SECURITY FEDERAL CORP
For the period ended Dec 31, 2024. Filed Mar 14, 2025.
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A company's yearly report to the SEC, with audited financial statements. It is the fullest account a company gives of its business, its finances and the risks it sees.
FY2024 · Filed Mar 14, 2025
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What changed in Risk Factors?
Read the current filingPrevious report: 10-K
Period ended 2023-12-31; filed 2024-03-21.
0001437749-24-008852
Item 1A. Risk FactorsCurrent report: 10-K
Period ended 2024-12-31; filed 2025-03-14.
0001437749-25-007686
Item 1A. Risk FactorsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 68 previous paragraphs and 61 current paragraphs.
22 unchanged; 31 reworded; 8 added; 15 removed; 0 previous and 0 current paragraphs rearranged.
Tables are not compared: 14 previous and 14 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (8)
Current report
Monetary policy, inflation, deflation, and other external economic factors could adversely impact our business, financial condition and results of operations.
Current report
Our net interest margin, the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities, can be adversely affected by interest rate changes. While yields on assets and costs of liabilities tend to move in the same direction, they may do so at different speeds, causing the margin to expand or contract. As our interest-bearing liabilities often have shorter durations than our interest-earning assets, a rise in interest rates may lead to funding costs increasing faster than asset yields, compressing our net interest margin. Additionally, changes in the slope of the yield curve, such as flattening or inversion, can further pressure our margins as funding costs rise relative to asset yields. Conversely, falling rates can increase loan prepayments, leading to reinvestment in lower-yielding assets, reducing income.
Current report
In a rising rate environment, retaining deposits can become costlier. If deposit and borrowing rates rise faster than loan and investment yields, our net interest income and overall earnings could decline. Additionally, adjustable-rate residential mortgage loans and home equity lines of credit may face increased default risks in a rising rate environment. Interest rate fluctuations also influence the fair value of fixed-rate investment securities, which inversely correlates with rate changes. At December 31, 2024, the fair value of our securities available for sale was $525.6 million, with unrealized net losses of $31.1 million reflected in stockholders’ equity. Further declines in fair value from rising rates could have an adverse effect on stockholders’ equity.
Current report
Mortgage banking is generally considered a volatile source of income because it depends largely on loan volume, which is influenced by prevailing market interest rates. In a rising or higher interest rate environment, our originations of mortgage loans may decrease, resulting in fewer loans that are available to be sold to investors. This would result in a decrease in mortgage banking revenues and a corresponding decrease in noninterest income.
Current report
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment regarding the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances, yet might result in us reporting materially different results than would have been reported under a different alternative.
Current report
We are subject to certain risks related to our use of technology, including the potential for cyber-attacks and system failures.
Current report
Competition for qualified employees in the banking industry is intense, with a limited pool of candidates experienced in community banking. Our success relies on attracting and retaining skilled management, loan origination, finance, administrative, marketing, and technical personnel, as well as on the continued contributions of key executives, including our Chief Executive Officer, J. Chris Verenes, and other critical employees. Losing any of these individuals could result in a challenging transition period and negatively impact our operations. The loss of these key personnel or directors nearing retirement without suitable replacements could adversely affect our business.
Current report
Additionally, collateralized public funds are bank deposits of state and local municipalities. These deposits are required to be secured by certain investment grade securities to ensure repayment, which on the one hand tends to reduce our contingent liquidity risk by making these funds somewhat less credit sensitive, but on the other hand reduces standby liquidity by restricting the potential liquidity of the pledged collateral. Although these funds historically have been a relatively stable source of funds for us, availability depends on the individual municipality’s fiscal policies and cash flow needs. At December 31, 2024, $131.8 million of our deposits were public funds.
Removed paragraphs (15)
Previous report
External economic factors, such as changes in monetary policy and inflation, may have an adverse effect on our business, financial condition and results of operations.
Previous report
Our earnings and cash flows are largely dependent upon our net interest income. Interest rates are sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, and particularly, the Federal Reserve. Since March 2022, in response to inflation, the Federal Open Market Committee ("FOMC") of the Federal Reserve has increased the target range for the federal funds rate by 525 basis points, including 225 basis points during 2023, to a range of 5.25% to 5.50% as of December 31, 2023. The FOMC has paused increases to the target federal funds rate but has not ruled out future increases. If the FOMC further increases the targeted federal funds rates, overall interest rates will likely rise, which will negatively impact our net interest income and may negatively impact both the housing market by reducing refinancing activity and new home purchases and the U.S. economy.
Previous report
We principally manage interest rate risk by managing our volume and mix of our earning assets and funding liabilities. In a changing interest rate environment, we may not be able to manage this risk effectively. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially affected.
Previous report
Changes in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations or by reducing our margins and profitability. Our net interest margin is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates-up or down-could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yields on interest-earning assets catch up.
Previous report
Changes in the slope of the “yield curve”, or the spread between short-term and long-term interest rates-could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. Also, interest rate decreases can lead to increased prepayments of loans and mortgage-backed securities as borrowers refinance their loans to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk as we may have to redeploy such repayment proceeds into lower yielding investments, which would likely hurt our income.
Previous report
A sustained increase in market interest rates could adversely affect our earnings. As is the case with many financial institutions, we attempt to increase our proportion of deposits comprising either no or relatively low-interest-bearing accounts, which has been challenging over the last couple years. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. Our net interest income could be adversely affected if the rates we pay on deposits and borrowings increase more rapidly than the rates we earn on loans and other investments.
Previous report
Changes in interest rates also affect the value of our investment securities portfolio. Generally, the fair value of fixed-rate securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as a separate component of equity, net of tax. Decreases in the fair value of securities available for sale resulting from increases in interest rates could have an adverse effect on stockholders’ equity. At December 31, 2023, we had an accumulated other comprehensive loss of $35.0 million, which is reflected as a reduction to shareholders’ equity.
Previous report
Changes in economic conditions significantly impact mortgage loan production levels. A slowdown in the housing market, decreased economic activity, or higher interest rates can particularly affect this aspect of our operations. Sustained periods of economic downturn or elevated interest rates have the potential to adversely impact mortgage originations, subsequently affecting income derived from our mortgage lending activities.
Previous report
Failure to generate an adequate volume of loans for sale may adversely affect our results of operations. In addition, during periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in loan originations. Moreover, deteriorating economic conditions may increase the potential for homebuyers to default on their mortgages. In instances where we have originated loans sold to investors, we may be required to repurchase such loans or provide a financial settlement to investors. Such situations arise if it is proven that borrowers furnished incomplete or inaccurate information on their loan applications, if appraisals are deemed unacceptable, or if loans were not underwritten as per the specified loan program outlined by the investor. If repurchase and indemnity demands increase on loans that we sell from our portfolios, our liquidity, results of operations and financial condition could be adversely affected.
Previous report
As a result of the change in methodology from the incurred loss model to the CECL model, on January 1, 2023, the Company recorded a one-time increase in the allowance for credit losses on loans of $784,000 and the reserve for unfunded commitments of $1.2 million, and an after-tax decrease to opening retained earnings of $1.6 million.
Previous report
While we have established policies and procedures to prevent or limit the impact of systems failures and interruptions, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. In addition, we outsource certain aspects of our data processing and other operational functions to certain third-party providers. While we select third-party vendors carefully, we do not control their actions. If our third-party providers encounter difficulties including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher transaction volumes, cyber-attacks and security breaches or if we otherwise have difficulty in communicating with them, our ability to adequately process and account for transactions could be affected, and our ability to deliver products and services to our customers and otherwise conduct business operations could be adversely impacted. Replacing these third-party vendors could also entail significant delay and expense. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.
Previous report
We cannot assure you that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely.** **We may not be insured against all types of losses as a result of third party failures and insurance coverage may be inadequate to cover all losses resulting from breaches, system failures or other disruptions. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to identify alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all. Further, the occurrence of any systems failure or interruption could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to legal liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations. The board of directors oversees the risk management process, including the risk of cybersecurity, and engages with management on cybersecurity issues.
Previous report
Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of, and experience in, the community banking industry where Security Federal conducts its business. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies is often lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan origination, finance, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel. In particular, our success has been and continues to be highly dependent upon the abilities of key executives, including our Chief Executive Officer, J. Chris Verenes, and certain other employees. In addition, our success has been and continues to be highly dependent upon the services of our directors, many of whom are at or nearing retirement age, and we may not be able to identify and attract suitable candidates to replace such directors.
Previous report
Maintaining sufficient liquidity is essential to our business. Any inability to secure funds through deposits, borrowings, loan or investment sales, or other means could significantly impact our liquidity in a negative manner. Our primary liquidity sources include deposit increases, and when necessary, FHLB advances, borrowing from the FRB, and other borrowings. While historically, we have managed to replace maturing deposits and advances as needed, future replacements may be uncertain due to various factors. Changes in our financial condition, the financial condition of the FHLB or FRB, or market conditions could impede our ability to replace these funds. Factors such as reduced business activity in our South Carolina and Georgia markets, adverse operating results, or regulatory actions against us might also impede access to our liquidity sources. External factors like disruptions in financial markets, negative industry sentiments, or shifts in credit markets could further impede our ability to access funds. Changes in underwriting guidelines by the FHLB or alterations in lending policies may limit our ability to borrow, significantly impacting our access to funds. Moreover, dependence on more expensive funding sources due to large-scale withdrawals or the inability to replace brokered deposits could strain our ability to meet our obligations, originate loans, or invest in securities. The availability of additional financing in the future might be uncertain or come at unreasonable terms, affecting our financial condition, operations, growth prospects, and overall future.
Previous report
Additionally, while collateralized public funds tend to mitigate some credit sensitivity, they also limit standby liquidity due to collateral restrictions. These funds, while historically a stable funding source, are contingent upon the fiscal policies and cash flow needs of individual municipalities. At December 31, 2023, $141.4 million of our deposits were public funds.
Reworded paragraphs (31)
Previous wording
Our operations are significantly affected by the general economic conditions of the states of South Carolina and Georgia and the specific local markets in which we operate. Our entire real estate portfolio consists primarily of loans secured by properties located in Aiken, Richland, and Lexington Counties in South Carolina and Columbia and Richmond Counties in Georgia. Weakness in the global economy and global supply chain issues have adversely affected many businesses operating in our markets that are dependent upon international trade. Changes in agreements or relationships between the United States and other countries may also affect these businesses.
Current wording
Our operations are significantly affected by the general economic conditions of the states of South Carolina and Georgia and the specific local markets in which we operate. Our entire real estate portfolio consists primarily of loans secured by properties located in Aiken, Richland, and Lexington Counties in South Carolina and Columbia and Richmond Counties in Georgia. Adverse economic conditions in our market areas could impact our growth rate, reduce our customers’ ability to repay loans, and adversely impact our business, financial condition, and results of operations. Broader economic factors such as inflation, unemployment and money supply fluctuations also may adversely affect our profitability. Trade wars, tariffs, or shifts in trade policies between the United States and other nations could disrupt supply chains, increase costs for businesses, and reduce export opportunities for our customers. These developments may, in turn, negatively impact these businesses and, by extension, our operations and financial performance.
Previous wording
A deterioration in economic conditions in the market areas we serve, be it due to inflation, a recession, war, geopolitical conflicts, adverse weather conditions, the impact of COVID-19 variants, or other factors could result in the following consequences, any of which, could have a materially adverse effect on our business, financial condition, or results of operations:
Current wording
A deterioration in economic conditions in the market areas we serve, due to inflation, a recession, war, geopolitical conflicts, adverse weather conditions, or other factors could result in the following consequences, any of which, could have a materially adverse effect on our business, financial condition, or results of operations:
Previous wording
A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse. Many of the loans in our portfolio are secured by real estate. Any deterioration in the real estate markets associated with the collateral securing mortgage loans could significantly impact borrowers' repayment capabilities and the value of collateral. Real estate values are affected by various factors, including economic conditions, governmental rules or policies, and natural disasters such as earthquakes. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.
Current wording
A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse. Many of the loans in our portfolio are secured by real estate. Any deterioration in the real estate markets associated with the collateral securing mortgage loans could significantly impact borrowers' repayment capabilities and the value of collateral. Real estate values are affected by various factors, including economic conditions, governmental rules or policies, natural disasters such as earthquakes, and trade-related pressures that may affect construction costs or materials availability. If we are required to liquidate a significant amount of collateral during a period of reduced real estate values, our financial condition and profitability could be adversely affected.
Previous wording
We maintain an allowance for losses on loans, which is a reserve established through a provision for credit losses charged to expense, that we believe is appropriate to provide for lifetime expected credit losses in our loan portfolio. The appropriate level of the allowance for credit losses on loans is determined by management through periodic reviews and consideration of several factors, including, but not limited to:
Current wording
We maintain an allowance for credit losses on loans, which is a reserve established through a provision for credit losses charged to expense. This allowance is intended to cover lifetime expected credit losses in our loan portfolio. The appropriate level of the allowance is determined by management through periodic reviews and consideration of several factors, including, but not limited to:
Previous wording
The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. If our estimates are incorrect, the allowance for credit losses may not be sufficient to cover the expected losses in our loan portfolio, resulting in the need for increases in our allowance for credit losses through the provision for credit losses which is recorded as a charge against income. Management also recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions. Our allowance for credit losses on loans was 1.98% of total loans outstanding (excluding loans held for sale) at December 31, 2023. For additional information concerning our allowance for credit losses, see “Management’s Discussion and Analysis of Financial Condition - Comparison of Results of Operations for the Years Ended December 31, 2023 and 2022 - Provision for Credit Losses” contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this 2023 Form 10-K.
Current wording
The determination of the appropriate level of the allowance for credit losses involves a high degree of subjectivity and requires significant estimates of current credit risks and future trends, which may change materially. If our estimates are incorrect, the allowance may not be sufficient to cover the expected losses in our loan portfolio, resulting in the need to increase the allowance through the provision for credit losses, recorded as a charge against income. Additionally, management recognizes that new growth in loan portfolios, new loan products, and the refinancing of existing loans can result in portfolios comprised of unseasoned loans, which may not perform as historically or projected. This increases the risk that the allowance may be insufficient to absorb losses without significant additional provisions. Our allowance for credit losses on loans was 1.98% of total loans outstanding (excluding loans held for sale) at December 31, 2024. For additional information concerning our allowance for credit losses, see “Management’s Discussion and Analysis of Financial Condition - Comparison of Results of Operations for the Years Ended December 31, 2024 and 2023 - Provision for Credit Losses” contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this 2024 Form 10-K.
Previous wording
At December 31, 2023, our non-performing assets (which consist of non-accrual loans and OREO) were $6.8 million, or 0.44% of total assets. Our non-performing assets adversely affect our net income in various ways:
Current wording
At December 31, 2024, our non-performing assets (which consist of non-accrual loans) were $7.6 million, or 0.47% of total assets. Our non-performing assets adversely affect our net income in various ways:
Previous wording
While commercial real estate lending offers the potential for higher returns compared to single-family residential lending, it is more susceptible to fluctuations in regional and local economic conditions, presenting challenges in predicting potential losses accurately. Evaluating collateral and conducting financial statement analysis for these loans necessitates a more intricate approach during underwriting and continual assessment. At December 31, 2023, we had $264.8 million of commercial real estate loans, representing 41.7% of our total loan portfolio.
Current wording
While commercial real estate lending offers the potential for higher returns compared to single-family residential lending, it is more susceptible to fluctuations in regional and local economic conditions, presenting challenges in accurately predicting potential losses. Evaluating collateral and conducting financial statement analysis for these loans requires a more intricate approach during underwriting and continual assessment. At December 31, 2024, we had $288.5 million of commercial real estate loans, representing 41.2% of our total loan portfolio.
Previous wording
Commercial real estate loans typically involve larger principal amounts than other types of lending, and some borrowers hold multiple loans with us. Consequently, adverse developments in a single loan or credit relationship can significantly increase our risk exposure compared to single-family residential loans. Repayment of these loans is dependent on income generated or anticipated from the property securing the loan in amounts sufficient to cover operating expenses and debt service. Economic fluctuations or local market changes can impact this cash flow. For instance, failure to secure or renew leases can impair the borrower's ability to repay the loan. Commercial real estate loans also pose a greater credit risk than one-to-four family residential real estate loans, primarily because the collateral is less liquid. Further, many of these loans include large balloon payments upon maturity, increasing the risk of default as borrowers may need to sell or refinance the property to pay off the loan at maturity.
Current wording
Commercial real estate loans typically involve larger principal amounts than other types of lending, and some borrowers hold multiple loans with us. Consequently, adverse developments in a single loan or credit relationship can significantly increase our risk exposure compared to single-family residential loans. Repayment of these loans depends on income generated or anticipated from the property securing the loan in amounts sufficient to cover operating expenses and debt service. Economic fluctuations or local market changes can impact this cash flow. For instance, failure to secure or renew leases can impair the borrower's ability to repay the loan. Commercial real estate loans also pose a greater credit risk than one-to-four family residential real estate loans, primarily because the collateral is less liquid. Further, many of these loans include large balloon payments upon maturity, increasing the risk of default as borrowers may need to sell or refinance the property to pay off the loan.
Previous wording
We originate construction loans on single-family residences, multi-family dwellings and projects, and commercial real estate, as well as loans for the acquisition and development and construction of residential subdivisions and commercial projects. At December 31, 2023, we had $104.5 million of construction loans, representing 16.5% of our total loan portfolio.
Current wording
We originate construction loans for single-family residences, multi-family dwellings and projects, and commercial real estate, as well as loans for the acquisition and development and construction of residential subdivisions and commercial projects. At December 31, 2024, we had $109.9 million in construction loans, representing 15.7% of our total loan portfolio.
Previous wording
Construction lending involves inherent risks due to estimating costs in relation to project values. Uncertainties in construction costs, market value, and regulatory impacts make accurately evaluating total project funds and loan-to-value ratios challenging. Factors like shifts in housing demand and unexpected building costs can significantly vary actual results from estimates. Additionally, this type of lending often involves higher principal amounts and might be concentrated among a few builders. A downturn in housing or real estate markets could escalate delinquencies, defaults, foreclosures, and compromise collateral value.
Current wording
Construction lending involves inherent risks due to the need to estimate costs in relation to project values. Uncertainties in construction costs, market value fluctuations, and regulatory impacts make accurately evaluating total project funds and loan-to-value ratios challenging. Factors such as shifts in housing demand and unexpected building costs can significantly cause actual results to differ from estimates. Additionally, this type of lending often involves higher principal amounts and can be concentrated among a few builders. A downturn in housing or real estate markets could increase delinquencies, defaults, foreclosures, and reduce collateral values.
Previous wording
Some builders have multiple loans with our institution and also hold residential mortgage loans for rental properties with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss. Moreover, these loans often involve the disbursement of funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing. Thus, repayment depends heavily on project success and the borrower's ability to sell, lease, or secure permanent financing, rather than their ability to repay principal and interest directly. Misjudging a project's value could leave us with inadequate security and potential losses upon completion. Actively monitoring construction loans, involving cost comparisons and on-site inspections, adds complexity and cost. Market interest rate hikes also might significantly impact construction loans, affecting end-purchaser borrowing costs, potentially reducing demand or the homeowner's ability to finance the completed home. Further, properties under construction are hard to sell and often need completion for successful sales, complicating problem loan resolution. This might require additional funds or engaging another builder, incurring additional costs and market risks. Moreover, speculative construction loans pose additional risks, especially regarding finding end-purchasers for finished projects.
Current wording
Some builders have multiple loans with our institution and also hold residential mortgage loans for rental properties with us. Consequently, an adverse development with one loan or credit relationship can expose us to a significantly greater risk of loss. Moreover, these loans often involve the disbursement of funds with repayment substantially dependent on the success of the project and borrower's ability to sell, lease, or secure permanent financing. Thus, repayment depends heavily on the project’s success rather than the borrower’s ability to directly repay principal and interest. Misjudging a project’s value could leave us with inadequate security and potential losses upon completion. Actively monitoring construction loans, through cost comparisons and on-site inspections, adds complexity and cost. Market interest rate hikes may also significantly impact construction loans, affecting end-purchaser borrowing costs and potentially reducing demand or the homeowner's ability to finance the completed home. Further, properties under construction are difficult to sell and often need completion to be sold successfully, complicating loan resolution. This might require additional funds or engaging another builder, which incurs further costs and market risks. Speculative construction loans, in particular, pose additional risks, especially in finding end-purchasers for finished projects.
Previous wording
Construction loans made by us include those with a sales contract or permanent loan in place for the finished homes and those for which purchasers for the finished homes may not be identified either during or following the construction period, known as speculative construction loans. Speculative construction loans pose additional risks, especially regarding finding end-purchasers for finished projects. Land loans also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral. These risks can also be significantly impacted by supply and demand conditions.
Current wording
Our construction loans include those with a sales contract or permanent loan in place for finished homes, as well as speculative construction loans, where purchasers for the finished homes may not be identified during or after the construction period. Speculative construction loans carry additional risks, particularly regarding the challenge of finding end-purchasers for completed projects. Land loans also present additional risks due to lack of income generated by the property and the potential illiquidity of the collateral. These risks can be significantly impacted by supply and demand conditions.
Previous wording
Construction, acquisition and development ("A&D") loans carry additional risk due to the lack of income being produced by the property and the potential illiquid nature of the collateral. These risks are particularly sensitive to supply and demand dynamics, significantly impacting this lending type. Consequently, such loans often entail substantial fund disbursements, where repayment depends on the project's success and the borrower's capability to develop, sell, or lease the property. This reliance differs from the borrower's or guarantor's independent ability to repay principal and interest. At December 31, 2023, there were no non-performing A&D loans; however, a material increase in non-performing construction and development loans could significantly impact our financial condition and results of operations.
Current wording
Construction, acquisition, and development ("A&D") loans carry additional risks due to the lack of income generated by the property and the potential illiquidity of the collateral. These risks are especially sensitive to supply and demand dynamics, significantly impacting this type of lending. Consequently, such loans often require substantial fund disbursements, where repayment depends on the project's success and the borrower's ability to develop, sell, or lease the property. This differs from the borrower's or guarantor's ability to independently repay principal and interest. At December 31, 2024, there were no non-performing A&D loans. However, a significant increase in non-performing construction and development loans could materially impact our financial condition and results of operations.
Previous wording
At December 31, 2023, $33.3 million or 5.3% of our total loans were commercial and agricultural business loans. These loans carry distinct risks compared to residential and commercial real estate loans. Unlike real estate lending, which relies on predetermined loan-to-collateral values and views liquidation of the underlying real estate as the primary source of repayment in case of default, our commercial and agricultural business loans are primarily predicated on the borrower's cash flow and secondarily on provided collateral. The borrower's cash flow, often unpredictable, serves as the primary repayment source, supported by collateral such as equipment, inventory, or accounts receivable. However, relying solely on collateral in the event of default may be insufficient due to uncollectible receivables, obsolete inventory, or other factors.
Current wording
At December 31, 2024, $36.9 million or 5.3% of our total loans were commercial and agricultural business loans. These loans carry distinct risks compared to residential and commercial real estate loans. Unlike real estate lending, which relies on predetermined loan-to-collateral values and views liquidation of the underlying real estate as the primary source of repayment in case of default, our commercial and agricultural business loans are primarily predicated on the borrower's cash flow and secondarily on provided collateral. The borrower's cash flow, often unpredictable, serves as the primary repayment source, supported by collateral such as equipment, inventory, or accounts receivable. However, relying solely on collateral in the event of default may be insufficient due to uncollectible receivables, obsolete inventory, or other factors.
Previous wording
In the course of our business, we may foreclose and take title to real estate, and we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third persons for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition and results of operations could be materially and adversely affected.
Current wording
In the course of our business, we may foreclose on and take title to real estate, and we could be subject to environmental liabilities concerning these properties. We may be held liable by a governmental entity or third parties for property damage, personal injury, investigation, and clean-up costs incurred due to environmental contamination. We may also be required to investigate or clean up hazardous or toxic substances, or chemical releases, at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties for damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, and results of operations could be materially and adversely affected.
Previous wording
We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed upon and the property taken in as OREO, and at certain other times during the assets holding period. Our net book value in the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset's net book value over its fair value. If our valuation process is incorrect, or if the property declines in value after foreclosure, the fair value of our investments in OREO may not be sufficient to recover our net book value in such assets, resulting in the need for additional charge-offs. Additional material charge-offs to our investments in OREO could have a material adverse effect on our financial condition and results of operations. In addition, bank regulators periodically review our OREO and may require us to recognize further charge-offs. Significant charge-offs, as required by such regulators, may have a material adverse effect on our financial condition and results of operations.
Current wording
We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed upon and the property is taken as OREO, as well as at certain other times during the asset's holding period. Our net book value of the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess of the asset's net book value over its fair value. If our valuation process is incorrect, or if the property declines in value after foreclosure, the fair value of our investments in OREO may not be sufficient to recover our net book value in such assets, resulting in the need for additional charge-offs. Additional material charge-offs to our investments in OREO could have a materially adverse effect on our financial condition and results of operations. In addition, bank regulators periodically review our OREO and may require us to recognize further charge-offs. Significant charge-offs, as required by such regulators, may have a materially adverse effect on our financial condition and results of operations.
Previous wording
Our securities portfoliomay be negatively impacted by fluctuations in market value, changes in the tax code, and *** interest rates.***
Current wording
Our securities portfolio may be negatively impacted by fluctuations in market value, changes in the tax code, and *** interest rates.***
Previous wording
Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by, or other adverse events affecting, the issuer or with respect to the underlying securities, and changes in market interest rates and continued instability in the capital markets. Any of these factors, among others, could cause realized and/or unrealized losses in future periods and declines in other comprehensive income, which could have a material effect on our business, financial condition and results of operations. The process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security to assess the probability of receiving all contractual principal and interest payments on the security. There can be no assurance that the declines in market value will not result in other-than-temporary impairments of these assets, and would lead to accounting charges that could have a material adverse effect on our net income and capital levels. For the year ended December 31, 2023, we did not incur any other-than-temporary impairments on our securities portfolio.
Current wording
Factors beyond our control can significantly influence the fair value of securities in our portfolio and may cause adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions regarding the securities, defaults by, or other adverse events affecting, the issuer or the underlying securities, and changes in market interest rates, as well as continued instability in the capital markets. Any of these factors, among others, could result in realized and/or unrealized losses in future periods and declines in other comprehensive income, which could materially affect on our business, financial condition and results of operations. The process for determining whether the impairment of a security is other-than-temporary usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security to assess the probability of receiving all contractual principal and interest payments on the security. There can be no assurance that declines in market value will not result in other-than-temporary impairments of these assets, leading to accounting charges that could have a material adverse effect on our net income and capital levels. For the year ended December 31, 2024, we did not incur any other-than-temporary impairments in our securities portfolio.
Previous wording
Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on our results of operations, any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations. Also, our interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on our balance sheet. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Asset and Liability Management and Market Risk” included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this 2023 Form 10-K.
Current wording
While we employ asset and liability management strategies to mitigate interest rate risk, unexpected, substantial, or prolonged rate changes could materially affect our financial condition and results of operations. Additionally, our interest rate risk models and assumptions may not fully capture the impact of actual rate changes on our balance sheet or projected operating results. For further details, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset and Liability Management and Market Risk” of this 2024 Form 10–K.
Previous wording
Our mortgage banking operations provide a meaningful portion of our non-interest income. We generate mortgage revenues primarily from gains on the sale of single-family mortgage loans underwritten pursuant to programs currently offered by Freddie Mac and Fannie Mae. These entities account for a substantial portion of the secondary market in residential mortgage loans. Future changes in their programs, including our eligibility to participate in such programs, the criteria for loans to be accepted, or laws that significantly affect the activity of such entities, could materially adversely affect the success of our mortgage banking operations and, consequently, our results of operations.
Current wording
Our mortgage banking operations contribute significantly to our noninterest income, primarily through gains on the sale of one-to-four-family real estate loans. These loans are sold pursuant to programs offered by Fannie Mae, which entity accounts for a substantial portion of the secondary market for such loans. Changes to these programs, our eligibility to participate, the criteria for loan acceptance, or related laws could materially and adversely affect our results of operations.
Previous wording
Our results of operations are also significantly impacted by non-interest expenses related to mortgage banking activities, encompassing salaries, employee benefits, occupancy, equipment, data processing, and other operating costs.
Current wording
Our results of operations are also affected by noninterest expenses associated with mortgage banking activities, including salaries and employee benefits, occupancy, equipment, data processing, and other operating costs. During periods of reduced loan demand, we may face challenges in reducing these expenses proportionately, which could adversely impact our results of operations. Although we sell loans into the secondary market without recourse, we provide customary representations and warranties to buyers. If these representations and warranties are breached, we may be required to repurchase the loans, potentially incurring a loss.
Previous wording
The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit our shareholders. These regulations may sometimes impose significant limitations on operations. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on an institution's operations, the classification of assets by the institution and the adequacy of an institution's allowance for credit losses. These bank regulators also have the ability to impose conditions in the approval of merger and acquisition transactions.
Current wording
The financial services industry is extensively regulated. Federal and state banking regulations are designed primarily to protect the deposit insurance funds and consumers, not to benefit our shareholders. Regulations may sometimes impose significant limitations on operations. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on an institution's operations, the classification of assets by the institution and the adequacy of an institution's allowance for credit losses. These bank regulators also have the ability to impose conditions in the approval of merger and acquisition transactions.
Previous wording
The significant federal and state banking regulations that affect us are described in this report under “Business - Regulation” in Item 1 of this 2023 Form 10-K. These regulations, along with the existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies, and interpretations control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. Any new regulations or legislation, change in existing regulations or oversight, whether a change in regulatory policy or a change in a regulator’s interpretation of a law or regulation, could have a material impact on our operations, increase our costs of regulatory compliance and of doing business and/or otherwise adversely affect us and our profitability. Additionally, actions by regulatory agencies or significant litigation against us and may lead to penalties that materially affect us. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent registered public accounting firm. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of our operations as could our interpretation of those changes. We cannot predict what restrictions may be imposed upon us with future legislation.
Current wording
The significant federal and state banking regulations that affect us are described in this report under “Business - Regulation” in Item 1 of this 2024 Form 10-K. These regulations, along with the existing tax, accounting, securities, insurance, and monetary laws, regulations, rules, standards, policies and interpretations, control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern financial reporting and disclosures. These laws, regulations, rules, standards, policies, and interpretations are constantly evolving and may change significantly over time. Any new regulations or legislation or changes in existing regulations or oversight, whether a change in regulatory policy or a change in a regulator’s interpretation of a law or regulation, could have a material impact on our operations, increase our costs of regulatory compliance and of doing business and/or otherwise adversely affect us and our profitability. Additionally, actions by regulatory agencies or significant litigation against us and may lead to penalties that materially affect us. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent registered public accounting firm. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of our operations as could our interpretation of those changes. We cannot predict what restrictions may be imposed upon us with future legislation.
Previous wording
The USA PATRIOT Act and Bank Secrecy Acts and related regulations require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts and beneficial owners of accounts. Failure to comply with these regulations could result in fines or sanctions. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations. If our policies and procedures are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the denial of regulatory approvals to proceed with certain aspects of our business plan, including acquisitions.
Current wording
The USA PATRIOT Act and Bank Secrecy Acts and related regulations require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts and beneficial owners of accounts. Failure to comply with these regulations could result in fines or sanctions. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance can be given that these policies and procedures will be effective in preventing violations of these laws and regulations. If our policies and procedures are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the denial of regulatory approvals to proceed with certain aspects of our business plan, including acquisitions. Additionally, any perceived or actual failure to prevent money laundering or terrorist financing activities could significantly damage our reputation. These outcomes could have a material adverse effect on our business, financial condition, results of operations, and growth prospects.
Previous wording
Certain accounting policies are critical to presenting the Company’s financial condition and results of operations. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include, but are not limited to the allowance for credit losses on loans, securities and unfunded commitments; the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans; income taxes, including tax provisions and realization of deferred tax assets; and the fair value of assets and liabilities. Because of the uncertainty of estimates involved in these matters, the Company may be required, among other things, to significantly increase the allowance for credit losses and/or sustain credit losses that are significantly higher than the reserve provided. For more information, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this 2023 Form 10-K.
Current wording
Certain accounting policies are critical to presenting our financial condition and results of operations. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include, but are not limited to the allowance for credit losses on loans, securities and unfunded commitments; the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans; income taxes, including tax provisions and realization of deferred tax assets; and the fair value of assets and liabilities. Because of the uncertainty of estimates involved in these matters, we may be required, among other things, to significantly increase the allowance for credit losses and/or sustain credit losses that are significantly higher than the reserve provided. For more information, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates” contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this 2024 Form 10-K.
Previous wording
Our security measures may not be sufficient to mitigate the risk of a cyber-attack. Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger and virtually all other aspects of our business. Our operations rely on the secure processing, storage, and transmission of confidential and other information in our computer systems and networks. Although we take protective measures and endeavor to modify them as circumstances warrant, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber-attacks that could have a security impact. If one or more of these events occur, this could jeopardize our or our customers' confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or the operations of our customers or counterparties. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered through any insurance maintained by us. We could also suffer significant reputational damage.
Current wording
Our security measures may not be sufficient to mitigate the risk of a cyber-attack. Communications and information systems are critical to our operations, as we rely on them to manage customer relationships, maintain our general ledger, and support other business functions. Our operations depend on the secure processing, storage, and transmission of confidential information through our computer systems and networks. While we take protective measures and adapt them as circumstances evolve, our systems may remain vulnerable to breaches, unauthorized access, denial-of-service attacks, misuse, malware, or other cyber threats. Any such event could compromise our or our customers' confidential information, disrupt operations, or harm customers and counterparties. If these risks materialize, we may incur significant expenses to investigate and remediate security vulnerabilities, enhance protective measures, or address the impact of an attack. Such incidents could expose us to litigation, regulatory scrutiny, financial losses not fully covered by insurance, and reputational damage, which could deter customers from using our services.
Previous wording
Security breaches in our internet banking activities could further expose us to possible liability and damage our reputation.** **
Current wording
Security breaches in our internet banking activities could further expose us to liability and reputational harm.** **Cybersecurity risks are particularly heightened in internet banking. Advances in criminal sophistication, technology, or vulnerabilities in third-party systems could lead to breaches that compromise the security of data and transactions, potentially discouraging customers from using our online services. While we continue to invest in systems and processes to detect and prevent breaches, no system is foolproof. A breach could result in financial losses, reputational harm, regulatory penalties, compliance costs, and legal liabilities, adversely affecting our financial condition and ability to grow our online services.
Previous wording
Our security measures may not protect us from system failures or interruptions.
Current wording
In addition, our security measures may not fully protect us from system failures or interruptions. While we have policies and procedures to mitigate these risks, we cannot guarantee their effectiveness. We also rely on third-party providers for data processing and operational support. Although we carefully select these providers, we do not control their actions. If a third-party vendor experiences disruptions, cyber-attacks, or fails to meet service standards, it could impair our ability to process transactions, deliver services, or conduct business. Transitioning to alternative vendors could involve significant delays and costs.
Previous wording
As a bank, we are susceptible to fraudulent activity that may be committed against us or our customers which may result in financial losses or increased costs to us or our customers, disclosure or misuse of our information or our customer’s information, misappropriation of assets, privacy breaches against our customers, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Nationally, reported incidents of fraud and other financial crimes have increased. We have also experienced losses due to apparent fraud and other financial crimes. While we have policies and procedures designed to prevent such losses, there can be no assurance that such losses will not occur.
Current wording
Our business may also be adversely affected by the increasing prevalence of fraud and other financial crimes. As a bank, we are vulnerable to fraudulent activity, which may result in financial losses, increased costs, or damage to our reputation. Fraud may take many forms, including check fraud, electronic fraud, wire fraud, phishing, and social engineering. Nationally, incidents of fraud and financial crimes have been on the rise, and we have experienced losses due to such activities. While we have policies and procedures to prevent these losses, we cannot guarantee that they will not occur.
Previous wording
Our reputation may also be negatively impacted by our diversity, equity and inclusion (“DEI”) efforts if they fall short of expectations. In addition, various private third-party organizations have developed ratings processes for evaluating companies on their approach to ESG and DEI matters. These ratings may be used by some investors to assist with their investment and voting decisions. Any unfavorable ratings may lead to reputational damage and negative sentiment among our investors and other stakeholders. Furthermore, increased ESG related compliance costs could result in increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, and our stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.
Current wording
Our reputation may suffer if our diversity, equity, and inclusion (“DEI”) efforts fall short of expectations. In addition, various private third-party organizations have developed rating systems to evaluate companies on their ESG and DEI practices. These ratings may influence investors’ decisions on investments and voting. Any unfavorable ratings could damage our reputation and generate negative sentiment among investors and other stakeholders. Furthermore, while the costs associated with ESG-related compliance may rise under current regulatory frameworks, future changes in government policy, such as a potential shift in administration, could lead to deregulation or reduced oversight in ESG and DEI areas, potentially altering these cost dynamics. However, regardless of regulatory changes, failure to adapt to evolving investor and stakeholder expectations could still harm our reputation, hinder our ability to do business with certain partners, and negatively impact our stock price. Moreover, even with a shift in government policy, private third-party organizations and institutional investors may continue to demand increased transparency, requiring companies to navigate a complex and potentially inconsistent landscape for reporting, due diligence, and disclosure.
Previous wording
The Company is a separate legal entity from its subsidiary and does not have significant operations of its own. The long-term ability of the Company to pay dividends to its stockholders and debt payments is based primarily upon the ability of the Bank to make capital distributions to the Company, and also on the availability of cash at the holding company level. The availability of dividends from the Bank is limited by the Bank’s earnings and capital, as well as various statutes and regulations. In the event, the Bank is unable to pay dividends to the Company, the Company may not be able to pay dividends on its common stock or make payments on its outstanding debt. Consequently, the inability to receive dividends from the Bank could adversely affect the Company’s financial condition, results of operations, and future prospects. At December 31, 2023, the Company had $128.3 million in unrestricted cash to support dividend and debt payments.
Current wording
Security Federal is a separate legal entity from the Bank and does not have significant operations of its own. The long-term ability of the Company to pay dividends to its stockholders and debt payments is based primarily upon the ability of the Bank to make capital distributions to Security Federal, and also on the availability of cash at the holding company level. The availability of dividends from the Bank is limited by the Bank’s earnings and capital, as well as various statutes and regulations. In the event, the Bank is unable to pay dividends to Security Federal, Security Federal may not be able to pay dividends on its common stock or make payments on its outstanding debt. Consequently, the inability to receive dividends from the Bank could adversely affect our financial condition, results of operations, and future prospects. At December 31, 2024, the Company had $178.3 million in unrestricted cash to support dividend and debt payments.