SECURITY FEDERAL CORP 10-K Analysis & Summary – 3/14/2025

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SECURITY FEDERAL CORP

10-K

Annual report

Filing date:

03/14/2025

TLDR:

ELI5:

Security Federal Bank grew a bit in 2024, but made less money because they had to set aside more funds for potential loan losses and spent more on operations. They’re working on managing risks like changing interest rates and cyber threats.

Accession #:

0001437749-25-007686

Published on

March 16, 2025

Analyst Summary

Total assets increased by 4.0% to $1.61 billion, driven by growth in net loans receivable and cash.
Net loans receivable increased by 10.4% to $687.1 million, driven by residential and commercial real estate loan growth.
Total deposits increased by 10.8% to $1.32 billion, reflecting competitive deposit rates and brokered deposits.
Net interest income increased by 6.6% to $41.8 million, driven by higher interest income from loans and deposits in other banks.
Net interest margin decreased slightly to 2.85% from 2.89% in the prior year.
Provision for credit losses increased significantly to $1.4 million, reflecting loan portfolio growth and increased substandard loans.
Non-interest expense increased by 6.2% to $38.1 million, primarily due to higher compensation, cloud service expenses, and other operating costs.
Net income available to common shareholders decreased to $8.9 million from $10.2 million in the prior year.
Operating Profit Margin decreased from 17.0% to 16.0%, a -5.9% change.
Net Profit Margin decreased from 13.7% to 11.2%, a -18.2% change.
Return on Assets (ROA) decreased from 0.66% to 0.61%, a -7.6% change.
Return on Equity (ROE) decreased from 5.99% to 5.57%, a -7.0% change.
Earnings Per Share (EPS) – Basic decreased from $3.14 to $2.77, a -11.8% change.
Debt-to-Equity Ratio decreased from 7.99 to 7.84, a -1.9% change.
Debt-to-Assets Ratio decreased from 88.9% to 88.7%, a -0.2% change.
Interest Coverage Ratio (Times Interest Earned) decreased from 1.48 to 1.35, a -8.8% change.
Asset Turnover increased from 4.8% to 5.5%, a 14.6% change.
Revenue Growth increased 18.0%.
Net Income Growth decreased -3.8%.
EPS Growth decreased -11.8%.
During November 2024, the company repurchased 8,210 shares at an average price of $27.00.
Non-accrual loans increased by 11.9% from $6.825 million in 2023 to $7.636 million in 2024.
Net Interest Margin (Tax Equivalent) decreased from 2.89% in 2023 to 2.85% in 2024.
A hypothetical 400 basis point increase or decrease in interest rates would result in a 20% decrease in NII.

Opportunities and Risks

Interest Rate Risk: Fluctuations in interest rates could negatively impact net interest income and asset values.
Credit Risk: Deterioration in economic conditions could lead to increased loan delinquencies and credit losses.
Commercial Real Estate Lending: High concentration in commercial real estate loans exposes the bank to increased lending risks.
Cybersecurity Risk: Potential for cyber-attacks and system failures could disrupt operations and compromise sensitive information.
Regulatory Risk: Changes in banking regulations could increase compliance costs and restrict operations.
Loan Growth: Continued growth in residential and commercial real estate lending could drive revenue growth.
Trust Services: Expansion of trust services could generate additional fee income.
Community Development: Leveraging CDFI designation to access grants and support community development initiatives.

Potential Implications

Company Performance

Focus on managing asset quality and reducing non-performing assets.
Implement strategies to mitigate interest rate risk and protect net interest margin.
Continue to invest in cybersecurity infrastructure and employee training.
Carefully manage operating expenses to improve profitability.

SEC Filing Report: Security Federal Corp 10-K (2024)

Executive Summary

This report analyzes Security Federal Corporation’s 10-K filing for the year ended December 31, 2024. Key findings include a moderate increase in total assets and deposits, driven by loan growth and competitive deposit rates. However, net income decreased due to higher provision for credit losses, non-interest expenses, and income tax provisions. The bank remains well-capitalized, but faces challenges related to interest rate risk, loan quality, and cybersecurity. Overall, a HOLD recommendation is suggested, pending further observation of asset quality and expense management.

Company Overview

Security Federal Corporation is a South Carolina-based bank holding company operating through its subsidiary, Security Federal Bank. The bank provides commercial and retail banking services, including loan origination, deposit accounts, and trust services, across 19 branch offices in South Carolina and Georgia. The company is traded on the OTC Pink Open Market under the symbol “SFDL.”

Detailed Analysis

Financial Statement Analysis

Balance Sheet

Total assets increased by 4.0% to $1.61 billion, primarily due to growth in net loans receivable and cash.
Net loans receivable increased by 10.4% to $687.1 million, driven by residential and commercial real estate loan growth.
Total deposits increased by 10.8% to $1.32 billion, reflecting competitive deposit rates and brokered deposits.
Shareholders’ equity increased by 5.8% to $182.4 million, supported by net income and a decrease in accumulated other comprehensive loss.

Income Statement

Net interest income increased by 6.6% to $41.8 million, driven by higher interest income from loans and deposits in other banks.
Net interest margin decreased slightly to 2.85% from 2.89% in the prior year.
Provision for credit losses increased significantly to $1.4 million, reflecting loan portfolio growth and increased substandard loans.
Non-interest income increased by 9.1% to $10.2 million, driven by gains on sales of loans and trust income.
Non-interest expense increased by 6.2% to $38.1 million, primarily due to higher compensation, cloud service expenses, and other operating costs.
Net income available to common shareholders decreased to $8.9 million from $10.2 million in the prior year.

Key Ratios

Ratio	2024	2023
Net Interest Margin	2.85%	2.89%
Return on Average Assets	0.61%	0.67%
Return on Average Equity	5.00%	6.00%
Allowance for Credit Losses / Total Loans	1.98%	1.98%
Non-Performing Assets / Total Assets	0.47%	0.44%

Management’s Discussion and Analysis (MD&A) Insights

Management acknowledges the impact of economic conditions on loan portfolio performance and is actively monitoring the situation.
The company is focused on managing interest rate risk through asset and liability management strategies.
The company is committed to community development and has received grant income to support these initiatives.

Risk and Opportunity Assessment

Risks

Interest Rate Risk: Fluctuations in interest rates could negatively impact net interest income and asset values.
Credit Risk: Deterioration in economic conditions could lead to increased loan delinquencies and credit losses.
Commercial Real Estate Lending: High concentration in commercial real estate loans exposes the bank to increased lending risks.
Cybersecurity Risk: Potential for cyber-attacks and system failures could disrupt operations and compromise sensitive information.
Regulatory Risk: Changes in banking regulations could increase compliance costs and restrict operations.

Opportunities

Loan Growth: Continued growth in residential and commercial real estate lending could drive revenue growth.
Trust Services: Expansion of trust services could generate additional fee income.
Community Development: Leveraging CDFI designation to access grants and support community development initiatives.

Red Flags and Uncommon Metrics

Increase in non-performing assets, particularly construction loans, requires close monitoring.
Significant increase in the provision for credit losses suggests heightened credit risk.
Reliance on brokered deposits could increase funding costs.

Conclusion and Actionable Insights

Security Federal Corporation demonstrated moderate growth in assets and deposits during 2024. However, profitability was negatively impacted by increased expenses and provisions for credit losses. While the bank remains well-capitalized, it faces challenges related to interest rate risk, loan quality, and cybersecurity.

Recommendations:

Focus on managing asset quality and reducing non-performing assets.
Implement strategies to mitigate interest rate risk and protect net interest margin.
Continue to invest in cybersecurity infrastructure and employee training.
Carefully manage operating expenses to improve profitability.

1. Commentary

Security Federal Corporation’s financial performance shows a mixed picture. While the bank increased its loan portfolio and deposit base, net income available to common shareholders decreased. The increase in interest income was offset by a larger increase in interest expense, leading to a modest rise in net interest income. The bank maintains strong capital ratios, but unrealized losses on investment securities continue to impact comprehensive income.

2. Financial Ratio and Metric Analysis

Profitability

Gross Profit Margin: Not applicable for banks.
Operating Profit Margin: Calculated as (Net Interest Income + Non-Interest Income – Non-Interest Expense) / Total Revenue.
- Metric: (41,827 + 10,247 – 38,140) / (77,306 + 10,247) = 16.0% (2024); (39,248 + 9,390 – 35,914) / (64,977 + 9,390) = 17.0% (2023)
- Trend: Decreased from 17.0% to 16.0%, a -5.9% change.
- Industry: Community banks typically have operating profit margins in the 15-25% range. SFDL is on the lower end.
Net Profit Margin: Net Income / Total Revenue
- Metric: 9,807 / (77,306 + 10,247) = 11.2% (2024); 10,190 / (64,977 + 9,390) = 13.7% (2023)
- Trend: Decreased from 13.7% to 11.2%, a -18.2% change.
- Industry: Community banks typically have net profit margins in the 10-20% range. SFDL is on the lower end.
Return on Assets (ROA): Net Income / Average Total Assets
- Metric: 9,807 / ((1,611,773 + 1,549,671) / 2) = 0.61% (2024); 10,190 / ((1,549,671 + previous year assets) / 2) – Assuming previous year assets are similar, ROA is approximately 0.66% (2023)
- Trend: Decreased from 0.66% to 0.61%, a -7.6% change.
- Industry: The industry average ROA for banks is typically between 0.8% and 1.2%. SFDL is below average.
Return on Equity (ROE): Net Income / Average Shareholders’ Equity
- Metric: 9,807 / ((182,389 + 172,362) / 2) = 5.57% (2024); 10,190 / ((172,362 + previous year equity) / 2) – Assuming previous year equity is similar, ROE is approximately 5.99% (2023)
- Trend: Decreased from 5.99% to 5.57%, a -7.0% change.
- Industry: The industry average ROE for banks is typically between 8% and 12%. SFDL is below average.
Earnings Per Share (EPS) – Basic: Net Income Available to Common Shareholders / Weighted Average Shares Outstanding (Basic)
- Metric: 8,881 / 3,208,405 = $2.77 (2024); 10,190 / 3,248,149 = $3.14 (2023)
- Trend: Decreased from $3.14 to $2.77, a -11.8% change.
- Industry: EPS varies widely based on the size and profitability of the bank.

Liquidity

Current Ratio: Current Assets / Current Liabilities
- Metric: Since a bank’s balance sheet is not categorized into current and non-current, this ratio is not applicable.
Quick Ratio (Acid-Test Ratio): (Current Assets – Inventory) / Current Liabilities
- Metric: Since a bank’s balance sheet is not categorized into current and non-current and inventory is not applicable, this ratio is not applicable.
Cash Ratio: Cash and Cash Equivalents / Total Current Liabilities
- Metric: Since a bank’s balance sheet is not categorized into current and non-current, this ratio is not applicable.

Solvency/Leverage

Debt-to-Equity Ratio: Total Liabilities / Total Shareholders’ Equity
- Metric: 1,429,384 / 182,389 = 7.84 (2024); 1,377,309 / 172,362 = 7.99 (2023)
- Trend: Decreased from 7.99 to 7.84, a -1.9% change.
- Industry: A typical debt-to-equity ratio for banks is between 6 and 10. SFDL is within this range.
Debt-to-Assets Ratio: Total Liabilities / Total Assets
- Metric: 1,429,384 / 1,611,773 = 88.7% (2024); 1,377,309 / 1,549,671 = 88.9% (2023)
- Trend: Decreased from 88.9% to 88.7%, a -0.2% change.
- Industry: Banks typically have high debt-to-assets ratios, often above 80%. SFDL is within the expected range.
Interest Coverage Ratio (Times Interest Earned): Earnings Before Interest and Taxes (EBIT) / Interest Expense
- Metric: (12,564 + 35,479) / 35,479 = 1.35 (2024); (12,478 + 25,729) / 25,729 = 1.48 (2023)
- Trend: Decreased from 1.48 to 1.35, a -8.8% change.
- Industry: A healthy interest coverage ratio for a bank is generally above 1.5. SFDL is slightly below this level.

Activity/Efficiency

Asset Turnover: Total Revenue / Average Total Assets
- Metric: (77,306 + 10,247) / ((1,611,773 + 1,549,671) / 2) = 5.5% (2024); (64,977 + 9,390) / ((1,549,671 + previous year assets) / 2) – Assuming previous year assets are similar, asset turnover is approximately 4.8% (2023)
- Trend: Increased from 4.8% to 5.5%, a 14.6% change.
- Industry: Banks typically have low asset turnover ratios, often below 10%. SFDL is within the expected range.

Valuation

Price-to-Earnings Ratio (P/E): Stock Price / Earnings Per Share
- Metric: 29.75 / 2.77 = 10.74 (2024)
- Industry: The average P/E ratio for banks varies, but a reasonable range is 10-15. SFDL is within this range.
Price-to-Book Ratio (P/B): Stock Price / Book Value Per Share
- Metric: Book Value per Share = Total Shareholders’ Equity / Total Shares Outstanding = 182,389 / 3,186,571 = 57.24. P/B = 29.75 / 57.24 = 0.52
- Industry: A P/B ratio for banks is typically between 0.5 and 1.5. SFDL is below average.
Price-to-Sales Ratio (P/S): Market Cap / Total Revenue
- Metric: Market Cap = Stock Price * Shares Outstanding = 29.75 * 3,186,571 = 94,800,487.25. Total Revenue = 77,306,000 + 10,247,000 = 87,553,000. P/S = 94,800,487.25 / 87,553,000 = 1.08
- Industry: A typical P/S ratio for banks is between 1 and 3. SFDL is within this range.
Enterprise Value to EBITDA (EV/EBITDA): (Market Cap + Total Debt – Cash) / EBITDA
- Metric: Market Cap = 94,800,487.25. Total Debt = 50,000,000 + 27,809,000 + 10,000,000 + 5,155,000 = 92,964,000. Cash = 178,277,000. EBITDA = Net Income + Interest Expense + Taxes + Depreciation = 9,807,000 + 35,479,000 + 2,757,000 + 2,070,000 = 50,113,000. EV = 94,800,487.25 + 92,964,000 – 178,277,000 = 9,487,487.25. EV/EBITDA = 9,487,487.25 / 50,113,000 = 0.19
- Industry: EV/EBITDA ratios for banks can vary, but a reasonable range is 5-15. SFDL is significantly below this range, which could indicate undervaluation or specific concerns about the company’s earnings stability.

Growth Rates

Revenue Growth: (Current Year Revenue – Prior Year Revenue) / Prior Year Revenue
- Metric: ((77,306 + 10,247) – (64,977 + 9,390)) / (64,977 + 9,390) = 18.0%
Net Income Growth: (Current Year Net Income – Prior Year Net Income) / Prior Year Net Income
- Metric: (9,807 – 10,190) / 10,190 = -3.8%
EPS Growth: (Current Year EPS – Prior Year EPS) / Prior Year EPS
- Metric: (2.77 – 3.14) / 3.14 = -11.8%

Other Relevant Metrics

Share Repurchase Program: During November 2024, the company repurchased 8,210 shares at an average price of $27.00. As of December 31, 2024, 127,066 shares remained authorized for repurchase under the plan. This indicates a continued effort to return value to shareholders.
Non-Performing Assets: Non-accrual loans increased by 11.9% from $6.825 million in 2023 to $7.636 million in 2024. The ratio of non-performing assets to total assets increased slightly from 0.44% to 0.47%. While still relatively low, this increase warrants monitoring.
Net Interest Margin (Tax Equivalent): Decreased from 2.89% in 2023 to 2.85% in 2024. This indicates a slight compression in the profitability of the bank’s lending activities.
Interest Rate Sensitivity: The bank provided an analysis of how changes in market interest rates would affect net interest income (NII) and the economic value of equity (EVE). A hypothetical 400 basis point increase or decrease in interest rates would result in a 20% decrease in NII. The hypothetical change in EVE ranged from a 41.5% decrease to a 3.8% increase. This highlights the bank’s vulnerability to interest rate fluctuations.