10-Q: Security Federal Reports Strong Q3 Earnings, Net Income Up 59%

Security Federal Corporation announced a significant increase in net income and improved credit quality for the third quarter and first nine months ended September 30, 2025, driven by higher net interest income and a reversal of credit loss provisions.

Summary

• Net income available to common shareholders for the three months ended September 30, 2025, increased by 59.1% to $3.173 million, or $1.01 per basic common share, compared to $1.995 million, or $0.62 per basic common share, for the same period in 2024.
• For the nine months ended September 30, 2025, net income available to common shareholders rose 38.5% to $8.139 million, or $2.57 per basic common share, up from $5.877 million, or $1.83 per basic common share, in 2024.
• Net interest income for the third quarter of 2025 increased 16.0% to $12.079 million, and for the nine months, it grew 13.1% to $34.619 million.
• The company recorded a $200,000 net reversal to the provision for credit losses for both the three and nine months ended September 30, 2025, a significant improvement from a $580,000 provision and $1.090 million provision in the comparable 2024 periods, respectively.
• Total assets remained stable at $1.612 billion at September 30, 2025, with a notable 28.3% increase in Available For Sale (AFS) securities to $674.281 million.
• Total deposits increased by $41.4 million, or 3.1%, to $1.365 billion at September 30, 2025, primarily due to growth in higher-cost certificates of deposit and money market accounts.
• Borrowings from the Federal Reserve Bank of Richmond (FRB) were fully repaid, decreasing from $50.0 million at December 31, 2024, to $0 at September 30, 2025.
• Shareholders' equity increased by $12.4 million, or 6.8%, to $194.791 million, driven by net income and a reduction in accumulated other comprehensive loss (AOCL).
• Loans past due 30 days or more decreased significantly to $6.9 million (1.00% of total loans) at September 30, 2025, from $12.6 million (1.80% of total loans) at December 31, 2024.
• Nonaccrual loans also improved, decreasing to $5.624 million at September 30, 2025, from $7.636 million at December 31, 2024.

Sentiment

Score: 8

Explanation: The company demonstrated strong financial performance with significant increases in net income and EPS, improved net interest margin, and a favorable reversal of credit loss provisions. Asset quality improved with reduced past due and nonaccrual loans, and capital ratios remain robust. While non-interest expenses increased and cash balances decreased due to debt repayment, the overall financial health and operational efficiency appear strong.

Positives

• Net income available to common shareholders increased by 59.1% for the quarter and 38.5% for the nine months ended September 30, 2025.
• Basic earnings per common share rose to $1.01 for the quarter and $2.57 for the nine months, demonstrating strong profitability.
• Net interest income saw a healthy increase of 16.0% for the quarter and 13.1% for the nine months, reflecting improved interest rate management.
• A $200,000 net reversal of the provision for credit losses indicates improved credit quality and reduced loan loss expectations.
• Loans past due 30 days or more decreased by 45.3% to $6.9 million, and nonaccrual loans decreased by 26.3% to $5.624 million, signaling better asset quality.
• The company fully repaid $50.0 million in borrowings from the Federal Reserve Bank of Richmond, reducing funding costs and reliance on external liquidity.
• Shareholders' equity increased by $12.4 million, or 6.8%, bolstered by net income and a $7.9 million reduction in accumulated other comprehensive loss.
• The Bank maintains a 'well-capitalized' status, significantly exceeding all regulatory capital requirements, with a Common Equity Tier 1 ratio of 18.7% and a total risk-based capital ratio of 19.9%.

Negatives

• Cash and cash equivalents decreased significantly by $126.5 million, or 70.9%, primarily due to the repayment of FRB borrowings.
• Total loans receivable, net, decreased by 1.3% to $678.114 million, reflecting a decline in construction loans and commercial and agricultural loans.
• Total non-interest expense increased by 11.1% for the quarter and 6.8% for the nine months, mainly due to higher compensation and employee benefits, occupancy, and debit card expenses.
• Interest income from taxable investments decreased by 2.0% for the nine months ended September 30, 2025, due to a decrease in average yield.
• Interest income from deposits with other banks decreased by $593,000 for the quarter and $709,000 for the nine months, reflecting lower average balances and yields.

Risks

• Adverse economic conditions in market areas or other areas with lending relationships.
• Effects of employment levels, labor shortages, persistent inflation, recessionary pressures, or slowing economic growth.
• Changes in interest rate levels and the duration of such changes, including actions by the Federal Reserve, which could adversely affect revenues, expenses, asset values, cost of capital, and liquidity.
• The impact of inflation and monetary and fiscal policy responses thereto.
• The effects of a federal government shutdown, debt ceiling standoff, or other fiscal uncertainty.
• Credit risks of lending activities, including changes in loan delinquencies, write-offs, and the allowance for credit losses.
• Fluctuations in the demand for loans, the number of unsold homes, land, and real estate values in market areas.
• Secondary market conditions for loans and the ability to originate and sell loans in the secondary market.
• The impact of bank failures or adverse developments at other banks and related negative press about the banking industry in general on investor and depositor sentiment.
• Legislation or regulatory changes, including shifts in capital requirements, banking regulation, tax laws, or consumer protection laws.
• Ability to attract and retain deposits.
• Ability to control operating costs and expenses.
• Vulnerabilities in information systems or third-party service providers, including disruptions, breaches, or attacks.
• The impact on the Company of the U.S. government's elimination of all employees at the Community Development Financial Institutions Fund.
• Geopolitical developments and international conflicts, which may disrupt financial markets, global supply chains, energy prices, or economic activity.
• Changes in accounting principles, policies, or guidelines, including additional guidance and interpretation on accounting issues.
• The effects of climate change, severe weather events, natural disasters, pandemics, epidemics, and other public health crises, acts of war or terrorism, domestic political unrest, and government shutdowns.

Future Outlook

The company expects to continue its current practice of paying quarterly cash dividends on common stock, subject to Board discretion. Management believes the current liquidity position and forecasted operating results are sufficient to fund existing commitments. The company is actively evaluating the revised CDFI Certification Application requirements and completing its recertification, acknowledging potential impacts from an Executive Order limiting CDFI Fund operations. The company also expects to utilize its borrowing facilities from time to time to fund loan originations, deposit withdrawals, and investment opportunities.

Management Comments

• Management believes that the Company's current liquidity position and its forecasted operating results are sufficient to fund all its existing commitments.
• The increase in AFS securities reflects reinvestment of maturing HTM securities into higher-yielding instruments amid a favorable interest rate environment.
• The decline in past due balances was primarily as a result of improvements in construction real estate and residential real estate, reflecting a combination of successful loan repayments, active collection efforts, and generally favorable credit conditions.
• The increase in loans held for sale reflects stronger secondary market demand and seasonal growth in home purchase activity during the summer months.
• The growth in certificates of deposits was largely the result of targeted promotions to retain and attract customers amid heightened competition for deposits as market interest rates stabilized.
• The decrease in FRB borrowings was primarily due to our excess liquidity, which reduced the need for borrowed funds.
• The increase in the net interest margin was the result of several key factors, primarily the yield on loans increasing due to adjustable-rate loan repricing and new originations at higher rates, combined with reduced interest expense on borrowings.
• The reversal of provision for credit losses on loans reflects stable credit quality, minimal net charge-offs, and management's determination that the existing allowance for credit losses was adequate based on current portfolio performance, economic conditions, and loan loss expectations.

Industry Context

The company's strong performance, particularly the increase in net interest income and improved credit quality, suggests effective navigation of the current interest rate environment. The shift towards higher-yielding AFS securities and the repayment of FRB borrowings indicate proactive balance sheet management in response to market conditions. The growth in deposits, especially certificates of deposit, highlights the competitive landscape for funding in a stabilized interest rate environment. The ongoing evaluation of CDFI certification requirements and the potential impact of an Executive Order on the CDFI Fund reflect broader regulatory and policy shifts affecting community financial institutions.

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.

Stakeholder Impact

• Shareholders: Benefited from increased net income, higher earnings per share, and continued cash dividends. The share repurchase program also indicates a commitment to returning capital.
• Customers: Deposit customers saw targeted promotions for certificates of deposit, reflecting competition for funds. Lending customers experienced a slight decrease in total loans, but improved credit quality suggests prudent lending practices.
• Employees: Compensation and employee benefits increased due to higher staffing levels and additional compensation-related costs, indicating investment in human capital.
• Regulators: The Bank maintains a 'well-capitalized' status, significantly exceeding all regulatory capital requirements, demonstrating financial stability and compliance.
• Communities: The company's ongoing CDFI certification process and participation in CDFI programs highlight its commitment to serving lowand moderate-income communities, though potential changes to CDFI Fund operations could impact future benefits.

Next Steps

• Continue current practice of paying quarterly cash dividends on common stock.
• Monitor capital levels to provide for current and future business opportunities and maintain 'well-capitalized' status.
• Utilize borrowing facilities (FHLB, Fed Funds) to fund loan originations, deposit withdrawals, and investment opportunities as feasible.
• Evaluate revised CDFI Certification Application requirements and complete recertification by December 31, 2025.
• Monitor developments regarding the Executive Order on the CDFI Fund and assess potential effects on operations or financial performance.
• Continue share repurchase program, with 63,143 shares remaining available for repurchase.

Key Dates

Recommendation

The company delivered exceptionally strong financial results for both the quarter and nine-month periods, with substantial growth in net income and EPS. The significant reversal of credit loss provisions and marked improvement in asset quality (lower past due and nonaccrual loans) indicate effective risk management and a healthy loan portfolio. The increase in net interest margin and the strategic repayment of FRB borrowings demonstrate sound balance sheet management. With robust capital ratios well above regulatory requirements and a continued commitment to shareholder returns through dividends and share repurchases, Security Federal Corporation presents a compelling investment opportunity. While non-interest expenses rose, the overall positive trends in profitability and asset quality outweigh these factors, suggesting continued strong performance.

Keywords

Banking, Financial Services, SEC Filing, 10-Q, Quarterly Report, Net Income, Earnings Per Share, Net Interest Income, Credit Quality, Loan Portfolio, Deposits, Capital Ratios, Community Development Financial Institution, ECIP, Share Repurchase