Attached files
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EX-31.1 - EXHIBIT 31.1 - SECURITY FEDERAL CORP | sfdl-20200331xex311.htm |
EX-32 - EXHIBIT 32 - SECURITY FEDERAL CORP | sfdl-20200331xex32.htm |
EX-31.2 - EXHIBIT 31.2 - SECURITY FEDERAL CORP | sfdl-20200331xex312.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 – Q
(Mark one)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD:
FROM: | TO: |
COMMISSION FILE NUMBER: 000-16120
SECURITY FEDERAL CORPORATION
(Exact name of registrant as specified in its charter)
South Carolina | 57-0858504 | |||
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
238 RICHLAND AVENUE NORTHWEST, AIKEN, SOUTH CAROLINA 29801
(Address of principal executive office and Zip Code)
(803) 641-3000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.) Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filed [ ] | Smaller reporting company [ X ] | |||
Non-accelerated filer [ X ] | Emerging growth company [ ] | |||
Accelerated filer [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
YES | NO |
Indicate by check mark whether the registrant is a shell corporation (defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Securities registered pursuant to Section 12(b) of the Act: None
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
CLASS: | OUTSTANDING SHARES AT: | SHARES: | ||||
Common Stock, par value $0.01 per share | May 14, 2020 | 3,252,884 |
PART I. | FINANCIAL INFORMATION (UNAUDITED) | PAGE NO. |
Item 1. | Financial Statements (unaudited): | 3 |
Consolidated Balance Sheets at March 31, 2020 and December 31, 2019 | 3 | |
Consolidated Statements of Income for the Three Months Ended March 31, 2020 and 2019 | 4 | |
Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2020 and 2019 | 5 | |
Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2020 and 2019 | 6 | |
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 | 7 | |
Notes to Consolidated Financial Statements | 9 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 41 |
Item 4. | Controls and Procedures | 42 |
PART II. | OTHER INFORMATION | |
Item 1. | Legal Proceedings | 42 |
Item 1A. | Risk Factors | 42 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 44 |
Item 3. | Defaults Upon Senior Securities | 44 |
Item 4. | Mine Safety Disclosures | 44 |
Item 5. | Other Information | 44 |
Item 6. | Exhibits | 44 |
Signatures | 46 | |
SCHEDULES OMITTED
All schedules other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information is included in the consolidated financial statements and related notes.
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Part 1. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2020 | December 31, 2019 | ||||||
(Unaudited) | (Audited) | ||||||
ASSETS: | |||||||
Cash and Cash Equivalents | $ | 15,462,336 | $ | 12,536,311 | |||
Certificates of Deposit with Other Banks | 950,005 | 950,005 | |||||
Investment and Mortgage-Backed Securities: | |||||||
Available For Sale ("AFS") | 469,324,205 | 414,644,840 | |||||
Held To Maturity ("HTM") (Fair Value of $19,196,143 and $19,805,841 at March 31, 2020 and December 31, 2019, Respectively) | 18,286,574 | 19,246,935 | |||||
Total Investments and Mortgage-Backed Securities | 487,610,779 | 433,891,775 | |||||
Loans Receivable, Net: | |||||||
Held For Sale | 5,408,570 | 3,990,606 | |||||
Held For Investment (Net of Allowance of $9,871,838 and $9,225,574 at March 31, 2020 and December 31, 2019, Respectively) | 454,557,940 | 448,868,129 | |||||
Total Loans Receivable, Net | 459,966,510 | 452,858,735 | |||||
Accrued Interest Receivable: | |||||||
Loans | 1,332,054 | 1,211,826 | |||||
Mortgage-Backed Securities | 619,704 | 551,214 | |||||
Investment Securities | 1,583,949 | 1,635,497 | |||||
Total Accrued Interest Receivable | 3,535,707 | 3,398,537 | |||||
Operating Lease Right-of-Use Assets | 2,625,530 | 2,718,676 | |||||
Premises and Equipment, Net | 27,041,941 | 27,219,883 | |||||
Federal Home Loan Bank ("FHLB") Stock, at Cost | 4,086,200 | 2,536,500 | |||||
Other Real Estate Owned ("OREO") | 647,740 | 677,740 | |||||
Bank Owned Life Insurance ("BOLI") | 21,636,647 | 21,501,647 | |||||
Goodwill | 1,199,754 | 1,199,754 | |||||
Other Assets | 5,010,812 | 3,737,978 | |||||
Total Assets | $ | 1,029,773,961 | $ | 963,227,541 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY: | |||||||
Liabilities: | |||||||
Deposit Accounts | $ | 775,999,946 | $ | 771,407,482 | |||
Advance Payments By Borrowers for Taxes and Insurance | 379,176 | 207,582 | |||||
Advances from FHLB | 75,769,000 | 38,138,000 | |||||
Borrowings from Federal Reserve Bank ("FRB") | 19,900,000 | — | |||||
Other Borrowings | 17,006,411 | 11,579,819 | |||||
Junior Subordinated Debentures | 5,155,000 | 5,155,000 | |||||
Senior Convertible Debentures | — | 6,044,000 | |||||
Subordinated Debentures | 30,000,000 | 30,000,000 | |||||
Operating Lease Liabilities | 2,646,578 | 2,733,531 | |||||
Other Liabilities | 6,655,461 | 6,204,122 | |||||
Total Liabilities | $ | 933,511,572 | $ | 871,469,536 | |||
Shareholders' Equity: | |||||||
Common Stock, $.01 Par Value; Authorized 5,000,000 Shares; Issued and Outstanding Shares, 3,453,817 and 3,252,884, Respectively, at March 31, 2020 and 3,157,787 and 2,956,854, Respectively, at December 31, 2019 | $ | 34,538 | $ | 31,578 | |||
Additional Paid-In Capital | 18,230,187 | 12,308,179 | |||||
Treasury Stock, at Cost (200,933 Shares) | (4,330,712 | ) | (4,330,712 | ) | |||
Accumulated Other Comprehensive Income ("AOCI") | 2,308,164 | 4,467,527 | |||||
Retained Earnings | 80,020,212 | 79,281,433 | |||||
Total Shareholders' Equity | $ | 96,262,389 | $ | 91,758,005 | |||
Total Liabilities and Shareholders' Equity | $ | 1,029,773,961 | $ | 963,227,541 |
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
Interest Income: | |||||||
Loans | $ | 6,121,871 | $ | 6,003,502 | |||
Mortgage-Backed Securities | 1,650,086 | 1,549,122 | |||||
Investment Securities | 1,280,142 | 1,413,993 | |||||
Other | 43,028 | 64,205 | |||||
Total Interest Income | 9,095,127 | 9,030,822 | |||||
Interest Expense: | |||||||
NOW and Money Market Accounts | 449,275 | 485,473 | |||||
Savings Accounts | 20,616 | 16,326 | |||||
Certificate Accounts | 974,038 | 912,660 | |||||
FHLB Advances and Other Borrowed Money | 255,675 | 157,110 | |||||
Note Payable | — | 23,777 | |||||
Senior Convertible Debentures | 81,796 | 120,880 | |||||
Subordinated Debentures | 393,750 | — | |||||
Junior Subordinated Debentures | 44,186 | 57,410 | |||||
Total Interest Expense | 2,219,336 | 1,773,636 | |||||
Net Interest Income | 6,875,791 | 7,257,186 | |||||
Provision For Loan Losses | 700,000 | 100,000 | |||||
Net Interest Income After Provision For Loan Losses | 6,175,791 | 7,157,186 | |||||
Non-Interest Income: | |||||||
Gain on Sale of Investment Securities | 706,743 | 290,768 | |||||
Gain on Sale of Loans | 502,851 | 174,283 | |||||
Service Fees on Deposit Accounts | 285,075 | 252,017 | |||||
Commissions From Insurance Agency | 148,031 | 151,300 | |||||
Trust Income | 299,325 | 258,600 | |||||
BOLI Income | 135,000 | 135,000 | |||||
Check Card Fee Income | 354,099 | 342,334 | |||||
Grant Income | 58,340 | 259,615 | |||||
Other | 306,426 | 331,915 | |||||
Total Non-Interest Income | 2,795,890 | 2,195,832 | |||||
Non-Interest Expense: | |||||||
Compensation and Employee Benefits | 4,674,047 | 4,179,034 | |||||
Occupancy | 591,609 | 552,233 | |||||
Advertising | 263,003 | 172,684 | |||||
Depreciation and Maintenance of Equipment | 690,930 | 610,357 | |||||
Federal Deposit Insurance Corporation ("FDIC") Insurance Premiums | 16,080 | 73,176 | |||||
Net Cost (Recovery) of Operation of OREO | 12,740 | (92,114 | ) | ||||
Other | 1,395,177 | 1,249,145 | |||||
Total Non-Interest Expense | 7,643,586 | 6,744,515 | |||||
Income Before Income Taxes | 1,328,095 | 2,608,503 | |||||
Provision For Income Taxes | 263,908 | 519,630 | |||||
Net Income | 1,064,187 | 2,088,873 | |||||
Net Income Per Common Share (Basic) | $ | 0.34 | $ | 0.71 | |||
Net Income Per Common Share (Diluted) | $ | 0.34 | $ | 0.67 | |||
Cash Dividend Per Share on Common Stock | $ | 0.10 | $ | 0.09 | |||
Weighted Average Shares Outstanding (Basic) | 3,092,455 | 2,954,515 | |||||
Weighted Average Shares Outstanding (Diluted) | 3,092,455 | 3,256,715 |
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
Net Income | $ | 1,064,187 | $ | 2,088,873 | |||
Other Comprehensive (Loss) Income: | |||||||
Unrealized Holding (Losses) Gains on Securities AFS, Net of Taxes of $(541,264) and $998,996 at March 31, 2020 and 2019, Respectively | (1,623,967 | ) | 3,046,017 | ||||
Reclassification Adjustment for Gains Included in Net Income, Net of Taxes of $176,686 and $72,692 at March 31, 2020 and 2019, Respectively | (530,057 | ) | (218,076 | ) | |||
Amortization of Unrealized Gains on AFS Securities Transferred to HTM, Net of Taxes of $(1,780) and $(3,341) at March 31, 2020 and 2019, Respectively | (5,339 | ) | (10,024 | ) | |||
Other Comprehensive (Loss) Income, Net of Tax | (2,159,363 | ) | 2,817,917 | ||||
Comprehensive (Loss) Income | $ | (1,095,176 | ) | $ | 4,906,790 |
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
For the Three Months Ended March 31, 2020 and 2019
Common Stock | Additional Paid – In Capital | Treasury Stock | AOCI | Retained Earnings | Total | ||||||||||||||||||
Balance at December 31, 2018 | $ | 31,548 | $ | 12,235,341 | $ | (4,330,712 | ) | $ | (27,909 | ) | $ | 72,610,165 | $ | 80,518,433 | |||||||||
Net Income | — | — | — | — | 2,088,873 | 2,088,873 | |||||||||||||||||
Other Comprehensive Income, Net of Tax | — | — | — | 2,817,917 | — | 2,817,917 | |||||||||||||||||
Employee Stock Purchases | 5 | 12,004 | — | — | — | 12,009 | |||||||||||||||||
Redemption of Convertible Debentures | 10 | 19,990 | — | — | — | 20,000 | |||||||||||||||||
Cash Dividends on Common Stock | — | — | — | — | (265,982 | ) | (265,982 | ) | |||||||||||||||
Balance at March 31, 2019 | $ | 31,563 | $ | 12,267,335 | $ | (4,330,712 | ) | $ | 2,790,008 | $ | 74,433,056 | $ | 85,191,250 |
Common Stock | Additional Paid – In Capital | Treasury Stock | AOCI | Retained Earnings | Total | ||||||||||||||||||
Balance at December 31, 2019 | $ | 31,578 | $ | 12,308,179 | $ | (4,330,712 | ) | $ | 4,467,527 | $ | 79,281,433 | $ | 91,758,005 | ||||||||||
Net Income | — | — | — | — | 1,064,187 | 1,064,187 | |||||||||||||||||
Other Comprehensive Loss, Net of Tax | — | — | — | (2,159,363 | ) | — | (2,159,363 | ) | |||||||||||||||
Employee Stock Purchases | 4 | 12,964 | — | — | — | 12,968 | |||||||||||||||||
Redemption of Convertible Debentures | 2,956 | 5,909,044 | — | — | — | 5,912,000 | |||||||||||||||||
Cash Dividends on Common Stock | — | — | — | — | (325,408 | ) | (325,408 | ) | |||||||||||||||
Balance at March 31, 2020 | $ | 34,538 | $ | 18,230,187 | $ | (4,330,712 | ) | $ | 2,308,164 | $ | 80,020,212 | $ | 96,262,389 |
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||
Net Income | $ | 1,064,187 | $ | 2,088,873 | |||
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities: | |||||||
Depreciation Expense | 464,387 | 390,743 | |||||
Discount Accretion and Premium Amortization | 1,185,119 | 1,292,404 | |||||
Provision for Loan Losses | 700,000 | 100,000 | |||||
Earnings on BOLI | (135,000 | ) | (135,000 | ) | |||
Gain on Sales of Loans | (502,851 | ) | (174,283 | ) | |||
Gain on Sales of Investment Securities | (706,843 | ) | (290,768 | ) | |||
Gain on Sales of OREO | (3,291 | ) | (110,302 | ) | |||
Amortization of Operating Lease Right-of-Use Assets | 93,146 | 98,141 | |||||
Amortization of Deferred Loan Costs | 69,236 | 41,739 | |||||
Proceeds From Sale of Loans Held For Sale | 16,882,646 | 7,131,184 | |||||
Origination of Loans Held For Sale | (17,797,759 | ) | (7,611,361 | ) | |||
(Increase) Decrease in Accrued Interest Receivable: | |||||||
Loans | (120,228 | ) | (71,426 | ) | |||
MBS | (68,490 | ) | (12,411 | ) | |||
Investment Securities | 51,548 | (2,704 | ) | ||||
Increase in Advance Payments By Borrowers | 171,594 | 154,037 | |||||
(Increase) Decrease in Other, Net | (195,838 | ) | 736,821 | ||||
Net Cash Provided By Operating Activities | $ | 1,151,563 | $ | 3,625,687 | |||
CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||
Purchase of MBS AFS | $ | (42,508,264 | ) | $ | (13,971,139 | ) | |
Proceeds from Payments and Maturities of MBS AFS | 5,698,171 | 7,665,227 | |||||
Proceeds from Payments and Maturities of MBS Held To Maturity ("HTM") | 901,954 | 149,162 | |||||
Purchase of Investment Securities AFS | (41,965,408 | ) | (21,531,244 | ) | |||
Proceeds from Payments and Maturities of Investment Securities AFS | 9,655,542 | 7,989,484 | |||||
Proceeds from Sale of Investment Securities AFS | 11,148,752 | 6,555,400 | |||||
Proceeds from Redemption of Certificates of Deposits with Other Banks | — | 250,000 | |||||
Purchase of FHLB Stock | (5,069,100 | ) | (1,698,100 | ) | |||
Redemption of FHLB Stock | 3,519,400 | 1,975,700 | |||||
(Increase) Decrease in Loans Receivable | (6,459,047 | ) | 812,445 | ||||
Proceeds From Sale of OREO | 33,291 | 463,603 | |||||
Purchase and Improvement of Premises and Equipment | (286,445 | ) | (1,435,353 | ) | |||
Net Cash Used By Investing Activities | $ | (65,331,154 | ) | $ | (12,774,815 | ) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Increase in Deposit Accounts | $ | 4,592,464 | $ | 21,351,459 | |||
Proceeds from FHLB Advances | 163,155,000 | 54,180,000 | |||||
Repayment of FHLB Advances | (125,524,000 | ) | (62,210,000 | ) | |||
Increase in Other Borrowings, Net | 5,426,592 | 3,345,823 | |||||
Repayment of Note Payable | — | (850,000 | ) | ||||
Redemption of Senior Convertible Debentures | (132,000 | ) | — | ||||
Proceeds from FRB Borrowings | 19,900,000 | — | |||||
Proceeds from Employee Stock Purchases | 12,968 | 12,009 | |||||
Dividends to Common Stock Shareholders | (325,408 | ) | (265,982 | ) | |||
Net Cash Provided By Financing Activities | $ | 67,105,616 | $ | 15,563,309 | |||
Net Increase in Cash and Cash Equivalents | 2,926,025 | 6,414,181 | |||||
Cash and Cash Equivalents at Beginning of Period | 12,536,311 | 12,705,910 | |||||
Cash and Cash Equivalents at End of Period | $ | 15,462,336 | $ | 19,120,091 | |||
7
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) (Continued) | |||||||
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||
Cash Paid for Interest | $ | 1,902,816 | $ | 1,401,916 | |||
Non-Cash Transactions: | |||||||
Initial Recognition of Operating Lease Right-of-Use Assets | $ | — | $ | 3,090,512 | |||
Initial Recognition of Operating Lease Liabilities | $ | — | $ | 3,090,512 | |||
Transfers From Loans Receivable to OREO | $ | — | $ | 440,200 | |||
Other Comprehensive (Loss) Income | $ | (2,159,363 | ) | $ | 2,817,917 |
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
8
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and accounting principles generally accepted in the United States of America ("GAAP"); therefore, they do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows. Such statements are unaudited but, in the opinion of management, reflect all adjustments, which are of a normal recurring nature and necessary for a fair presentation of results for the selected interim periods. Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the audited consolidated financial statements appearing in Security Federal Corporation’s (the “Company”) 2019 Annual Report to Shareholders which was filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 10-K”) when reviewing interim financial statements. The unaudited consolidated results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
2. Principles of Consolidation
The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Security Federal Bank (the “Bank”) and the Bank’s wholly owned subsidiaries, Security Federal Insurance, Inc. (“SFINS”), Security Federal Investments, Inc. ("SFINV") and Security Financial Services Corporation (“SFSC”). SFINS is an insurance agency offering auto, business, health and home insurance. SFINS has a wholly owned subsidiary, Collier Jennings Financial Corporation, which has as subsidiaries Security Federal Auto Insurance, The Auto Insurance Store Inc., and Security Federal Premium Pay Plans Inc. Security Federal Premium Pay Plans Inc. has one wholly owned premium finance subsidiary and also has an ownership interest in four other premium finance subsidiaries. SFINV was formed to hold investment securities and allow for better management of the securities portfolio. SFSC is currently inactive. All significant intercompany transactions and balances have been eliminated in consolidation.
The Company has a wholly owned subsidiary, Security Federal Statutory Trust (the “Trust”), which issued and sold fixed and floating rate capital securities of the Trust. However, under current accounting guidance, the Trust is not consolidated in the Company’s financial statements. The Bank is primarily engaged in the business of accepting savings and demand deposits and originating mortgage loans and other loans to individuals and small businesses for various personal and commercial purposes.
3. Critical Accounting Policies
The Company has adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the audited consolidated financial statements at December 31, 2019 included in our 2019 Annual Report to Shareholders. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, and, as such, have a greater possibility of producing results that could be materially different than originally reported. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.
The Company believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of the consolidated financial statements. The impact of an unexpected and sudden large loss could deplete the allowance and potentially require increased provisions to replenish the allowance, which would negatively affect earnings. The Company provides for loan losses using the allowance method. Accordingly, all loan losses are charged to the related allowance and all recoveries are credited to the allowance for loan losses. Additions to the allowance for loan losses are provided by charges to operations based on various factors, which, in management’s judgment, deserve current recognition in estimating possible losses. Such factors considered by management include the fair value of the underlying collateral, stated guarantees by the borrower (if applicable), the borrower’s ability to repay from other economic resources, growth and composition of the loan portfolio, the relationship of the allowance for loan losses to the outstanding loans, loss experience, delinquency trends, and general economic conditions. Management evaluates the carrying value of the loans periodically and the allowance is adjusted accordingly.
9
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
3. Critical Accounting Policies, Continued
While management uses the best information available to make evaluations, future adjustments may be necessary if economic conditions differ substantially from the assumptions used in making these evaluations. The allowance for loan losses is subject to periodic evaluations by our bank regulatory agencies, including the Board of Governors of the Federal Reserve System ("Federal Reserve"), the FDIC and the South Carolina Board of Financial Institutions, that may require adjustments to be made to the allowance based upon the information that is available at the time of their examination.
The Company values impaired loans at the loan’s fair value if it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement at the present value of expected cash flows, the market price of the loan, if available, or the value of the underlying collateral. Expected cash flows are required to be discounted at the loan’s effective interest rate. When the ultimate collectibility of an impaired loan’s principal is in doubt, wholly or partially, all cash receipts are applied to principal. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first to interest and then to principal. Once the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off.
The Company uses assumptions and estimates in determining income taxes payable or refundable for the current year, deferred income tax liabilities and assets for events recognized differently in its financial statements and income tax returns, and income tax expense. Determining these amounts requires analysis of certain transactions and interpretation of tax laws and regulations. The Company exercises considerable judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments and estimates are reevaluated on a continual basis as regulatory and business factors change. No assurance can be given that either the tax returns submitted by us or the income tax reported on the Consolidated Financial Statements will not be adjusted by either adverse rulings by the United States Tax Court, changes in the tax code, or assessments made by the Internal Revenue Service.
4. Earnings Per Share
Accounting guidance specifies the computation, presentation and disclosure requirements for earnings per share (“EPS”) for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding. Diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive common shares had been issued. The dilutive effect of options outstanding under the Company’s stock option plan is reflected in diluted EPS by application of the treasury stock method. There were no stock options outstanding at March 31, 2020 or March 31, 2019; and therefore, no dilutive options in the calculation of diluted EPS for those periods. Diluted EPS also assumes the convertible debentures were converted into 302,200 shares of common stock at the beginning of the three month period ended March 31, 2019. The related interest expense recorded during the period is added back to the EPS numerator while the underlying shares are added to the denominator.
The following tables include a summary of the Company's basic and diluted EPS for the periods indicated.
Three Months Ended March 31, | |||||||||||||||||||||
2020 | 2019 | ||||||||||||||||||||
Income | Shares | Per Share Amounts | Income | Shares | Per Share Amounts | ||||||||||||||||
Basic EPS | $ | 1,064,187 | 3,092,455 | $ | 0.34 | $ | 2,088,873 | 2,954,515 | $ | 0.71 | |||||||||||
Effect of Dilutive Securities: | |||||||||||||||||||||
Senior Convertible Debentures | — | — | — | 90,660 | 302,200 | (0.04) | |||||||||||||||
Diluted EPS | $ | 1,064,187 | 3,092,455 | $ | 0.34 | $ | 2,179,533 | 3,256,715 | $ | 0.67 |
10
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5. Stock-Based Compensation
Certain officers and directors of the Company participate in incentive and non-qualified stock option plans. Options are granted at exercise prices not less than the fair value of the Company’s common stock on the date of the grant. At March 31, 2020 and 2019, the Company had no options outstanding and there was no activity during the three months ended March 31, 2020 and 2019. At those dates, there were 50,000 options available for grants.
6. Investment and Mortgage-Backed Securities, Available For Sale
The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of investment and mortgage-backed securities available for sale at the dates indicated were as follows:
March 31, 2020 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Student Loan Pools | $ | 51,954,147 | $ | — | $ | 4,154,233 | $ | 47,799,914 | |||||||
Small Business Administration (“SBA”) Bonds | 116,275,454 | 677,769 | 598,900 | 116,354,323 | |||||||||||
Tax Exempt Municipal Bonds | 36,159,875 | 4,115,386 | — | 40,275,261 | |||||||||||
Taxable Municipal Bonds | 27,911,455 | 106,427 | 503,698 | 27,514,184 | |||||||||||
Mortgage-Backed Securities | 233,945,687 | 5,622,860 | 2,188,024 | 237,380,523 | |||||||||||
Total Available For Sale | $ | 466,246,618 | $ | 10,522,442 | $ | 7,444,855 | $ | 469,324,205 | |||||||
December 31, 2019 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Student Loan Pools | $ | 41,088,231 | $ | — | $ | 856,401 | $ | 40,231,830 | |||||||
SBA Bonds | 111,927,938 | 622,105 | 656,944 | 111,893,099 | |||||||||||
Tax Exempt Municipal Bonds | 43,153,086 | 4,088,408 | — | 47,241,494 | |||||||||||
Taxable Municipal Bonds | 15,169,737 | 35,359 | 364,686 | 14,840,410 | |||||||||||
Mortgage-Backed Securities | 197,356,288 | 3,664,621 | 582,902 | 200,438,007 | |||||||||||
Total Available For Sale | $ | 408,695,280 | $ | 8,410,493 | $ | 2,460,933 | $ | 414,644,840 |
Student Loan Pools are typically 97% guaranteed by the United States government while SBA bonds are 100% backed by the full faith and credit of the United States government. Included in the tables above and below in mortgage-backed securities are Government National Mortgage Association ("GNMA") mortgage-backed securities, which are also backed by the full faith and credit of the United States government. At March 31, 2020, AFS GNMA mortgage-backed securities had an amortized cost and fair value of $69.9 million and $70.2 million, respectively, compared to an amortized cost and fair value of $63.2 million and $63.9 million, respectively, at December 31, 2019.
Also included in mortgage-backed securities in the tables above and below are private label collateralized mortgage obligation ("CMO") securities, which are issued by non-governmental real estate mortgage investment conduits and are not backed by the full faith and credit of the United States government. At March 31, 2020 the Bank held AFS private label CMO mortgage-backed securities with an amortized cost and fair value of $28.0 million and $27.1 million, respectively, compared to an amortized cost and fair value of $15.8 million and $16.1 million, respectively, at December 31, 2019.
The amortized cost and fair value of investment and mortgage-backed securities available for sale at March 31, 2020 are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without call or prepayment penalties. Since mortgage-backed securities are not due at a single maturity date, they are disclosed separately, rather than allocated over the maturity groupings set forth in the table below.
11
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
6. Investment and Mortgage-Backed Securities, Available For Sale, Continued
March 31, 2020 | |||||||
Investment Securities: | Amortized Cost | Fair Value | |||||
One Year or Less | $ | 22,564 | $ | 22,471 | |||
After One – Five Years | 5,723,428 | 5,774,746 | |||||
After Five – Ten Years | 66,054,005 | 66,119,094 | |||||
More Than Ten Years | 160,500,934 | 160,027,371 | |||||
Mortgage-Backed Securities | 233,945,687 | 237,380,523 | |||||
Total Available For Sale | $ | 466,246,618 | $ | 469,324,205 |
At March 31, 2020 the amortized cost and fair value of investment and mortgage-backed securities available for sale pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were $204.5 million and $210.5 million, respectively, compared to an amortized cost and fair value of $171.4 million and $173.1 million, respectively, at December 31, 2019.
The Company received $11.1 million and $6.6 million in gross proceeds from sales of available for sale securities during the three months ended March 31, 2020 and 2019, respectively. As a result, the Company recognized gross gains of $707,000 and $299,000 and gross losses of $0 and $8,000 during the three months ended March 31, 2020 and 2019, respectively.
The following tables show gross unrealized losses and fair value, aggregated by investment category, and length of time that the individual available for sale securities were in a continuous unrealized loss position at the dates indicated.
March 31, 2020 | ||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||
Student Loan Pools | $ | 28,402,671 | $ | 2,305,196 | $ | 19,397,243 | $ | 1,849,037 | $ | 47,799,914 | $ | 4,154,233 | ||||||||
SBA Bonds | 28,353,399 | 174,615 | 42,900,499 | 424,285 | 71,253,898 | 598,900 | ||||||||||||||
Taxable Municipal Bonds | 16,813,764 | 503,698 | — | — | 16,813,764 | 503,698 | ||||||||||||||
Mortgage-Backed Securities | 79,832,042 | 1,954,994 | 8,080,882 | 233,030 | 87,912,924 | 2,188,024 | ||||||||||||||
$ | 153,401,876 | $ | 4,938,503 | $ | 70,378,624 | $ | 2,506,352 | $ | 223,780,500 | $ | 7,444,855 |
December 31, 2019 | ||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||
Student Loan Pools | $ | 30,079,497 | $ | 534,048 | $ | 10,152,333 | $ | 322,353 | $ | 40,231,830 | $ | 856,401 | ||||||||
SBA Bonds | 13,844,666 | 106,110 | 47,395,036 | 550,834 | 61,239,702 | 656,944 | ||||||||||||||
Taxable Municipal Bond | 13,810,279 | 364,686 | — | — | 13,810,279 | 364,686 | ||||||||||||||
Mortgage-Backed Securities | 55,326,064 | 480,958 | 7,975,863 | 101,944 | 63,301,927 | 582,902 | ||||||||||||||
$ | 113,060,506 | $ | 1,485,802 | $ | 65,523,232 | $ | 975,131 | $ | 178,583,738 | $ | 2,460,933 |
Securities classified as available for sale are recorded at fair market value. At March 31, 2020 and December 31, 2019, 33.7% and 39.6% of the unrealized losses, representing 72 and 69 individual securities, respectively, consisted of securities in a continuous loss position for 12 months or more. The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary. The Company reviews its investment securities portfolio at least quarterly and more frequently when economic conditions warrant, assessing whether there is any indication of other-than-temporary impairment (“OTTI”).
12
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
6. Investment and Mortgage-Backed Securities, Available For Sale, Continued
Additional deterioration in market and economic conditions related to COVID-19 pandemic may, however, have an adverse impact on credit quality in the future and result in OTTI charges. Factors considered in the review include estimated future cash flows, length of time and extent to which market value has been less than cost, the financial condition and near term prospects of the issuer, and our intent and ability to retain the security to allow for an anticipated recovery in market value. If the review determines that there is OTTI, then an impairment loss is recognized in earnings equal to the entire difference between the investment’s cost and its fair value at the balance sheet date of the reporting period for which the assessment is made, or the Company may recognize a portion in other comprehensive income. The fair value of investments on which OTTI is recognized then becomes the new cost basis of the investment. There was no OTTI recognized during the three months ended March 31, 2020.
7. Investment and Mortgage-Backed Securities, Held to Maturity
At March 31, 2020 and December 31, 2019, the Company's entire held to maturity portfolio was comprised of mortgage-backed securities. The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of held to maturity securities at those dates were as follows:
March 31, 2020 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Mortgage-Backed Securities (1) | $ | 18,286,574 | $ | 910,708 | $ | 1,139 | $ | 19,196,143 | |||||||
Total Held To Maturity | $ | 18,286,574 | $ | 910,708 | $ | 1,139 | $ | 19,196,143 | |||||||
December 31, 2019 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Mortgage-Backed Securities (1) | $ | 19,246,935 | $ | 560,067 | $ | 1,161 | $ | 19,805,841 | |||||||
Total Held To Maturity | $ | 19,246,935 | $ | 560,067 | $ | 1,161 | $ | 19,805,841 |
(1) COMPRISED OF MORTGAGE-BACKED SECURITIES OF GSEs OR GNMA
At March 31, 2020, the Bank held an amortized cost and fair value of $10.7 million and $11.2 million, respectively, in GNMA mortgage-backed securities classified as held to maturity, which are included in the table above, compared to an amortized cost and fair value of $11.3 million and $11.6 million, respectively, at December 31, 2019. The Company has not invested in any private label mortgage-backed securities classified as held to maturity.
At March 31, 2020, the amortized cost and fair value of mortgage-backed securities held to maturity that were pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were $16.7 million and $17.6 million, respectively, compared to an amortized cost and fair value of $17.5 million and $18 million, respectively, at December 31, 2019.
The following tables show gross unrealized losses, fair value, and length of time that individual held to maturity securities have been in a continuous unrealized loss position at the dates indicated below.
March 31, 2020 | ||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||
Mortgage-Backed Securities (1) | $ | — | $ | — | $ | 812,158 | $ | 1,139 | $ | 812,158 | $ | 1,139 | ||||||||
$ | — | $ | — | $ | 812,158 | $ | 1,139 | $ | 812,158 | $ | 1,139 |
(1) COMPRISED OF MORTGAGE-BACKED SECURITIES OF GSEs OR GNMA
13
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
7. Investment and Mortgage-Backed Securities, Held to Maturity, Continued
December 31, 2019 | ||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||
Mortgage-Backed Securities (1) | $ | — | $ | — | $ | 820,313 | $ | 1,161 | $ | 820,313 | $ | 1,161 | ||||||||
$ | — | $ | — | $ | 820,313 | $ | 1,161 | $ | 820,313 | $ | 1,161 |
(1) COMPRISED OF MORTGAGE-BACKED SECURITIES OF GSEs OR GNMA
The Company’s held to maturity portfolio is recorded at amortized cost. The Company has the ability and intent to hold these securities to maturity.
8. Loans Receivable, Net
Loans receivable, net, consisted of the following as of the dates indicated below:
March 31, 2020 | December 31, 2019 | ||||||
Residential Real Estate Loans | $ | 86,708,745 | $ | 86,404,304 | |||
Consumer Loans | 59,064,397 | 56,331,013 | |||||
Commercial Business Loans | 24,221,626 | 22,234,189 | |||||
Commercial Real Estate Loans | 305,483,071 | 303,550,905 | |||||
Total Loans Held For Investment | 475,477,839 | 468,520,411 | |||||
Loans Held For Sale | 5,408,570 | 3,990,606 | |||||
Total Loans Receivable, Gross | $ | 480,886,409 | $ | 472,511,017 | |||
Less: | |||||||
Allowance For Loan Losses | 9,871,838 | 9,225,574 | |||||
Loans in Process | 10,622,153 | 9,957,140 | |||||
Deferred Loan Fees | 425,908 | 469,568 | |||||
20,919,899 | 19,652,282 | ||||||
Total Loans Receivable, Net | $ | 459,966,510 | $ | 452,858,735 |
The Company uses a risk based approach based on the following credit quality measures when analyzing the loan portfolio: pass, caution, special mention, and substandard. These indicators are used to rate the credit quality of loans for the purposes of determining the Company’s allowance for loan losses. Pass loans are loans that are performing and are deemed adequately protected by the net worth of the borrower or the underlying collateral value. These loans are considered to have the least amount of risk in terms of determining the allowance for loan losses. Loans that are graded as substandard are considered to have the most risk. These loans typically have an identified weakness or weaknesses and are inadequately protected by the net worth of the borrower or collateral value. All loans 90 days or more past due are automatically classified in this category. The caution and special mention categories fall in between the pass and substandard grades and consist of loans that do not currently expose the Company to sufficient risk to warrant adverse classification but possess weaknesses.
14
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. Loans Receivable, Net, Continued
The tables below summarize the balance within each risk category by loan type, excluding loans held for sale, at March 31, 2020 and December 31, 2019.
March 31, 2020 | Pass | Caution | Special Mention | Substandard | Total Loans | ||||||||||||||
Residential Real Estate | $ | 76,650,860 | $ | 5,302,605 | $ | 1,060,055 | $ | 3,695,225 | $ | 86,708,745 | |||||||||
Consumer | 45,658,549 | 10,769,030 | 780,448 | 1,856,370 | 59,064,397 | ||||||||||||||
Commercial Business | 18,275,291 | 5,074,669 | 438,534 | 433,132 | 24,221,626 | ||||||||||||||
Commercial Real Estate | 236,711,024 | 52,122,797 | 14,162,480 | 2,486,770 | 305,483,071 | ||||||||||||||
Total | $ | 377,295,724 | $ | 73,269,101 | $ | 16,441,517 | $ | 8,471,497 | $ | 475,477,839 |
December 31, 2019 | Pass | Caution | Special Mention | Substandard | Total Loans | ||||||||||||||
Residential Real Estate | $ | 76,674,539 | $ | 4,612,182 | $ | 1,155,802 | $ | 3,961,781 | $ | 86,404,304 | |||||||||
Consumer | 44,294,400 | 9,617,301 | 624,248 | 1,795,064 | 56,331,013 | ||||||||||||||
Commercial Business | 16,140,592 | 5,486,393 | 301,462 | 305,742 | 22,234,189 | ||||||||||||||
Commercial Real Estate | 230,810,756 | 56,025,352 | 14,285,015 | 2,429,782 | 303,550,905 | ||||||||||||||
Total | $ | 367,920,287 | $ | 75,741,228 | $ | 16,366,527 | $ | 8,492,369 | $ | 468,520,411 |
The following tables present an age analysis of past due balances by loan category at March 31, 2020 and December 31, 2019:
March 31, 2020 | |||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | Total Past Due | Current | Total Loans Receivable | ||||||||||||||||||
Residential Real Estate | $ | 493,064 | $ | — | $ | 706,590 | $ | 1,199,654 | $ | 85,509,091 | $ | 86,708,745 | |||||||||||
Consumer | 386,364 | 198,759 | 95,369 | 680,492 | 58,383,905 | 59,064,397 | |||||||||||||||||
Commercial Business | 751,042 | 23,257 | 169,506 | 943,805 | 23,277,821 | 24,221,626 | |||||||||||||||||
Commercial Real Estate | 4,508,722 | 138,935 | 1,226,852 | 5,874,509 | 299,608,562 | 305,483,071 | |||||||||||||||||
Total | $ | 6,139,192 | $ | 360,951 | $ | 2,198,317 | $ | 8,698,460 | $ | 466,779,379 | $ | 475,477,839 |
December 31, 2019 | |||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | Total Past Due | Current | Total Loans Receivable | ||||||||||||||||||
Residential Real Estate | $ | — | $ | 355,290 | $ | 144,209 | $ | 499,499 | $ | 85,904,805 | $ | 86,404,304 | |||||||||||
Consumer | 422,443 | 217,542 | 81,736 | 721,721 | 55,609,292 | 56,331,013 | |||||||||||||||||
Commercial Business | 147,959 | 76,515 | 20,316 | 244,790 | 21,989,399 | 22,234,189 | |||||||||||||||||
Commercial Real Estate | 3,849,424 | — | 1,352,716 | 5,202,140 | 298,348,765 | 303,550,905 | |||||||||||||||||
Total | $ | 4,419,826 | $ | 649,347 | $ | 1,598,977 | $ | 6,668,150 | $ | 461,852,261 | $ | 468,520,411 |
At March 31, 2020 and December 31, 2019, the Company did not have any loans that were 90 days or more past due and still accruing interest. The Company's strategy is to work with its borrowers to reach acceptable payment plans while protecting its interests in the existing collateral. In the event an acceptable arrangement cannot be reached, the Company may have to acquire these properties through foreclosure or other means and subsequently sell, develop, or liquidate them.
15
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. Loans Receivable, Net, Continued
The following table shows non-accrual loans by category at March 31, 2020 compared to December 31, 2019:
March 31, 2020 | December 31, 2019 | $ | % | ||||||||||||||||
Amount | Percent (1) | Amount | Percent (1) | Increase (Decrease) | Increase (Decrease) | ||||||||||||||
Non-accrual Loans: | |||||||||||||||||||
Residential Real Estate | $ | 1,773,173 | 0.4 | % | $ | 1,520,485 | 0.3 | % | $ | 252,688 | 16.6% | ||||||||
Consumer | 402,084 | 0.1 | 319,280 | 0.1 | 82,804 | 25.9 | |||||||||||||
Commercial Business | 278,817 | 0.1 | 122,605 | — | 156,212 | 127.4 | |||||||||||||
Commercial Real Estate | 1,341,406 | 0.3 | 1,474,036 | 0.3 | (132,630 | ) | (9.0) | ||||||||||||
Total Non-accrual Loans | $ | 3,795,480 | 0.9 | % | $ | 3,436,406 | 0.7 | % | $ | 359,074 | 10.4% |
(1) PERCENT OF TOTAL LOANS HELD FOR INVESTMENT, NET OF DEFERRED FEES AND LOANS IN PROCESS.
The following tables show the activity in the allowance for loan losses by category for the three months ended March 31, 2020 and 2019:
Three Months Ended March 31, 2020 | |||||||||||||||||||
Residential Real Estate | Consumer | Commercial Business | Commercial Real Estate | Total | |||||||||||||||
Beginning Balance | $ | 1,390,594 | $ | 1,210,849 | $ | 544,764 | $ | 6,079,367 | $ | 9,225,574 | |||||||||
Provision for Loan Losses | 79,144 | 141,944 | 103,002 | 375,910 | 700,000 | ||||||||||||||
Charge-Offs | — | (47,107 | ) | (35,048 | ) | — | (82,155 | ) | |||||||||||
Recoveries | 600 | 22,599 | — | 5,220 | 28,419 | ||||||||||||||
Ending Balance | $ | 1,470,338 | $ | 1,328,285 | $ | 612,718 | $ | 6,460,497 | $ | 9,871,838 |
Three Months Ended March 31, 2019 | |||||||||||||||||||
Residential Real Estate | Consumer | Commercial Business | Commercial Real Estate | Total | |||||||||||||||
Beginning Balance | $ | 1,191,443 | $ | 1,203,593 | $ | 923,600 | $ | 5,853,081 | $ | 9,171,717 | |||||||||
Provision for Loan Losses | (12,650 | ) | 4,806 | 55,446 | 52,398 | 100,000 | |||||||||||||
Charge-Offs | (34,599 | ) | (130,194 | ) | (1,132 | ) | (400,085 | ) | (566,010 | ) | |||||||||
Recoveries | 3,476 | 43,000 | 14,068 | 32,304 | 92,848 | ||||||||||||||
Ending Balance | $ | 1,147,670 | $ | 1,121,205 | $ | 991,982 | $ | 5,537,698 | $ | 8,798,555 |
16
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. Loans Receivable, Net, Continued
The following tables present information related to impaired loans evaluated individually and collectively for impairment in the allowance for loan losses at the dates indicated:
Allowance For Loan Losses | |||||||||||
March 31, 2020 | Individually Evaluated For Impairment | Collectively Evaluated For Impairment | Total | ||||||||
Residential Real Estate | $ | — | $ | 1,470,338 | $ | 1,470,338 | |||||
Consumer | — | 1,328,285 | 1,328,285 | ||||||||
Commercial Business | — | 612,718 | 612,718 | ||||||||
Commercial Real Estate | — | 6,460,497 | 6,460,497 | ||||||||
Total | $ | — | $ | 9,871,838 | $ | 9,871,838 |
Allowance For Loan Losses | |||||||||||
December 31, 2019 | Individually Evaluated For Impairment | Collectively Evaluated For Impairment | Total | ||||||||
Residential Real Estate | $ | — | $ | 1,390,594 | $ | 1,390,594 | |||||
Consumer | — | 1,210,849 | 1,210,849 | ||||||||
Commercial Business | — | 544,764 | 544,764 | ||||||||
Commercial Real Estate | — | 6,079,367 | 6,079,367 | ||||||||
Total | $ | — | $ | 9,225,574 | $ | 9,225,574 |
The following tables present information related to impaired loans evaluated individually and collectively for impairment in loans receivable at the dates indicated:
Loans Receivable | |||||||||||
March 31, 2020 | Individually Evaluated For Impairment | Collectively Evaluated For Impairment | Total | ||||||||
Residential Real Estate | $ | 1,175,502 | $ | 85,533,243 | $ | 86,708,745 | |||||
Consumer | 180,171 | 58,884,226 | 59,064,397 | ||||||||
Commercial Business | 64,406 | 24,157,220 | 24,221,626 | ||||||||
Commercial Real Estate | 1,854,023 | 303,629,048 | 305,483,071 | ||||||||
Total | $ | 3,274,102 | $ | 472,203,737 | $ | 475,477,839 |
Loans Receivable | |||||||||||
December 31, 2019 | Individually Evaluated For Impairment | Collectively Evaluated For Impairment | Total | ||||||||
Residential Real Estate | $ | 1,086,433 | $ | 85,317,871 | $ | 86,404,304 | |||||
Consumer | 184,402 | 56,146,611 | 56,331,013 | ||||||||
Commercial Business | 64,406 | 22,169,783 | 22,234,189 | ||||||||
Commercial Real Estate | 1,894,642 | 301,656,263 | 303,550,905 | ||||||||
Total | $ | 3,229,883 | $ | 465,290,528 | $ | 468,520,411 |
17
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. Loans Receivable, Net, Continued
Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired management measures the impairment and records the loan at fair value. Fair value is estimated using one of the following methods: fair value of the collateral less estimated costs to sell, discounted cash flows, or market value of the loan based on similar debt. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, the Company reviews the most recent appraisal and, if it is over 24 months old, will request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, management may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. The average balance of impaired loans was $3.3 million for the three months ended March 31, 2020 compared to $6.7 million for the three months ended March 31, 2019.
The following tables present information related to impaired loans by loan category at March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020 and 2019. There was no allowance recorded related to any impaired loans at March 31, 2020 and December 31, 2019.
March 31, 2020 | December 31, 2019 | ||||||||||||||||||
Impaired Loans | Recorded Investment | Unpaid Principal Balance | Related Allowance | Recorded Investment | Unpaid Principal Balance | Related Allowance | |||||||||||||
With No Related Allowance Recorded: | |||||||||||||||||||
Residential Real Estate | $ | 1,175,502 | $ | 1,175,502 | $ | — | $ | 1,086,433 | $ | 1,086,433 | $ | — | |||||||
Consumer | 180,171 | 188,471 | — | 184,402 | 192,702 | — | |||||||||||||
Commercial Business | 64,406 | 959,406 | — | 64,406 | 959,406 | — | |||||||||||||
Commercial Real Estate | 1,854,023 | 2,026,242 | — | 1,894,642 | 2,066,862 | — | |||||||||||||
Total | $ | 3,274,102 | $ | 4,349,621 | $ | — | $ | 3,229,883 | $ | 4,305,403 | $ | — |
Three Months Ended March 31, | |||||||||||||
2020 | 2019 | ||||||||||||
Impaired Loans | Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||
With No Related Allowance Recorded: | |||||||||||||
Residential Real Estate | $ | 1,185,056 | $ | 1,195 | $ | 1,361,079 | $ | — | |||||
Consumer | 182,282 | — | 984,528 | — | |||||||||
Commercial Business | 64,406 | — | 77,206 | — | |||||||||
Commercial Real Estate | 1,874,528 | 15,560 | 2,884,732 | 14,247 | |||||||||
With an Allowance Recorded: | |||||||||||||
Consumer | — | — | 72,651 | — | |||||||||
Commercial Real Estate | — | — | 1,319,274 | — | |||||||||
Total | |||||||||||||
Residential Real Estate | 1,185,056 | 1,195 | 1,361,079 | — | |||||||||
Consumer | 182,282 | — | 1,057,179 | — | |||||||||
Commercial Business | 64,406 | — | 77,206 | — | |||||||||
Commercial Real Estate | 1,874,528 | 15,560 | 4,204,006 | 14,247 | |||||||||
Total | $ | 3,306,272 | $ | 16,755 | $ | 6,699,470 | $ | 14,247 |
18
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. Loans Receivable, Net, Continued
In the course of resolving delinquent loans, the Company may choose to restructure the contractual terms of certain loans. A troubled debt restructuring ("TDR") is a restructuring in which the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to a borrower that it would not otherwise consider (Financial Accounting Standards Board ("FASB") ASC Topic 310-40). The concessions granted on TDRs generally include terms to reduce the interest rate, extend the term of the debt obligation, or modify the payment structure on the debt obligation. The Company grants such concessions to reassess the borrower’s financial status and develop a plan for repayment.
At the date of modification, TDRs are initially classified as nonaccrual TDRs. TDR loans are returned to accruing status when there is economic substance to the restructuring, there is documented credit evaluation of the borrower's financial condition, the remaining balance is reasonably assured of repayment in accordance with its modified terms, and the borrower has demonstrated sustained repayment performance in accordance with the modified terms for a reasonable period of time (generally a minimum of six months).
TDRs included in impaired loans at March 31, 2020 and December 31, 2019 were $797,000 and $825,000, respectively, and the Company had no commitments at these dates to lend additional funds on these loans. There were no new TDRs during the three months ended March 31, 2020 and 2019. At March 31, 2020, no TDRs were in default. In comparison, at March 31, 2019, one TDR loan with a balance of $363,000 was in default. There were no TDRs, for which there was a payment default within the first 12 months of the modification during the three months ended March 31, 2020 and 2019. The Bank considers any loan 30 days or more past due to be in default.
The Company's policy with respect to accrual of interest on loans restructured as a TDR follows relevant supervisory guidance. That is, if a borrower has demonstrated performance under the previous loan terms and shows capacity to perform under the restructured loan terms, continued accrual of interest at the restructured interest rate is probable. If a borrower was materially delinquent on payments prior to the restructuring but shows capacity to meet the restructured loan terms, the loan will likely continue as nonaccrual going forward. Lastly, if the borrower does not perform under the restructured terms, the loan is placed on nonaccrual status.
The Company closely monitors these loans and will cease accruing interest on them if management believes that the borrowers may not continue performing based on the restructured note terms. If, after previously being classified as a TDR, a loan is restructured a second time, then that loan is automatically placed on nonaccrual status. The Company's policy with respect to nonperforming loans requires the borrower to make a minimum of six consecutive payments in accordance with the modified loan terms before that loan can be placed back on accrual status. Further, the borrower must demonstrate the capacity to continue making payments on the loan prior to restoration of accrual status.
The Coronavirus Aid, Relief, and Economic Security Act of 2020 signed into law on March 27, 2020 ("CARES Act") provided guidance around the modification of loans as a result of the COVID-19 pandemic, which outlined, among other criteria, that short-term modifications made on a good faith basis to borrowers who were current as defined under the CARES Act prior to any relief, are not TDRs. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. To qualify as an eligible loan under the CARES Act, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President or (B) December 31, 2020. At March 31, 2020 the Company had made six short-term modifications as a result of the COVID-19 pandemic.
19
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
9. Regulatory Matters
The Bank, as a state-chartered, federally insured savings bank, is subject to the capital requirements established by the FDIC. Under the FDIC's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors.
The Company is a bank holding company registered with the Federal Reserve. Bank holding companies are subject to capital adequacy requirements of the Federal Reserve under the Bank Holding Company Act of 1956, as amended, and the regulations of the Federal Reserve. For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company's subsidiary banks to be well-capitalized under the prompt corrective action regulations. If Security Federal Corporation was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, it would have exceeded all regulatory capital requirements with Common Equity Tier 1 ("CET1") capital, Tier 1 leverage-based capital, Tier 1 risk-based capital and total risk-based capital ratios of 16.5%, 10.0%, 17.4% and 24.0%, respectively, at March 31, 2020.
Based on its capital levels at March 31, 2020, the Bank exceeded all regulatory capital requirements as of that date. Consistent with the Bank's goals to operate a sound and profitable organization, it is the Bank's policy to maintain a "well-capitalized" status under the regulatory capital categories of the FDIC. Based on capital levels at March 31, 2020, the Bank was considered to be "well-capitalized" under applicable regulatory requirements. Management monitors the capital levels to provide for current and future business opportunities and to maintain the Bank's "well-capitalized" status.
The tables below provide the Bank’s regulatory capital requirements and actual results at the dates indicated.
Actual | For Capital Adequacy | To Be "Well-Capitalized" | |||||||||||||||
(Dollars in Thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||
March 31, 2020 | |||||||||||||||||
Tier 1 Risk-Based Core Capital (To Risk Weighted Assets) | $ | 102,698 | 18.3% | $ | 33,701 | 6.0% | $ | 44,934 | 8.0% | ||||||||
Total Risk-Based Capital (To Risk Weighted Assets) | 109,754 | 19.5% | 44,934 | 8.0% | 56,168 | 10.0% | |||||||||||
Common Equity Tier 1 Capital (To Risk Weighted Assets) | 102,698 | 18.3% | 25,276 | 4.5% | 36,509 | 6.5% | |||||||||||
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets) | 102,698 | 10.3% | 39,870 | 4.0% | 49,838 | 5.0% | |||||||||||
December 31, 2019 | |||||||||||||||||
Tier 1 Risk-Based Core Capital (To Risk Weighted Assets) | $ | 101,280 | 18.2% | $ | 33,418 | 6.0% | $ | 44,558 | 8.0% | ||||||||
Total Risk-Based Capital (To Risk Weighted Assets) | 108,270 | 19.4% | 44,558 | 8.0% | 55,697 | 10.0% | |||||||||||
Common Equity Tier 1 Capital (To Risk Weighted Assets) | 101,280 | 18.2% | 25,064 | 4.5% | 36,203 | 6.5% | |||||||||||
Tier 1 Leverage (Core) Capital (To Adjusted Tangible Assets) | 101,280 | 10.4% | 39,134 | 4.0% | 48,917 | 5.0% |
In addition to the minimum capital requirements, the Bank must maintain a capital conservation buffer, which consists of additional CET1 capital greater than 2.5% of risk weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. At March 31, 2020 the Bank’s conservation buffer was 11.5%.
20
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. Carrying Amounts and Fair Value of Financial Instruments
GAAP requires the Company to disclose fair value of financial instruments measured at amortized cost on the balance sheet and to measure that fair value using an exit price notion, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions.
Accounting guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 - | Quoted Market Price in Active Markets Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as U.S. Treasuries and money market funds. |
Level 2 - | Significant Other Observable Inputs Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, mortgage-backed securities, municipal bonds, corporate debt securities and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain derivative contracts. |
Level 3 - | Significant Unobservable Inputs Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. |
The following is a description of the valuation methodologies used for assets and liabilities recorded at fair value.
Investment Securities Available for Sale
Investment securities available for sale are recorded at fair value on a recurring basis. At March 31, 2020, the Company’s investment portfolio was comprised of student loan pools, government and agency bonds, mortgage-backed securities issued by government agencies or GSEs, private label CMO mortgage-backed securities and municipal securities. Fair value measurement is based upon prices obtained from third party pricing services that use independent pricing models which rely on a variety of factors including reported trades, broker/dealer quotes, benchmark yields, economic and industry events and other relevant market information. As a result, these securities are classified as Level 2.
Mortgage Loans Held for Sale
The Company originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed but not yet settled with the FHLMC or other investors, are carried in the Company’s loans held for sale portfolio. These loans are fixed rate residential loans that have been originated in the Company’s name and have closed. Virtually all of these loans have commitments to be purchased by investors and the majority of these loans were locked in by price with the investors on the same day or shortly thereafter that the loan was locked in with the Company’s customers. Therefore, these loans present very little market risk for the Company. The Company usually delivers a commitment to, and receives funding from, the investor within 30 days. Commitments to sell these loans to the investor are considered derivative contracts and are sold to investors on a “best efforts" basis. The Company is not obligated to deliver a loan or pay a penalty if a loan is not delivered to the investor. As a result of the short-term nature of these derivative contracts, the fair value of the mortgage loans held for sale in most cases is the same as the value of the loan amount at its origination. These loans are classified as Level 2.
21
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
10. Carrying Amounts and Fair Value of Financial Instruments, Continued
Impaired Loans
The Company does not record loans held for investment at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established as necessary. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as impaired, management measures the impairment by determining the fair value of the collateral for the loan.
Fair value is estimated using one of the following methods: fair value of the collateral less estimated costs to sell, discounted cash flows, or market value of the loan based on similar debt. The fair value of the collateral less estimated costs to sell is the most frequently used method. Typically, the Company reviews the most recent appraisal and if it is over 24 months old will request a new third party appraisal. Depending on the particular circumstances surrounding the loan, including the location of the collateral, the date of the most recent appraisal and the value of the collateral relative to the recorded investment in the loan, management may order an independent appraisal immediately or, in some instances, may elect to perform an internal analysis. Specifically as an example, in situations where the collateral on a nonperforming commercial real estate loan is out of the Company’s primary market area, management would typically order an independent appraisal immediately, at the earlier of the date the loan becomes nonperforming or immediately following the determination that the loan is impaired. However, as a second example, on a nonperforming commercial real estate loan where management is familiar with the property and surrounding areas and where the original appraisal value far exceeds the recorded investment in the loan, management may perform an internal analysis whereby the previous appraisal value would be reviewed and adjusted for current conditions including recent sales of similar properties in the area and any other relevant economic trends. These valuations are reviewed at a minimum on a quarterly basis.
Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2020, our impaired loans were generally evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The Company records impaired loans as nonrecurring Level 3. At March 31, 2020 and December 31, 2019, the recorded investment in impaired loans was $3.3 million and $3.2 million, respectively.
Foreclosed Assets
Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. Foreclosed assets are recorded as nonrecurring Level 3.
Assets measured at fair value on a recurring basis were as follows at March 31, 2020 and December 31, 2019:
March 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Student Loan Pools | $ | — | $ | 47,799,914 | $ | — | $ | — | $ | 40,231,830 | $ | — | |||||||||||
SBA Bonds | — | 116,354,323 | — | — | 111,893,099 | — | |||||||||||||||||
Tax Exempt Municipal Bonds | — | 40,275,261 | — |