UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 – Q10-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 SEPTEMBER 30, 2017MARCH 31, 2023
( )☐ 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 Carolina57-0858504
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
238 RICHLAND AVENUE NORTHWEST, AIKEN, SOUTH CAROLINARichland Avenue Northwest, Aiken, South Carolina 29801
(Address of principal executive office and Zip Code)
(803) 641-3000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files.) Yes [X][ 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    [ ]filer☐Smaller reporting company [ X ]☒
Non-accelerated filer    [ ]☒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.
YESNO
Indicate by check mark whether the registrant is a shell corporation (defined in Rule 12b-2 of the Exchange Act). Yes [ ]☐ No [X]☒
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 shareNovember 13, 2017May 12, 20232,945,4743,253,210

1


PART I.FINANCIAL INFORMATION (UNAUDITED)PAGE NO.
Item 1.Financial Statements (unaudited):3
Consolidated Balance Sheets at September 30, 2017March 31, 2023 and December 31, 201620223
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2017March 31, 2023 and 201620224
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017March 31, 2023 and 201620225
Consolidated Statements of Changes in Shareholders’ Equity for the NineThree Months Ended September 30, 2017March 31, 2023 and 201620226
Consolidated Statements of Cash Flows for the NineThree Months Ended September 30, 2017March 31, 2023 and 201620227
Notes to Consolidated Financial Statements98
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations3334
Item 3.Quantitative and Qualitative Disclosures about Market Risk4843
Item 4.Controls and Procedures4843
PART II.OTHER INFORMATION
Item 1.Legal Proceedings4944
Item 1A.Risk Factors4944
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds4944
Item 3.Defaults Upon Senior Securities4944
Item 4.Mine Safety Disclosures4944
Item 5.Other Information4944
Item 6.Exhibits4945
Signatures5146


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
 September 30, 2017 December 31, 2016
 (Unaudited) (Audited)
ASSETS:   
Cash and Cash Equivalents$15,158,779
 $9,374,549
Certificates of Deposit with Other Banks1,350,005
 2,445,005
Investment and Mortgage-Backed Securities:   
Available For Sale388,643,233
 362,059,429
Held To Maturity (Fair Value of $25,568,343 and $25,371,052 at September 30, 2017 and December 31, 2016, Respectively)25,337,966
 25,583,956
Total Investments and Mortgage-Backed Securities413,981,199
 387,643,385
Loans Receivable, Net:   
Held For Sale1,270,410
 4,243,907
Held For Investment (Net of Allowance of $8,169,188 and $8,356,231 at September 30, 2017 and December 31, 2016, Respectively)374,441,058
 355,478,939
Total Loans Receivable, Net375,711,468
 359,722,846
Accrued Interest Receivable:   
Loans936,428
 1,038,444
Mortgage-Backed Securities587,965
 605,474
Investment Securities1,716,518
 1,407,923
Total Accrued Interest Receivable3,240,911
 3,051,841
Premises and Equipment, Net22,865,424
 21,197,684
Federal Home Loan Bank ("FHLB") Stock, at Cost2,473,700
 2,776,500
Other Real Estate Owned ("OREO")1,907,637
 2,721,214
Bank Owned Life Insurance ("BOLI")18,665,893
 17,101,045
Goodwill1,199,754
 1,199,754
Other Assets4,593,887
 5,447,746
Total Assets$861,148,657
 $812,681,569
LIABILITIES AND SHAREHOLDERS’ EQUITY:   
Liabilities:   
Deposit Accounts$701,613,360
 $654,103,278
Advance Payments By Borrowers For Taxes and Insurance669,491
 260,580
Advances From FHLB41,000,000
 48,395,000
Other Borrowings12,355,812
 9,338,148
Note Payable9,700,000
 13,000,000
Junior Subordinated Debentures5,155,000
 5,155,000
Senior Convertible Debentures6,064,000
 6,084,000
Other Liabilities6,679,470
 5,233,289
Total Liabilities$783,237,133
 $741,569,295
Shareholders' Equity:   
Common Stock, $.01 Par Value; Authorized 5,000,000 Shares; Issued and Outstanding Shares, 3,146,407 and 2,945,474, Respectively$31,464
 $31,464
Additional Paid-In Capital12,036,744
 12,036,744
Treasury Stock, at Cost (200,933 Shares)(4,330,712) (4,330,712)
Unvested Restricted Stock—
 (25,358)
Accumulated Other Comprehensive Income3,739,788
 1,180,086
Retained Earnings66,434,240
 62,220,050
Total Shareholders' Equity$77,911,524
 $71,112,274
Total Liabilities and Shareholders' Equity$861,148,657
 $812,681,569

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Interest Income:        
Loans $5,146,669
 $4,912,317
 $14,849,109
 $14,378,826
Mortgage-Backed Securities 1,274,753
 1,192,792
 3,552,887
 3,672,252
Investment Securities 1,324,104
 1,042,765
 3,729,992
 3,245,857
Other 6,295
 4,944
 34,804
 14,057
Total Interest Income 7,751,821
 7,152,818
 22,166,792
 21,310,992
Interest Expense:        
NOW and Money Market Accounts 151,874
 102,321
 426,080
 309,757
Statement Savings Accounts 10,726
 8,984
 30,000
 25,468
Certificate Accounts 503,505
 407,283
 1,401,910
 1,239,282
FHLB Advances and Other Borrowed Money 164,544
 132,889
 409,655
 561,316
Note Payable 105,762
 —
 328,613
 —
Senior Convertible Debentures 121,396
 121,680
 364,756
 365,040
Junior Subordinated Debentures 38,975
 31,445
 110,863
 91,002
Total Interest Expense 1,096,782
 804,602
 3,071,877
 2,591,865
Net Interest Income 6,655,039
 6,348,216
 19,094,915
 18,719,127
Provision For Loan Losses 100,000
 —
 100,000
 —
Net Interest Income After Provision For Loan Losses 6,555,039
 6,348,216
 18,994,915
 18,719,127
Non-Interest Income:        
Gain on Sale of Investment Securities 79,363
 360,425
 707,902
 772,143
Gain on Sale of Loans 373,636
 256,918
 894,053
 657,473
Service Fees on Deposit Accounts 274,717
 266,960
 776,469
 772,341
Commissions From Insurance Agency 172,074
 149,529
 451,311
 441,519
Trust Income 186,000
 197,000
 554,000
 521,000
BOLI Income 788,133
 132,000
 1,028,133
 396,000
Check Card Fee Income 282,686
 247,331
 838,302
 742,583
Grant Income —
 —
 —
 265,496
Other 205,524
 170,519
 542,250
 504,200
Total Non-Interest Income 2,362,133
 1,780,682
 5,792,420
 5,072,755
Non-Interest Expense:        
Compensation and Employee Benefits 3,872,102
 3,167,112
 10,916,386
 9,675,430
Occupancy 569,024
 502,352
 1,661,661
 1,469,602
Advertising 120,033
 100,251
 391,742
 343,034
Depreciation and Maintenance of Equipment 569,839
 510,645
 1,541,460
 1,486,060
Federal Deposit Insurance Corporation ("FDIC") Insurance Premiums 64,518
 62,163
 168,707
 322,653
Net Cost (Benefit) of Operation of OREO 105,172
 25,991
 (96,730) (647,990)
Prepayment Penalties on FHLB Advances —
 260,594
 —
 789,306
Other 1,268,449
 1,065,209
 3,681,552
 3,485,289
Total Non-Interest Expense 6,569,137
 5,694,317
 18,264,778
 16,923,384
Income Before Income Taxes 2,348,035
 2,434,581
 6,522,557
 6,868,498
Provision For Income Taxes 445,133
 654,850
 1,513,090
 1,805,750
Net Income 1,902,902
 1,779,731
 5,009,467
 5,062,748
Preferred Stock Dividends —
 110,000
 —
 330,000
Net Income Available to Common Shareholders $1,902,902
 $1,669,731
 $5,009,467
 $4,732,748
Net Income Per Common Share (Basic) $0.65
 $0.57
 $1.70
 $1.61
Net Income Per Common Share (Diluted) $0.61
 $0.54
 $1.61
 $1.53
Cash Dividend Per Share on Common Stock $0.09
 $0.08
 $0.27
 $0.24
Weighted Average Shares Outstanding (Basic) 2,945,474
 2,944,001
 2,945,215
 2,944,001
Weighted Average Shares Outstanding (Diluted) 3,252,436
 3,248,526
 3,251,666
 3,248,474

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

  Three Months Ended September 30,
  2017 2016
Net Income $1,902,902
 $1,779,731
Other Comprehensive Loss    
Unrealized Gains (Losses) on Securities:    
Unrealized Holding Losses on Securities Available For Sale, Net of Taxes of $(39,600) and $(774,093) at September 30, 2017 and 2016, Respectively (64,802) (1,263,332)
Reclassification Adjustment for Gains Included in Net Income, Net of Taxes of $30,158 and $136,962 at September 30, 2017 and 2016, Respectively (49,205) (223,463)
Amortization of Unrealized Gains on Available For Sale Securities Transferred to Held To Maturity, Net of Taxes of $(14,084) and $(20,270) at September 30, 2017 and 2016, Respectively (23,019) (33,128)
Other Comprehensive Loss (137,026) (1,519,923)
Comprehensive Income $1,765,876
 $259,808


  Nine Months Ended September 30,
  2017 2016
Net Income $5,009,467
 $5,062,748
Other Comprehensive Income    
Unrealized Gains on Securities:    
Unrealized Holding Gains on Securities Available For Sale, Net of Taxes of $1,892,760 and $1,861,700 at September 30, 2017 and 2016, Respectively 3,080,485
 3,044,091
Reclassification Adjustment for Gains Included in Net Income, Net of Taxes of $269,003 and $293,415 at September 30, 2017 and 2016, Respectively (438,899) (478,728)
Amortization of Unrealized Gains on Available For Sale Securities Transferred to Held To Maturity, Net of Taxes of $(50,102) and $(55,872) at September 30, 2017 and 2016, Respectively (81,884) (91,314)
Other Comprehensive Income 2,559,702
 2,474,049
Comprehensive Income $7,569,169
 $7,536,797



 March 31, 2023December 31, 2022
(Unaudited)(Audited)
ASSETS:
Cash and Cash Equivalents$24,719,440 $28,502,364 
Certificates of Deposit with Other Banks1,100,045 1,100,045 
Investments:  
Available For Sale ("AFS")541,070,073 550,148,284 
Held To Maturity ("HTM") Net of Allowance for Credit Losses of $0 (Fair Value of $175,852,725 and $161,463,573 at March 31, 2023 and December 31, 2022, Respectively)180,178,508 167,437,616 
Total Investments721,248,581 717,585,900 
Loans Receivable, Net:  
Held For Sale240,841 913,258 
Held For Investment (Net of Allowance for Credit Losses of $12,126,810 and $11,177,753 at March 31, 2023 and December 31, 2022, Respectively)574,189,709 549,003,912 
Total Loans Receivable, Net574,430,550 549,917,170 
Accrued Interest Receivable:  
Loans1,531,288 1,462,039 
Investments3,828,399 3,348,635 
Total Accrued Interest Receivable5,359,687 4,810,674 
Operating Lease Right-of-Use ("ROU") Assets1,747,944 1,860,997 
Land Held for Sale1,096,614 1,096,614 
Premises and Equipment, Net28,674,858 27,959,793 
Federal Home Loan Bank ("FHLB") Stock, at Cost658,600 650,600 
Other Real Estate Owned ("OREO")119,700 119,700 
Bank Owned Life Insurance ("BOLI")27,468,302 27,318,098 
Goodwill1,199,754 1,199,754 
Other Assets18,269,716 19,244,454 
Total Assets$1,406,093,791 $1,381,366,163 
LIABILITIES: 
Deposit Accounts$1,108,673,509 $1,110,085,296 
Borrowings from Federal Reserve Bank ("FRB")61,375,000 44,080,000 
Other Borrowings27,817,803 27,588,147 
Junior Subordinated Debentures5,155,000 5,155,000 
Subordinated Debentures26,500,000 26,500,000 
Operating Lease Liabilities1,793,589 1,904,285 
Other Liabilities8,286,135 5,819,807 
Total Liabilities$1,239,601,036 $1,221,132,535 
SHAREHOLDERS’ EQUITY: 
Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP, $1,000 Par Value; 82,949 Shares Authorized, Issued and Outstanding at March 31, 2023 and December 31, 2022$82,949,000 $82,949,000 
Common Stock, $0.01 Par Value; 5,000,000 Shares Authorized; 3,454,143 and 3,453,817 Shares Issued and 3,253,210 and 3,252,884 Shares Outstanding at March 31, 2023 and December 31, 2022, Respectively34,541 34,538 
Additional Paid-In Capital ("APIC")18,238,598 18,230,187 
Treasury Stock, at Cost (200,933 Shares)(4,330,712)(4,330,712)
Accumulated Other Comprehensive Loss ("AOCI")(35,200,845)(40,778,646)
Retained Earnings104,802,173 104,129,261 
Total Shareholders' Equity$166,492,755 $160,233,628 
Total Liabilities and Shareholders' Equity$1,406,093,791 $1,381,366,163 
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


3
SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
Three Months Ended March 31,
 20232022
Interest Income:  
Loans$7,410,163 $6,096,686 
Investments6,773,482 2,600,958 
Other34,432 2,216 
Total Interest Income14,218,077 8,699,860 
Interest Expense:  
Deposits2,915,268 345,067 
FHLB Advances and Other Borrowed Money627,782 29,783 
Subordinated Debentures347,813 393,750 
Junior Subordinated Debentures83,606 26,039 
Total Interest Expense3,974,469 794,639 
Net Interest Income10,243,608 7,905,221 
Provision for Credit Losses— — 
Net Interest Income After Provision for Credit Losses10,243,608 7,905,221 
Non-Interest Income:  
Gain on Sale of Loans193,881 713,893 
Service Fees on Deposit Accounts269,613 257,491 
Commissions From Insurance Agency162,799 139,504 
Trust Income382,208 364,746 
BOLI Income150,204 157,241 
ATM and Check Card Fee Income802,022 717,267 
Other239,650 253,182 
Total Non-Interest Income2,200,377 2,603,324 
Non-Interest Expense:  
Compensation and Employee Benefits5,240,796 5,056,620 
Occupancy806,434 712,786 
Advertising244,595 260,333 
Depreciation and Maintenance of Equipment620,156 720,661 
FDIC Insurance Premiums90,306 112,042 
Writedown of Land Held for Sale— 339,344 
Consulting213,335 164,750 
Debit Card Expenses336,646 283,789 
Data Processing280,036 67,052 
Other1,198,284 877,467 
Total Non-Interest Expense9,030,588 8,594,844 
Income Before Income Taxes3,413,397 1,913,701 
Provision for Income Taxes739,297 364,670 
Net Income2,674,100 1,549,031 
Net Income Per Common Share (Basic)$0.82 $0.48 
Cash Dividend Per Share on Common Stock$0.13 $0.12 
Weighted Average Shares Outstanding (Basic)3,253,112 3,252,884 

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)


Three Months Ended March 31,
20232022
Net Income$2,674,100 $1,549,031 
Other Comprehensive Income (Loss):
Unrealized Holding Gains (Losses) on Securities AFS, Net of Tax Expense (Benefit) of $1,807,684 and $(6,553,438) at March 31, 2023 and 2022, Respectively5,575,156 (20,222,704)
Amortization of Unrealized Losses (Gains) on AFS Securities Transferred to HTM, Net of Tax Expense (Benefit) of $882 and $(51) at March 31, 2023 and 2022, Respectively2,645 (154)
Other Comprehensive Income (Loss), Net of Tax5,577,801 (20,222,858)
Comprehensive Income (Loss)$8,251,901 $(18,673,827)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

5

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

For the NineThree Months Ended September 30, 2017March 31, 2023 and 20162022


 Preferred StockCommon
Stock		APICTreasury StockAOCI (Loss)Retained EarningsTotal
Balance at December 31, 2021$— $34,538 $18,230,187 $(4,330,712)$5,215,107 $96,373,405 $115,522,525 
Net Income— — — — — 1,549,031 1,549,031 
Other Comprehensive Loss, Net of Tax— — — — (20,222,858)— (20,222,858)
Cash Dividends on Common Stock— — — — — (390,346)(390,346)
Balance at March 31, 2022$— $34,538 $18,230,187 $(4,330,712)$(15,007,751)$97,532,090 $96,458,352 
 
 
 
Preferred
 Stock
  
 
Common
Stock		 Unvested Restricted Stock 
 
Additional
Paid – In
 Capital
 
 
 
Treasury
Stock
 Accumulated
Other
 Comprehensive Income		 
 
 
Retained
Earnings
 
 
 
 
Total
Balance at December 31, 2015$22,000,000
 $31,464
 $(25,358) $12,028,832
 $(4,330,712) $4,262,361
 $57,000,835
 $90,967,422
Net Income—
 —
 —
 —
 —
 —
 5,062,748
 5,062,748
Other Comprehensive Income, Net of Tax—
 —
 —
 —
 —
 2,474,049
 —
 2,474,049
Stock Option Compensation Expense—
 —
 —
 5,976
 —
 —
 —
 5,976
Cash Dividends on Preferred Stock—
 —
 —
 —
 —
 —
 (330,000) (330,000)
Cash Dividends on Common Stock—
 —
 —
 —
 —
 —
 (706,914) (706,914)
Balance at September 30, 2016$22,000,000
 $31,464
 $(25,358) $12,034,808
 $(4,330,712) $6,736,410
 $61,026,669
 $97,473,281


 Preferred StockCommon
Stock		APICTreasury StockAOCI (Loss)Retained EarningsTotal
Balance at December 31, 2022$82,949,000 $34,538 $18,230,187 $(4,330,712)$(40,778,646)$104,129,261 $160,233,628 
Adoption of ASU 2016-13— — — — — (1,578,271)(1,578,271)
Net Income— — — — — 2,674,100 2,674,100 
Other Comprehensive Income, Net of Tax— — — — 5,577,801 — 5,577,801 
Employee Stock Purchase Plan— 3 8,411 — — — 8,414 
Cash Dividends on Common Stock— — — — — (422,917)(422,917)
Balance at March 31, 2023$82,949,000 $34,541 $18,238,598 $(4,330,712)$(35,200,845)$104,802,173 $166,492,755 



 
 
 
Common
Stock
 Unvested Restricted Stock 
 
Additional
Paid – In
 Capital
 
 
 
Treasury
Stock
 Accumulated Other Comprehensive Income 
 
 
Retained
Earnings
 
 
 
 
Total
Balance at December 31, 2016$31,464
 $(25,358) $12,036,744
 $(4,330,712) $1,180,086
 $62,220,050
 $71,112,274
Net Income—
 —
 —
 —
 —
 5,009,467
 5,009,467
Other Comprehensive Income, Net of Tax—
 —
 —
 —
 2,559,702
 —
 2,559,702
Vesting of Restricted Stock—
 25,358
 —
 —
 —
 —
 25,358
Cash Dividends on Common Stock—
 —
 —
 —
 —
 (795,277) (795,277)
Balance at September 30, 2017$31,464
 $—
 $12,036,744
 $(4,330,712) $3,739,788
 $66,434,240
 $77,911,524

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)
 Nine Months Ended September 30,
 2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES:   
Net Income$5,009,467
 $5,062,748
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:   
Depreciation Expense1,101,900
 1,053,224
Stock Option Compensation Expense25,358
 5,976
Discount Accretion and Premium Amortization4,190,700
 4,038,220
Provisions for Losses on Loans100,000
 —
Earnings on BOLI(374,000) (396,000)
Income Recognized From BOLI Death Benefit(654,133) —
Gain on Sales of Loans(894,053) (657,473)
Gain on Sales of Mortgage-Backed Securities(250,149) (55,958)
Gain on Sales of Investment Securities(457,752) (716,185)
Gain on Sale of Premises and Equipment(1,900) —
Gain on Sales of OREO(321,687) (841,728)
Write Down on OREO68,121
 40,000
Amortization of Deferred Loan Costs127,058
 88,054
Proceeds From Sale of Loans Held For Sale33,301,781
 23,896,772
Origination of Loans Held For Sale(29,434,231) (24,920,171)
Decrease (Increase) in Accrued Interest Receivable:   
Loans102,016
 38,341
Mortgage-Backed Securities17,509
 (14,884)
Investment Securities(308,595) 90,706
Increase in Advance Payments By Borrowers408,911
 379,234
Other, Net594,400
 2,244,880
Net Cash Provided By Operating Activities$12,350,721
 $9,335,756
    
CASH FLOWS FROM INVESTING ACTIVITIES:   
Purchase of Mortgage-Backed Securities Available For Sale ("AFS")$(42,875,234) $(37,793,135)
Proceeds from Payments and Maturities of Mortgage-Backed Securities AFS28,487,010
 23,942,058
Proceeds From Sale of Mortgage-Backed Securities AFS19,003,897
 3,082,591
Purchase of Mortgage-Backed Securities Held To Maturity ("HTM")—
 (1,507,125)
Proceeds from Payments and Maturities of Mortgage-Backed Securities HTM2,836,011
 3,496,657
Purchase of Investment Securities AFS(75,688,312) (30,233,311)
Proceeds from Payments and Maturities of Investment Securities AFS17,854,087
 18,402,244
Proceeds From Sale of Investment Securities AFS27,825,020
 18,410,863
Purchase of Investment Securities HTM(3,997,750) —
Proceeds from Payments and Maturities of Investment Securities HTM1,000,000
 —
Proceeds From Redemption of Certificates of Deposits with Other Banks1,095,000
 —
Purchase of FHLB Stock(5,129,700) (5,014,800)
Redemption of FHLB Stock5,432,500
 4,554,900
Purchase of BOLI(2,000,000) —
Proceeds From BOLI Death Benefit1,463,285
 —
Increase in Loans Receivable(19,680,925) (19,976,753)
Proceeds From Sale of OREO1,558,891
 3,159,524
Purchase and Improvement of Premises and Equipment(2,769,640) (1,599,727)
Proceeds From Sale of Premises and Equipment1,900
 —
Net Cash Used By Investing Activities$(45,583,960) $(21,076,014)

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited) (Continued)
    
 Nine Months Ended September 30,
 2017 2016
CASH FLOWS FROM FINANCING ACTIVITIES:   
Increase (Decrease) in Deposit Accounts$47,510,082
 $(1,798,293)
Proceeds from FHLB Advances157,576,000
 251,755,000
Repayment of FHLB Advances(164,971,000) (240,395,000)
Increase in Other Borrowings, Net3,017,664
 6,185,542
Repayment of Note Payable(3,300,000) —
Purchase of Senior Convertible Debentures(20,000) —
Dividends to Preferred Stock Shareholders—
 (330,000)
Dividends to Common Stock Shareholders(795,277) (706,914)
Net Cash Provided By Financing Activities$39,017,469
 $14,710,335
Net Increase in Cash and Cash Equivalents5,784,230
 2,970,077
Cash and Cash Equivalents at Beginning of Period9,374,549
 8,381,951
Cash and Cash Equivalents at End of Period$15,158,779
 $11,352,028
    
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:   
Cash Paid During The Period For:   
Interest$2,937,283
 $2,565,836
Income Taxes$1,162,000
 $572,242
Supplemental Schedule of Non Cash Transactions:   
Transfers From Loans Receivable to OREO$491,748
 $323,730


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


6


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
March 31,
 20232022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income$2,674,100 $1,549,031 
Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:
Depreciation Expense518,033 491,565 
Discount Accretion and Premium Amortization, net1,160,223 1,975,822 
Provision for Credit Losses— — 
Earnings on BOLI(150,204)(157,241)
Gain on Sales of Loans(193,881)(713,893)
Write Down of Land Held for Sale— 339,344 
Amortization of Operating Lease ROU Assets113,053 106,852 
Proceeds From Sale of Loans Held For Sale6,736,663 20,285,158 
Origination of Loans Held For Sale(5,870,365)(19,118,235)
Increase in Accrued Interest Receivable(549,013)(102,987)
Other, Net1,525,330 902,012 
Net Cash Provided By Operating Activities$5,963,939 $5,557,428 
CASH FLOWS FROM INVESTING ACTIVITIES:  
Purchase of Investments AFS$(3,487,262)$(43,978,806)
Proceeds from Paydowns and Maturities of Investments AFS18,739,220 30,072,755 
Purchase of Investments HTM(15,587,496)— 
Proceeds from Paydowns and Maturities of Investments HTM2,895,475 1,391,444 
Purchase of FHLB Stock(8,000)(64,800)
Increase in Loans Receivable(26,764,068)(5,315,638)
Purchase and Improvement of Premises and Equipment(1,233,098)(1,223,499)
Net Cash Used By Investing Activities$(25,445,229)$(19,118,544)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) Increase in Deposit Accounts$(1,411,787)$9,972,359 
Increase in Other Borrowings, Net229,656 7,466,530 
Proceeds from FRB Borrowings324,005,000 109,025,000 
Repayment of FRB Borrowings(306,710,000)(109,025,000)
Proceeds from Employee Stock Purchase Plan8,414 — 
Dividends to Common Stock Shareholders(422,917)(390,346)
Net Cash Provided By Financing Activities$15,698,366 $17,048,543 
Net (Decrease) Increase in Cash and Cash Equivalents(3,782,924)3,487,427 
Cash and Cash Equivalents at Beginning of Period28,502,364 27,622,851 
Cash and Cash Equivalents at End of Period$24,719,440 $31,110,278 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:  
Cash Paid for Interest$3,644,472 $402,484 
Non-Cash Transactions: 
Other Comprehensive Income (Loss)5,577,801 (20,222,858)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements







1. Basis of Presentation

NOTE 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 ("U.S. 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”) 20162022 Annual Report to Shareholders which was filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 20162022 (“20162022 10-K”) when reviewing interim financial statements. The unaudited consolidated results of operations for the ninethree months ended September 30, 2017March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2023 or any other period. 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

NOTE 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 Investments, Inc. ("SFINV") and Security Federal Insurance, Inc. (“SFINS”) and Security Financial Services Corporation (“SFSC”). SFINSSFINV was formed during fiscal 2002to hold investment securities and began operating duringallow for better management of the December 2001 quarter andsecurities portfolio. SFINS is an insurance agency offering auto, business, 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. SFSC was formed in 1975 and 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

NOTE 3 - SUMMARY OF SIGNIFICANT 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, 20162022 included in our 20162022 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. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the following:


TheAccounting Standards Adopted in 2023
On January 1, 2023, the Company believesadopted Accounting Standards Update (“ASU”) 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments Accounting Standards Codification (“ASC”) 326. This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an 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 chargedcredit losses.

In addition, CECL made changes to the related allowance and all recoveries are creditedaccounting for available for sale debt securities. One such change is 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 loanrequire credit losses to the outstanding loans, loss experience, delinquency trends,be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and general economic conditions.  Management evaluates the carrying value of the loans periodically and the allowancedoes not believe that it is adjusted accordingly.more likely than not, they will be required to sell.




8



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 valuesadopted ASC 326 and all related subsequent amendments thereto effective January 1, 2023 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. The transition adjustment of the adoption of CECL included an increase in the allowance for credit losses on loans of $784,000, which is presented as a reduction to net loans outstanding, and an increase in the allowance for credit losses on unfunded loan commitments of $1.2 million, which is recorded within "Other Liabilities." The adoption of CECL had an insignificant impact on the Company's held to maturity and available for sale securities portfolios. The Company recorded a net decrease to retained earnings of $1.6 million as of January 1, 2023 for the cumulative effect of adopting CECL, which reflects the transition adjustments noted above, net of the applicable deferred tax assets recorded. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”).

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available for sale securities was not deemed material.

The Company elected not to measure an allowance for credit losses for accrued interest receivable and instead elected to reverse interest income on loans or securities that are placed on nonaccrual status, which is generally when the instrument is 90 days past due, or earlier if the Company believes the collection of interest is doubtful. The Company has concluded that this policy results in the timely reversal of uncollectible interest.

Allowance for Credit Losses – Held to Maturity Securities
Management measures expected credit losses on held to maturity debt securities on a collective basis by major security type. Accrued interest receivable on held to maturity debt securities totaled $941,000 at March 31, 2023 and was excluded from the loan’s fair value ifestimate of credit losses.

The estimate of expected credit losses is primarily based on the ratings assigned to the securities by debt rating agencies and the average of the annual historical loss rates associated with those ratings. The Company then multiplies those loss rates, as adjusted for any modifications to reflect current conditions and reasonable and supportable forecasts as considered necessary, by the remaining lives of each individual security to arrive at a lifetime expected loss amount. Additionally, private label collateralized mortgage obligation ("CMO") securities which are not explicitly or implicitly guaranteed by the U.S. government are evaluated utilizing underlying pool data such as historical loss rates, loan-to-value ratios and credit enhancement data. See "Note 7 - Investments Held to Maturity" with regards to the held to maturity portfolio major security types.

All mortgage-backed securities issued by government-sponsored corporations are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The state and local governments securities held by the Company are highly rated by major rating agencies.

As a result, no allowance for credit losses was recorded on held to maturity securities at March 31, 2023.

Allowance for Credit Losses – Available for Sale Securities
For available for sale securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Company has the intent to sell the security or it is probablemore likely than not that the Company will be unablerequired to collect all amounts due accordingsell the security, the security is written down to fair value and the entire loss is recorded in earnings.

If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making the assessment, the Company may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the terms ofsecurity. If the loan agreement atassessment indicates that a credit loss exists, the present value of expected cash flows expected to be collected are compared to the market priceamortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.


9


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



Changes in the allowance for credit loss are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit loss when management believes an available for sale security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2023, there was no allowance for credit loss related to the available for sale portfolio.

Accrued interest receivable on available for sale debt securities totaled $2.9 million at March 31, 2023 and was excluded from the estimate of credit losses.

Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts and deferred fees and costs. Accrued interest receivable related to loans is reported in accrued interest receivable on the consolidated balance sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using methods that approximate a level yield without anticipating prepayments.

The accrual of interest is generally discontinued when a loan ifbecomes 90 days past due and is not well collateralized and in the process of collection, or when management believes, after considering economic and business conditions and collection efforts, that the principal or interest will not be collectible in the normal course of business. Past due status is based on contractual terms of the loan. A loan is considered to be past due when a scheduled payment has not been received 30 days after the contractual due date.

All accrued interest is reversed against interest income when a loan is placed on nonaccrual status. Interest received on such loans is accounted for using the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, there is a sustained period of repayment performance, and future payments are reasonably assured.

Allowance for Credit Losses - Loans
The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Accrued interest receivable is excluded from the estimate of credit losses.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

The Company measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Company has identified the following portfolio segments:

Real Estate
•Construction - Construction loans consist of loans to construct a borrower’s primary or secondary residence or vacant land upon which the owner intends to construct a dwelling at a future date. These loans are typically secured by undeveloped or partially developed land in anticipation of completing construction of a 1-4 family residential property. There is risk these construction and development projects can experience delays and cost overruns exceeding the borrower’s financial ability to complete the project. Such cost overruns can result in foreclosure of partially completed and unmarketable collateral. In addition, construction loans consist of loans to finance land for development of commercial or residential real property and construction of multifamily apartments or other commercial properties. These loans are highly dependent on the supply and demand for commercial real estate as well as the demand for newly constructed residential homes and lots acquired for development. Deterioration in demand could result in decreased collateral values, which could make repayments of outstanding loans difficult for customers.
•Residential Mortgage - Residential mortgages consist of loans to purchase or refinance the borrower’s primary dwelling, second residence or vacation home and are often secured by 1-4 family residential property. Significant and rapid declines in real estate values can result in borrowers having debt levels in excess of the current market value of the underlying collateral.  Expectedcollateral
10


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



•Commercial - Owner occupied commercial mortgages consist of loans to purchase or re-finance owner occupied nonresidential properties. This includes office buildings, other commercial facilities, and farmland. Commercial mortgages secured by owner occupied properties are primarily dependent on the ability of borrowers to achieve business results consistent with those projected at loan origination. While these loans and leases are collateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation. Non-owner occupied commercial mortgages consist of loans to purchase or refinance investment nonresidential properties. This includes office buildings and other facilities rented or leased to unrelated parties, as well as farmland and multifamily properties. The primary risk associated with income producing commercial mortgage loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flowsflow to service the debt. While these loans and leases are requiredcollateralized by real property in an effort to mitigate risk, it is possible the liquidation of collateral will not fully satisfy the obligation.
Commercial and Agricultural - Commercial business loans consist of loans or lines of credit to finance accounts receivable, inventory or other general business needs, business credit cards, and lease financing agreements for equipment, vehicles, or other assets. The primary risk associated with commercial and industrial and lease financing loans is the ability of borrowers to achieve business results consistent with those projected at origination. Failure to achieve these projections presents risk the borrower will be discounted atunable to service 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 underdebt consistent with the contractual terms of the loan agreementor lease.

Consumer loans
•Home equity - Home equity loans consist of home equity lines of credit and other lines of credit secured by first or second liens on the borrower’s primary residence. These loans are secured by both senior and junior liens on the residential real estate and are particularly susceptible to interestdeclining collateral values. This risk is elevated for loans secured by junior lines as a substantial decline in value could render the junior lien position effectively unsecured.
•Other - Consumer loans consist of loans to finance unsecured home improvements, student loans, automobiles and then to principal.  Oncerevolving lines of credit that can be secured or unsecured. The value of the recorded principal balance has been reduced to zero, future cash receipts are applied to interest income tounderlying collateral within this class is at risk of potential rapid depreciation which could result in unpaid balances in excess of the extent that any interest has been foregone.  Further cash receipts are recorded as recoveries of any amounts previously charged off.collateral.


The Company calculates the allowance for credit losses for each pool using a remaining life loss methodology with a two quarter reasonable and supportable forecast period and an immediate reversion period. Management believes that the Company’s historical loss experience provides the best basis for its assessment of expected credit losses to determine the allowance for credit losses. The Company uses assumptionsits own internal data to measure historical credit loss experience within the pools with similar risk characteristics over an economic cycle. The Company then forecasts the calculated historical loss rates over the calculated remaining life of loans by pool.

Additionally, the allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments may increase or reduce reserve levels and estimatesinclude adjustments for lending management experience and risk tolerance, loan review and audit results, asset quality and portfolio trends, loan portfolio growth, industry concentrations, trends in determiningunderlying collateral, external factors and economic conditions not already captured.

Loans that do not share risk characteristics are evaluated on an individual basis. When management determines that foreclosure is probable and the borrower is experiencing financial difficulty, the expected credit losses are based on the fair value of collateral at the reporting dated adjusted for selling costs as appropriate.

Allowance for Credit Losses – Unfunded Commitments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.





11


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to provision for unfunded commitments in the Company’s income taxes payable or refundablestatements. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for unfunded commitments is included in other liabilities on the Company’s consolidated balance sheets.

In January 2023, the Company adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminated the accounting guidance for troubled debt restructurings (“TDRs”) while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. In addition, for public business entities, the guidance requires disclosure of current-period gross write-offs by year deferred income tax liabilitiesof origination for financing receivables and assetsnet investments in leases within the scope of Subtopic 326-20. The Company adopted the guidance using the modified retrospective method. Upon adoption of this guidance, the Company no longer establishes a specific reserve for events recognized differentlymodifications to borrowers experiencing financial difficulty. Instead, these modifications are included in their respective cohort and a historical loss rate is applied to the current loan balance to arrive at the quantitative baseline portion of the allowance. The difference between the allowance previously determined and the current allowance was not material to the Company’s financial statements.

Recent Accounting Pronouncements
The following is a summary of recent authoritative pronouncements that could affect accounting, reporting, and disclosure of financial information by the Company:

In December 2022, the Financial Accounting Standards Board (“FASB”) issued amendments to extend the period of time preparers can use the reference rate reform relief guidance under ASC Topic 848 from December 31, 2022, to December 31, 2024, to address the fact that all London Interbank Offered Rate ("LIBOR") tenors were not discontinued as of December 31, 2021, and some tenors will be published until June 2023. The amendments are effective immediately for all entities and are applied prospectively. The Company does not expect these amendments to have a material effect on 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 evaluatingstatements.

Other accounting standards that have been issued or proposed by the amount and timing of recognition of the resulting tax liabilities and assets. These judgments and estimatesFASB or other standards-setting authorities are reevaluated onnot expected to have 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 reportedmaterial impact on the Consolidated Financial Statements will not be adjusted by either adverse rulings by the United States Tax Court, changes in the tax code,Company’s consolidated financial position, results of operations or assessments made by the Internal Revenue Service.cash flows.



4. Earnings Per Common Share

NOTE 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. All of theThere were no stock options outstanding at September 30, 2017 had an exercise price below the average market price during the threeMarch 31, 2023 or 2022; and nine months ended September 30, 2017. Therefore, thesetherefore, no dilutive options were considered to be dilutive toincluded in the calculation of diluted EPS infor those periods. None of the options outstanding at September 30, 2016 had an exercise price below the average market price during the three or nine month periods ended September 30, 2016. Therefore, these options were not deemed to be dilutive to EPS in those periods.

Net income available to common shareholders represents consolidated net income adjusted for preferred dividends declared, accretions of discounts and amortization of premiums on preferred stock issuances and cumulative dividends related to the current dividend period that have not been declared as of period end. The following table provides a reconciliation of net income to net income available to common shareholders for the periods presented:
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Earnings Available To Common Shareholders:       
Net Income$1,902,902
 $1,779,731
 $5,009,467
 $5,062,748
Preferred Stock Dividends—
 110,000
 —
 330,000
Net Income Available To Common Shareholders$1,902,902
 $1,669,731
 $5,009,467
 $4,732,748



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




4. Earnings Per Common Share, Continued

The following tables include a summary of the Company's basic and diluted EPS for the periods indicated.

Three Months Ended March 31,
20232022
IncomeSharesEPSIncomeSharesEPS
Basic EPS$2,674,100 3,253,112 $0.82 $1,549,031 3,252,884 $0.48 

 Three Months Ended September 30,
 2017 2016
 Income Shares Per Share Amounts Income Shares Per Share Amounts
Basic EPS$1,902,902
 2,945,474
 $0.65
 $1,669,731
 2,944,001
 $0.57
Effect of Dilutive Securities:           
Stock Options—
 3,762
 (0.01) —
 —
 —
Senior Convertible Debentures75,266
 303,200
 (0.03)
 75,442
 304,200
 (0.03)
Unvested Restricted Stock—
 —
 —
 —
 325
 —
Diluted EPS$1,978,168
 3,252,436
 $0.61
 $1,745,173
 3,248,526
 $0.54

 Nine Months Ended September 30,
 2017 2016
 Income Shares Per Share Amounts Income Shares Per Share Amounts
Basic EPS$5,009,467
 2,945,215
 $1.70
 $4,732,748
 2,944,001
 $1.61
Effect of Dilutive Securities:           
Stock Options—
 3,251
 (0.01) —
 —
 —
Senior Convertible Debentures226,149
 303,200
 (0.08)
 226,325
 304,200
 (0.07)
Unvested Restricted Stock—
 —
 —
 —
 273
 (0.01)
Diluted EPS$5,235,616
 3,251,666
 $1.61
 $4,959,073
 3,248,474
 $1.53


5. Stock-Based Compensation

NOTE 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. The following is a summary ofAt March 31, 2023 and 2022, the Company had no options outstanding and there was no activity underduring the Company’s stock option plansthree months ended March 31, 2023 and 2022. At those dates, there were 50,000 options available for the periods presented:

grants.
12
 Three Months Ended September 30,
 2017 2016
 SharesWeighted Average Exercise Price SharesWeighted Average Exercise Price
  
Balance, Beginning of Period19,500
$23.49 25,000
$23.50
Options Forfeited(1,000)24.61 (3,500)23.03
Balance, End of Period18,500
$23.43 21,500
$23.57








SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements








NOTE 6 - INVESTMENTS, AVAILABLE FOR SALE ("AFS")
5. Stock-Based Compensation, Continued

 Nine Months Ended September 30,
 2017 2016
 Shares Weighted Average Exercise Price Shares Weighted Average Exercise Price
    
Balance, Beginning of Period21,500
 $23.57 29,500
 $23.55
Options Forfeited(3,000) 24.43 (8,000) 23.47
Balance, End of Period18,500
 $23.43 21,500
 $23.57
        
Options Exercisable18,500
   17,800
  
        
Options Available For Grant50,000
   50,000
  


At September 30, 2017, the Company had the following options outstanding:

Grant Date Outstanding Options Option Price Expiration Date
10/01/07 2,000 $24.28 10/01/17
       
01/01/08 12,000 $23.49 01/01/18
       
05/19/08 2,500 $22.91 05/18/18
       
07/01/08 2,000 $22.91 07/01/18





SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



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 saleinvestments AFS at the dates indicated were as follows:
 March 31, 2023
 Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Student Loan Pools$57,131,715 $6,090 $1,303,979 $55,833,826 
Small Business Administration (“SBA”) Bonds94,018,900 508,204 2,831,043 91,696,061 
Tax Exempt Municipal Bonds21,550,469 593,719 1,224,676 20,919,512 
Taxable Municipal Bonds64,729,848 — 11,794,778 52,935,070 
Mortgage-Backed Securities ("MBS")350,265,323 39,438 30,619,157 319,685,604 
Total Available For Sale$587,696,255 $1,147,451 $47,773,633 $541,070,073 
 December 31, 2022
 Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Student Loan Pools$60,854,658 $11,647 $1,709,323 $59,156,982 
SBA Bonds102,292,600 584,290 3,246,923 99,629,967 
Tax Exempt Municipal Bonds22,536,806 405,341 1,631,819 21,310,328 
Taxable Municipal Bonds65,249,883 — 14,480,144 50,769,739 
MBS353,223,361 29,861 33,971,954 319,281,268 
Total Available For Sale$604,157,308 $1,031,139 $55,040,163 $550,148,284 
 September 30, 2017
 Amortized Cost 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
Federal Home Loan Mortgage Corporation (“FHLMC”) Bond$968,436
 $—
 $2,790
 $965,646
Small Business Administration (“SBA”) Bonds123,756,916
 1,186,563
 139,930
 124,803,549
Tax Exempt Municipal Bonds78,068,936
 3,175,211
 429,120
 80,815,027
Taxable Municipal Bonds2,017,913
 —
 5,323
 2,012,590
Mortgage-Backed Securities177,751,622
 2,548,619
 465,620
 179,834,621
State Tax Credit56,800
 —
 —
 56,800
Equity Securities155,000
 —
 —
 155,000
Total Available For Sale$382,775,623
 $6,910,393
 $1,042,783
 $388,643,233
        
 December 31, 2016
 Amortized Cost Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair Value
FHLB Bonds$998,001
 $—
 $1
 $998,000
SBA Bonds101,280,921
 909,361
 284,223
 101,906,059
Tax Exempt Municipal Bonds72,248,915
 1,185,753
 1,899,519
 71,535,149
Taxable Municipal Bonds2,021,192
 —
 30,062
 1,991,130
Mortgage-Backed Securities183,657,697
 2,575,616
 972,222
 185,261,091
Equity Securities250,438
 117,562
 —
 368,000
Total Available For Sale$360,457,164
 $4,788,292
 $3,186,027
 $362,059,429


The FHLMC and FHLBStudent Loan Pools are typically 97% guaranteed by the United States government sponsored enterprises ("GSEs") and the securities andwhile SBA bonds issued by GSEs are not100% backed by the full faith and credit of the United States government. SBA bondsThe majority of the MBS included in the tables above and below are issued or guaranteed by an agency of the United States government such as Ginnie Mae, or by Government Sponsored Entities ("GSEs"), including Fannie Mae and Freddie Mac. Ginnie Mae MBS are backed by the full faith and credit of the United States government. Included in the tables above and below in mortgage-backed securitiesgovernment, while those issued by GSEs 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 September 30, 2017 the Bank held AFS GNMA mortgage-backed securities with an amortized cost and fair value of $93.0 million and $94.2 million, respectively, compared to an amortized cost and fair value of $107.9 million and $109.2 million, respectively, at December 31, 2016.

not. Also included in mortgage-backed securitiesMBS 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 September 30, 2017March 31, 2023, the BankCompany held AFS private label CMO mortgage-backed securities with both an amortized cost and fair value of $31.2$61.3 million and $54.8 million in private label CMO securities, compared to an amortized cost and fair value of $20.0$60.1 million and $19.7$53.8 million respectively, at December 31, 2016.2022, respectively. There was no allowance for credit losses recorded on investments AFS as of March 31, 2023.











SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




6. Investment and Mortgage-Backed Securities, Available For Sale, Continued


The amortized cost and fair value of investment and mortgage-backed securities available for saleinvestments AFS at September 30, 2017March 31, 2023 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 securitiesMBS 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.
March 31, 2023
Investments AFS:Amortized CostFair Value
One Year or Less$17,789 $17,640 
After One – Five Years4,587,262 4,529,933 
After Five – Ten Years74,277,652 70,811,848 
More Than Ten Years158,548,229 146,025,048 
MBS AFS350,265,323 319,685,604 
Total AFS$587,696,255 $541,070,073 

13


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



 September 30, 2017
Investment Securities:Amortized Cost Fair Value
One Year or Less$190,589
 $190,501
After One – Five Years14,816,156
 14,930,955
After Five – Ten Years47,080,250
 47,638,450
More Than Ten Years142,937,006
 146,048,706
Mortgage-Backed Securities177,751,622
 179,834,621
Total Available For Sale$382,775,623
 $388,643,233


At September 30, 2017March 31, 2023, the amortized cost and fair value of investment and mortgage-backed securities available for saleinvestments AFS pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were $97.6$374.3 million and $99.5$348.3 million, respectively, compared to an amortized cost and fair value of $75.3$318.0 million and $76.9$297.0 million respectively, at December 31, 2016.2022, respectively.


The Bank received $29.3 million and $6.9 million in gross proceeds fromThere were no sales of available for sale securitiesinvestments AFS during the three months ended September 30, 2017March 31, 2023 and 2016, respectively. As a result, the Bank recognized gross gains of $241,0002022; and $360,000, respectively, and gross losses of $162,000 and $0, respectively, for the same periods.

During the nine months ended September 30, 2017 and 2016, the Bank received $46.8 million and $21.5 million, respectively, in grosstherefore, no proceeds from sales, of available for sale securities. As a result, the Bank recognized gross gains of $870,000 and $772,000, respectively, with $162,000 and $0or gross losses recognized for the samewere recorded during those periods.

The following tables showtable shows the gross unrealized losses and estimated fair value of available sale securities for which an allowance for credit losses has not been recorded aggregated by investment category and length of time that the individual available for sale securities have been in a continuous unrealized loss position at March 31, 2023.
 March 31, 2023
 Less than 12 Months12 Months or MoreTotal
 Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
Student Loan Pools$6,532,605 $96,105 $44,272,894 $1,207,874 $50,805,499 $1,303,979 
SBA Bonds3,627,220 18,733 44,567,268 2,812,310 48,194,488 2,831,043 
Tax Exempt Municipal Bonds519,710 9,017 12,819,506 1,215,659 13,339,216 1,224,676 
Taxable Municipal Bonds— — 52,935,070 11,794,778 52,935,070 11,794,778 
MBS19,109,549 801,062 298,058,704 29,818,095 317,168,253 30,619,157 
 $29,789,084 $924,917 $452,653,442 $46,848,716 $482,442,526 $47,773,633 

The following table shows the dates indicated.gross unrealized losses and estimated fair value of available sale securities aggregated by category and length of time that securities have been in a continuous unrealized loss position at December 31, 2022.

 December 31, 2022
 Less than 12 Months12 Months or MoreTotal
 Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
Student Loan Pools$24,768,260 $637,963 $30,684,124 $1,071,360 $55,452,384 $1,709,323 
SBA Bonds8,403,975 120,766 45,969,373 3,126,157 54,373,348 3,246,923 
Tax Exempt Municipal Bonds8,050,944 718,645 4,929,289 913,174 12,980,233 1,631,819 
Taxable Municipal Bonds14,427,796 3,196,761 36,341,943 11,283,383 50,769,739 14,480,144 
MBS146,016,464 11,132,554 170,578,059 22,839,400 316,594,523 33,971,954 
 $201,667,439 $15,806,689 $288,502,788 $39,233,474 $490,170,227 $55,040,163 
 September 30, 2017
 Less than 12 Months 12 Months or More Total
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
FHLMC Bond$965,646
$2,790
 $—
$—
 $965,646
$2,790
SBA Bonds22,776,378
102,708
 6,857,393
37,222
 29,633,771
139,930
Tax Exempt Municipal Bonds6,094,283
73,787
 10,341,319
355,333
 16,435,602
429,120
Taxable Municipal Bonds2,012,590
5,323
 —
—
 2,012,590
5,323
Mortgage-Backed Securities46,108,221
323,710
 13,021,339
141,910
 59,129,560
465,620
 $77,957,118
$508,318
 $30,220,051
$534,465
 $108,177,169
$1,042,783











SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




6. Investment and Mortgage-Backed Securities, Available For Sale, Continued

 December 31, 2016
 Less than 12 Months 12 Months or More Total
 Fair
Value		Unrealized
Losses		 Fair
Value		Unrealized
Losses		 Fair
Value		Unrealized
Losses
FHLB Securities$998,000
$1
 $—
$—
 $998,000
$1
SBA Bonds28,490,243
228,432
 8,212,824
55,791
 36,703,067
284,223
Tax Exempt Municipal Bonds47,405,066
1,899,519
 —
—
 47,405,066
1,899,519
Taxable Municipal Bond1,991,130
30,062
 —
—
 1,991,130
30,062
Mortgage-Backed Securities62,738,366
916,699
 5,600,262
55,523
 68,338,628
972,222
 $141,622,805
$3,074,713
 $13,813,086
$111,314
 $155,435,891
$3,186,027


Securities classified as available for saleinvestments AFS are recorded at fair market value.  At September 30, 2017March 31, 2023 and December 31, 2016, 51.3%2022, 411 and 3.5% of the unrealized losses, representing 28 and 15416 individual securities, respectively, consisted of securitiesinvestments AFS were in a continuousloss position, including 339 and 211 securities that were in a loss position for greater than 12 months, or more.respectively. The Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature.  The decrease in unrealized losses within the AFS portfolio during the three months ended March 31, 2023 resulted in a $1.4 million decrease in net deferred taxes, which is included in "Other Assets" on the Consolidated Balance Sheets at March 31, 2023.

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, theseunrealized losses arehave not considered other-than-temporary.been recognized into income. 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”).

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 allowan allowance for an anticipated recovery in market value. If the review determines that there is OTTI, then an impairmentcredit loss is recognized in earnings equaldeemed necessary.

Accrued interest receivable on available for sale debt securities totaled $2.9 million at March 31, 2023 and was excluded from the estimate of credit losses.

14


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to the entire difference between the investment’s cost and its fair valueConsolidated Financial Statements




NOTE 7 - INVESTMENTS, HELD TO MATURITY ("HTM")
The Company’s investments HTM portfolio is recorded 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 nine months ended September 30, 2017.

7. Investment and Mortgage-Backed Securities, Held to Maturity

amortized cost. The amortized cost, gross unrealized gains, gross unrealized losses, and fair values of held to maturity securitiesinvestments HTM at the datesdate indicated below were as follows:
 September 30, 2017
  Amortized Cost 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
FHLB Bonds$2,000,000
 $—
 $2,040
 $1,997,960
FHLMC Bonds997,997
 1,707
 —
 999,704
Mortgage-Backed Securities (1)
22,339,969
 249,124
 18,414
 22,570,679
Total Held To Maturity$25,337,966
 $250,831
 $20,454
 $25,568,343
 
 December 31, 2016
  Amortized Cost Gross
Unrealized
Gains		 Gross
Unrealized
Losses		 Fair Value
Mortgage-Backed Securities (1)$25,583,956
 $63,342
 $276,246
 $25,371,052
Total Held To Maturity$25,583,956
 $63,342
 $276,246
 $25,371,052
 March 31, 2023
Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
US Treasury Bonds$34,600,540 $— $486,165 $34,114,375 
FHLB Bond1,000,000 — 4,852 995,148 
Student Loan Pools18,494,187 100,836 67,488 18,527,535 
SBA Bonds15,448,896 716,125 — 16,165,021 
Taxable Municipal Bonds954,460 — 42,860 911,600 
MBS109,680,425 47,045 4,588,424 105,139,046 
Total Held To Maturity$180,178,508 $864,006 $5,189,789 $175,852,725 
December 31, 2022
Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
US Treasury Bonds$34,511,849 $— $682,198 $33,829,651 
FHLB Bond1,000,000 — 1,360 998,640 
Student Loan Pools16,387,997 88,489 59,090 16,417,396 
SBA Bonds3,521,293 162,235 — 3,683,528 
Taxable Municipal Bonds951,864 — 60,134 891,730 
MBS111,064,613 29,194 5,451,179 105,642,628 
Total HTM$167,437,616 $279,918 $6,253,961 $161,463,573 
(1) COMPRISED OF MORTGAGE-BACKED SECURITIES OF GSEs OR GNMA
At March 31, 2023 and December 31, 2022, 49 and 54 individual investments HTM were in a loss position, including 13 and six securities that were in a loss position for greater than 12 months, respectively. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value was attributable to changes in market interest rates and was not in the credit quality of the issuer. The Company has the ability and intent to hold these securities to maturity.

The estimate of expected credit losses is primarily based on the ratings assigned to the securities by debt rating agencies and the average of the annual historical loss rates associated with those ratings. The Company then multiplies those loss rates, as adjusted for any modifications to reflect current conditions and reasonable and supportable forecasts as considered necessary, by the remaining lives of each individual security to arrive at a lifetime expected loss amount. Additionally, private label collateralized mortgage obligation ("CMO") securities which are not explicitly or implicitly guaranteed by the U.S. government are evaluated utilizing underlying pool data such as historical loss rates, loan-to-value ratios and credit enhancement data.

All mortgage-backed securities issued by government-sponsored corporations are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies and have a long history of no credit losses. The state and local governments securities held by the Company are highly rated by major rating agencies.

As a result of the analysis, there was no allowance for credit losses recorded for investments HTM as of March 31, 2023.

As of March 31, 2023, there were no debt securities held to maturity that were classified as either nonaccrual or 90 days or more past due and still accruing.

Accrued interest receivable on held to maturity debt securities totaled $1 million at March 31, 2023 and was excluded from the estimate of credit losses.


15



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements






7. Investment and Mortgage-Backed Securities, Held to Maturity, Continued

At September 30, 2017, the Bank held an amortized cost and fair value of $13.9 million and $14.1 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 $16.3 million and $16.2 million, respectively, at December 31, 2016. The Company has not invested in any private label mortgage-backed securities classified as held to maturity.

At September 30, 2017, 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 $23.4 million and $23.7 million, respectively, compared to an amortized cost and fair value of $23.2 million and $23.0 million, respectively, at December 31, 2016.

The amortized cost and fair value of investment and mortgage-backed securities held to maturity at September 30, 2017 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.
 September 30, 2017
Investment Securities:Amortized Cost Fair Value
One – Five Years$2,997,997
 $2,997,664
Mortgage-Backed Securities22,339,969
 22,570,679
 Total Held to Maturity$25,337,966
 $25,568,343


The following tables show gross unrealized losses, fair value, and length of time that individual held to maturity securitiesinvestments HTM have been in a continuous unrealized loss position at the dates indicated below.indicated.
 March 31, 2023
 Less than 12 Months12 Months or MoreTotal
 Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
US Treasury Bonds$34,114,375 $486,165 $— $— $34,114,375 $486,165 
FHLB Bond995,148 4,852 — — 995,148 4,852 
Student Loan Pools4,790,881 67,488 — — 4,790,881 67,488 
Taxable Municipal Bonds911,600 42,860 — — 911,600 42,860 
MBS72,819,297 2,070,120 13,895,073 2,518,304 86,714,370 4,588,424 
 $113,631,301 $2,671,485 $13,895,073 $2,518,304 $127,526,374 $5,189,789 
December 31, 2022
Less than 12 Months12 Months or MoreTotal
Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses
US Treasury Bonds$33,829,651 $682,198 $— $— $33,829,651 $682,198 
FHLB Bond998,640 1,360 — — 998,640 1,360 
Student Loan Pools6,520,050 59,090 — — 6,520,050 59,090 
Taxable Municipal Bonds891,730 60,134 — — 891,730 60,134 
MBS88,351,096 3,145,166 9,334,438 2,306,013 97,685,534 5,451,179 
$130,591,167 $3,947,948 $9,334,438 $2,306,013 $139,925,605 $6,253,961 

At March 31, 2023, the amortized cost and fair value of investments HTM that were pledged as collateral for certain deposit accounts, FHLB advances and other borrowings were $57.1 million and $55.0 million, respectively, compared to an amortized cost and fair value of $25.3 million and $24.5 million, respectively, at December 31, 2022.























16
 September 30, 2017
 Less than 12 Months 12 Months or More Total
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
 
Fair
Value
Unrealized
Losses
FHLB Bonds$1,997,960
$2,040
 $—
$—
 $1,997,960
$2,040
Mortgage-Backed Securities (1)
889,172
811
 1,424,142
17,603
 2,313,314
18,414
 $2,887,132
$2,851
 $1,424,142
$17,603
 $4,311,274
$20,454

(1) COMPRISED OF MORTGAGE-BACKED SECURITIES OF GSEs OR GNMA
 December 31, 2016
 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)
$15,447,596
$276,246
 $—
$—
 $15,447,596
$276,246
 $15,447,596
$276,246
 $—
$—
 $15,447,596
$276,246
(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.




SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements






NOTE 8 - LOANS RECEIVABLE, NET
8.    Loans Receivable, Net


Loans receivable, net, consisted of the following as of the dates indicated below:
 September 30, 2017 December 31, 2016
Residential Real Estate Loans$79,106,075
 $77,979,909
Consumer Loans56,864,234
 50,667,894
Commercial Business Loans23,496,773
 16,279,177
Commercial Real Estate Loans228,182,149
 222,599,294
Total Loans Held For Investment387,649,231
 367,526,274
Loans Held For Sale1,270,410
 4,243,907
Total Loans Receivable, Gross$388,919,641
 $371,770,181
Less:   
Allowance For Loan Losses8,169,188
 8,356,231
Loans In Process4,935,647
 3,526,064
Deferred Loan Fees103,338
 165,040
 13,208,173
 12,047,335
Total Loans Receivable, Net$375,711,468
 $359,722,846

March 31, 2023December 31, 2022
Real Estate Loans:
Construction$108,716,018 $112,793,694 
Residential Mortgage131,958,557 110,056,973 
Commercial255,314,563 252,154,475 
Commercial and Agricultural Loans34,864,923 30,647,975 
Consumer Loans:
Home Equity Lines of Credit (HELOC)32,017,283 31,736,676 
Other Consumer24,185,686 23,598,110 
Total Loans Held for Investment, Gross587,057,030 560,987,903 
Less:
Allowance for Credit Losses12,126,810 11,177,753 
Deferred Loan Fees740,511 806,238 
 12,867,321 11,983,991 
Total Loans Receivable, Net$574,189,709 $549,003,912 
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 loancredit 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 loancredit 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.















17


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



The tablesfollowing table presents the Company's recorded investment in loans by credit quality indicators by year of origination as of March 31, 2023.
Term Loans by Year of Origination
Dollars in Thousands20232022202120202019PriorRevolvingTotal
Real Estate - Construction
Pass$3,095 $19,223 $9,564 $2,232 $760 $40,313 $4,999 $80,186 
Caution286 6,875 2,497 288 431 15,645 — 26,022 
Special Mention— 30 39 — — 1,426 — 1,495 
Substandard— — — 140 — 873 — 1,013 
Total3,381 26,128 12,100 2,660 1,191 58,257 4,999 108,716 
Current period gross write-offs— — — — — — — — 
Real Estate - Mortgage
Pass6,970 24,756 11,602 15,090 4,297 27,695 10,441 100,851 
Caution2,754 8,559 5,016 1,609 1,606 5,501 8 25,053 
Special Mention1,338 159 914 362 — 250 — 3,023 
Substandard— — 206 244 52 2,530 — 3,032 
Total11,062 33,474 17,738 17,305 5,955 35,976 10,449 131,959 
Current period gross write-offs— — — — — — — — 
Real Estate - Commercial
Pass4,380 39,104 43,477 14,467 21,036 77,045 2,112 201,621 
Caution1,363 3,945 3,346 6,302 7,214 20,659 100 42,929 
Special Mention— 844 464 792 243 3,426 — 5,769 
Substandard— 72 61 — — 4,863 — 4,996 
Total5,743 43,965 47,348 21,561 28,493 105,993 2,212 255,315 
Current period gross write-offs— — — — — — — — 
Commercial and Agricultural
Pass2,010 8,074 8,882 808 598 3,325 3,918 27,613 
Caution2,122 1,703 1,693 86 25 519 544 6,692 
Special Mention16 52 90 20 1 105 — 284 
Substandard— 24 47 14 15 76 100 276 
Total4,148 9,853 10,712 928 639 4,025 4,562 34,865 
Current period gross write-offs— — 16 — — — — 16 
Home Equity Lines of Credit
Pass— — — — — — 26,274 26,274 
Caution— — — — — — 4,658 4,658 
Special Mention— — — — — — 501 501 
Substandard— — — — — — 584 584 
Total— — — — — — 32,017 32,017 
Current period gross write-offs— — — — — — — — 
Consumer loans
Pass2,190 5,626 2,623 1,221 357 335 4,576 16,928 
Caution1,080 2,957 1,355 764 332 89 269 6,846 
Special Mention— 142 22 — — — 6 170 
Substandard— 59 84 53 31 10 5 242 
Total3,270 8,784 4,084 2,038 720 434 4,856 24,186 
Current period gross write-offs— 10 — — — — 25 35 
Total Loans$27,604 $122,204 $91,982 $44,492 $36,998 $204,685 $59,095 $587,058 

18


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




The table below summarizesummarizes the balance within each risk category by loan type, excluding loans held for sale, at September 30, 2017 and December 31, 2016.2022.
December 31, 2022
 
Pass
 
Caution
Special Mention
 
Substandard
 
Total Loans
Construction Real Estate$91,564,058 $18,837,894 $2,013,824 $377,918 $112,793,694 
Residential Real Estate84,028,037 22,372,649 887,874 2,768,413 110,056,973 
Commercial Real Estate196,063,300 47,821,422 3,270,916 4,998,837 252,154,475 
Commercial and Agricultural25,383,994 4,593,283 371,071 299,627 30,647,975 
Consumer HELOC25,693,252 5,018,419 401,550 623,455 31,736,676 
Other Consumer16,515,206 6,725,317 178,638 178,949 23,598,110 
Total$439,247,847 $105,368,984 $7,123,873 $9,247,199 $560,987,903 
September 30, 2017
 
Pass
 
 
Caution
 
Special
Mention
 
 
Substandard
 
 
Total Loans
Residential Real Estate$70,517,818
 $2,020,878
 $1,378,317
 $5,189,062
 $79,106,075
Consumer52,443,484
 1,738,094
 254,190
 2,428,466
 56,864,234
Commercial Business20,293,905
 1,799,445
 732,917
 670,506
 23,496,773
Commercial Real Estate145,016,591
 61,842,493
 15,929,625
 5,393,440
 228,182,149
Total$288,271,798
 $67,400,910
 $18,295,049
 $13,681,474
 $387,649,231
December 31, 2016
 
Pass
 
 
Caution
 
Special
Mention
 
 
Substandard
 
 
Total Loans
Residential Real Estate$70,503,057
 $665,235
 $1,082,928
 $5,728,689
 $77,979,909
Consumer46,818,650
 2,591,860
 6,357
 1,251,027
 50,667,894
Commercial Business14,731,698
 1,002,170
 50,081
 495,228
 16,279,177
Commercial Real Estate127,068,983
 71,927,031
 18,153,718
 5,449,562
 222,599,294
Total$259,122,388
 $76,186,296
 $19,293,084
 $12,924,506
 $367,526,274





SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



8.Past Due and Nonaccrual Loans Receivable, Net, Continued

The following tables below present an age analysis of past due balances including loans on non-accrual status, by loan category at September 30, 2017the dates indicated.
March 31, 2023
 
30-59 Days
Past Due
 
60-89 Days
Past Due
90 Days or
More Past Due
 
Total Past
Due
 
 
Current
 
Total Loans
Receivable
Construction Real Estate$2,848,456 $421,916 $205,057 $3,475,429 $105,240,589 $108,716,018 
Residential Real Estate1,076,722 103,930 266,093 1,446,745 130,511,812 131,958,557 
Commercial Real Estate649,004 95,678 349,906 1,094,588 254,219,975 255,314,563 
Commercial and Agricultural24,811 5,538 45,349 75,698 34,789,225 34,864,923 
Consumer HELOC285,415 47,683 76,325 409,423 31,607,860 32,017,283 
Other Consumer183,626 58,143 27,530 269,299 23,916,387 24,185,686 
Total$5,068,034 $732,888 $970,260 $6,771,182 $580,285,848 $587,057,030 
December 31, 2022
 
30-59 Days
Past Due
 
60-89 Days
Past Due
90 Days or More Past Due
 
Total Past
Due
 
 
Current
 
Total Loans
Receivable
Construction Real Estate$— $— $100,472 $100,472 $112,693,222 $112,793,694 
Residential Real Estate1,557,114 — 471,430 2,028,544 108,028,429 110,056,973 
Commercial Real Estate2,670,997 89,342 354,406 3,114,745 249,039,730 252,154,475 
Commercial and Agricultural5,683 2,113 55,468 63,264 30,584,711 30,647,975 
Consumer HELOC199,414 — 74,159 273,573 31,463,103 31,736,676 
Other Consumer271,774 78,566 17,321 367,661 23,230,449 23,598,110 
Total$4,704,982 $170,021 $1,073,256 $5,948,259 $555,039,644 $560,987,903 

At March 31, 2023 and December 31, 2016:
 September 30, 2017
 
 
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$206,120
 $—
 $2,551,216
 $2,757,336
 $76,348,739
 $79,106,075
Consumer865,261
 15,856
 453,189
 1,334,306
 55,529,928
 56,864,234
Commercial Business204,739
 32,265
 217,700
 454,704
 23,042,069
 23,496,773
Commercial Real Estate2,019,717
 17,037
 4,298,231
 6,334,985
 221,847,164
 228,182,149
Total$3,295,837
 $65,158
 $7,520,336
 $10,881,331
 $376,767,900
 $387,649,231

 December 31, 2016
 
 
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$653,858
 $—
 $2,488,158
 $3,142,016
 $74,837,893
 $77,979,909
Consumer625,178
 119,640
 241,571
 986,389
 49,681,505
 50,667,894
Commercial Business536,492
 69,256
 145,401
 751,149
 15,528,028
 16,279,177
Commercial Real Estate1,719,758
 256,285
 2,639,837
 4,615,880
 217,983,414
 222,599,294
Total$3,535,286
 $445,181
 $5,514,967
 $9,495,434
 $358,030,840
 $367,526,274

At September 30, 2017 and December 31, 2016,2022, the Company did not have any loans that were 90 days or more past due and still accruing interest. OurThe Company's strategy is to work with ourits borrowers to reach acceptable payment plans while protecting ourits interests in the existing collateral.  In the event an acceptable arrangement cannot be reached, wethe Company may have to acquire these properties through foreclosure or other means and subsequently sell, develop, or liquidate them.


The following table shows non-accrual loans by category at September 30, 2017 compared to December 31, 2016:


19
 September 30, 2017 December 31, 2016 $ %
 Amount 
Percent (1)
 Amount 
Percent (1)
 Increase (Decrease) Increase (Decrease)
Non-accrual Loans:           
Residential Real Estate$2,551,216
 0.67% $2,488,158
 0.68% $63,058
 2.5%
Consumer453,189
 0.12
 241,571
 0.07
 $211,618
 87.6
Commercial Business217,700
 0.06
 145,401
 0.04
 72,299
 49.7
Commercial Real Estate4,298,231
 1.12
 2,639,837
 0.73
 1,658,394
 62.8
Total Non-accrual Loans$7,520,336
 1.97% $5,514,967
 1.52% $2,005,369
 36.4%


(1) PERCENT OF TOTAL LOANS HELD FOR INVESTMENT, NET OF DEFERRED FEES AND LOANS IN PROCESS.









SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements







8.    Loans Receivable, Net, Continued


The following tables showtable shows non-accrual loans by category at the dates indicated.
CECLIncurred Loss
March 31, 2023December 31, 2022
Nonaccrual Loans with No AllowanceNonaccrual Loans with an AllowanceTotal Nonaccrual LoansNonaccrual Loans
Construction Real Estate$217,970 $— $217,970 $114,630 
Residential Real Estate1,505,185 — 1,505,185 1,544,762 
Commercial Real Estate4,220,087 — 4,220,087 4,281,975 
Commercial and Agricultural101,142 — 101,142 112,652 
Consumer HELOC188,266 — 188,266 188,540 
Other Consumer35,549 — 35,549 28,671 
Total Nonaccrual Loans$6,268,199 $— $6,268,199 $6,271,230 

The Company did not recognize any interest income on nonaccrual loans during the three months ended March 31, 2023.

The following table represents the accrued interest receivables written off by reversing interest income during the three months ended March 31, 2023:
For the Three Months Ended March 31, 2023
Construction Real Estate$2,882
Residential Real Estate1,031
Commercial Real Estate—
Commercial and Agricultural1,103
Consumer HELOC—
Other Consumer143
Total Loans$5,159

Allowance for Credit Losses

The following table shows the activity in the allowance for credit losses by category for the three months ended March 31, 2023 under the CECL methodology:
 Three Months Ended March 31, 2023
Real EstateConsumer
 ConstructionResidentialCommercialCommercial and AgriculturalHELOCOther
 
Total
Beginning Balance$2,323,397 $2,124,835 $4,804,282 $874,092 $598,807 $452,340 $11,177,753 
Adjustment to allowance for adoption of ASU 2016-13263,737 461,879 (340,492)112,452 107,548 179,070 784,194 
Provision for credit losses(245,136)477,263 (204,984)154,789 (56,733)39,801 165,000 
Charge-Offs— — — (15,880)— (34,940)(50,820)
Recoveries3,960 8,400 5,016 5,300 21,904 6,103 50,683 
Ending Balance$2,345,958 $3,072,377 $4,263,822 $1,130,753 $671,526 $642,374 $12,126,810 




20


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




The Company has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans:

•Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate.
•Residential real estate loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage.
•Home equity lines of credit are generally secured by second mortgages on residential real estate property.
•Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral.

The following table details the amortized cost of collateral dependent loans:
March 31, 2023
Construction Real Estate$217,970
Residential Real Estate1,062,365
Commercial Real Estate4,220,087
Commercial and Agricultural31,446
Consumer HELOC47,683
Total Loans$5,579,551

Prior to the adoption of ASC 326 on January 1, 2023, the Company calculated the allowance for loan losses under the Incurred Loss methodology. The following table shows the activity in the allowance for loan losses by category for the three and nine months ended September 30, 2017March 31, 2022:
Three Months Ended March 31, 2022
Real EstateConsumer
ConstructionResidentialCommercialCommercial and AgriculturalHELOCOtherTotal
Beginning Balance$2,401,196 $1,663,423 $4,832,440 $1,241,828 $517,512 $430,765 $11,087,164 
Provision for Loan Losses(73,215)(44,818)81,527 (22,242)35,182 23,566 — 
Charge-Offs— — — — — (31,871)(31,871)
Recoveries8,602 9,711 18,981 23,333 2,709 10,334 73,670 
Ending Balance$2,336,583 $1,628,316 $4,932,948 $1,242,919 $555,403 $432,794 $11,128,963 

Prior to the adoption of ASU 2016-13, loans were considered impaired when, based on current information and 2016:events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans include loans on nonaccrual status and accruing troubled debt restructurings. When determining if the Company would be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, the Company considered the borrower’s capacity to pay, which included such factors as the borrower’s current financial statements, an analysis of global cash flow sufficient to pay all debt obligations and an evaluation of secondary sources of repayment, such as guarantor support and collateral value. Non-accrual commercial loans under $200,000 and non-accrual consumer loans under $100,000 were considered immaterial and are excluded from the impairment review. The tables below include all loans deemed impaired, whether or not individually assessed for impairment. If a loan was deemed impaired, a specific valuation allowance was allocated, if necessary, so that the loan was reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment was expected solely from the collateral.


21
 Three Months Ended September 30, 2017
 
Residential
Real Estate
 
 
Consumer
 
Commercial
Business
 
Commercial
Real Estate
 
 
Total
Beginning Balance$1,450,176
 $1,122,473
 $880,642
 $4,749,341
 $8,202,632
Provision for Loan Losses80,766
 110,023
 (842) (89,947) 100,000
Charge-Offs(114,869) (82,087) —
 (62,482) (259,438)
Recoveries1,014
 15,392
 —
 109,588
 125,994
Ending Balance$1,417,087
 $1,165,801
 $879,800
 $4,706,500
 $8,169,188


 Nine Months Ended September 30, 2017
 
Residential
Real Estate
 
 
Consumer
 
Commercial
Business
 
Commercial
Real Estate
 
 
Total
Beginning Balance$1,360,346
 $996,620
 $882,999
 $5,116,266
 $8,356,231
Provision for Loan Losses241,112
 234,342
 2,690
 (378,144) 100,000
Charge-Offs(186,372) (123,942) (5,889) (198,482) (514,685)
Recoveries2,001
 58,781
 —
 166,860
 227,642
Ending Balance$1,417,087
 $1,165,801
 $879,800
 $4,706,500
 $8,169,188

 Three Months Ended September 30, 2016
 Residential
Real Estate		  
Consumer		 Commercial
Business		 Commercial
Real Estate		  
Total
Beginning Balance$1,462,636
 $1,115,976
 $865,867
 $4,950,735
 $8,395,214
Provision for Loan Losses31,415
 (155,298) 713,276
 (589,393) —
Charge-Offs(137,935) (35,312) (150,000) —
 (323,247)
Recoveries1,228
 23,569
 11,731
 2,616
 39,144
Ending Balance$1,357,344
 $948,935
 $1,440,874
 $4,363,958
 $8,111,111

 Nine Months Ended September 30, 2016
 Residential
Real Estate		  
Consumer		 Commercial
Business		 Commercial
Real Estate		  
Total
Beginning Balance$1,323,183
 $1,063,153
 $773,948
 $5,114,849
 $8,275,133
Provision for Loan Losses160,823
 (1,501) 805,195
 (964,517) —
Charge-Offs(137,935) (189,193) (150,000) (202,618) (679,746)
Recoveries11,273
 76,476
 11,731
 416,244
 515,724
Ending Balance$1,357,344
 $948,935
 $1,440,874
 $4,363,958
 $8,111,111







SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements








Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured, in which case interest was recognized on a cash basis.
8.    Loans Receivable, Net, Continued


The following tables present information related totable below summarizes the impaired loansloan balances evaluated individually and collectively for impairment inwithin the allowance for loan losses at the dates indicated:
 Allowance For Loan Losses
September 30, 2017
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
 
Total
Residential Real Estate$—
 $1,417,087
 $1,417,087
Consumer—
 1,165,801
 1,165,801
Commercial Business—
 879,800
 879,800
Commercial Real Estate—
 4,706,500
 4,706,500
Total$—
 $8,169,188
 $8,169,188
 Allowance For Loan Losses
December 31, 2016Individually Evaluated For
Impairment		 Collectively Evaluated For
Impairment		  
Total
Residential Real Estate$—
 $1,360,346
 $1,360,346
Consumer1,699
 994,921
 996,620
Commercial Business—
 882,999
 882,999
Commercial Real Estate12,590
 5,103,676
 5,116,266
Total$14,289
 $8,341,942
 $8,356,231

The following tables present information related to impaired loans evaluated individually and collectively for impairment in loans receivable balances at the dates indicated:December 31, 2022:
Allowance For Loan LossesLoans Receivable
December 31, 2022Individually Evaluated For ImpairmentCollectively Evaluated For ImpairmentTotalIndividually Evaluated For ImpairmentCollectively Evaluated For ImpairmentTotal
Construction Real Estate$— $2,323,397 $2,323,397 $114,630 $112,679,064 $112,793,694 
Residential Real Estate— 2,124,835 2,124,835 1,089,308 108,967,665 110,056,973 
Commercial Real Estate— 4,804,282 4,804,282 4,281,702 247,872,773 252,154,475 
Commercial and Agricultural— 874,092 874,092 31,446 30,616,529 30,647,975 
Consumer HELOC— 598,807 598,807 48,792 31,687,884 31,736,676 
Other Consumer— 452,340 452,340 — 23,598,110 23,598,110 
Total$— $11,177,753 $11,177,753 $5,565,878 $555,422,025 $560,987,903 
 Loans Receivable
September 30, 2017
Individually Evaluated For
Impairment
 
Collectively Evaluated For
Impairment
 
 
Total
Residential Real Estate$2,260,496
 $76,845,579
 $79,106,075
Consumer224,894
 56,639,340
 56,864,234
Commercial Business145,401
 23,351,372
 23,496,773
Commercial Real Estate7,259,347
 220,922,802
 228,182,149
Total$9,890,138
 $377,759,093
 $387,649,231
 Loans Receivable
December 31, 2016Individually Evaluated For
Impairment		 Collectively Evaluated For
Impairment		  
Total
Residential Real Estate$2,181,740
 $75,798,169
 $77,979,909
Consumer170,552
 50,497,342
 50,667,894
Commercial Business145,401
 16,133,776
 16,279,177
Commercial Real Estate5,830,341
 216,768,953
 222,599,294
Total$8,328,034
 $359,198,240
 $367,526,274





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 $10.3 million for the three months ended September 30, 2017 compared to $10.6 million for the three months ended September 30, 2016.


The following tables present information related to impaired loans by loan category at September 30, 2017 and December 31, 20162022 and for the three and nine months ended September 30, 2017 and 2016.March 31, 2022.

December 31, 2022
Impaired LoansRecorded
Investment		Unpaid Principal BalanceRelated
Allowance
Construction Real Estate$114,630 $114,630 $— 
Residential Real Estate1,089,308 1,626,308 — 
Commercial Real Estate4,281,702 4,281,702 — 
Commercial and Agricultural31,446 926,446 — 
Consumer HELOC48,792 48,792 — 
Other Consumer— — — 
Total$5,565,878 $6,997,878 $— 
 September 30, 2017 December 31, 2016
Impaired Loans
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
 Recorded
Investment		Unpaid
Principal
Balance		 
Related
Allowance
With No Related Allowance Recorded:      
Residential Real Estate$2,260,496
$2,720,495
$—
 $2,181,740
$2,263,240
$—
Consumer224,894
252,704
—
 110,114
118,414
—
Commercial Business145,401
995,401
—
 145,401
995,401
—
Commercial Real Estate7,259,347
8,740,948
—
 5,424,701
7,207,688
—
With an Allowance Recorded:       
Consumer—
—
—
 60,438
60,438
1,699
Commercial Real Estate—
—
—
 405,640
418,654
12,590
Total       
Residential Real Estate2,260,496
2,720,495
—
 2,181,740
2,263,240
—
Consumer224,894
252,704
—
 170,552
178,852
1,699
Commercial Business145,401
995,401
—
 145,401
995,401
—
Commercial Real Estate7,259,347
8,740,948
—
 5,830,341
7,626,342
12,590
Total$9,890,138
$12,709,548
$—
 $8,328,034
$11,063,835
$14,289
















SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




8.    Loans Receivable, Net, Continued

 Three Months Ended September 30,
 2017 2016
Impaired LoansAverage
Recorded
Investment		Interest
Income
Recognized		 Average
Recorded
Investment		Interest
Income
Recognized
With No Related Allowance Recorded:     
Residential Real Estate$2,613,299
$2,226
 $3,319,559
$—
Consumer240,005
—
 128,751
—
Commercial Business145,401
—
 296,401
—
Commercial Real Estate7,331,736
44,296
 6,180,761
67,380
With an Allowance Recorded:     
Consumer—
—
 61,581
772
Commercial Real Estate—
—
 641,743
28,534
Total     
Residential Real Estate2,613,299
2,226
 3,319,559
—
Consumer240,005
—
 190,332
772
Commercial Business145,401
—
 296,401
—
Commercial Real Estate7,331,736
44,296
 6,822,504
95,914
Total$10,330,441
$46,522
 $10,628,796
$96,686
 Nine Months Ended September 30,
 2017 2016
Impaired Loans
Average
Recorded
Investment
Interest
Income
Recognized
 Average
Recorded
Investment		Interest
Income
Recognized
With No Related Allowance Recorded:     
Residential Real Estate$2,939,263
$25,339
 $3,469,066
$8,282
Consumer294,002
—
 294,714
—
Commercial Business145,401
—
 301,881
—
Commercial Real Estate7,517,744
159,584
 8,589,845
192,017
With an Allowance Recorded:     
Consumer—
—
 62,322
3,470
Commercial Real Estate—
—
 652,867
28,534
Total     
Residential Real Estate2,939,263
25,339
 3,469,066
8,282
Consumer294,002
—
 357,036
3,470
Commercial Business145,401
—
 301,881
—
Commercial Real Estate7,517,744
159,584
 9,242,712
220,551
Total$10,896,410
$184,923
 $13,370,695
$232,303


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




8.    Loans Receivable, Net, Continued

In the course of resolving delinquent loans, the Bank may choose to restructure the contractual terms of certain loans. A troubled debt restructuring ("TDR") is a restructuring in which the Bank, 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”) Accounting Standards Codification (“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 Bank grants such concessions to reassess the borrower’s financial status and develop a plan for repayment.  TDRs included in impaired loans at September 30, 2017 and December 31, 2016 were $4.2 million and $4.6 million, respectively, and the Bank had no commitments at these dates to lend additional funds on these loans.

Loans on nonaccrual status at the date of modification are initially classified as nonaccrual TDRs. Loans on accruing status at the date of concession are initially classified as accruing TDRs if the loan is reasonably assured of repayment and performance is expected in accordance with its modified terms. Such loans may be designated as nonaccrual loans subsequent to the concession date if reasonable doubt exists as to the collection of interest or principal under the restructuring agreement. Nonaccrual TDRs 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).

Three Months Ended March 31, 2022
Impaired LoansAverage Recorded InvestmentInterest Income
Recognized
Construction Real Estate$18,511 $— 
Residential Real Estate1,239,308 — 
Commercial Real Estate1,038,300 — 
Commercial and Agricultural31,446 — 
Consumer HELOC96,578 — 
Other Consumer— — 
Total$2,424,143 $— 

Modifications to Borrowers Experiencing Financial Difficulty

The Bankallowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.
22


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification. Occasionally, the Company modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

In some cases, the Company will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. As such multiple types of modifications may have been made on the same loan within the current reporting period each much be reported. The combination is at least two of the following: a term extension, principal forgiveness, and interest rate reduction.

Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.

The Company had two modified loans with a combined balance of $375,000 at March 31, 2023, compared to two modified loans with a combined balance of $385,000 at December 31, 2022.

The Company did not modify any loans that were considered to be TDRsborrowers experiencing financial difficulty during the ninethree months ended September 30, 2017March 31, 2023 or 2022.

As of March 31, 2023 and 2016. At September 30, 2017, two2022, there were no loans totaling $611,000 that had previously been restructured as TDRs were inmodified with borrowers experiencing financial difficulty for which there was a payment default neither of which had been restructured within the last 12 months. One of these loans, with a balance of $41,000, defaulted during the nine month period ended September 30, 2017. In comparison, at September 30, 2016, six loans totaling $765,000 that had previously been restructured as TDRs were in default, and threemonths of the loans, with a balance of $637,000 defaulted during the nine month period ended September 30, 2016.restructuring date. The BankCompany considers any loan 30 days or more past due to be in default.


Our policyAllowance for Credit Losses - Unfunded Commitments

The Company maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, as well as both standby and commercial letters of credit when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e., commitment cannot be canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for (reversal of) credit loss expense. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the allowance for credit losses on loans, and are discussed in this Note 8. The allowance for credit losses for unfunded loan commitments of $1.0 million and $0 at March 31, 2023 and December 31, 2022, respectively, is separately classified on the balance sheet within "Other Liabilities."

The following table presents the balance and activity in the allowance for credit losses for unfunded loan commitments for the three months ended March 31, 2023.
Total Allowance for Credit Losses - Unfunded Commitments
Balance, December 31, 2022$—
Adjustment to allowance for unfunded commitments for adoption of ASU 2016-131,213,614
(Reversal of) provision for unfunded commitments(165,000)
Balance, March 31, 2023$1,048,614
23


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



NOTE 9 - DEPOSITS
Deposits outstanding at the dates indicated are summarized below by account type as follows:
Deposit Account TypeMarch 31, 2023December 31, 2022
Checking$474,947,532 $510,983,509 
Money Market348,562,043 348,833,623 
Savings102,392,660 108,237,098 
Certificates of Deposit182,771,274 142,031,066 
Total$1,108,673,509 $1,110,085,296 
The Bank had $5.0 million in brokered deposits, which are included in checking and money market deposits above, at March 31, 2023 and December 31, 2022. In addition, the Bank had $6.0 million and $6.0 million in brokered time deposits, and $68,000 and $98,000, in overdrafts that were reclassified to loans at March 31, 2023 and December 31, 2022, respectively.
Certificates of deposits that met or exceeded the FDIC insurance limit of $250,000 were $49.1 million and $30.3 million at March 31, 2023 and December 31, 2022, respectively. All deposits that met or exceeded the FDIC insurance limit totaled $310.2 million and $350.1 million at March 31, 2023 and December 31, 2022, respectively.
The amounts and scheduled maturities of all certificates of deposit at the dates indicated were as follows:
 March 31, 2023December 31, 2022
Within 1 Year$133,984,928 $97,163,169 
After 1 Year, Within 2 Years36,761,162 31,550,543 
After 2 Years, Within 3 Years6,189,086 6,465,582 
After 3 Years, Within 4 Years2,680,079 3,177,916 
After 4 Years, Within 5 Years3,156,019 3,673,856 
Total Certificates of Deposit$182,771,274 $142,031,066 

NOTE 10 - BORROWINGS
The Company had $27.8 million and $27.6 million in other borrowings at March 31, 2023 and December 31, 2022, respectively. These borrowings consist of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts. The repurchase agreements typically mature within one to three days and the interest rate paid on these borrowings floats monthly with money market type rates. The interest rate paid on the repurchase agreements was 1.39% at March 31, 2023 compared to 0.75% at December 31, 2022. Collateral pledged by the Company for these repurchase agreements consisted of investments with a combined amortized cost and fair value of $53.0 million and $50.3 million at March 31, 2023 and $52.3 million and $49.8 million at December 31, 2022, respectively.
During the first quarter of 2023, the Bank elected to participate in the Federal Reserve Bank Term Funding Program (“BTFP”), allowing the Bank to refinance its existing borrowings from Federal Reserve Discount Window in order to receive a lower fixed rate. Advances made under the BTFP are for up to one year and will be extended at the one year overnight index swap ("OIS") rate as of the day the advance is made plus 10 basis points. The interest rate will be fixed for the term of the advance on the day the advance is made. To determine the rate, the BTFP will use the fixed OIS rate based on the effective federal funds rate for a one-year maturity.
The Company had $61.4 million in outstanding borrowings under the BTFP with a weighted average borrowing rate of 4.39% at March 31, 2023 compared to $44.1 million in borrowings from the discount window of the Federal Reserve Bank of Atlanta at with a weighted average borrowing rate of 4.50% at December 31, 2022. Depository institutions may borrow from the discount window for periods as long as 90 days, and borrowings are prepayable and renewable by the borrower on a daily basis. At March 31, 2023, the Company had pledged as collateral for these borrowings investment securities with an amortized cost and fair value of $169.5 million and $157.3 million, compared to an amortized cost and fair value of $72.6 million and $69.2 million, respectively, at December 31, 2022, respectively.
There were no outstanding FHLB advances at March 31, 2023 and December 31, 2022. FHLB advances are secured by a blanket collateral agreement with the FHLB by pledging the Bank’s portfolio of residential first mortgage loans and investment securities. The Bank's pledged collateral for FHLB advances had an amortized cost and fair value of $60.8 million and $53.4 million at March 31, 2023, and $70.1 million and $61.1 million at December 31, 2022, respectively.
24


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




NOTE 11 - SUBORDINATED DEBENTURES
Junior Subordinated Debentures
In September 2006, Security Federal Statutory Trust (the "Trust"), issued and sold fixed and floating rate capital securities of the Trust (the “Capital Securities”). The Trust used the net proceeds from the sale of the Capital Securities to purchase a like amount of junior subordinated debentures (the “Debentures”) of the Company which are reported on the Consolidated Balance Sheets as junior subordinated debentures. The Capital Securities accrue and pay distributions at a floating rate of three month LIBOR plus 170 basis points annually which was equal to 6.57% at March 31, 2023 compared to 6.47% at December 31, 2022. The distribution rate payable on the Capital Securities is cumulative and payable quarterly in arrears. The Capital Securities mature or are mandatorily redeemable upon maturity on December 15, 2036, or upon earlier optional redemption as provided in the indenture. The Company has had the right to redeem the Capital Securities in whole or in part since September 15, 2011.
As of a result of the discontinuation of LIBOR, effective June 30, 2023, the Capital Securities will transition from its floating rate of three month LIBOR plus 170 basis points to a replacement rate which is expected to be the floating rate of three month Secured Overnight Financing Rate ("SOFR") as adjusted by the relevant spread adjustment of 0.26161 plus 170 basis points.

Subordinated Debentures
In November 2019, the Company sold and issued to certain institutional investors $17.5 million in aggregate principal amount of 5.25% fixed-to-floating rate subordinated notes due 2029 (the “10-Year Notes”) and $12.5 million in aggregate principal amount of 5.25% fixed-to-floating rate subordinated notes due 2034 (the “15-Year Notes”, and together with the 10-Year Notes, the “Notes”).
The 10-Year Notes have a stated maturity of November 22, 2029, and bear interest at a fixed rate of 5.25% per year, from and including November 22, 2019 but excluding November 22, 2024. From and including November 22, 2024 to but excluding the maturity date or early redemption date, the interest rate shall reset semi-annually to an interest rate equal to the then-current three-month LIBOR rate plus 369 basis points.
The 15-Year Notes have a stated maturity of November 22, 2034, and bear interest at a fixed rate of 5.25% per year, from and including November 22, 2019 but excluding November 22, 2029. From and including November 22, 2029 to but excluding the maturity date or early redemption date, the interest rate for the 15-Year Notes shall reset semi-annually to an interest rate equal to the then-current three-month LIBOR rate plus 357 basis points. The Notes are payable semi-annually in arrears on June 1 and December 1 of each year commencing June 1, 2020.
Both the 10-Year and 15-Note Year subordinated notes include remedies in the event that LIBOR is discontinued. The Company is currently determining an appropriate benchmark replacement for LIBOR. The Company expects the replacement benchmark to be materially consistent with the three-month LIBOR.
The Notes are not subject to redemption at the option of the holder and may be redeemed by the Company only under certain limited circumstances prior to November 22, 2024, 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 terms10-Year Notes, 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.

We closely monitor 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.  Our policyNovember 22, 2029, with respect to nonperforming loans requires the borrower15-Year Notes. The Company may redeem the 10-Year Notes and the 15-Year Notes at its option, in whole at any time, or in part from time to make a minimumtime, after November 22, 2024 and November 22, 2029, respectively. The Notes are unsecured, subordinated obligations of six consecutive paymentsthe Company and rank junior in accordanceright to payment to the Company’s current and future senior indebtedness, and each Note is equal in right to payment with respect to the modified loan terms before that loan can be placed back on accrual status.  In additionother Notes.
The Notes have been structured to this payment history,qualify as Tier 2 capital for the borrower must demonstrateCompany under applicable regulatory guidelines. The Company used the net proceeds from the sale of the Notes to fund the redemption of the convertible senior debentures and for general corporate purposes to support future growth.
During the year ended December 31, 2022 the Company repurchased $1.0 million in principal of the 10-Year Notes and $2.5 million in principal of the 15-Year Notes, leaving an abilityaggregate remaining principal balance of $16.5 million and $10.0 million, respectively.
25


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to continue making payments on the loan prior to restoration of accrual status.Consolidated Financial Statements



9. Regulatory Matters

NOTE 12 - 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 Board of Governors of the Federal Reserve.Reserve System (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 $1.0$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 $1.0 billion or more in assets, at September 30, 2017, it would have exceeded all regulatory capital requirements.


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




9. Regulatory Matters, Continued

Based on its capital levels at September 30, 2017,March 31, 2023, 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 September 30, 2017,March 31, 2023, 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 following tables below provide the Company’s and the Bank’s regulatory capital requirements and actual results at the dates indicated below:indicated.
 ActualFor Capital AdequacyTo Be "Well-Capitalized"
AmountRatioAmountRatioAmountRatio
March 31, 2023(Dollars in Thousands)
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)		$142,406 17.9%$47,863 6.0%$63,817 8.0%
Total Risk-Based Capital
(To Risk Weighted Assets)		152,417 19.1%63,817 8.0%79,772 10.0%
Common Equity Tier 1 Capital (To Risk Weighted Assets)142,406 17.9%35,897 4.5%51,852 6.5%
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)		142,406 10.4%54,811 4.0%68,513 5.0%
December 31, 2022
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)		$141,452 17.8%$47,714 6.0%$63,619 8.0%
Total Risk-Based Capital
(To Risk Weighted Assets)		151,408 19.0%63,619 8.0%79,523 10.0%
Common Equity Tier 1 Capital (To Risk Weighted Assets)141,452 17.8%35,785 4.5%51,690 6.5%
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)		141,452 10.4%54,372 4.0%67,965 5.0%
 Actual For Capital Adequacy To Be "Well-Capitalized"
(Dollars in Thousands)Amount Ratio Amount Ratio Amount Ratio
SECURITY FEDERAL CORP.September 30, 2017
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)		$77,970
 15.5% $30,227
 6.0% N/A N/A
Total Risk-Based Capital
(To Risk Weighted Assets)		84,289
 16.7% 40,303
 8.0% N/A N/A
Common Equity Tier 1 Capital (To Risk Weighted Assets)72,970
 14.5% 22,670
 4.5% N/A N/A
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)		77,970
 9.1% 34,398
 4.0% N/A N/A
SECURITY FEDERAL BANK           
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)
$88,802
 17.6% $30,218
 6.0% $40,290
 8.0%
Total Risk-Based Capital
(To Risk Weighted Assets)
95,121
 18.9% 40,290
 8.0% 50,363
 10.0%
Common Equity Tier 1 Capital (To Risk Weighted Assets)88,802
 17.6% 22,663
 4.5% 32,736
 6.5%
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)
88,802
 10.3% 34,393
 4.0% 42,992
 5.0%
  
SECURITY FEDERAL CORP.December 31, 2016
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)		$73,787
 16.6% $26,714
 6.0%  
N/A		  
N/A
Total Risk-Based Capital
(To Risk Weighted Assets)		79,383
 17.8% 35,618
 8.0%  
N/A		  
N/A
Common Equity Tier 1 Capital (To Risk Weighted Assets)68,787
 15.4% 20,035
 4.5%  
N/A		  
N/A
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)		73,787
 9.1% 32,548
 4.0%  
N/A		  
N/A
SECURITY FEDERAL BANK           
Tier 1 Risk-Based Core Capital
(To Risk Weighted Assets)		$88,139
 19.8% $26,694
 6.0% $35,592
 8.0%
Total Risk-Based Capital
(To Risk Weighted Assets)		93,735
 21.1% 35,592
 8.0% 44,490
 10.0%
Common Equity Tier 1 Capital (To Risk Weighted Assets)88,139
 19.8% 20,021
 4.5% 28,919
 6.5%
Tier 1 Leverage (Core) Capital
(To Adjusted Tangible Assets)		88,139
 10.8% 32,587
 4.0% 40,734
 5.0%




SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




9. Regulatory Matters, Continued


In addition to the minimum common equity Tier 1 ("CET1"), Tier 1 and total capital ratios,requirements, the Bank now has tomust maintain a capital conservation buffer, consistingwhich consists of additional CET1Common Equity Tier 1 capital greater than 2.5% of risk weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases,repurchasing shares, and paying discretionary bonuses based on percentages of retained income that could be utilized for such actions. The new capitalbonuses. At March 31, 2023, the Bank’s conservation buffer requirement beganwas 11.1%.

26


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and increases each year until fully implementedConsolidated Financial Statements



NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
GAAP requires the Company to an amount equal to 2.5% of risk weighted assets in January 2019. At September 30, 2017 the Bank’s CET1 capital exceeded the required capital conservation buffer of 1.25%.


10. Carrying Amounts and Fair Value of Financial Instruments

The Company has adopted accounting guidance which definesdisclose fair value establishes a framework for measuringof financial instruments measured at amortized cost on the balance sheet and to measure that fair value and expands disclosures about fair valueusing 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 generally accepted accounting principles. This guidance applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

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).
The following three levels of inputs may be used to measure fair value:
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 SaleAFS

Investment securities available for saleInvestments AFS are recorded at fair value on a recurring basis. At September 30, 2017,March 31, 2023, the Company’s investment portfolio was comprised of student loan pools, government and agency bonds, mortgage-backed securitiesMBS issued by government agencies or GSEs, private label CMO mortgage-backed securities and municipal securities, one state tax credit, and one equity investment.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.


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




10. Carrying Amounts and Fair Value of Financial Instruments, Continued


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.


Impaired
27


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



Land Held for Sale
Land held for sale is reported at the lower of the carrying amount or fair value less costs to sell. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral less estimated selling costs. The Company records land held for sale as nonrecurring level 3.

Collateral Dependent 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 impairedthe Company designates individually evaluated loans with higher risk as collateral dependent loans and an allowance for loancredit losses is established as necessary. LoansCollateral dependent loans are loans for which itthe repayment is probable that payment of interest and principal will notexpected to be made in accordance withprovided substantially through the contractual termsoperation or sale of the collateral and the borrower is experiencing financial difficulty. These loans do not share common risk characteristics and are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan agreement are considered impaired. Once a loanbasis based on the shortfall between the fair value of the loan's collateral, which is identified as impaired, management measures the impairment by determiningadjusted for estimated costs to sell, and amortized cost. If the fair value of the collateral forexceeds the loan.

amortized cost, no allowance is required.
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.collateral dependent. 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 impairedcollateral dependent 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 September 30, 2017, our impairedMarch 31, 2023, all collateral dependent loans were generally evaluated based on the fair value of the collateral. Impaired loansLoans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. The Company records impairedcollateral dependent loans as nonrecurring Level 3. At September 30, 2017 and December 31, 2016,

Other Real Estate Owned
Fair value adjustments to OREO are recorded at the recorded investment in impaired loans was $9.9 million and $8.3 million, respectively.

Foreclosed Assets
Foreclosed assets are adjusted tolower of carrying amount of the loan or fair value upon transfer of the loanscollateral less selling costs. Any write-downs based on the asset’s fair value at the date of acquisition are charged to foreclosed assets. Subsequently, foreclosed assets arethe allowance for credit losses. After foreclosure, management periodically performs valuations such that the real estate is carried at the lower of carrying valueits new cost basis or fair value. Fair value, is based upon independent market prices, appraised valuesnet of the collateral or management’s estimation of the value of the collateral.estimated costs to sell. Foreclosed assets are recorded as nonrecurring Level 3.






SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




10. Carrying Amounts and Fair Value of Financial Instruments, Continued


Assets measured at fair value on a recurring basis were as follows at September 30, 2017 and December 31, 2016:the dates indicated:
March 31, 2023December 31, 2022
Level 1Level 2Level 3Level 1Level 2Level 3
Student Loan Pools$— $55,833,826 $— $— $59,156,982 $— 
SBA Bonds— 91,696,061 — — 99,629,967 — 
Tax Exempt Municipal Bonds— 20,919,512 — — 21,310,328 — 
Taxable Municipal Bonds— 52,935,070 — — 50,769,739 — 
MBS— 319,685,604 — — 319,281,268 — 
Total$— $541,070,073 $— $— $550,148,284 $— 

28
 September 30, 2017 December 31, 2016
 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3
FHLB Securities$—
 $—
 $—
 $—
 $998,000
 $—
FHLMC Bond—
 965,646
 —
 —
 $—
 —
SBA Bonds—
 124,803,549
 —
 —
 101,906,059
 —
Tax Exempt Municipal Bonds—
 80,815,027
 —
 —
 71,535,149
 —
Taxable Municipal Bonds—
 2,012,590
 —
 —
 1,991,130
 —
Mortgage-Backed Securities—
 179,834,621
 —
 —
 185,261,091
 —
State Tax Credit—
 56,800
 —
 —
 —
 —
Equity Securities—
 155,000
 —
 —
 368,000
 —
Total$—
 $388,643,233
 $—
 $—
 $362,059,429
 $—



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



There were no liabilities measured at fair value on a recurring basis at September 30, 2017March 31, 2023 or December 31, 2016.2022.


The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. The tables below present assets measured at fair value on a nonrecurring basis at September 30, 2017 and December 31, 2016,the dates indicated, aggregated by the level in the fair value hierarchy within which those measurements fall. 
March 31, 2023
Assets:Level 1Level 2Level 3Total
Mortgage Loans Held For Sale$— $240,841 $— $240,841 
Collateral Dependent Loans (1)
— — 5,579,551 5,579,551 
Other Real Estate Owned— — 119,700 119,700 
Land Held for Sale— — 1,096,614 1,096,614 
Total$— $240,841 $6,795,865 $7,036,706 
September 30, 2017December 31, 2022
Assets:Level 1 Level 2 Level 3 TotalAssets:Level 1Level 2Level 3Total
Mortgage Loans Held For Sale$—
 $1,270,410
 $—
 $1,270,410
Mortgage Loans Held For Sale$— $913,258 $— $913,258 
Collateral Dependent Impaired Loans (1)
—
 —
 9,890,138
 9,890,138
Foreclosed Assets—
 —
 1,907,637
 1,907,637
Collateral Dependent Loans (1)
Collateral Dependent Loans (1)
— — 5,565,878 5,565,878 
Other Real Estate OwnedOther Real Estate Owned— — 119,700 119,700 
Land Held for Sale Land Held for Sale— — 1,096,614 1,096,614 
Total$—
 $1,270,410
 $11,797,775
 $13,068,185
Total$— $913,258 $6,782,192 $7,695,450 
 December 31, 2016
Assets:Level 1 Level 2 Level 3 Total
Mortgage Loans Held For Sale$—
 $4,243,907
 $—
 $4,243,907
Collateral Dependent Impaired Loans (1)
—
 —
 8,313,745
 8,313,745
Foreclosed Assets—
 —
 2,721,214
 2,721,214
Total$—
 $4,243,907
 $11,034,959
 $15,278,866
(1) IMPAIRED LOANS ARE REPORTED NET OF SPECIFIC RESERVES OF $14,289 AT DECEMBERReported net of specific reserves. There were no specific reserves at March 31, 2016. THERE WERE NO SPECIFIC RESERVES AT SEPTEMBER 30, 2017.

2023 and December 31, 2022.
There were no liabilities measured at fair value on a nonrecurring basis at September 30, 2017March 31, 2023 or December 31, 2016.

2022.
For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis at September 30, 2017,the dates indicated, the significant unobservable inputs used in the fair value measurements were as follows:
Range of Inputs
Level 3 AssetsValuation TechniqueSignificant Unobservable InputsMarch 31, 2023December 31, 2022
Land Held for SaleAppraised Value/Comparable SalesDiscounts to appraised values for estimated holding or selling costs10%10%
Collateral Dependent LoansAppraised ValueDiscounts to appraised values for estimated holding and/or selling costs or age of appraisal8% - 13%8% - 13%
Other Real Estate OwnedAppraised Value/Comparable SalesDiscounts to appraised values for estimated holding or selling costs
 
30%
30%
  ValuationSignificant 
Level 3 AssetsFair ValueTechniqueUnobservable InputsRange
Collateral Dependent Impaired Loans$9,890,138
Appraised ValueDiscount Rates/ Discounts to Appraised Values0% - 72%
Foreclosed Assets$1,907,637
Appraised Value/Comparable SalesDiscount Rates/ Discounts to Appraised Values
 
13% - 100%


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




10. Carrying Amounts and Fair Value of Financial Instruments, Continued


For assets and liabilities that are not presented on the balance sheet at fair value, the following methods are used to determine the fair value:
Cash and Cash Equivalents—Equivalents—The carrying amount of these financial instruments approximates fair value. All mature within 90 days and do not present unanticipated credit concerns.
Certificates of Deposit with Other Banks—Banks—Fair value is based on market prices for similar assets.
Investment Securities Held to Maturity—SecuritiesHTM—Investment securities held to maturity are valued at quoted market prices or dealer quotes.
Loans Receivable, Net—Net—The fair value of loans areis estimated by discountingusing an exit price notion. The exit price notion uses a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument and also incorporates other factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. The credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction.
29


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



The Company’s loan portfolio is initially fair valued using a segmented approach. The Company divides its loan portfolio into the currentfollowing categories: construction, residential mortgage, commercial real estate, other commercial, HELOCs and other consumer loans. The results are then adjusted to account for credit risk as described above.
A further credit risk discount must be applied through the use of a discounted cash flow model to compensate for illiquidity risk, based on certain assumptions included within the discounted cash flow model, primarily the use of discount rates at which similar loans would be made to borrowers with similarthat better capture inherent credit ratings andrisk over the lifetime of a loan. This consideration of enhanced credit risk provides an estimated exit price for the same remaining maturities. As discount rates are based on currentCompany’s loan rates as well as management estimates, theportfolio. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values presented may not be indicative of the value negotiated in an actual sale.approximate carrying values.
FHLB Stock—Stock—The fair value approximates the carrying value. No ready market exists for this stock, and it has no quoted market value; however, redemption of this stock has historically been at par value. Accordingly, par value is deemed to be a reasonable estimate of fair value.
Deposits—Deposits—The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposits is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturities.
FHLB Advances—Advances and Borrowings from the FRB—Fair value is estimated based onusing discounted cash flows usingwith current market rates for advancesborrowings with similar terms. The Company had no outstanding FHLB advances as of March 31, 2023 or December 31, 2022.
Other Borrowed Money—Money—The carrying value of these short term borrowings approximates fair value.
Note Payable—The carrying value of the note payable approximates fair value.

Senior Convertible Debentures— Subordinated Debentures—The fair value is estimated by discounting the future cash flows using the current rates at which similar debenture offerings with similar terms and maturities would be issued by similar institutions. As discount rates are based on current debenture rates as well as management estimates, the fair values presented may not be indicative of the value negotiated in an actual sale.
Junior Subordinated Debentures—Debentures—The carrying value of junior subordinated debentures approximates fair value.



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




10. Carrying Amounts and Fair Value of Financial Instruments, Continued


The following tables provide a summary of the carrying value and estimated fair value of the Company’s financial instruments at September 30, 2017 and December 31, 2016the dates indicated presented in accordance with the applicable accounting guidance.

March 31, 2023CarryingFair Value
AmountLevel 1Level 2Level 3
Financial Assets:Dollars in thousands
Cash and Cash Equivalents$24,719 $24,719 $— $— 
Certificates of Deposits with Other Banks1,100 — 1,100 — 
Investment Securities AFS541,070 — 541,070 — 
Investment Securities HTM180,179 — 175,853 — 
Loans Receivable, Net574,190 — — 557,843 
FHLB Stock659 659 — — 
Land Held for Sale1,097 — — 1,097 
Financial Liabilities:
Deposits:
  Checking, Savings & Money Market Accounts$925,902 $925,902 $— $— 
  Certificates of Deposits182,771 — 179,810 — 
Borrowings from FRB61,375 61,191 — — 
Other Borrowed Money27,818 27,818 — — 
Subordinated Debentures26,500 — 24,135 — 
Junior Subordinated Debentures5,155 — 5,155 — 



30


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



 September 30, 2017
 Carrying Fair Value
(In Thousands)Amount Total Level 1 Level 2 Level 3
Financial Assets:         
Cash and Cash Equivalents$15,159
 $15,159
 $15,159
 $—
 $—
Certificates of Deposits with Other Banks1,350
 1,350
 —
 1,350
 —
Investment and Mortgage-Backed Securities413,981
 414,212
 —
 414,212
 —
Loans Receivable, Net375,711
 374,295
 —
 —
 374,295
FHLB Stock2,474
 2,474
 2,474
 —
 —
Financial Liabilities:         
Deposits:         
  Checking, Savings & Money Market Accounts$463,741
 $463,741
 $463,741
 $—
 $—
  Certificate Accounts237,873
 236,225
 —
 236,225
 —
Advances from FHLB41,000
 40,775
 —
 40,775
 —
Other Borrowed Money12,356
 12,356
 12,356
 —
 —
Note Payable9,700
 9,700
 —
 9,700
 —
Senior Convertible Debentures6,064
 6,064
 —
 6,064
 —
Junior Subordinated Debentures5,155
 5,155
 —
 5,155
 —

December 31, 2022CarryingFair Value
AmountLevel 1Level 2Level 3
Financial Assets:Dollars in thousands
Cash and Cash Equivalents$28,502 $28,502 $— $— 
Certificates of Deposits with Other Banks1,100 — 1,100 — 
Investment Securities AFS550,148 — 550,148 — 
Investment Securities HTM167,438 — 161,464 — 
Loans Receivable, Net549,917 — — 528,174 
FHLB Stock651 651 — — 
Land Held for Sale1,097 — — 1,097 
Financial Liabilities:
Deposits:
  Checking, Savings & Money Market Accounts$968,054 $968,054 $— $— 
  Certificates of Deposits142,031 — 138,382 — 
Borrowings from FRB44,080 44,071 — — 
Other Borrowed Money27,588 27,588 — — 
Subordinated Debentures26,500 — 24,435 — 
Junior Subordinated Debentures5,155 — 5,155 — 
 December 31, 2016
 Carrying Fair Value
(In Thousands)Amount Total Level 1 Level 2 Level 3
Financial Assets:         
Cash and Cash Equivalents$9,375
 $9,375
 $9,375
 $—
 $—
Certificates of Deposits with Other Banks2,445
 2,445
 —
 2,445
 —
Investment and Mortgage-Backed Securities387,643
 387,430
 —
 387,430
 —
Loans Receivable, Net359,723
 357,457
 —
 —
 357,457
FHLB Stock2,777
 2,777
 2,777
 —
 —
Financial Liabilities:         
Deposits:         
  Checking, Savings & Money Market Accounts$438,559
 $438,559
 $438,559
 $—
 $—
  Certificate Accounts215,545
 214,149
 —
 214,149
 —
Advances from FHLB48,395
 48,153
 —
 48,153
 —
Other Borrowed Money9,338
 9,338
 9,338
 —
 —
Note Payable13,000
 13,000
 —
 13,000
 —
Senior Convertible Debentures5,155
 5,155
 —
 5,155
 —
Junior Subordinated Debentures6,084
 6,084
 —
 6,084
 —

At September 30, 2017,March 31, 2023, the Bank had $104.4$165.0 million ofin off-balance sheet financial commitments.  These commitments are to originate loans and unused consumer lines of credit and credit card lines.  Because these obligations are based on current market rates, if funded, the original principalprincipal amount is considered to be a reasonable estimate of fair value.

Fair value estimates are made on a specific date, based on relevant market data and information about the financial instrument.  These estimates do not reflect any premium or discount that could result from offering for sale the Bank’s entire holdings of a particular financial instrument.


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements




10. Carrying Amounts and Fair Value of Financial Instruments, Continued

Because no active market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, current interest rates and prepayment trends, risk characteristics of various financial instruments, and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in any of these assumptions used in calculating fair value would also significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.  For example, the Bank has significant assets and liabilities that are not considered financial assets or liabilities including deposit franchise values, loan servicing portfolios, deferred tax liabilities, and premises and equipment.
In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. The Company has used management’s best estimate of fair value on the above assumptions.  Thus, the fair values presented may not be the amounts, which could be realized, in an immediate sale or settlement of the instrument.  In addition, any income taxes or other expenses that would be incurred in an actual sale or settlement are not taken into consideration in the fair value presented.

11. Accounting and Reporting Changes

NOTE 14 - NON-INTEREST INCOME
The following is a summary of recent authoritative pronouncements that could affect accounting, reporting, and disclosure of financial information by the Company:Revenue Recognition
In May 2014, the FASB issued guidance to change the recognition ofaccordance with ASU 2014-09, Revenue from Contracts with Customers topic(Topic 606), revenues are recognized when control of the ASC. The core principle of the new guidancepromised goods or services is that an entity should recognize revenue to reflect the transfer of goods and servicestransferred to customers in an amount equal tothat reflects the consideration the entity receives orCompany expects to receive. This guidance also includes expanded disclosure requirementsbe entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that result in an entity providing users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. The guidance will be effective for the Company for reporting periods beginning after December 15, 2017. The Company will apply the guidance using a modified retrospective approach. As a bank holding company, key revenue sources, such as interest income have been identified as out ofdetermines are within the scope of this new guidance. The Company’s preliminary analysis suggests thatTopic 606, the adoption of this accounting standard is not expected to haveCompany performs the following five steps: (i) identify the contract(s) with a material impact oncustomer; (ii) identify the Company’s consolidated financial statements. New accounting guidance related to the adoption of this standard continues to be released by the FASB, which could impact the Company’s preliminary analysis of materiality and may change the preliminary conclusions reached as to the application of this new guidance.
In January 2016, the FASB amended the Financial Instruments topic of the ASC to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its consolidated financial statements. Management isperformance obligations in the planning stages of developing processes and procedures to comply withcontract; (iii) determine the disclosures requirements of this ASU, which could impacttransaction price; (iv) allocate the disclosures the Company makes related to fair value of its financial instruments.
In February 2016, the FASB amended the Leases topic of the ASC to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The effect of the adoption will depend on leases at time of adoption. Once adopted, we expect to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities related to certain banking offices and certain equipment under noncancelable operating lease agreements, however, based on current leases the adoption is not expected to have a material impact on the Company's consolidated financial statements.
In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The effective date and impact on the Company's consolidated financial statements for this update are the same as those described in the Revenue from Contracts with Customers topic issued in May 2014 and August 2015 discussed above.

31



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements






transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation.

The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
11. AccountingService Fees on Deposit Accounts
The Bank earns fees from its deposit customers for account maintenance, transaction-based and Reporting Changes, Continuedoverdraft services.  Account maintenance fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis.  The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees on deposits accounts are charged to deposit customers for specific services provided to the customer, such as non-sufficient funds fees, overdraft fees, and wire fees. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.
In March 2016,ATM and Check Card Fee Income
Check card fee income represents fees earned when a debit card issued by the FASB issued guidanceBank is used.  The Bank earns interchange fees from debit cardholder transactions through the Mastercard payment network.  Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to simplify several aspectsthe cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the card.  Certain expenses directly associated with the debit card are recorded on a net basis with the fee income.

Trust Income
Trust income includes monthly advisory fees that are based on assets under management and certain transaction fees that are assessed and earned monthly, concurrently with the investment management services provided to the customer. The Bank does not charge performance based fees for its trust services and does not currently have any institutional clients, hedge funds or mutual funds. Although trust income is included within the scope of ASC 606, based on the fees charged by the Bank, there were no changes in the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classificationtrust income.  
Gains/Losses on OREO Sales
Gains/losses on the statementsale of cash flows. Additionally,OREO are included in non-interest expense and are generally recognized when the guidance simplifies two areas specificperformance obligation is complete. This is typically at delivery of control over the property to entities other than public business entities allowing them apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awardsbuyer at fair value to measuring them at intrinsic value. the time of each real estate closing.
The amendments were effectivefollowing table presents the Company's non-interest income for the Company for annual periods beginning after December 15, 2016 and interim periodsindicated. All of the Company’s revenue from contracts with customers within those annual periods. These amendments did not have a material effectthe scope of ASC 606 is recognized in non-interest income, with the exception of gains on the Company's consolidated financial statements.
In April 2016, the FASB amended the Revenue from Contracts with Customers topicsale of the ASC to clarify guidance related to identifying performance obligations and accounting for licenses of intellectual property. The effective date and impact on the Company's consolidated financial statements for this guidanceOREO, which are the same as those described in the Revenue from Contracts with Customers topic issued in May 2014 and August 2015 discussed above.
In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the ASC to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The effective date and impact on the Company's consolidated financial statements for this guidance are the same as those described in the Revenue from Contracts with Customers topic issued in May 2014 and August 2015 discussed above.
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The guidance significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model. The amendments will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for all entities beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of identifying required changes to the loan loss estimation models and processes and evaluating the impact of this new guidance. Once adopted, we expect our allowance for loan losses to increase, however, until our evaluation is complete the magnitude of the increase will be unknown.
In August 2016, the FASB amended the Statement of Cash Flows topic of the ASC to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
In January 2017, the FASB amended the Codification for SEC staff announcements made at recent Emerging Issues Task Force (EITF) meetings. The SEC guidance that specifically relates to the Company’s consolidated financial statements was from the September 2016 meeting, where the SEC staff expressed their expectations about the extent of disclosures registrants should make about the effects of the new FASB guidance as well as any amendments issued prior to adoption, in particular on revenue, leases and credit losses on financial instruments in accordance with Staff Accounting Bulletin Topic 11.M. Entities are required to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases where a company cannot reasonably estimate the impact of the adoption, then additional qualitative disclosures should be considered. The Company has adopted the amendments in this guidance and appropriate disclosures have been included in this Note for each recently issued accounting standard.
In March 2017, the FASB issued guidance on Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The guidance shortens the amortization period for certain callable debt securities held at a premium. The amendments will be effective for the Company for reporting periods beginning after December 15, 2018. The Company does not expect these amendments to have a material effect on its consolidated financial statements.
In May 2017, the FASB amended the requirements in the Compensation-Stock Compensation topic of the ASC related to changes to the terms or conditions of a share-based payment award. The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

non-interest expense when applicable.

32



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements






Three Months Ended March 31,
20232022
Non-interest income:
Gain on Sale of Loans (1)
$193,881 $713,893 
Service Fees on Deposit Accounts269,613 257,491 
Commissions From Insurance Agency (1)
162,799 139,504 
Trust Income382,208 364,746 
BOLI Income (1)
150,204 157,241 
ATM and Check Card Fee Income802,022 717,267 
Other (1)
239,650 253,182 
Total non-interest income$2,200,377$2,603,324
(1) Not within the scope of ASC 606

33
11. Accounting


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



NOTE 15 - LEASES
The Company has operating leases on six of its branches. During the three months ended March 31, 2023, the Company made cash payments in the amount of $128,000 for operating leases. The lease expense recognized during this period was $128,000 and Reporting Changes, Continuedwas recorded in occupancy expense within the Consolidated Statements of Income. The lease liability had a net decrease of $111,000. At March 31, 2023, the Bank had ROU assets of $1.7 million and a lease liability of $1.8 million recorded on its consolidated balance sheet compared to ROU assets of $1.9 million and a lease liability of $1.9 million at December 31, 2022. The lease agreements have maturity dates ranging from 2023 through 2028, some of which include options for multiple five or ten year extensions. At March 31, 2023, the remaining weighted average lease term was 3.86 years and the weighted average discount rate used was 3.2%.
In August 2017,
At March 31, 2023, maturities of operating lease liabilities for future periods were as follows:
Remainder of 2023$389,688 
2024522,147 
2025474,815 
2026363,428 
2027149,301 
Thereafter10,371 
Total undiscounted lease payments1,909,750 
Less: effect of discounting(116,161)
Present value of estimated lease payments (lease liability)$1,793,589 

NOTE 16 - PREFERRED STOCK
On May 24, 2022, the FASB amendedCompany entered into a Letter Agreement (“Agreement”) with the hedge accounting recognitionU.S. Department of Treasury under the Emergency Capital Investment Program (“ECIP”). Established by the Consolidated Appropriations Act, 2021, the ECIP was created to encourage low- and presentation requirements in ASC 815moderate-income community financial institutions and minority depository institutions to (1) improveprovide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, especially low-income and underserved communities, including counties with persistent poverty, that may be disproportionately impacted by the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. The amendments permit hedge accounting for hedging relationships involving nonfinancial risk and interest rate risk by removing certain limitations in cash flow and fair value hedging relationships. In addition, the amendments require an entity to present the earningseconomic effect of the hedging instrumentCOVID-19 pandemic by providing direct and indirect capital investments in low- and moderate-income community financial institutions.

Pursuant to the Agreement, the Company agreed to issue and sell 82,949 shares of Preferred Stock for an aggregate purchase price of $82.9 million in cash.This ECIP investment is treated as tier 1 capital. The Preferred Stock bears no dividend for the first 24 months following the investment date. Thereafter, the dividend rate will be adjusted, not higher than 2%, based on the lending growth criteria listed in the same income statement line item in whichAgreement. After the earnings effecttenth anniversary of the hedged item is reported. The amendments are effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company does not expect these amendments to have a material effect on its consolidated financial statements.

Other accounting standards that have been issued or proposed byinvestment date, the FASB or other standards-setting authorities are not expected to have a material impactdividend rate will be fixed based on the Company’s consolidated financial position, resultsaverage annual amount of operationslending in years 2 through 10. Dividends will be payable quarterly in arrears on March 15, June 15, September 15, and December 15.

The Preferred Stock may be redeemed at the option of the Company on or cash flows.after the fifth anniversary of issuance (or earlier in the event of loss of regulatory capital treatment), subject to the approval of the appropriate federal banking regulator and in accordance with the federal banking agencies’ regulatory capital regulations. The Preferred Stock is reported on the Consolidated Balance Sheets as Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP.



12. Subsequent Events

NOTE 17 - SUBSEQUENT EVENTS
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.
Management has reviewed all events occurring through the date the consolidated financial statements were available to be issued and determined that there were no subsequent events that requiredrequiring accrual or disclosure.

34






SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations


When we refer to “Security Federal” in this report, we are referring to Security Federal Corporation. When we refer to the “Bank” in this report, we are referring to Security Federal Bank, the wholly owned subsidiary of Security Federal. As used in this report, the terms “we,” “our,” “us,” and “Company” refer to Security Federal Corporation and its consolidated subsidiary, Security Federal Bank, unless the context indicates otherwise.

Forward-Looking Statements and “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995

Certain matters discussed in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. Forward-looking statements are not statements of historical fact, are based on certain assumptions and are generally identified by use of the words "believes," "expects," "anticipates," "estimates," "forecasts," "intends," "plans," "targets," "potentially," "probably," "projects," "outlook" or similar expressions or future or conditional verbs such as "may," "will," "should," "would" and "could." Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, assumptions and statements about, among other things, expectations of the business environment in which we operate, projections of future performance or financial items, perceived opportunities in the market, potential future credit experience, and statements regarding our mission and vision. These forward-looking statements are based upon current management expectations and may, therefore, involve risk and uncertainties. Our actual results, performance, or achievements may differ materially from those suggested, expressed, or implied by forward-looking statements as a result of a wide variety or range of factors, including, but not limited to:
•potential adverse impacts to economic conditions in our local market areas, other markets where the Company has lending relationships, or other aspects of the Company's business operations or financial markets, including, without limitation, as a result of employment levels, labor shortages and the effects of inflation, a potential recession or slowed economic growth caused by increasing political instability from acts of war including Russia’s invasion of Ukraine, as well as increasing prices and supply chain disruptions, and any governmental or societal responses to new variants of the novel coronavirus disease 2019 (“COVID-19”);
•the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loancredit losses and provision for loancredit losses that may be affected by deterioration in the housing and commercial real estate markets which may lead to increased losses and non-performing assets in our loan portfolio, and may result in our allowance for loancredit losses not being adequate to cover actual losses, and require us to materially increase our allowance for loancredit losses;
•changes in general economic conditions, either nationally or in our market areas;
•changes in the levels of general interest rates, and the relative differences between short and long term interest rates, deposit interest rates, our net interest margin and funding sources;
•unexpected outflows of uninsured deposits may require us to sell investment securities at a loss;
•the transition away from London Interbank Offered Rate ("LIBOR") toward new interest rate benchmarks;
•fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas;
•secondary market conditions for loans and our ability to originate loans for sale and sell loans in the secondary market;
•results of examinations of the Company by the Board of Governors of the Federal Reserve System ("Federal Reserve") and our bank subsidiarythe Bank by the FDICFederal Deposit Insurance Corporation ("FDIC") and the South Carolina State Board of Financial Institutions, or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loancredit losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, or impose additional requirements or restrictions on us, any of which could adversely affect our liquidity and earnings;
•legislative or regulatory changes that adversely affect our business, including the effect of the Dodd-Frank Wall Street Reformchanges in banking, securities and Consumer Protection Act; changestax law, and in regulatory policies and principles, or the interpretation of regulatory capital requirements or other rules, including as a result of Basel III;rules;
•our ability to attract and retain deposits;
increases in premiums for deposit insurance;
•our ability to control operating costs and expenses;
•our ability to implement our business strategies;
•the use of estimates in determining the fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation;
35


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
•difficulties in reducing risks associated with the loans on our balance sheet;
•staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
computer•disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on which we depend could fail or experience a security breach;the third-party vendors who perform several of our critical processing;
•our ability to retain key members of our senior management team;
•costs and effects of litigation, including settlements and judgments;
•our ability to manage loan delinquency rates;
•increased competitive pressures among financial services companies;
•changes in consumer spending, borrowing and savings habits;


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

•the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
•our ability to pay dividends on our common stock;
•the quality and composition of our securities portfolio and the impact of any adverse changes in the securities markets;
•inability of key third-party providers to perform their obligations to us;
•changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the FASB, including additional guidance and interpretation on accounting issues and details of the implementation of new accounting methods;
•the effects of climate change, severe weather events, natural disasters, pandemics, epidemics and other public health crises, acts of war or terrorism, and other external events on our business;
•other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and servicesservices; and the
•other risks described elsewhere in this document.document and in the Company's other reports filed with or furnished to the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Form 10-K”).


Some of these and other factorsforward-looking statements are discussed in the Company's 20162022 Form 10-K as well as other risk factors under Item 1A, “Risk Factors.” Such developments could have an adverse impact on our consolidated financial position and results of operations.
Any of the forward-looking statements that we make in this quarterly report on Form 10-Q and in other public reports and statements we make may turn out to be inaccurate as a result of our beliefs and assumptions we make in connection with the factors set forth above or because of other unidentified and unpredictable factors. Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements and you should not rely on such statements. The Company undertakes no obligation to publish revised forward-looking statements to reflect the occurrence of unanticipated events or circumstances after the date hereof. These risksfactors could cause our actual results for 20172023 and beyond to differ materially from those expressed in any forward-looking statements by or on behalf of us, and could negatively affect the Company’s consolidated financial condition, consolidated results of operations, liquidity and stock price performance.


Financial Condition at September 30, 2017 and December 31, 2016


Assets


Total assets increased $48.5 million or 6.0% to $861.1 million at September 30, 2017 from $812.7 million at December 31, 2016. Changes in total assets were primarily concentrated in the following asset categories:











36
     Increase (Decrease)
 September 30, 2017 December 31, 2016 Amount Percent
Cash and Cash Equivalents$15,158,779
 $9,374,549
 $5,784,230
 61.7%
Certificates of Deposits with Other Banks1,350,005
 2,445,005
 (1,095,000) (44.8)
Investment and Mortgage-Backed Securities – AFS388,643,233
 362,059,429
 26,583,804
 7.3
Investment and Mortgage-Backed Securities – HTM25,337,966
 25,583,956
 (245,990) (1.0)
Loans Receivable, Net375,711,468
 359,722,846
 15,988,622
 4.4
OREO1,907,637
 2,721,214
 (813,577) (29.9)
Premises and Equipment, Net22,865,424
 21,197,684
 1,667,740
 7.9
FHLB Stock2,473,700
 2,776,500
 (302,800) (10.9)
BOLI18,665,893
 17,101,045
 1,564,848
 9.2
Other Assets4,593,887
 5,447,746
 (853,859) (15.7)


Cash and cash equivalents increased $5.8 million or 61.7% to $15.2 million at September 30, 2017 from $9.4 million at December 31, 2016. Certificates of deposits with other banks decreased $1.1 million or 44.8% to $1.4 million at September 30, 2017. The decrease was due to the maturity and redemption of six of the Bank's lower yield time deposits with other banks during the first nine months of 2017.

Investment and mortgage-backed securities available for sale increased $26.6 million or 7.3% to $388.6 million at September 30, 2017 from $362.1 million at December 31, 2016. Investment and mortgage-backed securities held to maturity decreased $246,000 or 1.0% to $25.3 million at September 30, 2017 from $25.6 million at December 31, 2016. The Bank purchased 64 investment and mortgage-backed securities classified as available for sale for $118.6 million and three investment securities classified as held to maturity for $4.0 million during the first nine months of 2017.



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations



Financial Condition at March 31, 2023 and December 31, 2022

Assets - Total assets increased $24.7 million to $1.4 billion at March 31, 2023 from $1.4 billion at December 31, 2022. This increase was primarily due to increases in investments held to maturity ("HTM") and loans receivable, net, which were partially offset by decreases in cash and cash equivalents and investments available for sale ("AFS"). Changes in total assets are shown below.
Increase (Decrease)
March 31, 2023December 31, 2022$%
Cash and Cash Equivalents$24,719,440 $28,502,364 $(3,782,924)(13.3)%
Certificates of Deposits with Other Banks1,100,045 1,100,045 — — 
Investments AFS541,070,073 550,148,284 (9,078,211)(1.7)
Investments HTM180,178,508 167,437,616 12,740,892 7.6 
Total Loans Receivable, Net574,430,550 549,917,170 24,513,380 4.5 
Accrued Interest Receivable5,359,687 4,810,674 549,013 11.4 
OREO119,700 119,700 — — 
Operating Lease ROU Assets1,747,944 1,860,997 (113,053)(6.1)
Land Held for Sale1,096,614 1,096,614 — — 
Premises and Equipment, Net28,674,858 27,959,793 715,065 2.6 
FHLB Stock658,600 650,600 8,000 1.2 
BOLI27,468,302 27,318,098 150,204 0.5 
Goodwill1,199,754 1,199,754 — — 
Other Assets18,269,716 19,244,454 (974,738)(5.1)
Total Assets$1,406,093,791 $1,381,366,163 $24,727,628 1.8%

Cash and cash equivalents decreased $3.8 million or 13.3% to $24.7 million at March 31, 2023 compared to $28.5 million at December 31, 2022, as a result of the purchase of investments HTM and funding of loans. Investments HTM increased $12.7 million to $180.2 million at March 31, 2023 from $167.4 million at December 31, 2022.

Investments AFS decreased $9.1 million or 1.7% to $541.1 million at March 31, 2023 from $550.1 million at December 31, 2022 as maturities and principal paydowns of investments AFS exceeded purchases during the three months ended March 31, 2023. Additionally, investments AFS experienced a $5.6 million increase in fair value during the three months ended March 31, 2023.

Loans receivable, net, including loans held for sale, increased $16.0$24.5 million or 4.4%4.5% to $375.7$574.4 million at September 30, 2017March 31, 2023 from $359.7$549.9 million at December 31, 2016 as a result2022, primarily due to residential mortgage, commercial real estate, commercial and agricultural loans originated during the period. All held for investment loan balances increased during the first quarter of increased loan originations in all loan categories2023 with the exception of construction loans, held for sale, which decreased $3.0$4.1 million or 70.1%3.6% to $1.3$108.7 million at September 30, 2017March 31, 2023 from $4.2$112.8 million at December 31, 2016. Consumer loans increased $6.2 million or 12.2% to $56.9 million at September 30, 2017 compared to $50.7 million at December 31, 2016. Commercial business loans increased $7.2 million or 44.3% to $23.5 million at September 30, 2017 from $16.3 million at December 31, 2016.2022. Commercial real estate loans increased $5.6$3.2 million or 2.5%1.3% to $228.2$255.3 million at September 30, 2017March 31, 2023 from $222.6$252.2 million at December 31, 2016.2022. Residential real estatemortgage loans increased $1.1$21.9 million or 1.4%19.9% to $79.1$132.0 million at September 30, 2017March 31, 2023 from $78.0$110.1 million at December 31, 2016.

OREO decreased $814,0002022. Consumer HELOC increased $281,000 or 29.9%0.9% to $1.9$32.0 million at September 30, 2017March 31, 2023 from $2.7$31.7 million at December 31, 2016. The decrease was due2022. Other consumer loans increased $588,000 or 2.5% to the sale of 11 OREO properties during the nine months ended September 30, 2017, with a total book value of $1.2 million, offset slightly by the addition of five OREO properties with a book value of $486,000. At September 30, 2017, OREO consisted of the following real estate properties: five single-family residences and 27 lots within residential subdivisions located throughout our market areas in South Carolina and Georgia; five parcels of commercial land in South Carolina; and two commercial buildings in South Carolina.

Premises and equipment, net increased $1.7 million or 7.9% to $22.9$24.2 million at September 30, 2017March 31, 2023 from $21.2$23.6 million at December 31, 2016. The increase was primarily due2022. Loans held for sale, decreased $672,000 or 73.6% to additions related$241,000 at March 31, 2023 from $913,000 at December 31, 2022.

Other assets decreased $975,000 or 5.1% to the construction of the Bank's new branch in Evans, Georgia, which opened in April 2017.

FHLB stock decreased $303,000 or 10.9% to $2.5$18.3 million at September 30, 2017 compared to $2.8March 31, 2023 from $19.2 million at December 31, 2016 as a result of stock redemptions by the FHLB of Atlanta. The Bank, as a member of the FHLB of Atlanta, is required to acquire and hold shares of capital stock in the FHLB of Atlanta in an amount equal to a membership component, which is 0.09% of total assets, plus a transaction component, which is 4.25% of outstanding advances (borrowings) from the FHLB of Atlanta. As the Bank's total advances have decreased, so has its required investment in FHLB stock.

The cash value of BOLI increased $1.6 million or 9.2% to $18.7 million at September 30, 2017 compared to $17.1 million at December 31, 2016 primarily due to the purchase of 15 additional policies for a total of $2.0 million during the first nine months of 2017. BOLI, which earns tax-free yields, is utilized to partially offset the cost of the Company’s employee benefits programs and to provide key person insurance on certain officers of the Company.

Other assets decreased $854,000 or 15.7% to $4.6 million at September 30, 2017 from $5.4 million at December 31, 2016.2022. The decrease was primarily the result of a $1.6$1.4 million decrease in net deferred taxes, which was related to increaseddecreased unrealized gainslosses in the investment portfolio. The decrease in net deferred taxes was offset partially by increases of $444,000 and $320,000 in principal payments receivable on investment securities and prepaid assets, respectively, during, the same period.portfolio at March 31, 2023.





37



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations


Liabilities

Deposit Accounts

Total deposits increased $47.5decreased $1.4 million or 7.3%0.1% to $701.6 million$1.11 billion at September 30, 2017 compared to $654.1 million atMarch 31, 2023 from December 31, 2016. Checking2022 due to decreases in checking and certificate deposits accounted for thesavings accounts, partially offset by an increase in higher cost certificates of deposits. The majority of the growth, increasing $25.2Bank’s deposits are originated within the Bank’s immediate market area. The Bank had $6.0 million and $22.3 million, respectively, during 2017. The balances, weighted average rates and increases and decreases in deposit accounts were as followsbrokered time deposits at September 30, 2017both March 31, 2023 and December 31, 2016:
 September 30, 2017 December 31, 2016 Balance Increase (Decrease)
 BalanceWeighted Rate BalanceWeighted Rate Amount

Percent
Demand Accounts:        
Checking$193,586,490
0.03% $171,133,555
0.02% $22,452,935
13.1%
Money Market227,880,092
0.23 230,902,038
0.20 (3,021,946)(1.3)
Statement Savings Accounts42,273,930
0.11 36,522,989
0.10 5,750,941
15.7
Total$463,740,512
0.14% $438,558,582
0.12% $25,181,930
5.7%
Certificate Accounts        
0.00 – 0.99%$137,325,410
  $148,370,515
  $(11,045,105)(7.4)%
1.00 – 1.99%99,395,482
  66,532,221
  32,863,261
49.4
2.00 – 2.99%1,151,956
  641,960
  509,996
79.4
Total$237,872,848
0.88% $215,544,696
0.78% $22,328,152
10.4%
Total Deposits$701,613,360
0.39% $654,103,278
0.34% $47,510,082
7.3%

Included2022. The Bank uses brokered time deposits to manage interest rate risk because they are accessible in bulk at rates typically only slightly higher than those in our market areas. A portion of these brokered time deposits give the certificate accounts above were $31.5 million and $40.3Bank a call option that allows the Bank the choice to redeem them early should rates change. In addition, the Bank had $5.0 million in other brokered deposits at September 30, 2017both March 31, 2023 and December 31, 2016, respectively, with a weighted average interest rate2022. At March 31, 2023, approximately $310.2 million of 1.21%our $1.11 billion deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies and 1.14%, respectively.assumptions used for the Bank’s regulatory reporting requirements. For additional details of deposits, see “Note 9 – Deposits” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.


Advances From FHLBBorrowings
FHLB advances are summarized by contractual year
The Bank had $61.4 million in borrowings from the Federal Reserve Bank of maturity and weighted average interest rateAtlanta (“FRB”) at March 31, 2023, compared to $44.1 million at December 31, 2022. During the first quarter of 2023, the Bank elected to participate in the table below:
 September 30, 2017 December 31, 2016 Increase (Decrease)
Year Due:BalanceRate BalanceRate BalancePercent
2017$—
—% $15,395,000
0.76% $(15,395,000)(100.0)%
201813,000,000
1.08 18,000,000
1.06 (5,000,000)(27.8)
201920,500,000
1.39 12,000,000
1.31 8,500,000
70.8
20207,500,000
1.58 3,000,000
1.38 4,500,000
150.0
Total Advances$41,000,000
1.32% $48,395,000
1.05% $(7,395,000)(15.3)%

Advances are secured by a blanket collateral agreement with the FHLB pledging the Bank’s portfolio of residential first mortgage loans and investment securities with an amortized cost and fair value of $74.5 million and $69.5 million at September 30, 2017,respectively, and $73.3 million and $71.1 million at December 31, 2016, respectively.
There were no callable FHLB advances at September 30, 2017. Callable advances are callable at the option of the FHLB.  If an advance is called,Federal Reserve Bank Term Funding Program (“BTFP”) program, allowing the Bank has the option to pay off the advance without penalty, re-borrow funds on different terms, or convert the advance to a three-month floating rate advance tied to LIBOR.
Other Borrowings
refinance its existing FRB borrowings. The Bank also had $12.4$27.8 million in other borrowings (non-FHLB advances) at September 30, 2017, an increase of $3.0March 31, 2023, compared to $27.6 million or 32.3% from $9.3 million atand December 31, 2016. These borrowings consist2022, which consisted of short-term repurchase agreements with certain commercial demand deposit customers for sweep accounts. The repurchase agreements typically mature within oneFor additional information, see “Note 10 – Borrowings” of the Notes to three days and the interest rate paid on these borrowings floats monthly with money market type rates. Consolidated Financial Statements included in Part I. Item 1 of this report.

At both September 30, 2017March 31, 203 and December 31, 2016,2022, the interest rateCompany had $5.2 million in junior subordinated debentures and $26.5 million in subordinated debentures outstanding, which are described in more detail in “Note 11 - Subordinated Debentures” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.

Shareholders’ Equity

Shareholders’ equity increased $6.3 million or 3.9% to $166.5 million at March 31, 2023 from $160.2 million at December 31, 2022. The increase was primarily attributable to year to date net income of $2.7 million combined with a $5.6 million decrease in accumulated other comprehensive loss, net of tax. The decrease in net accumulated other comprehensive loss, net of tax, was related to the unrecognized gain in fair value of investments AFS during the three months ended March 31, 2023. The increases were partially offset by a $1.6 million adjustment to retained earnings related to the adoption of ASC 326 on January 1, 2023 and $423,000 in dividends paid onto common shareholders during the repurchase agreements was 0.15%.three months ended March 31, 2023.







38



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations for the Quarters Ended March 31, 2023 and 2022


Net Income
Net income increased $1.1 million, or 72.6%, to $2.7 million or $0.82 per basic common share for the quarter ended March 31, 2023 compared to $1.5 million or $0.48 per basic common share for the quarter ended March 31, 2022. The Bank had pledgedincrease in net income was primarily due to an increase in net interest income as collateral for these repurchase agreements investmenta result of increased market interest rates and, mortgage-backed securities with amortized coststo a lesser extent, higher average balances of investments and fair values of $16.9 million and $17.3 million, respectively, at September 30, 2017 and $17.6 million and $17.9 million, respectively, at December 31, 2016.

Note Payable

On October 31, 2016,loans receivable, net. Since March 2022, in response to inflation, the Company repurchased all 22,000 shares of its Series B Preferred Stock from the United States Department of the Treasury ("Treasury") for $21.4 million. In connection with the funding of this repurchase, the Company obtained a $14.0 million unsecured term loan from another financial institution. The loan accrues and pays interest quarterly at a floating rate of the Wall Street Journal Prime index minus 30 basis points, which was equal to 3.95% at September 30, 2017. The unpaid principal balance is payable in 11 consecutive quarterly payments of $437,500 each, with a balloon payment equal to the entire remaining principal balance due on October 1, 2019. At September 30, 2017, the remaining principal balance on the loan was $9.7 million.

The note has the following covenants with which the Bank must maintain compliance: the Bank must maintain a "Well Capitalized" rating in accordance with regulatory standards, a Risk-Based Capital Ratio of not less than 12.00%, a “Modified” Texas Ratio of not more than 30.00%, and an annual return on assets of at least 0.60%. The Bank is also required to maintain a loan loss reserve an amount deemed adequate by all federal and state regulatory authorities. Management of the Bank reviews these covenants quarterly for compliance. At September 30, 2017, the Bank was in compliance with all of these covenants.

Junior Subordinated Debentures

On September 21, 2006, Security Federal Statutory Trust (the Trust), issued and sold fixed and floating rate capital securities of the Trust (the “Capital Securities”). The Trust used the net proceeds from the sale of the Capital Securities to purchase a like amount of junior subordinated debentures (the “Debentures”Open Market Committee (“FMOC”) of the Company which are reported onFederal Reserve has increased the Consolidated Balance Sheets as junior subordinated debentures. The Capital Securities accrue and pay distributions at a floatingtarget range for the federal funds rate of three month LIBOR plus 170by 475 basis points, annually which was equalincluding 50 basis points during the first quarter of 2023, to 3.02% at September 30, 2017. a range of 4.75% to 5.00% as of March 31, 2023. As it seeks to control inflation without creating a recession, the FOMC has indicated further increases are may be implemented during calendar 2023.
Net Interest Income
The distribution rate payablefollowing table compares detailed average balances, average yields on interest-earning assets, average costs of interest-bearing liabilities and the Capital Securities is cumulativeresulting changes in interest income and payable quarterlyexpense for the three months ended March 31, 2023 and 2022. The average balances were derived from the daily balances throughout the periods indicated. The average yields or costs were calculated by dividing the income or expense by the average balance of the corresponding assets or liabilities. Nonaccrual loans are included in arrears. The Capital Securities mature or are mandatorily redeemable upon maturity on December 15, 2036, or upon earlier optional redemption as providedearning assets in the indenture. The Company hasfollowing table. Loan yields have been reduced to reflect the right to redeemnegative impact on our earnings of loans on nonaccrual status. Interest income from non-taxable investments is calculated on a tax equivalent basis, which recognizes the Capital Securities in whole or in part.

Convertible Debentures

Effective December 1, 2009,income tax savings when comparing taxable and tax-exempt assets and was calculated using the Company issued $6.1 million in convertible senior debentures. The debentures will mature on December 1, 2029 and accrue interest at theeffective tax rate of 8.0% per annum until maturity or earlier redemption or repayment. Interest on the debentures is payable on June 1 and December 1 of each year and commenced on June 1, 2010. The debentures are convertible into the Company’s common stock at a conversion price of $20 per share at the option of the holder at any time prior to maturity. The debentures are redeemable, in whole or in part, at the option of the Company at any time on or after December 1, 2019, at a price equal to 100% of the principal amount of the debentures to be purchased plus any accrued and unpaid interest to, but excluding, the date of redemption. The debentures are unsecured general obligations of the Company ranking equal in right of payment to all of our present and future unsecured indebtedness that is not expressly subordinated.

Equity

Shareholders’ equity increased $6.8 million or 9.6% to $77.9 million at September 30, 2017 from $71.1 million at December 31, 2016 primarily due to net income and increased accumulated other comprehensive income, net of tax. The Company’s net income available for common shareholders was $5.0 million for the nine monthsquarters ended September 30, 2017. Accumulated other comprehensive income, net of tax, comprised primarily of unrealized gains on securities available for sale, net of tax, increased $2.6 million or 216.9% to $3.7 million at September 30, 2017 from $1.2 million at DecemberMarch 31, 2016. The Board of Directors of the Company declared common stock dividends totaling $795,000 during the nine months ended September 30, 2017. Book value per common share was $26.45 at September 30, 2017 compared to $24.14 at December 31, 2016.2023 and 2022.

Quarter Ended March 31,
20232022
(Dollars in thousands)Average BalanceInterest
Yield/ Rate (1)
Average BalanceInterest
Yield/ Rate (1)
Interest-Earning Assets:
Loans Receivable, Net$570,125 $7,410 5.20 %$516,382 $6,097 4.72 %
Taxable Investments698,974 6,610 3.78 681,785 2,426 1.42 
Non-taxable Investments21,087 197 3.74 24,151 226 3.74 
Deposits with other Banks3,585 34 3.84 2,404 2 0.37 
Total Interest-Earning Assets$1,293,771 $14,251 4.41 %$1,224,722 $8,751 2.86 %
Interest-Bearing Liabilities:
Checking, Savings & Money Market Accounts$672,122 $2,293 1.36 %$695,774 $223 0.13 %
Certificates Accounts163,806 622 1.52 160,215 122 0.34 
Total Interest-Bearing Deposits835,928 2,915 1.39 855,989 345 0.16 
Other Borrowings (2)
77,501 627 3.24 49,356 30 0.24 
Junior Subordinated Debentures5,155 84 6.49 5,155 26 2.02 
Subordinated Debentures26,500 348 5.25 30,000 394 5.25 
Total Interest-Bearing Liabilities$945,084 $3,974 1.68 %$940,500 $795 0.34 %
Net Interest Rate Spread2.73 %2.52 %
Tax Equivalent Net Interest Income/Margin$10,277 3.18 %$7,956 2.60 %
Less: tax equivalent adjustment34 51 
Net Interest Income$10,243 $7,905 

(1) Annualized
(2) Includes Federal Reserve borrowings and repurchase agreements.



39



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations



Results of OperationsNet interest income increased $2.3 million or 29.6% to $10.2 million during the quarter ended March 31, 2023, compared to $7.9 million for the Three Month Periods Ended September 30, 2017 and 2016

Net Income Available to Common Shareholders

Net income available to common shareholderssame quarter in 2022. During the quarter ended March 31, 2023, average interest-earning assets increased $233,000 or 14.0% to $1.9$69.0 million or $0.61 per diluted common share5.6% to $1.3 billion from $1.2 billion for the three monthssame quarter in 2022, while average interest-bearing liabilities increased $4.6 million or 0.5% to $945.1 million for the quarter ended September 30, 2017March 31, 2023 from $940.5 million for the comparable quarter in 2022. The Company's net interest margin was 3.18% for the quarter ended March 31, 2023 compared to $1.7 million or $0.54 per diluted common share2.60% for the three months ended September 30, 2016.comparable quarter in 2022. The increase in net income available to common shareholders for the three month period was primarily the result of increases in net interest income and non-interest income combined with the absence of preferred stock dividends. These items were partially offset by increases in the provision for loan losses and non-interest expense.
Net Interest Income

TheCompany's net interest spread on a tax equivalent basis decreased four basis points to 3.35%was 2.73% for the three monthsquarter ended September 30, 2017 from 3.39%March 31, 2023 compared to 2.52% for the comparable period in 2016. Netquarter ended March 31, 2022.

Interest Income
Total tax-equivalent interest income increased $307,000$5.5 million or 4.8%62.8% to $6.7$14.3 million duringfor the three monthsquarter ended September 30, 2017,March 31, 2023 compared to $6.3$8.8 million for the same period in 2016. During the three months ended September 30, 2017, average interest earning assets increased $43.0 million or 5.7% to $798.4 million from $755.4 million for the same period in 2016. Average interest-bearing liabilities increased $48.2 million or 5.5% to $700.7 million for the three months ended September 30, 2017 from $652.5 million for the comparable period in 2016.2022.


Interest Income

The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the three months ended September 30, 2017 and 2016:
 Three Months Ended September 30, Change in Average BalanceIncrease (Decrease) in Interest Income
 2017 2016 
(Dollars in thousands)Average Balance
Yield(1)
 Average Balance
Yield(1)
 
Loans Receivable, Net$372,993
5.52% $347,681
5.65% $25,312
$234
Mortgage-Backed Securities206,353
2.47 219,616
2.17 $(13,263)82
Investment Securities(2)
216,271
2.80 184,332
2.66 $31,939
287
Overnight Time and Certificates of Deposit2,783
0.90 3,726
0.53 $(943)1
Total Interest-Earning Assets$798,400
3.98% $755,355
3.89% $43,045
$604
(1)Annualized
(2)Tax equivalent basis recognizes the income tax savings when comparing taxable and tax-exempt assets and was calculated using an effective tax rate of 34%. The tax equivalent adjustment relates to the tax exempt municipal bonds and the state tax credit and was $188,924 and $183,850 for the quarters ended September 30, 2017 and 2016, respectively.
Total tax equivalent interest income increased $604,000 or 8.2% to $7.9 million during the three months ended September 30, 2017 compared to $7.3 million during the same period in 2016. This increase was primarily the result of a $43.0 million or 5.7% increase in average interest-earning assets combined with an increase of nine basis points in the average yield. Total interest income on loans increased $234,000$1.3 million or 4.8%21.5% to $5.1$7.4 million duringfor the three monthsquarter ended September 30, 2017March 31, 2023 from $4.9$6.1 million duringfor the comparable periodfirst quarter of 2022. The increase in 2016. The increaseloan interest income was the result of a $25.3$53.7 million or 7.3% increase in the average loan portfolio balance which was partially offset bycombined with a 1348 basis point decreaseincrease in the average yield. yield on loans receivable.

Interest income from mortgage-backed securitiestaxable investments increased $82,000$4.2 million or 6.9%172.5% to $1.3$6.6 million during the three monthsquarter ended September 30, 2017 due to an increaseMarch 31, 2023 from $2.4 million for the first quarter of 30 basis points in the average portfolio yield offset by a $13.3 million or 6.0% decrease in the average balance. Tax equivalent interest income from investment securities increased $287,000 or 23.3% to $1.5 million during the three months ended September 30, 20172022, due to a $31.9$17.2 million or 17.3% increase in the average balance of the investment securities portfoliotaxable investments combined with a 14236 basis point increase in the yield.



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations


Interest Expense

The following table compares detailed average balances, cost of funds, and the resulting changes inyield to 3.78%. Tax equivalent interest expense for the three months ended September 30, 2017 and 2016.
 Three Months Ended September 30, Change in Average BalanceIncrease (Decrease) in Interest Expense
 2017 2016 
(Dollars in thousands)Average Balance
Cost(1)
 Average Balance
Cost(1)
 
Now and Money Market Accounts$343,898
0.18% $328,233
0.12% $15,665
$50
Statement Savings Accounts41,551
0.10 35,673
0.10 $5,878
2
Certificate Accounts232,619
0.87 222,077
0.73 $10,542
96
FHLB Advances and Other Borrowed Money60,930
1.08 55,272
0.96 $5,658
32
Note Payable10,477
4.04 —
— $10,477
106
Junior Subordinated Debentures5,155
3.02 5,155
2.44 $—
8
Senior Convertible Debentures6,069
8.00 6,084
8.00 $(15)—
Total Interest-Bearing Liabilities$700,699
0.63% $652,494
0.49% $48,205
$294
(1) Annualized

Total interest expense increased $294,000 or 36.3%income from non-taxable investments decreased $29,000 to $1.1 million$197,000 during the three monthsquarter ended September 30, 2017 comparedMarch 31, 2023 due to $805,000 fora decrease in the same period in 2016. The increase in total interest expense was attributableaverage balance of non-taxable investments.

Interest income from deposits with other banks increased $32,000 during the quarter ended March 31, 2023 to increases in interest rates paid and$34,000, due to a $48.2$1.2 million or 7.4% increase in the average balance of interest-bearingthese assets combined with a significant increase in the average yield earned on these assets due to increased market interest rates.
Interest Expense
Total interest expense increased $3.2 million or 399.9% to $4.0 million for the quarter ended March 31, 2023 compared to $795,000 for the same quarter in 2022 due to an increase in market interest rates combined with a $4.6 million increase in the average balance of these liabilities.
Interest expense on deposits increased $148,000 or 28.4%$2.6 million to $666,000 during the three months ended September 30, 2017 compared to $519,000 for the same period in 2016. The increase was attributable to an eight basis point increase in the average cost of deposit accounts combined with a $32.1 million or 5.5% increase in average interest-bearing deposits to $618.1$2.9 million for the three monthsquarter ended September 30, 2017compared to $586.0 millionMarch 31, 2023 from $345,000 for the three months ended September 30, 2016.

Interest expense on FHLB advances and other borrowings increased $32,000 or 23.8% to $165,000 during the three months ended September 30, 2017 from $133,000 for the same period in 2016. The increase was attributablefirst quarter of 2022, due to an increase of 12123 basis points in the average cost, combined withpartially offset by a $5.7$20.1 million or 10.2% increasedecrease in the average balance of FHLB advancesinterest-bearing deposit accounts. Interest expense on FRB and other borrowed money to $60.9 millionborrowings increased $598,000 during the three months ended September 30, 2017 from $55.3quarter due to a $28.1 million forincrease in the same periodbalance of these liabilities combined with an increase of 300 basis points in 2016.the average cost of these liabilities. Interest expense on the junior subordinated debentures increased due to increased floating interest rates reflecting higher market interest rates.



Provision for LoanCredit Losses

The amount of the provision is determined by management’s on-going monthly analysis of the loan portfolio and the adequacy of the allowance for loancredit losses. The Company has policies and procedures in place for evaluating and monitoring the overall credit quality of the loan portfolio and for timely identification of potential problem loans including internal and external loan reviews. The adequacy of the allowance for loancredit losses is reviewed monthly by the Asset Classification Committee and quarterly by the Board of Directors.

Management’s monthly review of the adequacy of the allowance includes three main components.
The first component is an analysis of loss potential in various homogeneous segments of the loan portfolio based on historical trends and the risk inherent in each loan category. Currently, management appliesThe Company calculates the allowance for credit losses for each pool using a four yearremaining life loss methodology with a two quarter reasonable and supportable forecast period and an immediate reversion period. Management believes that the Company’s historical loss ratioexperience provides the best basis for its assessment of expected credit losses to each loan categorydetermine the allowance for credit losses. The Company uses its own internal data to estimatemeasure historical credit loss experience within the inherentpools with similar risk characteristics over an economic cycle. The Company then forecasts the calculated historical loss in these pooled loans.

rates over the calculated remaining life of loans by pool. The second component of management’s monthly analysis is the specific review and evaluation of significant problem creditsindividually evaluated collateral dependent loans identified through the Company’s internal monitoring system. These loans are evaluated for impairmentdo not share common risk characteristics and recorded in accordance with accounting guidance. For each loan deemed impaired, management calculates a specific reserve for the amount in which the recorded investment in the loan exceeds the fair value. This estimate is based on a thorough analysis of the most probable source of repayment, which is typically liquidation of the collateral underlying the loan.


40



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

are not included within the collectively evaluated loans for determining the allowance for credit losses. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. The third component is an analysis of changes in qualitative factors that may affect the portfolio, including but not limited to: relevant economic trends that could impact borrowers’ ability to repay, industry trends, changes in the volume and composition of the portfolio, credit concentrations, or lending policies and the experience and ability of the staff and Board of Directors.
Management also reviews and incorporates certain ratios such as percentage of classified loans, average historical loancredit losses by loan category, delinquency percentages, and the assignment of percentage targets of reserves in each loan category when evaluating the allowance.

Once the analysis is completed, the three components are combined and compared to the allowance amount. Based on this, charges are made to the provision as needed.
Based on the foregoing, no provision for credit losses was recorded for the three months ended March 31, 2022 and 2023.For additional details of the changes in the allowance for credit losses, see “Note 8 - Loans Receivable" of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.
The Company had net charge-offs of $133,000
Non-Interest Income
Non-interest income decreased $403,000 or 15.5% to $2.2 million for the quarter ended September 30, 2017March 31, 2023 compared to net charge-offs of $284,000$2.6 million for the same three month periodquarter ended March 31, 2022. The decrease was primarily due to a $520,000 decrease in 2016. There was $100,000gain on sale of loans reflecting the decline in provisionoriginations of loans held for loan losses recordedsale following recent market interest rate increases. In addition, BOLI income and other non-interest income decreased $7,000 and $14,000, respectively, during the quarter ended September 30, 2017March 31, 2023 when compared to no provisionthe quarter ended March 31, 2022. These decreases were partially offset by increases in all other non-interest income line items with the largest increase occurring in ATM and check card fee income, which increased $85,000 or 11.8% to $802,000 during the quarter ended March 31, 2023 when compared to the quarter ended March 31, 2022, due to a new interchange service provider that pays the Bank more fees per transaction. For additional details of the changes in non-interest income, see “Note 14 - Non-Interest Income” of the Notes to Consolidated Financial Statements included in Part I. Item 1 of this report.

Non-Interest Expense
Non-interest expense increased $436,000 or 5.1% to $9.0 million for the same quarter ended March 31, 2023 compared to $8.6 million for the quarter ended March 31, 2022. The following table summarizes the changes in 2016.non-interest expense:

Quarter Ended March 31,Increase (Decrease)
20232022$%
Compensation and Employee Benefits$5,240,796 $5,056,620 $184,176 3.6 %
Occupancy806,434 712,786 93,648 13.1 
Advertising244,595 260,333 (15,738)(6.0)
Depreciation and Maintenance of Equipment620,156 720,661 (100,505)(13.9)
FDIC Insurance Premiums90,306 112,042 (21,736)(19.4)
Write down of Land Held for Sale— 339,344 (339,344)(100.0)
Consulting213,335 164,750 48,585 29.5 
Debit Card Expense336,646 283,789 52,857 18.6 
Data Processing280,03667,052212,984 317.6 
Other1,198,284 877,467 320,817 36.6 
Total Non-Interest Expense$9,030,588 $8,594,844 $435,744 5.1 %
The table below summarizes activity associated withincrease in non-interest expense was primarily due to increases in compensation and employee benefits, occupancy expense and other non-interest expenses during the allowancefirst quarter of 2023, which were partially offset by a decrease in depreciation and maintenance of equipment and a writedown of land held for loan losses for the quarters ended September 30, 2017 and 2016:sale.

41
 Three Months Ended September 30,
 2017 2016
Beginning Balance$8,202,632
 $8,395,214
Provision for Loan Losses100,000
 —
Charge-offs(259,438)
 (323,247)
Recoveries125,994
 39,144
Ending Balance$8,169,188
 $8,111,111
    
Allowance For Loan Losses as a % of Gross Loans Receivable, Held For Investment at the End of the Period2.1% 2.3%
Allowance For Loan Losses as a % of Impaired Loans at the End of the Period82.6% 83.2%
Impaired Loans$9,890,138
 $9,751,765
Gross Loans Receivable, Held For Investment (1)
$382,610,246
 $355,786,250
Total Loans Receivable, Net$375,711,468
 $351,818,570

(1) TOTAL LOANS HELD FOR INVESTMENT, NET OF DEFERRED FEES AND LOANS IN PROCESS.
Our strategy is to work with our borrowers to reach acceptable payment plans while protecting our interests in the existing collateral. In the event an acceptable arrangement cannot be reached, we may need to acquire these properties through foreclosure or other means and subsequently sell, develop or liquidate them.



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations


Non-Interest Income
Non-interest income increased $581,000 or 32.7% to $2.4 million for the three months ended September 30, 2017, compared to $1.8 million for the three months ended September 30, 2016. The following table summarizes the changes in non-interest income:
 Three Months Ended September 30, 
Increase (Decrease)

 20172016 AmountsPercent
Gain on Sale of Investment Securities$79,363
$360,425
 $(281,062)(78.0)%
Gain on Sale of Loans373,636
256,918
 116,718
45.4
Service Fees on Deposit Accounts274,717
266,960
 7,757
2.9
Commissions From Insurance Agency172,074
149,529
 22,545
15.1
BOLI Income788,133
132,000
 656,133
497.1
Trust Income186,000
197,000
 (11,000)(5.6)
Check Card Fee Income282,686
247,331
 35,355
14.3
Other205,524
170,519
 35,005
20.5
Total Non-Interest Income$2,362,133
$1,780,682
 $581,451
32.7 %

Net gain on sale of investment securities was $79,000 during the quarter ended September 30, 2017, a decrease of $281,000 or 78.0% compared to $360,000 for the same period last year. The decrease resulted from gross losses of $162,000 on the sale of investment securities during the quarter ended September 30, 2017 compared to no gross loss during the third quarter of 2016. Gain on sale of loans increased $117,000 or 45.4% as the dollar volume of loans sold increased due to the increase in originations of loans held for sale.

BOLI income increased $656,000 or 497.1% to $788,000 during the quarter ended September 30, 2017 from $132,000 for the same period in 2016. During the third quarter of 2017, the Bank recognized $654,000 in death benefits in addition to $134,000 in income related to accrued interest credited to the cash surrender value underlying the BOLI policies. The Company did not receive any life insurance proceeds during the third quarter of 2016. The entire portion of income recognized in 2016 was related to changes in the cash surrender value of the policies.


Non-Interest Expense

For the quarter ended September 30, 2017, non-interest expense increased $875,000 or 15.4% to $6.6 million compared to $5.7 million for the same period in 2016. The following table summarizes the changes in non-interest expense:
 Three Months Ended September 30, Increase (Decrease)
 20172016 AmountsPercent
Compensation and Employee Benefits$3,872,102
$3,167,112
 $704,990
22.3%
Occupancy569,024
502,352
 66,672
13.3
Advertising120,033
100,251
 19,782
19.7
Depreciation and Maintenance of Equipment569,839
510,645
 59,194
11.6
FDIC Insurance Premiums64,518
62,163
 2,355
3.8
Net Cost of Operation of OREO105,172
25,991
 79,181
304.6
Prepayment Penalties on FHLB Advances—
260,594
 (260,594)(100.0)
Other1,268,449
1,065,209
 203,240
19.1
Total Non-Interest Expense$6,569,137
$5,694,317
 $874,820
15.4%

Compensation and employee benefits expenses increased $705,000,$184,000 or 22.3%3.6% to $3.9$5.2 million for the three monthsquarter ended September 30, 2017March 31, 2023 when compared to $3.2 million for the same period last yearquarter ended March 31, 2022 due to general annual cost of living increases, combined with an increase in the number of full time employees.

equivalent employees as a result of our newest branch added in 2023 and the overall growth of the Company. Occupancy expense and other non-interest expense also increased $67,000 or 13.3%during the first quarter of 2023 due to increased operations and the addition of our Evans, Georgianewest branch which openedlocated in April 2017.Augusta, Georgia.

Provision For Income Taxes
The provision for income taxes increased $375,000 or 102.7% to $739,000 for the quarter ended March 31, 2023 from $365,000 for the same period in 2022 due to higher net income before taxes in 2023. Pre-tax net income was $3.7 million for the quarter ended March 31, 2023 compared to $1.9 million for the first quarter of 2022. The Company’s combined federal and state effective income tax rate was 21.7% and 19.1% for the quarters ended March 31, 2023 and 2022, respectively.

42



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations


The Company had a net cost of $105,000 from the operation of OREO properties during the quarter ended September 30, 2017 compared to a net cost of $26,000 during the quarter ended September 30, 2016. This amount includes all expenses associated with OREO including write-down in value and gain or loss on sales incurred during each period. The Company had write-downs of $50,000 during the third quarter of 2017 compared to no write-downs for the same period in 2016.

The Company did not prepay any FHLB advances during the three months ended September 30, 2017, and, therefore, incurred no prepayment penalties during the period. In comparison, the Company prepaid one FHLB advance during the same three month period in 2016 and incurred a prepayment penalty of $261,000. The Company elected to prepay this higher rate advance in order to reduce interest expense in future periods and improve net interest spread.

Other expenses increased $203,000, or 19.1% to $1.3 million for the three month period ended September 30, 2017 compared to $1.1 million for the same period in the prior year. Other expenses include legal, professional and consulting expenses, supplies and other miscellaneous expenses.


Provision For Income Taxes

The provision for income taxes decreased $210,000 or 32.0% to $445,000 for the three months ended September 30, 2017 from $655,000 for the same period one year ago. Income before income taxes was $2.3 million for the three months ended September 30, 2017 compared to $2.4 million for the same three month period in 2016. The Company’s combined federal and state effective income tax rate for the current quarter was 19.0% compared to 26.9% for the same quarter one year ago.


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations for the Nine Month Periods Ended September 30, 2017 and 2016

Net Income Available to Common Shareholders
Net income available to common shareholders increased $277,000 or 5.8% to $5.0 million for the nine months ended September 30, 2017 when compared to the same nine month period in 2016. The increase in net income available to common shareholders for the nine month period was primarily the result of increases in net interest income and non-interest income combined with the absence of preferred stock dividends. These items were partially offset by increases in the provision for loan losses and non-interest expense.

Net Interest Income
The net interest spread on a tax equivalent basis decreased seven basis points to 3.28% for the nine months ended September 30, 2017 from 3.35% for the comparable period in 2016. Net interest income increased $376,000 or 2.0% to $19.1 million for the nine months ended September 30, 2017. During the nine months ended September 30, 2017, average interest earning assets increased $31.3 million or 4.2% to $781.9 million from $750.7 million for the nine months ended September 30, 2016. Average interest-bearing liabilities also increased by $37.9 million or 5.8% to $687.9 million for the nine months ended September 30, 2017 from $650.0 million for the same period in 2016.

Interest Income
The following table compares detailed average balances, associated yields, and the resulting changes in interest income for the nine months ended September 30, 2017 and 2016:

 Nine Months Ended September 30, Change in Average BalanceIncrease (Decrease) in Interest Income
 2017 2016 
(Dollars in Thousands)Average Balance
Yield(1)
 Average Balance
Yield(1)
 
Loans Receivable, Net$363,918
5.44% $339,587
5.65% $24,331
$470
Mortgage-Backed Securities203,907
2.32
 219,104
2.23
 (15,197)(119)
Investment Securities(2)
207,925
2.74
 187,918
2.69
 20,007
493
Overnight Time & Certificates of Deposit6,1780.75
 4,0620.46
 2,116
21
Total Interest-Earning Assets$781,928
3.87% $750,671
3.88% $31,257
$865
(1)Annualized
(2)Tax equivalent basis recognizes the income tax savings when comparing taxable and tax-exempt assets and was calculated using an effective tax rate of 34%. The tax equivalent adjustment relates to the tax exempt municipal bonds and state tax credit and was $550,269 and $540,948 for the nine months ended September 30, 2017 and 2016, respectively.

Total tax equivalent interest income increased $865,000 or 4.0% to $22.7 million during the nine months ended September 30, 2017 from $21.9 million for the same period in 2016. This increase was primarily the result of a $31.3 million or 4.2% increase in average interest earning assets, which was partially offset by a decline of one basis point in the average yield on interest-earning assets. Total interest income on loans increased $470,000 or 3.3% to $14.8 million during the nine months ended September 30, 2017 from $14.4 million for the same period in 2016. The increase was a result of a $24.3 million or 7.2% increase in the average loan portfolio to $363.9 million from $339.6 million for the same period in 2016, which was partially offset by a decrease of 21 basis points in the average yield on loans. Interest income from mortgage-backed securities decreased $119,000 or 3.3% to $3.6 million for the nine months ended September 30, 2017 from $3.7 million for the same period in 2016 as a result of a $15.2 million or 6.9% decrease in the average balance of mortgage-backed securities, which was partially offset by an increase of nine basis points in the average yield. Tax equivalent interest income from investment securities increased $493,000 or 13.0% to $4.3 million for the nine months ended September 30, 2017 from $3.8 million for the same period in 2016 due to a $20.0 million increase in the average balance of investment securities combined with an increase of six basis points in the average yield.




SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations

Interest Expense

The following table compares detailed average balances, cost of funds, and the resulting changes in interest expense for the nine months ended September 30, 2017 and 2016:
 Nine Months Ended September 30, Change in Average BalanceIncrease (Decrease) in Interest Expense
 2017 2016 
(Dollars in Thousands)Average Balance
Yield(1)
 Average Balance
Yield(1)
 
Now and Money Market Accounts$340,876
0.17% $327,971
0.13% $12,905
$116
Statement Savings Accounts39,796
0.10 33,970
0.10 5,826
5
Certificates Accounts227,674
0.82 230,563
0.72 (2,889)163
FHLB Advances and Other Borrowed Money56,486
0.97 46,227
1.62 10,259
(152)
Note Payable11,809
3.71 —
— 11,809
329
Junior Subordinated Debentures5,155
2.87 5,155
2.35 —
20
Senior Convertible Debentures6,079
8.00 6,084
8.00 (5)—
Total Interest-Bearing Liabilities$687,875
0.60% $649,970
0.53% $37,905
$481
(1) Annualized

Interest expense increased $481,000 or 18.5% to $3.1 million during the nine months ended September 30, 2017 compared to $2.6 million for the same period in 2016. The increase in total interest expense was attributable to increases in interest rates paid combined with a $37.9 million or 5.8% increase in the average balance of interest-bearing liabilities. Interest expense on deposits increased $283,000 or 18.0% to $1.9 million during the nine months ended September 30, 2017 compared to $1.6 million for the same period last year. The increase was attributable to a six basis point increase in the average cost of deposit accounts combined with a $15.8 million or 2.7% increase in average interest-bearing deposits to $608.3 million for the nine months ended September 30, 2017 compared to $592.5 million for the nine months ended September 30, 2016.

Interest expense on FHLB advances and other borrowings decreased $152,000 or 27.0% to $410,000 during the nine months ended September 30, 2017 from $561,000 during the same period in 2016 due to a decrease of 65 basis points in the average cost. This decrease was partially offset by a $10.3 million or 22.2% increase in the balance of FHLB advances and other borrowed money to $56.5 million during the nine months ended September 30, 2017 from $46.2 million for the same period last year.


Provision for Loan Losses

There was $100,000 in provision for loan losses for the nine months ended September 30, 2017 compared to no provision expense for the same period in 2016. The Company had net charge-offs of $287,000 for the nine months ended September 30, 2017 compared to net charge-offs of $164,000 during the comparable period in 2016. The following table summarizes the changes in the allowance for loan losses for the nine months ended September 30, 2017 and 2016:

 Nine Months Ended September 30,
 2017 2016
Beginning Balance$8,356,231
 $8,275,133
Provision for Loan Losses100,000
 —
Charge-offs(514,685)
 (679,746)
Recoveries227,642
 515,724
Ending Balance$8,169,188
 $8,111,111


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations


Non-Interest Income

Non-interest income increased $720,000 or 14.2% to $5.8 million for the nine months ended September 30, 2017, compared to $5.1 million for the nine months ended September 30, 2016. The following table summarizes the changes in the components of non-interest income:

 Nine Months Ended September 30, Increase (Decrease)
 20172016 AmountsPercent
Gain on Sale of Investment Securities$707,902
$772,143
 $(64,241)(8.3)%
Gain on Sale of Loans894,053
657,473
 236,580
36.0
Service Fees on Deposit Accounts776,469
772,341
 4,128
0.5
BOLI Income1,028,133
396,000
 632,133
159.6
Commissions From Insurance Agency451,311
441,519
 9,792
2.2
Trust Income554,000
521,000
 33,000
6.3
Check Card Fee Income838,302
742,583
 95,719
12.9
Grant Income—
265,496
 (265,496)(100.0)
Other542,250
504,200
 38,050
7.5
Total Non-Interest Income$5,792,420
$5,072,755
 $719,665
14.2 %

Net gain on sale of investment securities was $708,000 during the nine months ended September 30, 2017, a decrease of $64,000 or 8.3% compared to a net gain of $772,000 during the same period last year. The decrease resulted from gross losses of $162,000 on the sale of investment securities during the nine months ended September 30, 2017 compared to no gross loss during the comparable period of 2016.

Gain on sale of loans increased $237,000 or 36.0% to $894,000 for the nine months ended September 30, 2017 compared to $657,000 during the same period in 2016 as the dollar volume of loans sold increased due to the increase in originations of loans held for sale.

BOLI income increased $656,000 or 497.1% to $1.0 million during the nine months ended September 30, 2017 from $396,000 for the same period in 2016. During the nine months ended September 30, 2017, the Bank recognized $654,000 in death benefits in addition to $374,000 in income related to accrued interest credited to the cash surrender value underlying the BOLI policies. The Company did not receive any life insurance proceeds during 2016; all BOLI income recognized was related to changes in the cash surrender value of the policies.

These increases were partially offset by a $265,000 decrease in grant income. The Company received a Bank Enterprise Award (“BEA”) grant from the US Treasury in 2016 in recognition of its continued commitment to community development in economically distressed areas. Our commitment to these areas has continued in 2017 and we anticipate receiving another comparable BEA grant later this year.



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations


Non-Interest Expense

For the nine months ended September 30, 2017, non-interest expense increased $1.3 million or 7.9% to $18.3 million compared to $16.9 million for the same period in 2016. The following table summarizes the changes in the components of non-interest expense:
 Nine Months Ended September 30, Increase (Decrease)
 20172016 AmountsPercent
Compensation and Employee Benefits$10,916,386
$9,675,430
 $1,240,956
12.8%
Occupancy1,661,661
1,469,602
 192,059
13.1
Advertising391,742
343,034
 48,708
14.2
Depreciation and Maintenance of Equipment1,541,460
1,486,060
 55,400
3.7
FDIC Insurance Premiums168,707
322,653
 (153,946)(47.7)
Net Benefit of Operation of OREO(96,730)(647,990) 551,260
(85.1)
Prepayment Penalties on FHLB Advances—
789,306
 (789,306)(100.0)
Other3,681,552
3,485,289
 196,263
5.6
Total Non-Interest Expense$18,264,778
$16,923,384
 $1,341,394
7.9%

Compensation and employee benefits expenses were $10.9 million for the nine months ended September 30, 2017, an increase of $1.2 million or 12.8% from $9.7 million during the same period last year. The increase was due to general annual cost of living increases combined with the addition of several new hires during the nine months ended September 30, 2017. The Company had 223 full time equivalent employees at September 30, 2017 compared to 204 at September 30, 2016.

The Company had a net benefit of $97,000 from the operation of OREO properties during the nine months ended September 30, 2017 compared to a net benefit of $674,000 during the nine months ended September 30, 2016. The majority of the prior year net benefit was related to the sale of one OREO property in February 2016, which resulted in a $739,000 gain that offset the cost of operating OREO properties during the nine months ended September 30, 2016.

The Company did not prepay any FHLB advances during the nine months ended September 30, 2017, and, therefore, incurred no prepayment penalties during the period. In comparison, the Company prepaid three FHLB advances during the nine months ended September 30, 2016 and incurred prepayment penalties of $789,000. The Company elected to prepay these higher rate advances in order to reduce interest expense in future periods and improve net interest spread.


Provision For Income Taxes

The provision for income taxes decreased $293,000 or 16.2% to $1.5 million for the nine months ended September 30, 2017from $1.8 million for the same period in 2016. Income before taxes was $6.5 million and $6.9 million for the nine months ended September 30, 2017 and 2016, respectively. The Company’s combined federal and state effective income tax rate was 23.2% for the nine months ended September 30, 2017 compared to 26.3% for the same period in 2016.




SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations



Liquidity Commitments, Capital Resources, and Impact of Inflation and Changing Prices

Liquidity

The CompanyWe actively analyzesanalyze and manages the Bank’smanage liquidity with the objective of maintaining an adequate level of liquidity and to ensure the availability of sufficient cash flows to support loan growth, fund deposit withdrawals, fund operations, and satisfy other financial commitments. See the “Consolidated Statements of Cash Flows” contained in Item 1 – Financial Statements, herein.

The Bank's primary sources of funds are customerinclude deposits, scheduled loan repayments, loan sales, maturingand investment securities repayments, including interest payments, maturities and sales of loans and investment securities, advances from the FHLB.FRB, and cash flow generated from operations.  The sources of funds, together with retained earnings and equity, are used to make loans, acquire investment securities and other assets, and fund continuing operations. While maturities and the scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage repayments are greatly influenced by the level of interest rates, economic conditions, and competition. Management believes that the Company’s current liquidity position and its forecasted operating results are sufficient to fund all of its existing commitments.

The Bank had $165.1 million in unused commitments to extend credit and standby letters of credit at March 31, 2023.  
During the ninethree months ended September 30, 2017March 31, 2023, loan disbursements exceeded loan repayments resulting in a $16.0$24.5 million or 4.4%4.5% increase in total net loans receivable. DuringAlso during the ninethree months ended September 30, 2017,March 31, 2023, deposits increased $47.5decreased $1.4 million or 7.3% and FHLB advances decreased $7.4 million or 15.3%0.1%. The Bank had $216.0no outstanding FHLB advances at March 31, 2023 with $395.1 million in additional borrowing capacity at the FHLB at that date. The Bank had $61.4 million of outstanding borrowings from the endFederal Reserve BTFP at March 31, 2023, which was collateralized by investments with a fair market value of $157.3 million at that date. The Bank also had a $50.0 million unused Fed Funds facility with Pacific Coast Bankers Bank at March 31, 2023. Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

The Bank's liquid assets in the form of cash and cash equivalents, certificates of deposits with other banks and investment AFS totaled $566.9 million at March 31, 2023. Certificates of deposit that are scheduled to mature in less than one year from March 31, 2023 totaled $134.0 million. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.

Security Federal is a separate legal entity from the Bank and must provide for its own liquidity. At March 31, 2023, Security Federal had liquid assets of $89.9 million. In addition to its operating expenses, Security Federal is responsible for paying any dividends declared, if any, to its shareholders, funds paid for Security Federal stock repurchases, and payments on trust-preferred securities and subordinated debentures held at the Company level. Security Federal's main source of funds are dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the period. At September 30, 2017,Bank to pay dividends. We currently expect to continue our current practice of paying quarterly cash dividends on our common stock subject to our Board of Directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice. Our current quarterly common stock dividend rate is $0.13 per share which we believe is a dividend rate per share which enables us to balance our multiple objectives of managing and investing in the Bank, had $138.9 million of certificates of deposit maturing within one year. Based on previous experience, the Bank anticipatesand returning a significantsubstantial portion of these certificates willour cash to our shareholders. Assuming continued payment during 2023 at this rate of $0.13 per share, our average total dividend paid each quarter would be renewedapproximately $423,000 based on maturity.the number of outstanding shares at March 31, 2023.

At September 30, 2017,March 31, 2023, the Bank exceeded all regulatory capital requirements with Common Equity Tier 1 Capital (CET1), Tier 1 leverage-based capital, Tier 1 risk-based capital, and total risk-based capital ratios of 17.6%17.85%, 10.3%10.39%, 17.6%17.85%, and 18.9%19.11%, respectively.To be categorized as “well capitalized” under the prompt corrective action provisions the Bank must maintain minimum CET1, total risk based capital, Tier 1 risk basedrisk-based capital and Tier 1 leverage capital ratios of 6.5%, 10.0%, 8.0% and 5.0%, respectively.

The Company also exceeded all regulatory In addition to the minimum capital requirements, withthe Bank must maintain a capital conservation buffer, which consists of additional CET1 Tier 1 leverage-based capital Tier 1 risk- based capitalgreater than 2.5% of risk weighted assets above the required minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and total risk-based capital ratios of 14.5%, 9.1%, 15.5%, and 16.7%, respectively, at September 30, 2017.


Off-Balance Sheet Commitments

The Company is a party to financial instruments with off-balance sheet risk inpaying discretionary bonuses. At March 31, 2023 the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage, commercial and consumer loans, and involve to varying degrees, elements of credit and interest rate risk in excessBank’s conservation buffer was 11.1%. For additional details, see “Note 12 - Regulatory Matters” of the amount recognizedNotes to Consolidated Financial Statements included in the balance sheet. The Company’s maximum exposure to credit loss in the eventPart I. Item 1 of nonperformance by the borrower is represented by the contractual amount of those instruments. Since some commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Collateral is not required to support commitments.

The following table sets forth the length of time until maturity for unused commitments to extend credit and standby letters of credit at September 30, 2017.this report.
43
(Dollars in thousands)
One
Month or Less
After One
Through
Three
Months
After Three
Through
Twelve Months
Total Within
One Year
Greater
Than
One Year
Total
Unused Lines of Credit$521
$3,356
$33,095
$36,972
$66,288
$103,260
Standby Letters of Credit—
177
974
1,151
—
1,151
Total$521
$3,533
$34,069
$38,123
$66,288
$104,411



SECURITY FEDERAL CORPORATION AND SUBSIDIARIES


Item 3. Quantitative and Qualitative Disclosures about Market Risk


Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises principally from interest rate risk inherent in its lending, investment, deposit and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Although the Company manages other risks such as credit quality and liquidity risk in the normal course of business, management considers interest rate risk to be its most significant market risk that could potentially have the largest material effect on the Company’s financial condition and results of operations. Other types of market risks such as foreign currency exchange rate risk and commodity price do not arise in the normal course of the Company’s business activities.


The Company’sprofitability is affected by fluctuations in the market interest rate. Management’s goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. A sudden and substantial increase or decrease in interest rates may adversely impact the Company’s earnings to the extent that the interest rates on interest-earning assets and interest-bearing liabilities do not change at the same rate, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using a test that measures the impact on net interest income and net portfolio value of an immediate change in interest rates in 100 basis point increments. Net portfolio value is defined as the net present value of assets, liabilities, and off-balance sheet contracts. There were no material changes in information concerning market risk from the information provided in the Company’s 2022 Form 10-K.
For the three and nine months ended September 30, 2017,March 31, 2023, the Bank's interest rate spread, defined as the average yield on interest bearinginterest-earning assets less the average rate paid on interest bearinginterest-bearing liabilities, was 3.35% and 3.28%, respectively.2.73%.




Item 4. Controls and Procedures


(a)     Evaluation of Disclosure Controls and Procedures: An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a - 15(e) of the Securities Exchange Act of 1934 (“Act”)) was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management as of the end of the period covered by this quarterly report. The Company’s Chief Executive Officer and Chief Financial Officer concluded that at September 30, 2017March 31, 2023 the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms.

(b)    Changes in Internal Control over Financial Reporting: There have been no significant changes in our internal controls over financial reporting during the quarter ended September 30, 2017March 31, 2023 that have materially affected or are reasonably likely to affect our internal controls over financial reporting.reporting


The Company does not expect that its disclosure controls and procedures will prevent all error and or fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.


44

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES



Part II: Other Information


Item 1    Legal Proceedings


The Company is not engaged in any legal proceedings of a material nature at the present time. From time to time, the Company is a party to legal proceedings in the ordinary course of business wherein it enforces its security interest in mortgage loans it has made.


Item 1A    Risk Factors
There have been no material changes in the risk factorsRisk Factors previously disclosed in Item 1A of the Company’s Annual Report onCompany's 2022 Form 10-K for the year ended December 31, 2016.10-K.

Item 2    Unregistered Sales of Equity Securities and Use Ofof Proceeds


None


Item 3    Defaults Upon Senior Securities


None


Item 4    Mine Safety Disclosures


Not applicable


Item 5    Other Information


None



45

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Item 6    Exhibits

3.1
3.2
4.13.3 
Certificate of Designations Senior Non-Cumulative Perpetual Preferred Stock, Series ECIP (3)
4.1 Form of Stock Certificate of the Company and other instruments defining the rights of security holders, including indentures (3) P(4)
4.2
Form of Indenture with respect to the Company's 8.0% ConvertibleCertificate for Senior Debentures Due 2029 (4)
Non-Cumulative Perpetual Preferred Stock, Series ECIP (3)
4.310.1 
10.1
1993 Salary Continuation Agreements (5) P
10.2
Amendment One to 1993 Salary Continuation Agreements (6) P
10.3
Form of 2006 Salary Continuation Agreement (7) (5)
10.410.2 
10.510.3 
10.6
2002 Stock Option Plan (9) 
10.7
2006 Stock Option Plan (10)
10.8
2008 Equity Incentive Plan (11)
10.9
Form of incentive stock option agreement and non-qualified stock option agreement pursuant to the 2006 Stock Option Plan (10)
10.1
20042018 Employee Stock Purchase Plan (12)  (6)
10.11
Incentive Compensation Plan (5) P

SECURITY FEDERAL CORPORATION AND SUBSIDIARIES

10.4 
10.12
31.1
31.2
32
101
The following materials from Security Federal Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,March 31, 2023, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income;Income (Loss); (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements
104 Cover Page Interactive Data File (formatted in Inline XBRL and included in Exhibit 101)
_____________
(1)Filed on June 26, 1998, as an exhibit to the Company’s Proxy Statement and incorporated herein by reference.
(2)Incorporated by reference to the Company’s Current Report on Form 8-K filed on January 16, 2015.
(3)Filed on August 12, 1987, as an exhibit to the Company’s Registration Statement on Form 8-A and incorporated herein by reference.
(4)Filed on July 13, 2009 as an exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-160553) and incorporated herein by reference.
(5)Filed on June 28, 1993, as an exhibit to the Company’s Annual Report on Form 10-KSB and incorporated herein by reference.
(6)Filed as an exhibit to the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 1993 and incorporated herein by reference.
(7)Filed on May 24, 2006 as an exhibit to the Company’s Current Report on Form 8-K dated May 18, 2006 and incorporated herein by reference.
(8)Filed on March 2, 2000, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference
(9)Filed on January 3, 2003, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference.
(10)Filed on August 22, 2006, as an exhibit to the Company's Registration Statement on Form S-8 (Registration Statement No. 333-136813) and incorporated herein by reference.
(11)Filed on November 12, 2008, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference.
(12)Filed on June 18, 2004, as an exhibit to the Company’s Proxy Statement and incorporated herein by reference.
(13)Incorporated by reference to the Company's Current Report on Form 8-K filed on December 23, 2008.

_______________________

(1)    Filed on June 26, 1998, as an exhibit to the Company’s Proxy Statement and incorporated herein by reference.

(2)    Filed on January 16, 2015 as an exhibit to the Company’s Current Report on Form 8-K dated January 15, 2015 and incorporated herein by reference.

(3)    Filed on May 24, 2022 as an exhibit to the Company's Current Report on Form 8-K dated May 18, 2022 and incorporated herein by reference.

(4)    Filed on August 12, 1987, as an exhibit to the Company’s Registration Statement on Form 8-A and incorporated herein by reference.
(5)    Filed on May 24, 2006 as an exhibit to the Company’s Current Report on Form 8-K dated May 18, 2006 and incorporated herein by reference.
(6)Filed on March 2, 2000, as an exhibit to the Company's Registration Statement on Form S-8 and incorporated herein by reference.


46


SECURITY FEDERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements



SIGNATURES


Signatures


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SECURITY FEDERAL CORPORATION
Date:November 13, 2017May 12, 2023By:/s/J. Chris Verenes
J. Chris Verenes
Chief Executive Officer
Duly Authorized Representative

Date:November 13, 2017May 12, 2023By:/s/Jessica T. CumminsDarrell Rains
Jessica T. CumminsDarrell Rains
Chief Financial Officer
Duly Authorized Representative















SECURITY FEDERAL CORPORATION AND SUBSIDIARIES47

EXHIBIT INDEX

31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
32 Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
101 The following materials from Security Federal Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in Extensible Business Reporting Language (XBRL): (a) Consolidated Balance Sheets; (b) Consolidated Statements of Income; (c) Consolidated Statements of Comprehensive Income; (d) Consolidated Statements of Changes in Shareholders’ Equity; (e) Consolidated Statements of Cash Flows; and (f) Notes to Consolidated Financial Statements




52