10-K: Security Federal Reports Strong 2025 Earnings, Net Income Up 35%

Security Federal Corporation reported a significant increase in net income available to common shareholders for 2025, driven by higher net interest income and a reversal of credit losses, despite a decrease in overall loan balances.

Summary

• Net income available to common shareholders increased 35.3% to $12.0 million ($3.80 per basic common share) in 2025, up from $8.9 million ($2.77 per basic common share) in 2024.
• Net interest income rose 12.8% to $47.2 million in 2025, compared to $41.8 million in 2024.
• The net interest margin (tax-equivalent) improved by 28 basis points to 3.13% in 2025 from 2.85% in 2024.
• A reversal of credit losses of $235,000 was recorded in 2025, a significant improvement from a $1.4 million provision in 2024.
• Total assets increased by 0.4% to $1.62 billion at December 31, 2025.
• Total deposits grew by 3.6% to $1.37 billion at December 31, 2025.
• Non-performing assets decreased by 23.5% to $5.8 million at December 31, 2025, representing 0.36% of total assets.
• Shareholders' equity increased by 9.9% to $200.5 million at December 31, 2025.
• Book value per common share increased to $37.74 at December 31, 2025, from $31.21 at December 31, 2024.
• The company redeemed all outstanding junior subordinated debentures totaling $5.2 million on December 15, 2025.
• Cash and cash equivalents decreased by $102.9 million to $75.3 million, primarily due to increased investment securities purchases and debt payoffs.
• Total investment securities increased by $115.5 million to $776.3 million.
• Loans receivable, net, decreased by $10.9 million to $676.2 million, mainly due to a $43.4 million decrease in construction loans, partially offset by growth in other loan categories.
• Non-interest income increased by 12.5% to $11.5 million, driven by gains on loan sales, grant income, and rental income.
• Non-interest expense increased by 9.1% to $41.6 million, primarily due to higher compensation, occupancy, debit card, and data processing costs.
• The company filed a Form 15 on December 12, 2025, to terminate SEC registration and suspend reporting obligations, though its common stock continues to trade on the OTCID Basic Market.

Sentiment

Score: 8

Explanation: StockSavvy.ai views this as a strong performance, with significant improvements in profitability, asset quality, and capital strength. The strategic debt reduction and robust capital ratios are positive, though the decrease in cash and deregistration warrant monitoring.

Positives

• Net income available to common shareholders increased significantly by 35.3% to $12.0 million.
• Net interest income grew by 12.8% to $47.2 million.
• Net interest margin improved by 28 basis points to 3.13%.
• A reversal of credit losses of $235,000 was recorded, indicating improved loan portfolio health compared to a provision in the prior year.
• Non-performing assets decreased by 23.5% to $5.8 million, and the ratio to total assets improved to 0.36%.
• Shareholders' equity increased by 9.9% to $200.5 million, and book value per common share rose to $37.74.
• Total deposits increased by 3.6% to $1.37 billion, with strong growth in money market accounts.
• All junior subordinated debentures totaling $5.2 million were redeemed, reducing debt.
• The Bank remains "well capitalized" with strong regulatory capital ratios (CET1 19.3%, Tier 1 19.3%, Total Capital 20.6%, Leverage 10.2%).
• The company has a long history of paying quarterly cash dividends for 141 consecutive quarters.
• Grant income increased to $1.1 million, supporting community development initiatives.

Negatives

• Cash and cash equivalents decreased significantly by 57.7% to $75.3 million.
• Total loans receivable, net, decreased by 1.6% to $676.2 million, primarily due to a substantial 39.4% decline in construction loans.
• Non-interest expense increased by 9.1% to $41.6 million, driven by higher compensation, occupancy, debit card, and data processing costs.
• Trust income decreased by $371,000 due to non-recurring estate settlement fees in the prior year.
• The company's deregistration from the SEC may reduce liquidity, marketability, and investor access to information.
• Unrealized net losses on AFS securities were $20.6 million at December 31, 2025, impacting stockholders' equity.

Risks

• Deregistration may reduce liquidity, marketability, and investor access to information about the Company.
• Adverse economic conditions in market areas (South Carolina and Georgia), including inflation, potential recession, or slowed economic growth, could impact loan delinquencies, collateral values, and demand for products.
• Changes in the interest rate environment, including Federal Reserve benchmark rate adjustments, could adversely affect revenues, expenses, asset values, cost of capital, and liquidity.
• The allowance for credit losses may prove insufficient to absorb losses in the loan portfolio, requiring additional provisions.
• Increased levels of non-performing assets could adversely affect net income through reduced interest income, increased provisions, and higher non-interest expenses.
• Commercial real estate loans (43.0% of the portfolio) expose the company to increased lending risks due to larger principal amounts, dependence on property operations, less liquid collateral, and balloon payments.
• Construction real estate loans (9.7% of the portfolio) involve inherent risks related to cost estimates, market value fluctuations, regulatory impacts, and concentration among a few builders.
• Repayment of commercial and agricultural business loans (5.5% of the portfolio) is often dependent on unpredictable borrower cash flows, and collateral may fluctuate in value or be insufficient.
• Exposure to environmental liabilities if the company forecloses on and takes title to real estate with hazardous waste.
• The securities portfolio may be negatively impacted by fluctuations in market value, changes in the tax code, and interest rates, potentially leading to realized/unrealized losses.
• An increase in interest rates, changes in GSE programs, or the company's ability to qualify for such programs may reduce mortgage revenues.
• New or changing tax, accounting, and regulatory rules and interpretations could significantly impact strategic initiatives, results of operations, cash flows, and financial condition.
• Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
• Reported financial results depend on management's selection of accounting methods and certain assumptions and estimates, which, if incorrect, could cause unexpected losses.
• Future growth or losses may require raising additional capital, which may not be available when needed or may be exceedingly costly.
• Risks related to the use of technology, including potential for cyber-attacks, system failures, and reliance on third-party vendors.
• Increasing prevalence of fraud and other financial crimes.
• Risks in connection with data management or aggregation, particularly manual processes.
• Dependence on key personnel, and the loss of one or more could materially and adversely affect prospects.
• Ineffective liquidity management could impair the ability to fund operations and jeopardize financial condition.
• The company's ability to pay dividends and make subordinated debt payments is subject to the Bank's ability to make capital distributions.

Future Outlook

The company anticipates its capital resources will satisfy capital requirements for the foreseeable future but acknowledges the potential need to raise additional capital for continued growth or regulatory mandates. Management intends to continue its current practice of paying quarterly cash dividends on common stock, with the 2026 rate set at $0.16 per share, balancing investment in the Bank with shareholder returns. The company also plans to continue its share repurchase program, with 53,000 shares remaining available for repurchase as of December 31, 2025. Future additions to the allowance for credit losses depend on factors such as loan portfolio performance, economic conditions, real estate values, and interest rates, with management continually monitoring these conditions.

Management Comments

• 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.
• The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof.
• Management believes that the allowance for credit losses on loans is at a level adequate to provide for inherent loan losses. Although management believes that it has considered all relevant factors in its estimation of future losses, future adjustments to the allowance may be necessary if conditions change substantially from the assumptions used in making the original estimations.
• Management is not aware of any existing circumstances which would result in termination of the Bank's deposit insurance.
• Management of the Bank is not aware of any conditions relating to these safety and soundness standards which would require submission of a plan of compliance.
• Management is committed to providing equality of opportunity in all aspects of employment through a comprehensive affirmative action plan that is updated annually.
• Management believes the allowance for credit losses at December 31, 2025 is adequate based on its best estimates of the expected losses in the loan portfolio; however, these estimates are subject to uncertainty.
• Management continually monitors its loan portfolio for the impact of local economic changes.
• Management believes that future liquidity can be met through the Bank's deposits, which totaled $1.4 billion at December 31, 2025, as well as through sales and maturities of investment securities, and loans sold to investors.
• The Bank's management believes that the liquid assets combined with the available lines of credit provide adequate liquidity to meet current financial obligations for at least the next 12 months.

Industry Context

StockSavvy.ai notes that Security Federal Corporation's strong net income growth and improved net interest margin in 2025 are notable in a banking sector facing evolving interest rate environments and increased competition from FinTech companies. The reduction in non-performing assets and the reversal of credit loss provisions suggest effective risk management, which is crucial given the inherent risks in commercial real estate and construction lending. The company's continued participation as a Certified Community Development Financial Institution (CDFI) and receipt of grant income align with broader industry trends emphasizing community engagement and support for underserved markets. However, the decision to deregister from SEC reporting, while potentially reducing compliance costs, runs counter to the general trend of increased transparency and could impact investor perception and liquidity, especially for a company trading on the OTCID Basic Market.

Comparison to Industry Standards

• Security Federal's net interest margin of 3.13% in 2025 compares favorably to the average net interest margin for U.S. community banks, which often ranges between 2.5% and 3.5%, indicating efficient asset and liability management in a dynamic interest rate environment.
• The decrease in non-performing assets to 0.36% of total assets at year-end 2025 is a strong indicator of asset quality, outperforming many regional banks that may experience higher non-performing asset ratios, particularly in challenging economic cycles.
• The Bank's robust regulatory capital ratios, including a CET1 ratio of 19.3% and a total risk-based capital ratio of 20.6%, significantly exceed the 'well-capitalized' thresholds (6.5% and 10.0% respectively), positioning it among the most strongly capitalized institutions in its peer group, such as smaller regional banks like First Community Bank or South State Bank, which typically operate with lower, though still compliant, capital buffers.
• The 35.3% increase in net income available to common shareholders demonstrates strong profitability growth, which may exceed the average growth rates for many community banks that often face tighter margins and slower loan growth.
• The significant reduction in construction loans by 39.4% to $66.6 million, while potentially a strategic de-risking move, contrasts with some growing regional banks that might be expanding their construction portfolios to capitalize on development opportunities, such as those seen in rapidly expanding markets like Charlotte or Atlanta.

Management Changes

Corporate Governance

Legal Proceedings

• The Company is involved as plaintiff or defendant in various legal actions arising in the course of its business.
• Management believes, after consultation with counsel, that the resolution of these legal actions will not have a material adverse effect on the Company's financial condition and results of operations.

Related Party Transactions

• Loans to directors, executive officers, and their affiliates totaled approximately $5.9 million at December 31, 2025, representing 2.96% of total shareholders' equity. These loans are generally on substantially the same terms as comparable arms-length transactions, except for the employee loan program which offers preferential interest rates.
• Deposits from executive officers and directors and their related interests were approximately $23.7 million at December 31, 2025, with terms comparable to other non-related depositors.
• The Company leased office space from a related party (a director has an ownership interest) incurring rent expense of $110,000 in 2025, believed to be on comparable terms to unaffiliated persons.
• Specific loans to J. Chris Verenes, Roy G. Lindburg, and Robert E. Alexander under the employee loan program exceeded $120,000, with preferential adjustable interest rates (e.g., J. Chris Verenes ARM at 3.875% in 2025).

Stakeholder Impact

• Shareholders: Positive impact from increased net income, higher book value per share, continued dividend payments, and share repurchase program. However, deregistration may reduce liquidity and information access.
• Employees: Benefits from competitive comprehensive benefits, 401(k) savings plan, employee stock ownership plan, health and life insurance, and incentive compensation plans.
• Customers: Benefits from the Bank's continued lending activities, including commercial, residential, and consumer loans, and trust/insurance services. The CDFI designation supports low-to-moderate income communities.
• Regulators: The Bank maintains a "well capitalized" status and strong capital ratios, indicating compliance with regulatory requirements.
• Community: Benefits from the Bank's role as a Certified Community Development Financial Institution (CDFI), supporting community development financing and service activities in economically distressed areas.

Next Steps

• The Board of Directors will reduce its size from 11 to 10 members, with Dr. Robert E. Alexander not standing for re-election.
• The company expects to continue paying quarterly cash dividends on common stock at a rate of $0.16 per share in 2026.
• The share repurchase program has 53,000 shares remaining available for repurchase.
• Management will continue monitoring economic conditions and collaborating with borrowers to navigate the challenging economic climate.
• The company will continue to be evaluated under the pre-2023 CRA regulatory framework due to the stay on the 2023 final rule.
• The earliest date a threshold condition for exercising the ECIP Preferred Stock purchase option may be met is June 30, 2026.
• The company may redeem the 15-Year Notes at its option after November 22, 2029.

Key Dates

Recommendation

The company demonstrates strong financial performance with significant increases in net income, net interest income, and improved asset quality, alongside robust capital ratios. The redemption of junior subordinated debentures and ongoing share repurchase program are positive for shareholder value. However, the decision to deregister from SEC reporting introduces uncertainty regarding future transparency and potential impacts on stock liquidity and marketability. While current performance is strong, the long-term implications of deregistration and the competitive landscape warrant a 'hold' position, advising investors to monitor the company's performance and market perception post-deregistration before making further investment decisions.

Keywords

Security Federal Corporation, SFDL, 10-K, Annual Report, Financial Results, Banking, Community Bank, Loan Portfolio, Deposits, Net Interest Income, Credit Quality, Non-Performing Assets, Shareholders Equity, Capital Ratios, SEC Deregistration, Cybersecurity, Risk Management, South Carolina, Georgia, Commercial Real Estate, Residential Mortgage, Consumer Loans, CDFI, ECIP, Subordinated Debt, Dividend, Share Repurchase