Security Federal H1: NII & NIM Up on Yield Capture; AFS Losses and Cost Pressure Loom

Snapshot - Security Federal Corporation (OTCMKTS: SFDL)
Security Federal reported solid first‑half 2025 results: strengthening net interest income, higher non‑interest revenue and improved equity, driven by reinvestment into higher‑yield securities. Key risk items are unrealized losses in the investment portfolio, higher operating costs and reliance on brokered/time deposits for share growth.

Key facts & figures (as reported at June 30, 2025)

- Total assets: $1,625,236 thousand

- Total deposits: $1,383,201 thousand (up $59,168k vs 12/31/24)

- Cash & cash equivalents: $142,190 thousand (down $36,087k)

- Available‑for‑sale (AFS) securities: $588,207 thousand

- Held‑to‑maturity (HTM) securities: $119,402 thousand (fair value $116,430k)

- Loans held for investment, net: $685,501 thousand; total loans (gross): $699,661k

- Allowance for credit losses (loans): $14,007 thousand (2.00% of total loans)

- Nonaccrual loans: $5,956 thousand

- Net interest income (Q2 2025): $11,312 thousand; Net interest income (6M 2025): $22,541k

- Total non‑interest income (Q2 2025): $2,595k; (6M): $5,039k

- Total non‑interest expense (Q2 2025): $10,361k; (6M): $20,202k

- Net income (Q2 2025): $2,790k; Net income available to common (Q2): $2,375k

- EPS basic (Q2 2025): $0.75; EPS basic (6M 2025): $1.56

- Preferred stock dividends (Q2): $415k; (6M): $830k

- Shareholders' equity: $191,279k (up from $182,389k)

- Regulatory capital (Bank) - CET1: 19.2%; Total risk‑based capital: 20.5% - classified "well‑capitalized"

What's happening inside the company - plain view

- Management is shifting investment mix: HTM paydowns/maturities were reinvested into AFS securities ($62.6m increase in AFS), capturing higher yields as rates rose. This boosted interest income on new loan originations and lifted net interest margin (NIM to ~3.02% for Q2).

- Loan portfolio is essentially stable in size but mix changed: construction and commercial & agricultural loans declined modestly while residential and HELOCs grew. Credit metrics improved: past‑due balances fell (30‑59/60‑89/90+ days down to $7.3m total past due).

- Expense investments: staffing and technology costs rose to support growth (compensation +6% q/q year‑over‑year; data/cloud costs increasing), and the bank bought a multi‑tenant property to convert to a branch (rental income +).

- Capital management: the company continues share repurchases (3,000 shares q2) and pays common dividends ($0.15 per quarter target), while holding Treasury ECIP preferred stock ($82.949m) with repurchase option terms not yet met.

Positive aspects of the income statement

- Net interest income up materially: NII rose to $11.3m in Q2 (11.1% YoY increase) and $22.54m for 6M (11.8% YoY) driven by higher loan yields and reinvestment into higher‑yield securities.

- Margin expansion: net interest margin increased (3.02% Q2 vs 2.86% prior year quarter) - lending repricing and lower costly borrowings (FRB payoff) helped.

- Lower credit provisioning: no provision for credit losses recorded in Q2 or YTD 2025 (versus provision of $175k Q2 2024; $510k for 6M 2024). Net recoveries of $114k YTD reduce charge‑off pressure.

- Non‑interest income growing: +5.7% YoY in Q2 (driven by rental income, ATM/card fees, insurance commissions).

- Strong capital and liquidity: CET1 19.2% and well‑capitalized; liquid assets (cash + AFS + CDs) total ~$644m; deposits increased.

Negative aspects of the income statement / risks

- Investment unrealized losses: AFS portfolio shows gross unrealized losses of $34,953k and 369 securities in loss positions. That creates volatility in AOCL and potential future realized losses if forced sales occur.

- Elevated non‑interest expense: total non‑interest expense rose 7.2% YoY in Q2 and 4.7% YTD - compensation, debit card costs, data/cloud expenses are trending higher and pressuring efficiency.

- Preferred dividends drag: Preferred ECIP dividends ($415k Q2; $830k YTD) reduce net income available to common; repurchase option conditions not yet met.

- Reliance on higher‑cost deposits: certificates of deposit balances and brokered CDs increased (CDs $331,387k), raising deposit cost pressure even if overall borrowing costs fell.

- Investment duration / interest‑rate risk: large MBS and private CMO holdings expose the bank to interest‑rate mark‑to‑market swings (many unrealized losses driven by rate moves, not credit) - could compress capital if rates reverse or liquidity tightens.

Operational & credit watch items

- Allowance for credit losses remains modest at $14,007k (2.00% of loans). Nonaccrual loans $5,956k - manageable but should be monitored if economic conditions worsen.

- Liquidity use: operating cash provided was $5.6m while investing used $45.3m (heavy AFS purchases of $111.7m) - the cash outflow financed by deposit growth and drawdowns of cash balances (cash down $36.1m).

- Uninsured deposits: ~$342.6m (approx. 24.8% of deposits) - concentration and potential sensitivity if local stress appears.

Bottom line - concise take

- Security Federal (OTCMKTS: SFDL) is executing a yield‑capture strategy: reinvesting maturing HTM into higher‑yield AFS securities and benefiting from loan repricing to expand NII and NIM. Results: higher earnings, stronger equity and clean credit trends to date.

- Key tradeoffs: rising operating costs and meaningful unrealized AFS losses increase earnings volatility and place a premium on deposit cost management. Watch AFS mark‑to‑market volatility, deposit mix/costs, and whether the bank sustains credit stability if macro conditions deteriorate.

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