | 6,079 |
| 8.00 | | 6,084 |
| 8.00 | | (5 | ) | — |
|
Total Interest-Bearing Liabilities | $ | 687,875 |
| 0.60 | % | | $ | 649,970 |
| 0.53 | % | | $ | 37,905 |
| $ | 481 |
|
(1) Annualized
Interest expense increased $481,000 or 18.5% to $3.1 million during the nine months ended September 30, 2017 compared to $2.6 million for the same period in 2016. The increase in total interest expense was attributable to increases in interest rates paid combined with a $37.9 million or 5.8% increase in the average balance of interest-bearing liabilities. Interest expense on deposits increased $283,000 or 18.0% to $1.9 million during the nine months ended September 30, 2017 compared to $1.6 million for the same period last year. The increase was attributable to a six basis point increase in the average cost of deposit accounts combined with a $15.8 million or 2.7% increase in average interest-bearing deposits to $608.3 million for the nine months ended September 30, 2017 compared to $592.5 million for the nine months ended September 30, 2016.
Interest expense on FHLB advances and other borrowings decreased $152,000 or 27.0% to $410,000 during the nine months ended September 30, 2017 from $561,000 during the same period in 2016 due to a decrease of 65 basis points in the average cost. This decrease was partially offset by a $10.3 million or 22.2% increase in the balance of FHLB advances and other borrowed money to $56.5 million during the nine months ended September 30, 2017 from $46.2 million for the same period last year.
Provision for Loan Losses
There was $100,000 in provision for loan losses for the nine months ended September 30, 2017 compared to no provision expense for the same period in 2016. The Company had net charge-offs of $287,000 for the nine months ended September 30, 2017 compared to net charge-offs of $164,000 during the comparable period in 2016. The following table summarizes the changes in the allowance for loan losses for the nine months ended September 30, 2017 and 2016:
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Beginning Balance | $ | 8,356,231 |
| | $ | 8,275,133 |
|
Provision for Loan Losses | 100,000 |
| | — |
|
Charge-offs | (514,685) |
| | (679,746) |
|
Recoveries | 227,642 |
| | 515,724 |
|
Ending Balance | $ | 8,169,188 |
| | $ | 8,111,111 |
|
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
Non-Interest Income
Non-interest income increased $720,000 or 14.2% to $5.8 million for the nine months ended September 30, 2017, compared to $5.1 million for the nine months ended September 30, 2016. The following table summarizes the changes in the components of non-interest income:
|
| | | | | | | | | | | | |
| Nine Months Ended September 30, | | Increase (Decrease) |
| 2017 | 2016 | | Amounts | Percent |
Gain on Sale of Investment Securities | $ | 707,902 |
| $ | 772,143 |
| | $ | (64,241 | ) | (8.3 | )% |
Gain on Sale of Loans | 894,053 |
| 657,473 |
| | 236,580 |
| 36.0 |
Service Fees on Deposit Accounts | 776,469 |
| 772,341 |
| | 4,128 |
| 0.5 |
BOLI Income | 1,028,133 |
| 396,000 |
| | 632,133 |
| 159.6 |
Commissions From Insurance Agency | 451,311 |
| 441,519 |
| | 9,792 |
| 2.2 |
Trust Income | 554,000 |
| 521,000 |
| | 33,000 |
| 6.3 |
Check Card Fee Income | 838,302 |
| 742,583 |
| | 95,719 |
| 12.9 |
Grant Income | — |
| 265,496 |
| | (265,496 | ) | (100.0) |
Other | 542,250 |
| 504,200 |
| | 38,050 |
| 7.5 |
Total Non-Interest Income | $ | 5,792,420 |
| $ | 5,072,755 |
| | $ | 719,665 |
| 14.2 | % |
Net gain on sale of investment securities was $708,000 during the nine months ended September 30, 2017, a decrease of $64,000 or 8.3% compared to a net gain of $772,000 during the same period last year. The decrease resulted from gross losses of $162,000 on the sale of investment securities during the nine months ended September 30, 2017 compared to no gross loss during the comparable period of 2016.
Gain on sale of loans increased $237,000 or 36.0% to $894,000 for the nine months ended September 30, 2017 compared to $657,000 during the same period in 2016 as the dollar volume of loans sold increased due to the increase in originations of loans held for sale.
BOLI income increased $656,000 or 497.1% to $1.0 million during the nine months ended September 30, 2017 from $396,000 for the same period in 2016. During the nine months ended September 30, 2017, the Bank recognized $654,000 in death benefits in addition to $374,000 in income related to accrued interest credited to the cash surrender value underlying the BOLI policies. The Company did not receive any life insurance proceeds during 2016; all BOLI income recognized was related to changes in the cash surrender value of the policies.
These increases were partially offset by a $265,000 decrease in grant income. The Company received a Bank Enterprise Award (“BEA”) grant from the US Treasury in 2016 in recognition of its continued commitment to community development in economically distressed areas. Our commitment to these areas has continued in 2017 and we anticipate receiving another comparable BEA grant later this year.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
Non-Interest Expense
For the nine months ended September 30, 2017, non-interest expense increased $1.3 million or 7.9% to $18.3 million compared to $16.9 million for the same period in 2016. The following table summarizes the changes in the components of non-interest expense:
|
| | | | | | | | | | | | |
| Nine Months Ended September 30, | | Increase (Decrease) |
| 2017 | 2016 | | Amounts | Percent |
Compensation and Employee Benefits | $ | 10,916,386 |
| $ | 9,675,430 |
| | $ | 1,240,956 |
| 12.8 | % |
Occupancy | 1,661,661 |
| 1,469,602 |
| | 192,059 |
| 13.1 |
Advertising | 391,742 |
| 343,034 |
| | 48,708 |
| 14.2 |
Depreciation and Maintenance of Equipment | 1,541,460 |
| 1,486,060 |
| | 55,400 |
| 3.7 |
FDIC Insurance Premiums | 168,707 |
| 322,653 |
| | (153,946 | ) | (47.7) |
Net Benefit of Operation of OREO | (96,730 | ) | (647,990 | ) | | 551,260 |
| (85.1) |
Prepayment Penalties on FHLB Advances | — |
| 789,306 |
| | (789,306 | ) | (100.0) |
Other | 3,681,552 |
| 3,485,289 |
| | 196,263 |
| 5.6 |
Total Non-Interest Expense | $ | 18,264,778 |
| $ | 16,923,384 |
| | $ | 1,341,394 |
| 7.9 | % |
Compensation and employee benefits expenses were $10.9 million for the nine months ended September 30, 2017, an increase of $1.2 million or 12.8% from $9.7 million during the same period last year. The increase was due to general annual cost of living increases combined with the addition of several new hires during the nine months ended September 30, 2017. The Company had 223 full time equivalent employees at September 30, 2017 compared to 204 at September 30, 2016.
The Company had a net benefit of $97,000 from the operation of OREO properties during the nine months ended September 30, 2017 compared to a net benefit of $674,000 during the nine months ended September 30, 2016. The majority of the prior year net benefit was related to the sale of one OREO property in February 2016, which resulted in a $739,000 gain that offset the cost of operating OREO properties during the nine months ended September 30, 2016.
The Company did not prepay any FHLB advances during the nine months ended September 30, 2017, and, therefore, incurred no prepayment penalties during the period. In comparison, the Company prepaid three FHLB advances during the nine months ended September 30, 2016 and incurred prepayment penalties of $789,000. The Company elected to prepay these higher rate advances in order to reduce interest expense in future periods and improve net interest spread.
Provision For Income Taxes
The provision for income taxes decreased $293,000 or 16.2% to $1.5 million for the nine months ended September 30, 2017from $1.8 million for the same period in 2016. Income before taxes was $6.5 million and $6.9 million for the nine months ended September 30, 2017 and 2016, respectively. The Company’s combined federal and state effective income tax rate was 23.2% for the nine months ended September 30, 2017 compared to 26.3% for the same period in 2016.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity Commitments, Capital Resources, and Impact of Inflation and Changing Prices
Liquidity
The CompanyWe actively analyzesanalyze and manages the Bank’smanage 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 are customerinclude deposits, scheduled loan repayments, loan sales, maturingand investment securities repayments, including interest payments, maturities and sales of loans and investment securities, advances from the FHLB.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 of its existing commitments.
The Bank had $165.1 million in unused commitments to extend credit and standby letters of credit at March 31, 2023.
During the ninethree months ended September 30, 2017March 31, 2023, loan disbursements exceeded loan repayments resulting in a $16.0$24.5 million or 4.4%4.5% increase in total net loans receivable. DuringAlso during the ninethree months ended September 30, 2017,March 31, 2023, deposits increased $47.5decreased $1.4 million or 7.3% and FHLB advances decreased $7.4 million or 15.3%0.1%. The Bank had $216.0no outstanding FHLB advances at March 31, 2023 with $395.1 million in additional borrowing capacity at the FHLB at that date. The Bank had $61.4 million of outstanding borrowings from the endFederal Reserve BTFP at March 31, 2023, which was collateralized by investments with a fair market value of $157.3 million at that date. The Bank also had a $50.0 million unused Fed Funds facility with Pacific Coast Bankers Bank at March 31, 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 investment AFS totaled $566.9 million at March 31, 2023. Certificates of deposit that are scheduled to mature in less than one year from March 31, 2023 totaled $134.0 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 March 31, 2023, Security Federal had liquid assets of $89.9 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 period. At September 30, 2017,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, had $138.9 million of certificates of deposit maturing within one year. Based on previous experience, the Bank anticipatesand returning a significantsubstantial portion of these certificates willour 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 renewedapproximately $423,000 based on maturity.the number of outstanding shares at March 31, 2023.
At September 30, 2017,March 31, 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 17.6%17.85%, 10.3%10.39%, 17.6%17.85%, and 18.9%19.11%, 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 basedrisk-based capital and Tier 1 leverage capital ratios of 6.5%, 10.0%, 8.0% and 5.0%, respectively.
The Company also exceeded all regulatory In addition to the minimum capital requirements, withthe Bank must maintain a capital conservation buffer, which consists of additional CET1 Tier 1 leverage-based capital Tier 1 risk- based capitalgreater than 2.5% of risk weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and total risk-based capital ratios of 14.5%, 9.1%, 15.5%, and 16.7%, respectively, at September 30, 2017.
Off-Balance Sheet Commitments
The Company is a party to financial instruments with off-balance sheet risk inpaying discretionary bonuses. At March 31, 2023 the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excessBank’s conservation buffer was 11.1%. For additional details, see “Note 12 - Regulatory Matters” of the amount recognizedNotes to Consolidated Financial Statements included in the balance sheet. The Company’s maximum exposure to credit loss in the eventPart I. Item 1 of nonperformance by the borrower is represented by the contractual amount of those instruments. Since some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Collateral is not required to support commitments.
The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at September 30, 2017.this report.
|
| | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | One Month or Less | After One Through Three Months | After Three Through Twelve Months | Total Within One Year | Greater Than One Year | Total |
Unused Lines of Credit | $ | 521 |
| $ | 3,356 |
| $ | 33,095 |
| $ | 36,972 |
| $ | 66,288 |
| $ | 103,260 |
|
Standby Letters of Credit | — |
| 177 |
| 974 |
| 1,151 |
| — |
| 1,151 |
|
Total | $ | 521 |
| $ | 3,533 |
| $ | 34,069 |
| $ | 38,123 |
| $ | 66,288 |
| $ | 104,411 |
|
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’sprofitability 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 three and nine months ended September 30, 2017,March 31, 2023, the Bank's interest rate spread, defined as the average yield on interest bearinginterest-earning assets less the average rate paid on interest bearinginterest-bearing liabilities, was 3.35% and 3.28%, respectively.2.73%.
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, 2017March 31, 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 controls over financial reporting during the quarter ended September 30, 2017March 31, 2023 that have materially affected or are reasonably likely to affect our internal controls over financial reporting.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
Part II: Other Information
Item 1 Legal Proceedings
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.
Item 1A Risk Factors
There have been no material changes in the risk factorsRisk Factors previously disclosed in Item 1A of the Company’s Annual Report onCompany's 2022 Form 10-K for the year ended December 31, 2016.10-K.
Item 2 Unregistered Sales of Equity Securities and Use Ofof Proceeds
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Mine Safety Disclosures
Not applicable
Item 5 Other Information
None
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Item 6 Exhibits
|
| | | | |
3.1 |
| |
3.2 |
| |
4.13.3 |
| 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 (3) P(4) |
4.2 |
| Non-Cumulative Perpetual Preferred Stock, Series ECIP (3) |
4.310.1 |
| |
10.1 |
| 1993 Salary Continuation Agreements (5) P |
10.2 |
| Amendment One to 1993 Salary Continuation Agreements (6) P |
10.3 |
| |
10.410.2 |
| |
10.510.3 |
| |
10.6 |
| |
10.7 |
| |
10.8 |
| |
10.9 |
| |
10.1 |
| |
10.11 |
| Incentive Compensation Plan (5) P |
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
|
10.4 | | |
10.12 |
| |
31.1 |
| |
31.2 |
| |
32 |
| |
101 |
| The following materials from Security Federal Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,March 31, 2023, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income;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) | Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 16, 2015. |
| |
(3) | Filed on August 12, 1987, as an exhibit to the Company’s Registration Statement on Form 8-A and incorporated herein by reference. |
| |
(4) | Filed on July 13, 2009 as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-160553) and incorporated herein by reference. |
| |
(5) | Filed on June 28, 1993, as an exhibit to the Company’s Annual Report on Form 10-KSB and incorporated herein by reference. |
| |
(6) | Filed as an exhibit to the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 1993 and incorporated herein by reference. |
| |
(7) | Filed on May 24, 2006 as an exhibit to the Company’s Current Report on Form 8-K dated May 18, 2006 and incorporated herein by reference. |
| |
(8) | Filed on March 2, 2000, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference |
| |
(9) | Filed on January 3, 2003, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference. |
| |
(10) | Filed on August 22, 2006, as an exhibit to the Company's Registration Statement on Form S-8 (Registration Statement No. 333-136813) and incorporated herein by reference. |
| |
(11) | Filed on November 12, 2008, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference. |
| |
(12) | Filed on June 18, 2004, as an exhibit to the Company’s Proxy Statement and incorporated herein by reference. |
| |
(13) | Incorporated by reference to the Company's Current Report on Form 8-K filed on December 23, 2008. |
_______________________
(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 on Form 8-K dated May 18, 2006 and incorporated herein by reference.
(6)Filed on March 2, 2000, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SIGNATURES
Signatures
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, 2017May 12, 2023 | | By: | /s/J. Chris Verenes |
| J. Chris Verenes |
| Chief Executive Officer |
| Duly Authorized Representative |
|
| | | | | | | | | | | | | | | | |
Date: | November 13, 2017May 12, 2023 | | By: | /s/Jessica T. CumminsDarrell Rains |
| Jessica T. CumminsDarrell Rains |
| Chief Financial Officer |
| Duly Authorized Representative |
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES47
EXHIBIT INDEX
101 The following materials from Security Federal Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements